Yves here. I can confirm the thesis of this post. I graduated from Harvard Business School in 1981. A high percentage of the class had undergraduate degrees in engineering. The hot employer that year was Atari. Consulting was as prestigious as going to Wall Street, and it was seen as no-lose: you could try to become a partner, or use a stint in consulting to accelerate a career in Corporate America. And big financial firms didn’t hire that many MBAs in absolute terms then either.
By Lynn Parramore, senior research analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website
Over the last several decades, American business executives have made decisions that have exacerbated the inequality that chokes prosperity for the country. They have misallocated resources and they have awarded themselves mind-boggling compensation packages while workers have suffered stagnant wages and increasing job insecurity. The stats are shocking: In 1965, a typical CEO took in about 20 times what an average employee earned, while the latest figures from the AFL-CIO put current CEO pay at 373 times what the average worker makes. (Amazingly, according to a forthcoming paper for the Institute for New Economic Thinking (INET) by Matt Hopkins and William Lazonick, even that ratio is grossly underestimated because it is based on grant-date fair value estimates of what stock options and stock awards might be worth, rather than how much CEOs actually take home when they exercise stock options and when stock awards vest).
Inequality holds back the growth of the entire economy, as research supported by INET has shown. Even today’s business elites are worried about its impact: In a 2015 poll of over 2,700 Harvard Business School alumni, respondents said that they were more concerned about growing inequality than ever before. They saw it as a serious threat to the country, and to the bottom line of U.S. corporations. According to Harvard Professors Jan Rivkin and Michael Porter, and Harvard Business School Senior Fellow Karen Mills, who reported on the findings, respondents “remain pessimistic on balance about the likelihood that firms will lift American living standards by paying higher wages and benefits in the near term.”
In other words, don’t look to American companies to help solve inequality any time soon. The pessimism of the Harvard alums comes despite business-school programs in recent years adding courses that examine issues related to inequality.
Why is there so little expectation that today’s MBAs will run companies differently than their predecessors have done in light of the inequality crisis? What are they learning or failing to learn?
William Lazonick, professor of economics at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness, sees something in the core teachings of business schools that ensures that firms do not give workers a fair shake. Lazonick, who has been on the faculty of Harvard Business School and of INSEAD business school in France, observes that starting in the 1980s, business schools underwent a transformation in philosophy and orientation that reflected shifts in the economics discipline and in the economy at large.
During that time, Wall Street was taking off and American businesses were becoming increasingly financialized —meaning that executives started to base all of their business decisions on the goal of boosting their firms’ stock prices. When corporations become financialized, executives turn their attention away from investing in the productive capabilities of employees, which is the basic building block for rising American living standards. They also tend to allocate fewer resources to research and development, which is where innovation happens. Instead, executives watch the stock market — in large part because their own compensation was increasingly based on the value of the company’s shares. (See Lazonick’s INET paper, ” Profits Without Prosperity.”)
Throughout the 1980s, fewer MBA graduates went into industrial corporations; more headed to Wall Street to make a quick buck. Business schools tailored their hiring to match this trend. They hired professors, particularly economists, who favored theories that tended to prioritize the interests of shareholders and executives who cater to them. Lazonick notes that in 1985, for example, Harvard Business School hired economist Michael Jensen. Jensen, a former University of Chicago student of Milton Friedman, co-authored a famous and often-cited business paper, “Theory of the Firm,” in which he argued that the single goal of a company should be to maximize the return to shareholders. He became one of the most highly visible proponents of shareholder value ideology. Jensen and supporters of this theory believed that it would cause executives to focus on the actual performance of the firm and increase shareholder value over time. They were dead wrong: instead, executives turned their attention to the short-term goal of boosting stock value over the long-term prospects of the company and executive pay shot into the stratosphere.
As Lazonick explains, shareholder-value ideology provides a cover for destructive behavior that tends to heighten inequality in our society. For executives, focusing on shareholder value means that they stop concentrating on the actual work of running a business and creating useful things and services. It boosts their motivation to shirk taxes or lay off workers in the hope that demonstrablycutting costs in an already profitable corporation would boostthe stock price in the short term. It also prompts them to allocate more of their profits to shareholders in the forms of dividends and stock buybacks rather than using it to give workers a raise or invest in the technology to improve productivity or create new products.
By the 1990s, anyone taking courses in finance would be inculcated with the view that shareholders are the only constituents who really matter to a company. “When this notion came in, a lot of business school professors didn’t believe it,” Lazonick points out, “but once it took over, there wasn’t much debate.” Today, professors focus more on mathematical models and nurturing the “quants” who will go on to work on Wall Street than on teaching students how to run a business. Lazonick believes that many of those teaching currently do not even understand the significance of shareholder value and how it negatively impacts corporate governance and promotes inequality.
Shareholder value ideology lets executives argue that it is their duty to exclude workers and taxpayers and other stakeholders from sharing in the gains of innovative enterprise.
Lazonick says this is baloney. He is not alone: None other than Jack Welch, former chairman and CEO of General Electric, has called shareholder-value ideology ” the dumbest idea in the world.” Yet business executives still pretend that maximizing shareholder value is their primary fiduciary obligation, which is nonsense except in few restricted cases, such as when a company is going to be sold.
Lazonick notes that prior to the 1980s, business schools taught that executives and directors of U.S. public corporations had a responsibility to many stakeholders, such as customers, employees, suppliers, creditors, communities and the country. But for the last several decades, students have been taught how to extract wealth from these constituencies in order to line the pockets of executives.
In Jack Welch’s view, this is no way to run a company:
“Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”
Lazonick argues that challenging thedistorted shareholder value framework is an urgent priority in the discipline of economics, pointing out that even among well-known economists who challenge many aspects of economic orthodoxy, there is little talk of shareholder value. Until economists reckon with the problem, he warns, MBAs who go on to hold positions of influence in politics, corporations and a wide range of organizations will likely be steeped in a vocabulary, language and culture that reinforces the growing inequality which hurts everyone — including businesses.
Lazonick emphasizes that economists need to acknowledge that the economy should be run so that people can have decent standards of living on a widespread basis, which requires a theory of how this state of affairs might come to pass. In his view, economists need a theory of innovative enterprise in which the corporation retains earnings and reinvests them in the productive capabilities of the people it employs. “Retain-and-reinvest” is the antithesis of “downsize-and-distribute” — the current strategy in which the firm lays off experienced workers who cost more and funnels cash to shareholders. Focusing on keeping and investing in such valuable employees is the way to get to an economy in which there is more job security, more exciting innovation, greater economic equality, and prosperity for all.
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This seems to continue a series of posts that imply something is uniquely wrong with MBA education but don’t actually offer evidence of how MBA programs are materially different from the rest of higher ed.
The whole system is the problem.
And is Parramore holding up Jack Welch as a model of inequality-busting progressive leadership? This strikes me as so odd that I must be reading this wrong. In case I’m not reading this wrong, here’s an overview on what’s wrong with lauding Welch:
That makes no sense to me. This is exactly how he runs a company. It’s exactly how he teaches – in a business school – other executives to run a company.
GE become a model of an industrial company transforming itself into a financial engineering company that happened to make some stuff. GE became a model of a company’s leadership pushing employees unrealistically hard with the only possible solution to cut corners, encapsulating pretty much the whole crapification meme of NC. GE also became a model of lavish executive compensation. When Welch retired in 2001 (excellent timing for a firm dependent upon unsustainable financial gambling), he magically received the largest severance package in the history of corporate America. Welch has consistently and vigorously defended high executive compensation relative to average workers. Welch is a member of the entitlement class, demanding perks like NY apartments and baseball tickets not only while leading GE, but even in retirement afterward. And in demanding these things be kept secret, too. We only know that latter bit due to financial specifics from his second wife in a divorce filing (remember when the SEC used to at least pretend to investigate stuff like that? How quaint.).
I’m not even necessarily saying Welch is wrong in everything he says. I think he offers some valid and challenging perspectives. But to reference him even somewhat as offering relevant guidance on the topic of MBA programs and inequality is to fundamentally miss the body of his life’s work.
P.S., in case anyone is curious for more than a summary, here’s a detailed description of just one particular aspect of Neutron Jack’s vision of how to run a company. I had totally forgotten the apt was at the Trump! Small world.
https://en.wikipedia.org/wiki/GE_Capital
I remember when GE Capital leased construction trailers were like mushrooms
How could anybody be expected to live on only $35,000 per month.
That’s “day job” money. You’d have to take the bus! Can you imagine? If you can’t imagine, you have no idea. Literally and figuratively.
$35,000 per month without imagination is like $4,000 per month with imagination.
Beneath a certain point, it gets hard to live even with imagination.
You may think that more money is better than less and that all the money is better than a lot of money. You may think if you have all the money everywhere you’re optimizing yourself. When nobody but you has any money, and you have it all, you will need a lot of imagination to figure out what to do. It won’t be self evident.
It’s best to have a certain amount, less than all, but more than zero. An amount that lets you walk around without a gun or a bodyguard. If you want drama, you can always use your imagination if you have one.
If you don’t. Then $35,000 per month won’t help you.
Well said!
As a GE alumnus, I always found Jack Welch and his ilk less than human. They had a messianic impulse and rolled over anyone and anything in their way. They left a lot of destruction and ruined lives in their wake. I was fortunate to have worked during the Reginald Jones years and so got to see the difference. There is more to life than shareholder value, like human value. I say that not as someone wanting a handout, but as someone respecting fellow employees and customers.
Let’s not forget the GE became one of the companies that we taxpayers got to bail out thanks to the management of Neutron Jack and his handpicked successor Jeffrey Immelt.
“GE become a model of an industrial company transforming itself into a financial engineering company that happened to make some stuff.”
After its near-death experience in 2008, and getting designated under Dodd-Frank as “systematically important,” GE decided that being a highly regulated financial company wasn’t such a great idea.
Having shed most of its finance arm, last week GE’s systematically important designation was rescinded.
Had GE’s managers attended Hamburger U. instead of Hahhhhhvid Biz, this whole pointless round trip into and out of finance could have been avoided. :-)
GE has always been in the financing business, they just didn’t want it to be called “financial”. They sell capital goods. There’s no way to do that without being a bank, one way or another, and then financing the purchase of those goods.
They’ve never been anything but a bank.
The people who attend elite MBA programs already know this.
that’s why they attend the programs.
but they won’t learn real quant stuff. they won’t.
they may learn the equation machine but they won’t learn the ghost in the machine. they won’t learn that. for that, you really have to learn the real math. that’s my personal opinion.
I have been searching for a catchy phrase that encapsulates the idea that applications of the ‘right’ formula is insufficient for demonstrating actual knowledge/competency.
I am going to unabashedly sample (to use a recording industry term) your ‘equation machine’ comment.
MBA degrees are quite worthless in terms of education. They are merely the entrance to a club which rules most of America. They don’t rule it well though. Most MBA grads I see basically all do the exact same thing: cut back costs, cut back overhead, etc. A vast majority could care less about learning the details of whatever business they are in. I routinely see their incompetence in meetings, presentations, etc. It’s incredibly stark in software/computer engineering firms, and any kind of manufacturing. They assume that business is all about numbers, usually short term metrics like EBITDA, and fret constantly about stock price and other completely irrelevant features of a business. I’ve seen so many firms go bankrupt, split, sell assets after they were taken over by a private equity group. No money is spent on R&D nowadays, so engineers have had to try to compete by not only coming up with solutions and products, but coming up with CHEAP solutions and products.
While the engineers fight to keep a business afloat, the MBA’s are almost all in the business of corporate style raiding. About 20 years ago, many companies had 2x the number of engineers/scientists and 1/2 the number of management. Today, its rare to find a company that hires more engineers than management. For example, a company in the automotive filtration industry I work with had 15 design engineers before 2008. Now that number is down to 7. However, they have added roles like CMO (Chief Marketing Officer), various VP roles, and of course, are now owned by a conglomerate that is owned by a private equity group. So they have an additional tier of management, let alone more direct management.
This company was bought for $15 million ($5 million in cash) in 2008, when it still had 75% of the market share AND had around $85 million in revenue. Then again, its Chicago, so it was probably a mixture of corruption/backroom deals/tax evasion strategies. Now the company makes $250 million, only 8 years later. Of course, the company looks like crap. They constantly complain about their capex being denied, even for $50k software. Now, a Japanese and Korean filtration company took away about 15% of their market share, which is currently rapidly shrinking. However, at these board room meetings, dominated by ex-Dell CEO’s, CFO’s, VP’s, you would think everything is going great! They all just talk about the upcoming IPO and their stock, and whatever new company they bought for pennies on the dollar.
It’s the beginning of the end of American dominance, and the power granted to MBA’s is stunning given the track record.
While I don’t know much specifically about MBA’s it’s probably true that most education in America today is about signaling not about acquiring useful knowledge. Engineering fields may be an exception.
IIRC, that was Kenneth Arrow’s theory years ago….
I work in Civil/Environmental/Geological engineering. The licenced engineer MBAs turned the firm I worked for from an award winning, innovative, problem solving, profitable, employee mentoring workplace into a billable minute, cookie cutter, quantity over quality, unethical, less profitable (but huge bonuses to the partners) firm that had a goal of milking their clients instead of solving client’s problems. All that in 3 years following the installation of an MBA track for engineers, and the company sending a cadre of department heads off to get their MBAs.
I got out of there as fast as I could. Generic managers can mess up engineering as sure as they mess up everything else. Innovation and research is not generally billable and will inevitably be a low priority under generic management.
Seriously. This is the sort of thing that we need more details about. I have the same sort of experience at a firm (but it is not too relevant since it’s a private school).
What do you mean exactly when you say “cookie cutter, quantity over quality, unethical, less profitable (but huge bonuses to the partners) firm that had a goal of milking their clients instead of solving client’s problems.” What were the exact changes made?
Another thing I don’t understand is how the market doesn’t respond to the glaring inefficiency of expensive, redundant management that contributes nothing. Why doesn’t an innovative firm restructure itself to slash “management” dreck and refocus on delivering product?
Cartelism? Groupthink?
Selfish extraction of wealth is the value system that reigns supreme. Individuals still focused on delivering quality goods and services to people in order to satisfy legitimate human needs are in the minority. We have a world full of predators and predator-wanabe’s.
Crapification is systemic. It took decades of effort to achieve this level of societal decay and will take decades of concerted effort to reverse course- baring a sudden collapse.
The innovation desperately needed today is a critical mass of citizens rejecting the current ideology of greed and selfishness and returning to a more humane worldview.
The current system is a looting operation plain and simple. Held together by tribal loyalty, secrecy, and violence.
You answer your own question- the innovation of tomorrow, by definition, will be the opposite of todays worldview. A society of people providing goods and services to satisfy human needs.
Sort-termism. Most of those in positions of power do not care about long-term quality which usually costs more.
Lack of capital and debt: Research is not like in Darwin’s days. You don’t just collect bugs and use your eyes to analyze. It takes capital to buy the equipment. Garage businesses are not what they were in the 50s. And if everyone has student debt, a huge mortgage and a BMW, it’s hard to start a business… most of the top notch gets sucked into the money grab.
Regulation. My friend’s father got rich patenting medical stuff in his garage. Today, he’d have to get everything licensed…
Short-termism involves excessive uses of energy in the short-term instead of the long-term. It’s like a sprint vs. a marathon.
The thing is that the reserve currency status has given the US the power of a sprint over a few decades.
Individuals can not sprint over long periods of time. So the system sucks them in and spits them out.
Many of the clients don’t read the proposals, only the $ on the bottom line. If it’s low, it goes. Then they get stuck with keyhole scopes (pavement design is in our proposal, but a grading plan is extra) and $15/hr interns billed as $100/hr engineers, etc. I went 5 years without a raise but watched my billing rate double (making my projects over budget even though they were under in terms of hours). The profit went only to the top tier of management, so they thought (still think- they’re still there) business was better than ever. But nearly all of the middle tier management and experts, people age 30 to 50, bailed out in a 2 year span, almost all taking better jobs at better comp. Every departure was badmouthed by management- they weren’t good enough, took a pay cut, etc. – to keep the remaining workers from asking questions. So if you see a consultant hollowed out in the middle like that, beware.
Not all potential clients fall for this but most do.
Effectively the goal of the company went from taking on difficult complex projects to “value engineering”, where the manta was “tailor your work to the budget”. Translating the mantra into English, it means providing low quality engineering to clients, then hitting them up for change orders to do the job better or even simply to finish it.
Please note that not all engineering consultants are like this.
They turned it into a law firm.
Hugely important topic. Will revisit over the weekend, along with the INET link.
Maybe Bob Townson’s comment in his book Up The Organization is still relevant. “You MBAs, I would not hire you, but I will tell you how to overcome it”.
The change in MBA education has certainly been lead by a change in philosophy of which stake holders of a corporation are most valued. But along with the change in philosophy there has been a need for revenue for higher education. The number of online and brick and mortar MBA programs has exploded as these are very lucrative and easy to run factory programs. Better to teach theories handed down on high from text books rather than try to teach more difficult topics.
And while elite MBAs are certainly at the upper reaches of organizations helping to enrich the C-suite at the expense of all other stakeholders, most MBAs are doing more mundane things. In the large company I work for, I’m constantly surprised by the number of front line sales people and account managers who hold MBAs. It seems to be another pointless resume point to hold for any position, akin to many with undergraduate and graduate degrees doing work that requires no such training.
The one thing more useless than an MBA may be the “Executive MBA” short-term courses offered by many institutions.
As one well-regarded engineer-manager at Lockheed Skunk Works opined after attending one of these junkets at Harvard Business School: “HBS = 2/3 BS”.
It always interests me when the supposed ‘fix’ to a problem is located in the education/academic sphere. The idea expressed here is that academics need to reevaluate the theories they teach, because students go on to make decisions based on the formal theories they learned.
First: I am not sure that the empirical evidence supports the claim that people base their work related decisions primarily, or even significantly, on the things they learn in college (even though post-hoc justifications may revolve around those ideas). Maybe the theoretical is more important in all of the businesses I have not worked at, I (necessarily) work from a small sample. I would be curious to know if that experience is incorrect.
Second, I always worry that, in locating the causal source of an issue within the Academy, we obfuscate the necessary actions and agents involved at a much more proximal level. For example, when management (whoever that is) lays off workers, cuts R&D, or engages in tax avoidance schemes –when the firm is already profitable– any resultant rise in stock price only occurs because investors (broadly construed) think thats a good thing. So, none of the negative effects get off the ground unless the people who buy/sell the stock actually consent, or even encourage, it. Maybe, it would be argued, investors act that way because they got taught something in Grad school, and maybe thats right…but I would refer back to my first concern.
To be clear, I am not defending an economic theory or the academy. Rather, that (it seems) a lot of people push too much responsibility on systems that are far back along the universe’s causal chain. In doing so we risk making problems effectively unsolvable, or getting caught in the nets of political forces (who primarily work to alleviate their own pain points).
Right on.
In a recent post, a very lucid lady was asked about the language of the Sanders campaign, and she did mention that Sanders has “invoked FDR’s Second Bill of Rights” as “…unfinished business”…albeit not specifically, he certainly and undeniably has drawn from it…
https://en.wikipedia.org/wiki/Second_Bill_of_Rights
Notice how the “Economic bill of rights” describes what the intended purpose of SS was-“The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment”. No mention of “trust fund”, “pre-funding”, “means testing”, “chained cpi” etc…AND how this complemented “The right to a useful and remunerative job in the industries or shops or farms or mines of the nation”…
Also worth remembering is that “free-markets”, “MBAs” etc. did not pioneer space exploration and other foundations of technological innovation, the results of which silicon valley owes its existence, ie, the efforts of many minds and hands working together in common purpose prior, made “it” possible. What kind of society would be possible without the fears associated with the very issues that ” FDR’s Second Bill of Rights” intended to address? A case can certainly be made that the so-called “defining issue of our time” is a consequence of ” unfinished business”…
Thugh nit my field of rxpertise, this reminds me of the trickle down school that held sway so unreasonably for so long. What has happened in our society to allow academic theories that are just plain wrong, to take over?
This is why I don’t understand the insistence on inclusion of Free College in the Democrat platform. Setting aside for a moment the fact that it’s an easy ceremonial olive branch for H to extend, due to zero harm effect on her corporate financiers as well as providing myriad bureaucratic enrichment opportunities on the taxpayers’ dime…
All this will end up doing is changing the method by which employers screen applicants. State school degrees will become the new high school diplomas, with private school degrees being seen as more elite. Older workers with no college degree will be forced back to school, or will otherwise fail to qualify and drop out of the workforce.
This is, in fact, already happening. For example, many employers view online degrees from for-profit institutions as inferior.
Instead, I’d like to see us focus on alternative schooling that will provide real job skills to those who are not academically inclined. Everybody is not geared toward learning in a classroom setting, then graduating and getting a desk job.
Free College needs to be understood as free education. A healthy, and resilient society provides free education and work for its members. The whole concept of “paying” for education and training has evolved to its current state of rent extraction and exploitation in our capitalist system. It is a social system devouring itself.
Nothing will change until we view and structure our society on satisfying human needs. Goods and services need to be supplied satisfying needs not wants. That would be a complete reversal of current thinking and effort, but would lead to a more balanced and healthy system. Also, a sustainable system.
Humans are social animals and need relations to others in order to survive. Providing access to meaningful work building the health of the social group needs to be viewed as a natural right, not something that one must “pay” to have access.
The current arrangements have little to do about building society and its needs. Just extraction at all costs.
I’m not sure they’ll only want private school degrees but they will want state school Masters Degrees from everyone, they’ll be the new Bachelors degree.
“Older workers with no college degree will be forced back to school, or will otherwise fail to qualify and drop out of the workforce.”
Older workers who didn’t get a degree when they are young may just become unemployable in such a scheme, even if they have the aptitude and (the harder part) somehow the TIME to go back to school. Employers don’t cut the same type of slack for middle aged people just out of college as they do for young people, they will be told “get a degree” and then told their degree is worthless because they aren’t 20 or even 30 something anymore.
Although cheaper college may be desirable, it’s putting the cart before the horse. Let’s worry about free college AFTER we’ve solved the not enough jobs and/or no guaranteed income problem. Otherwise it just becomes a way to redistribute the hurting (yea to those older workers, those not good at formal academics etc.).
(in response to Pirmann above)
So how is it that Parramore and Lazonick took so long to figure this out. It has been obvious to most of us for the past 20 or 30 years that managerial imposition of MBA instigated fictionalization as the corporate be all and end all was destroying corporate integrity, research and real-world productivity and overly enriching wretchedly poor management practices. This is not a novel idea, but it has apparently just now become recognized as a possibility by the mainstream, now that the horse is well out of the barn and most major corporate operations have been stripped of primary functions and converted to producing nothing but paper profits and debt-based stock valuations.
To position yourself to offer faux solutions once the game has revealed itself to all,
one must first jump in front of the parade and claim you are a leader, so you then
co-opt the crowd with a Martingale Strategy.
Is there anyone left on the planet who thinks these guys, and their bretheren,
are seriously going to punt the overpaid MBAs patrons of the Economic Arts?
(That was rhetorical…)
“Why is there so little expectation that today’s MBAs will run companies differently than their predecessors have done in light of the inequality crisis? What are they learning or failing to learn?”
Marx wrote Das Kapital and published it in 1867. He answered this question definitively. Whatever you may think of his predictive capability, his analytical capacity was top-notch.
To anyone interested in this, I would suggest Richard Wolff’s series “Intro to Marxian Economics” and “Advanced and Applied Marxian Economics” which are available on youtube. Many of the questions we scratch our heads over today were answered 150 years ago.
The University just hired an MBA to run the department. This is after they recently hired four new managers. Results are to be as expected.
Retirement looms.. and looks pretty good.
Ka-ching!
Yves – good post. I think theres also another culprit behind why current corporate executives run companies the way they do.
Financialized decision making, short term thinking, the misallocation of corporate resources, and obscene compensation relative to average employee pay are all the result of how CEO’s are compensated. While CEO’s at the biggest U.S. companies make between $500K-$1MM annual salaries (very generous), over 95% (and 99.9999% in many cases) of their compensation comes in the form of company stock grants and stock options. This stock based compensation is, incidentally, determined using performance measures such as EPS and ROE. What CEO’s have learned is that correctly timed financial tricks like stock buybacks can increase performance based stock compensation by increasing EPS and ROE. Repeating stock buybacks the following year removes the per share impact of collecting their compensation (executing options increases the number of outstanding shares) which in turn increases CEO performance measures for that year. It’s a pretty perverse incentive for corporate executives because these seemingly self destructive decisions reward the overwhelming majority of their income.
This may seem like I’m overly cynical about a perverse incentive, but keep in mind that “since 2011 Cisco has repurchased $21.9 billion in stock. Since then, it has fired 21,000 people”:
http://www.zerohedge.com/news/2014-08-13/cisco-quarter-nutshell-terminating-6000-while-buying-back-15-billion-stock
Quoting the story in this Cisco link: “assuming the terminated 6,000 jobs paid a generous salary of $100,000 per year, that means CSCO, net of restructuring charges of course, just cut down on some $600 million in annual compensation…….if CSCO was indeed so focused on preserving cash and streamlining its operations would it also spend more than double that amount in just one quarter on repurchases.”
Jack Welch?!
You’re kidding, right?
There are much better examples of American business leadership excellence than that clown, like Yvon Chouinard for instance.
Why not an article on what Mr. Chouinard has achieved, as opposed to the butcher who destroyed the once-mighty GE?
Oh, wait. Mr. Chouinard doesn’t even hold an MBA …
So he obviously has no clue how to run a company…into the ground.
What’s truly horrifying is when you realize this is how medical care is supplied.
We forget that the progress of science does a great deal to cover up underlying negative trends, but they always add up.
There are some who are marching successfully to a different drummer, and doing their part to reform the brainwashed MBAs.
Ricardo Semler (Semco Brazil) is one. He has given talks at Harvard and other business schools, basically telling them they need to throw out practically everything they’ve learned. His 2 books are great introductions.
Another is David Martin (CEO of M-CAM). He has not only developed and implemented Integral Accounting into all aspects of his life and work around the world, but has also developed a module to integrate it into MBA programs in 3 states.
Alan Savory has developed a system called Holistic Management which is relevant for policy-makers in government as well as grassland restoration.
There are many others. People who want a better way will find or create possibilities. There is hope.
Isn’t Jack Welch the CEO who “discovered” that English was spoken in New Delhi and moved businesses there from the U.S.?
I cannot remember where I found this stat but it said that about 2/3rd’s of the 0.1 or the .01 percenters were CEO’s or ex CEO’s. They are the problem of inequality.
MBA = indoctrination in economic reality….
Most are already indoctrinated. MBA programs are where they learn the liturgy. Or JD programs.
Related: http://www.brookings.edu/~/media/research/files/papers/2016/07/01-b-corporations-kassoy-houlahan-gilbert/b_corps.pdf
http://www.brookings.edu/~/media/research/files/papers/2016/07/01-b-corporations-kassoy-houlahan-gilbert/b_corps.pdf
Inequality is built into the economics.
Neoclassical economics assumes raw capitalism will reach stable equilibriums that benefit the majority.
The Euro-zone works on this assumption and we see the rich nations get richer and the poor nations get poorer. We then use austerity on the poorer nations to exacerbate the problem.
Has raw capitalism ever helped the majority?
We had small state, raw capitalism in the 19th Century, the wealthy lived in the lap of luxury and the poor lived in abject squalor. The vast majority were poor.
To maximise profits the wealthy used slave and child labour and only gave them up when regulations were put in place and they were compensated for the loss of their slaves.
Only through organised labour movements did the workers get a larger slice of the pie and it had nothing to do with raw capitalism itself.
Neoclassical economics was in use in the 1920s and its raw capitalism again led to massive inequality.
The wealthy had so much money to invest they got drawn into wild speculative bubbles. The Wall Street Crash and the Great depression came next.
Today everything is polarising again with massive inequality, with such subdued demand everyone is struggling.
How much longer can we believe in this neoclassical nonsense?
In a world drowning in investment capital, negative interest rates have to be used to try and keep the stuff away.
Demand is so subdued there is nothing productive worth investing in and so people are willing to pay to have somewhere to park their money.
Get the impression things have gone too far?
Normal problem solving:
1) Fully understand problem
2) Work out solution
Difficulty doing this with economics.
Obviously economists started off in the normal manner but pretty soon they started coming up with some unpleasant conclusions:
Adam Smith:
“The Labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.”
Adam Smith saw landlords, usurers (bankers) and Government taxes as equally parasitic, all raising the cost of doing business.
He sees the lazy people at the top living off “unearned” income from their land and capital.
He sees the trickle up of Capitalism:
1) Those with excess capital collect rent and interest.
2) Those with insufficient capital pay rent and interest.
He differentiates between “earned” and “unearned” income.
Adam Smith:
“But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.”
Exactly the opposite of today’s thinking, what does he mean?
When rates of profit are high, capitalism is cannibalising itself by:
1) Not engaging in long term investment for the future
2) Paying insufficient wages to maintain demand for its products and services
With conclusions like this Classical Economics became very unpopular with the wealthy.
What could they do?
They promoted another economics, neoclassical economics, whose conclusions were much more favourable to them.
Unfortunately, it doesn’t work because it is not based on the real world like Classical Economics.
Neoclassical economics:
You can ensure every mainstream economist is a neoclassical economist.
You can ensure neoclassical economics is rolled out across the world.
You can ensure neoclassical economics is the only economics taught at Universities.
You can sell its ideas to the masses with PR.
You can’t make it work.
2008 – How did that happen?
All the mainstream economists are neoclassical economists.
How do you break the cycle? Wait for the system to fall apart itself?
When you call people out on the selfishness and greed of it all, conflict and anger pursues. The neoliberal ideology has permeated so many social institutions and critical businesses that changing course can only be disruptive in the short run.
Practicing self-reliance and spreading love seem to me the only viable longterm response to the neoliberal mission. Self-reliant communities, consisting of individual networks of coops seems the only long term solution.
Wait for the system to fall apart itself? – I don’t think we have long to wait.
Keep an eye on the alternative media, things are getting pretty hairy and the mainstream will tell you nothing until its so obvious they can’t hide it.
Could we simplify the closing paragraph:
Lazonick emphasizes that economists need to acknowledge that the economy should be run so that people can have decent standards of living on a widespread basis, which requires a theory of how this state of affairs might come to pass. In his view, economists need a theory of innovative enterprise in which the corporation retains earnings and reinvests them in the productive capabilities of the people it employs. “Retain-and-reinvest” is the antithesis of “downsize-and-distribute” — the current strategy in which the firm lays off experienced workers who cost more and funnels cash to shareholders. Focusing on keeping and investing in such valuable employees is the way to get to an economy in which there is more job security, more exciting innovation, greater economic equality, and prosperity for all.
to “privatize and financialize” ?
Editing wouldn’t allow me to add a link. So, here it is: https://www.wordnik.com/words/financialize
in the buddhist metaphysics, greed (along with dislike and delusion) is known as the fundamental problem of the mind.
so this was something people at least in public had some shame over.
till the “great economist” Friedman came out and invaded fearlessly the moral realm and claimed the only goal of business was to make (more and more) money. This is a disturbing idea, and like monotheism, it is an invasive predator species perpetually at war and destroyed the somewhat innocent ecosystem that existed before it.
so what you have now is basically the result of friedman’s corruption as the motive and fiat money as the enabler. they just printed more money (debt/liabilities) and kept it to themselves. and when the got in trouble they got the non-FIRE people to pay for it (via inflation).
https://www.flickr.com/photos/8911225@N05/2131644900/
One of President George W. Bush’s unique qualifications for office was
his Harvard MBA
“Bush’s former Harvard Business School professor recalls George W. Bush not just as a terrible student but as spoiled, loutish and a pathological liar.”
https://en.wikipedia.org/wiki/Robert_K._Greenleaf
“Robert K. Greenleaf (1904–1990) was the founder of the modern Servant leadership movement and the Greenleaf Center for Servant Leadership.
Greenleaf was born in Terre Haute, Indiana in 1904. After graduating from Carleton College in Minnesota, he went to work for AT&T, then the American Telephone and Telegraph Company. For the next forty years he researched management, development, and education. All along, he felt a growing suspicion that the power-centered authoritarian leadership style so prominent in U.S. institutions was not working, and in 1964 he took an early retirement to found the Greenleaf Center for Servant Leadership (first called the “Center for Applied Ethics”).[1]”
…worth mentioning here;
Worth exploring… a counter culture to contemporary greed.
I would like to see how the following ratios have changed over the past 30-50 years:
* engineering graduates to MBA’s
* people who worked their way up the corporate ladder to become CEO vs. MBA’s who
were brought in from outside the company.
The goal is so much to not pay workers, that actually making anything is forgotten.
That is how I put it.