On March 22, 2015, Henry Blodget writes on Business Insider:
One reason U.S. economic growth is still weak is that average American consumers are still strapped.
Consumers account for ~70% of the spending in our economy, so when they’re hurting, we’re all hurting.
The reason average consumers are strapped is that, for the past 35 years, we have increasingly told ourselves that the only thing companies are supposed to do is “maximize profit.” We have forgotten that great companies can serve other constituencies in addition to shareholders — namely, customers and employees. We have come to treat employees not as dedicated, hard-working teammates who create value, but as “costs” to be minimized.
One result of this “profit maximization” obsession is that our big companies now have the highest profit margins as a percent of our economy in history:
Business Insider, St. Louis Fed
Another result of it is that our big companies now pay the lowest wages in history as a percent of the economy:
Business Insider, St. Louis Fed
A third result is that all of the income gains in this country over the past three decades have gone to the top 10% of American earners — the ones who own and control our largest businesses. These top earners — especially the top 0.1% of earners — now take home more of the country’s national income than at any time in the past century, including the “Gilded Age” of the 1920s:
Fairness aside, the problem with a handful of Americans running off with such a high percentage of the country’s loot is that it starves everyone else of purchasing power. No matter how rich they are — and they’re mind-bogglingly rich — the top 0.1% of Americans don’t actually buy that much stuff. The folks who buy most of the stuff sold in America are average American consumers, whose earnings are stagnant or declining.
Back in the 1940s, 1950s, and 1960s, income gains were more evenly distributed. The top earners did well, but so did everyone else. There was a universal sense — an accurate one — that we were all in this together. And the idea that rich companies should share more of the value they create with the people who created it — their employees — was well-established.
That was great for our economy.
But now the idea that we’re all in this together has been replaced by the mantra that it’s every man for himself.
Again, even if you hate the idea that someone who dedicates his or her life to creating value for a company should share more in the value he or she creates, you should understand that “minimizing wage costs” is bad for the economy.
If average Americans don’t get paid living wages, they can’t spend much money buying products and services. And when average Americans can’t buy products and services, companies that sell products and services can’t grow. So the profit obsession of America’s big companies is, ironically, hurting their ability to grow.
The idea that the only purpose of a company is to “maximize profit” is also an insult to anyone who has ever dreamed of having a job or company that is about more than money. And it is a short-sighted and destructive view of capitalism, an economic system that sustains not just this country but most countries in the world.
This view has become deeply entrenched, though.
These days, if you suggest that great companies should serve customers and employees in addition to owners, you get called a “socialist.” You get called a “liberal.” (Even though this has nothing to do with politics.) You get told that you “don’t understand economics.” You get accused of promoting “wealth confiscation.” You get told that, in America, people get paid what they deserve to get paid: Anyone who wants more money should go out and “start their own company” or “demand a raise” or “get a better job.”
In other words, you get told that anyone who suggests that great companies should share more of the value they create with the people who create it is an idiot.
After all, these folks say, it’s a law of capitalism that employers pay their employees as little as possible. Employees are just “costs.” You should try to minimize those “costs” whenever and wherever you can.
This view, unfortunately, is not just selfish and demeaning to everyone who works for a living. It’s also economically shortsighted. Those “costs” you are minimizing (your employees) are also current and prospective customers for your company and other companies. And the less money they have, the fewer products and services they are going to buy.
Obviously, the folks who own and run America’s big corporations want to do as well as they can for themselves, and we obviously need to maintain an incentive for them to do so. But the key point is this:
It is not a law that they pay their employees as little as possible.
It’s a choice.
It’s a choice made by senior managers and owners who want to keep the highest possible percentage of a company’s wealth for themselves.
It’s a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees (“associate,” “partner,” “representative,” “team-member”), they, in fact, don’t really care.
These senior managers and owners, after all, are taking home record profits and earnings while choosing to pay their employees so little in many cases that the employees have to live in poverty.
It is no mystery why America’s senior managers and owners describe the decision to pay employees as little as possible as a “law of capitalism.” Because this masks the fact that they are making a selfish choice.
But that’s exactly what they’re doing.
If we want to get our economy humming again, we need to remember that the economy is an ecosystem and that healthy ecosystems are balanced. We need to encourage our companies to maximize value, not profit. And we need to encourage great companies and managers to serve three important constituencies — customers, owners, and employees — instead of just one.
http://www.businessinsider.com/companies-need-to-pay-people-more-2015-3#ixzz3V8bBJx1z
Basically, Henry Blodget’s argument is that higher profit margins exacerbate income inequality, and that’s not a good thing, and ”minimizing wage costs” are bad for the economy. And when average Americans in low paying jobs don’t get paid living wages, they can’t spend much money buying products and services, which, in turn, dampens the ability of American corporations to grow and enable the 90 percent who own the corporation to further concentrate the ownership of the growth capital assets that result.
Blodget is correct in assessing that the purpose of a for-profit business corporation is to “maximize profit” by striving to keep labor input and other costs at a minimum in order to maximize profits for the owners. They strive to minimize marginal costs, the cost of producing an additional unit of a good, product or service once a business has its fixed costs in place, in order to stay competitive with other companies racing to stay competitive through technological innovation. Reducing marginal costs enables businesses to increase profits, offer goods, products and services at a lower price (which people as consumers seek), or both. Increasingly, new technologies are enabling companies to achieve near-zero cost growth without having to hire people. Thus, private sector job creation in numbers that match the pool of people willing and able to work is constantly being eroded by physical productive capital’s ever increasing role.
The result is that the price of products and services are extremely competitive as consumers will always seek the lowest cost/quality/performance alternative, and thus for-profit companies are constantly competing with each other (on a local, national and global scale) for attracting “customers with money” to purchase their products or services.
But while this is the role of business corporations to efficiently produce products and services, which produces wealth and thus income to those who own the corporations, business corporations should also act justly and serve and enhance the community well-being. This should be a proper function of government regulation to ensure that corporations do not disregard the health and welfare of the people and their communities.
The problem that Blodget and others have advocating for solutions to economic inequality is that their mind-set is limited by ONLY thinking in terms of human productive input––as in labor’s contribution––while failing to understand that fundamentally, economic value is created through human and non-human contributions. Those who OWN business corporations know that the productive capital factor input represents upward of 98 percent of the total contributions. In concentrated capital ownership terms, roughly 1 percent own 50 percent of the corporate wealth with 10 percent owning 90 percent. This leaves 90 percent of the people scrambling for the last 10 percent, with them dependent ONLY on their labor worker wages to purchase capital assets. Thus, we have the great bulk of the people providing a mere 10 percent or less of the productive input. Contrast that to the less than 5 percent who own all the productive capital providing 90 percent or more of the productive input, and who initiate and oversee most of the technological advances that replace labor work with capital work.
As a result, the trend has been to diminish the importance of employment with productive capital ownership concentrating faster than ever, while technological change makes physical capital ever more productive. Corporate decision makers know this, whether in the United States or China, or anywhere organized assemblies of people engage in production. Technology is an easier and faster way to get a job done. Because technology increases the profitability of companies throughout the world, technology always has the advantage over human labor when the costs of them are the same. But because this is not well understood, what we as a society have been doing is to continually shift the work burden from people labor to real physical capital while distributing the earning capacity of physical capital’s work (via capital ownership of stock in corporations) to non-owners through make-work job creation, minimum wage requirements, and welfare programs. Such policies do not function effectively.
The REAL solution is to lift all legal barriers to universal capital ownership access by every child, woman, and man as a fundamental right of citizenship and the basis of personal liberty and empowerment. The goal should be to enable every child, woman, and man to become an owner of ever-advancing labor-displacing technologies, new and sustainable energy systems, new rentable space, new enterprises, new infrastructure assets, and productive land and natural resources as a growing and independent source of their future incomes. This would enable our business corporations to operate more efficiency and competitively, while broadening wealth-creating ownership participation, creating new capitalists and “customers with money” to support the products and services being produced.
Blodget’s thinking is the result of being stuck, as is the entire playing field of advocates for change, in one-factor thinking––that is, the labor worker. While he tiptoes around an understanding, he is oblivious to the most powerful and increasingly productive factor––non-human physical capital (the land, structures, tools, machines and robotics, computerization, etc.) that is responsible for 90 percent of the production of the products and services needed and wanted by society. His focus at Business Insider should be on broadening personal ownership of capital asset formation simultaneously with financing the growth of the economy, instead of just talking about the continued concentration of capital ownership and the dire consequences for labor workers.
What Blodget should really being doing, this year and in the upcoming 2016 presidential election year, is leading a national discussion on the topic of the importance of capital ownership and how we can expand the base of private capital ownership simultaneously with the creation of new physical capital formation, with the aim of building long-term financial security for all Americans through accumulating a viable capital estate.
This is the approach necessary for business corporations to best serve their constituencies — customers, owners, and employees — instead of just constantly concentrating more wealth ownership among a tiny minority.
