William Lazonick and Jang-Sup Shin, Predatory Value Extraction – How the Looting of the Business Corporation Became the U.S. Norm and How Sustainable Prosperity Can Be Restored, OUP 2020
[These comments originate from an online seminar with Professor William (Bill) Lazonick to discuss his joint research with Professor Jang-Sup Shin on April 26, 2021]
I should begin by thanking Professors Lazonick and Shin not only for this book but for the decades of research it encapsulates (Lazonick and Shin 2019). It deserves to be widely read and to be widely influential. The core of the book is economics and I am mindful, in preparing this response, that I am not an economist. I have approached the book as a political philosopher and political economist and have tried to stay in my lane. Professor Lazonick has already summarised the book so I will be brief in my general characterisation of its aims and approach before I move to some commentary on its key theses.
It is a work grounded on what I would call the Schumpeter-Minsky approach to the firm and to finance (Thomas 2020a). It is an approach that locates the efficiency of capitalism in its dynamic efficiency: the capacity of the large-scale industrial organisation to muster and organise resources to produce market disruptive innovations. Every firm seeks a monopolistic edge over its competitors, even if it is short lived. The consistently successful firm innovates in plural ways to maintain this edge in numerous different forms. One focus of this book is the importance of viewing the firm as a learning device, correcting itself through trial, error, and sustaining the results via organisational memory. From a distributive point of view, the key fact is that while such firms are, internally, command economies from an internally distributive point of view their profits must be shared with key employees to retain them and their contribution to sustaining the learning process. I will return, later, to the problem of what you might call the “external” distributive effects of placing this Chandlerian conception of the firm on the commanding heights of the economy.
It is this conception of how we ought to structure the macro-economy for sustainable and inclusive prosperity that is the normative core of this book. In tracing out the ideological assault on this conception, Lazonick notes the strange theoretical disconnection between theories of the static efficiency of capitalism and theories of its dynamic efficiency. It is difficult to think of analogies in other sciences for such a disconnection. In the case of modelling an entire economic system there is a disconnect between the model of perfect competition in the textbooks that putatively model static efficiency and the dynamic models of Keynes and Schumpeter.
One way to approach this disconnect is that welfare economists take the foundational theorem of their discipline to be the Arrow-Debreu theorem in which the utility maximising consumer meets the efficiency maximising firm (Arrow and Debreu 1954). Now both Arrow and Debreu were political progressives, and their goal was to answer this simple question: if an economic system is for the general good, how can we model that system such that it maximises utility? This model is clearly wholly inappropriate for the modelling the dynamic efficiency of a macro-economy.
Lazonick’s book centrally takes issue not with Arrow-Debreu, but with the politically motivated project of taking its micro-foundational perspective on competitive efficiency to offer any insight into macro-level dynamic efficiency, which it clearly does not.
Mention of a political motivation induces me to change registers and to comment on the underlying philosophical motivation for the critique of Lazonick and Shin’s proposal. The reason that libertarians and other see an affinity between capitalism and their normative commitments is this feature of the A-D model: everyone in it is powerless. Every agent in the model, both producer and consumer, is a price taker and not a price maker. Liberty is preserved, in this model, because everyone is equally powerless. At this point we have to introduce the vexed topic of neo-liberalism, about which I will try to be brief. Utopian neo-liberals believe that the market does, indeed, ideally disperse power if we can intervene to prevent imbalances of power emerging. As it is potentially efficient and utility maximising, we should expand marketisation so that the depth and efficiency of markets can underpin as many of our social institutions as possible. This suggests, complementarily, that the state can take a back seat, perhaps restricted to defence, regulation, the correction of market failures but, on the whole, markets are self-correcting. The deeper and more extensive any such market is, the more purely it approximates this ideal suggesting that the financial market, above all, should be the fundamental disciplinary-cum-governance institution in the economy.
Those are the views of the utopian neo-liberal; the non-utopian neo-liberal espouses a limited role for government and a more extensive role for markets. However, what she actually engages in is putting the state at the disposal of private capitalists (Galbraith 2008). The state is only selectively “rolled back”. If rolling back state protections harms the worst off, or trade unionists, or if rolling back capital controls favours the best off, or the rentier investor class more generally, then the state will be rolled back. However, it is more often co-opted (Thomas 2017). The state is co-opted to generate rent seeking niches such as when its immense spending power is directed to certain favoured industries. It is co-opted, in a way central to Lazonick’s book, when public subsidies are seized to fund innovation only for the commercialisation of that innovation to produce private profit only for taxation on that profit to be evaded. In other words, our conception of the democratic state as the honest broker between competing private interests has been transformed, under actually existing neo-liberalism, into the state as a dishonest broker that favours the interests solely of the rentier-investor class (Thomas 2020b).
The core thesis of Lazonick’s book is the conflict between the entrepreneurial function and the interests of the rentier-investor class (Deutschmann 2012). The rhetoric of the utopian neo-liberal is used falsely to legitimate the policies of what one might call the actually existing neo-liberalism of our time.
That is why it is misleading when neo-liberal rhetoric suggests that the US economy has become “hyper capitalist” or “turbo capitalist” with the extension of the logic of marketisation merely bringing us some uncomfortable truths. (Don’t shoot the messenger.) If blue collar manufacturing jobs ought to be shipped to China in the interest of productive efficiency, let them be shipped (Lind 2020a). That is characteristic of a certain kind of false naturalisation of economic constraints: America’s coastal elites view themselves as meritocrats who have adjusted to the new realities of a knowledge based economy. The majority of their fellow citizens have, by this meritocratic standard, been judged and found wanting – the market here works as a cruel truth teller. Peter Temin, in the Vanishing Middle Class, classifies America’s high wage sector as located in the “Finance, Technology and Electronics” or FTE sector – 20% of the US population. The remaining 80% work in the low wage sector (Temin 2017). I hold the more political view, shared with Dean Baker and Michael Lind, that this false naturalisation is better explained by class politics (Baker 2016; Lind 2020b).
It is no accident that the neo-liberal experiment happened predominantly in the two countries where organised labour was blamed for the crisis of productivity of the 1970s (Prasad 2006). The Reagan-Thatcher project brought the state down, like a hammer, on both organised labour and the broader democratisation of the economy that the aspirations of labour represented. It is undoubtedly true that both corporations and organised labour suffered when Volcker’s solution to the problem of stagnation and high inflation together was the scorched earth approach of simply destroying parts of the US economy’s own productive capacity (Sonti 2018). However, that short term shock was at the service of the longer term triumph of the US business class. Lazonick’s book focuses on the internal conflict within that class.
The stable price regime in place since the Nixon and Volcker shocks has deepened financialization. It was easy to make money when you could lend it out at 19%, but interest rates have slowly declined over the last few decades, its path eased by that which the markets call the “Greenspan put”. But as margins decline, leverage must increase, one way or another, and in the search for leverage the Wall Street system has become increasingly fragile and even more prone to crisis, until we had the Crisis of 2007–8 where the Federal Reserve system was forced to become the lender of last resort for global capitalism (Tooze 2018). That merely indicated, as Daniela Gabor puts it, that the entire system rested on the de-risking state to deal with the massive risk externality built into the Wall Street model of finance (Gabor 2020). The regulatory capture of the SEC, described in this book, is one aspect of the rise of the private predator who not only skirts the law, but who through extensive lobbying gets to write the laws in her own favour.
Lazonick’s book is about the transformation of the Chandlerian firm into the vehicle of predatory value extraction by the rent seeking insiders of the US economy. Since this process of massive upwards redistribution, as opposed to the fantasy of trickle down, has been facilitated by law and institutions it is only reasonable to call it a form of corporate socialism. The institutional form of the firm, the corporate governance regime in which it is embedded, and its relation to the financial sector have all been put at the service of value extraction. Qua political philosopher, the one phrase missing from Lazonick’s book which I wish had been there was “systemic corruption”.
Under the doctrine of Maximising Shareholder Value what has disappeared is the corporate person of the firm itself, with its own interests, under the stewardship of a board and executive who owe a fiduciary duty to the firm. That duty to the firm underpins a commitment to the temporally extended balance between retained earnings and investment in productivity with the payment of debt obligations and dividends. Corporations have long-term interests in which capital is invested under the direction of a board that also appoints management. It is a form of systemic corruption when the interests of the Pikettyan supermanager, working in combination with a remuneration committee, ignores the clear conflict of interest involved in engaging in financial engineering to boost not only the share price but, in the process, their own remuneration. All of this is, as Lazonick notes, not at the behest of the diffuse and anonymous group of limited liability shareholders, but at the behest of the organised representatives of the rentier-investor class – the major players in that which Minsky called “money manager capitalism” (Minsky 1986/2008).
Lazonick rightly focuses on share buybacks as the most egregious form of this systemic corruption, but his book demonstrates that the problems run more deeply than that. I think one way to frame the success of this book is as the extension of the arguments of another book I very much admire, James Kenneth Galbraith’s Created Unequal: the Crisis in American Pay – a book that dates from 1998 (Galbraith 1998). Lazonick’s and Galbraith’s frames are exactly the same: understanding why, on a Schumpeterian account of the firm, we can expect a fissured economy (Thomas 2020a). What I mean by this is that the legacy of the US developmental state had to create the conditions of deep, structural inequality and macro-instability unless the centralised state was strong, not weak; unless it was an honest broker, not a dishonest one, between competing social interests.
From his sectoral, macro-perspective Galbraith diagnosed a situation where the legacy of the US developmental state, from my perspective better described as an imperial and militarised state, fractured the macro-economy into capital creating firms, capital using firms, and services. The outlines of Jason Furman’s “superstar firms” lay in the creation of the conditions for these firms in the industries that the USA seeks to dominate (Furman and Orszag 2018). Capital using firms, manufacturing, contributed to the fissured economy through their “rationalisation” (a point to which I will return). Finally the low-end services sector, employing a significant majority of US workers looks like the textbook case of a perfectly competitive sector in the sense that firms are under-capitalised, margins and profits are tight and work that is precarious and very poorly paid. Without direct support from government via wage support workers in this sector would barely get by, but that puts a sticking plaster over the problem of low pay. This is part of the structural transformation of welfare state capitalism across the affluent West, but markedly so in the racialised and inefficient version of the welfare state in the USA (Alesina and Glaeser 2004).
In my view Lazonick takes Galbraith’s framework and shows how things are even worse than you might think. If Galbraith takes the Schumpeterian explanatory framework to show that there was a fundamental, structural, inequality in the US economy grounded on sectoral division, what has happened in Lazonick’s accounting is that the financial sector has colluded with both the capital goods creating sector and the capital goods using sector to engage in predatory value extraction using the mechanisms that he carefully documents. The malformation of the American state’s investment policies has produced a lopsided capital distribution across the economy, that has created a fatted calf for the value extracting elite (including the “high end” part of the service sector). What “the neo-liberal state” means in this context is a state that enables, and sustains, this activity. It creates and sustains rent seeking niches, it places its own massive spending at the service of sectors deemed key to its political purposes, and it places the exorbitant privilege of the dollar at the service of derisking the financial sector.
That segues into my basic question for Lazonick: if we reinstate the Chandlerian firm do we not have the same problem of the fissured economy that worried Galbraith in 1998? In some ways this is a corollary of the problems with which Lazonick is concerned: one aspect of the doctrine of MSV, which he notes in passing, is that a firm should focus on its “core activities”. That means any part of a firm’s generic operations that can be outsourced, should be outsourced. So, for example, if Microsoft is forced to share its profits with its highly talented software engineers, it is not so constrained when it comes to paying the minibus drivers who shuttle the engineers across the Redmond campus. That service should be outsourced – and it is. The same holds true for a plethora of functions that used to be part of the Chandlerian firm but which the logic of “downsize and distribute” dictates should be outsourced. If this outsourcing also involves jurisdictional arbitrage, where the work can be done by poorly paid employees in developing countries, so much the better.
In fact, underpinning Lazonick’s and Galbraith’s worrying diagnoses there is a further one that is even more troubling. I do not want to deny that if we could put the clock back to the 1950s and 1960s in the USA to those decades which are, in this book, paradigms of sustainable and inclusive prosperity it would be a major improvement on the historical episode that has come to a close. But the deeper diagnosis, originating with Keynes but applied to the political economy of the USA by Minsky and Robinson, is that the structural basis of current inequality lay in those earlier decades (Robinson 1972, 1976, 1977).
The American state saw its task in those years as sustaining profits in the private sector. Aggregate demand was thus targeted solely via the sector that created capital goods in key industries radiating outwards from a core focused on military expenditure. While Keynes thought that two thirds of national investment should be under state control, the US state concentrated on channelling private investment, by guaranteeing profits, into this capital intensive sector (Minsky 1975, 1986/2008). Those sectors that employed the majority of American workers were, by contrast, not the recipients of investment. If you want to control inflation, then a core set of goods and services must be produced at stable prices, but this investment policy did not set itself this aim (Feygin 2021).
Instead, conflict emerges because of the contrast between the employees of the Chandlerian firm, who must receive a share of the profits, and workers more generally. With no investment, because of low anticipated profits, across most the US economy, the output of goods and services from this periphery remained stable while a newly affluent group of industrial workers are, indeed, receiving their Schumpeterian dividend. The result simply had to be the inflation crisis of the 1970s that was, comically, then blamed on something called “Keynesianism”. If it was easy to destroy the organised power of the working class in the 1970s it is because the Chandlerian firm has already divided the skilled from the unskilled, and those employed in the investment intensive sectors from those who were not.
My question is, then, whether it is enough to recapture the prominence of the innovative, Chandlerian firm, at the commanding heights of the US economy, without Keynes’s complementary emphasis on the state control of public investment via a national strategy whose aim went beyond sustaining private profits. If our concern is justice, and the fate of the worst off, then we have to be concerned with the workers who are either not candidates to be in the Chandlerian firm, or were “outsourced” from it. In spite of the remarkable achievements of this book, it seems to me that its reform agenda will have to extend to a wider reform of industrial policy, the role of the state in directing investment, and in a jobs guarantee.
The need for a comprehensive and national investment strategy leads to the deepest question this book raises – a political question. Time is a central theme of this book. The predatory value extractor does nothing to create future value, being content to extract rent from an existing value creation process. As a result that process is effectively sabotaged. What, then, of the future?
Here we come up against the basic fact, recently noted by Mark Blyth and Thomas Oatley, that the post-WWII growth model was based on the material reality of fossil fuel industry with an attendant politics they call a “carbon coalition” (Blyth and Oatley 2021). It is undoubtedly true that, as we transition away from that, many of the coastal elite are already working as symbolic analysts in a New Economy. But far more members of the business elite are, instead, profiting from the transition of a carbon based economy into an economy shaped by the climate crisis into what they envisage as a class of permanent rentiers. The predatory value extractor has no concern for future productivity as the plan is to live off the proceeds of past productivity for as long as possible.
Not only to address climate change, but to transform America’s politics, Professor Lazonick’s policies have to be embedded in a new investment strategy. As Blyth and Oatley put it:
Non-coastal, largely Republican states must be the epicenter of the green transition and be the recipients of most of the investment. After all, they have the most assets to turn around and the most to lose if they are not compensated. If all they are offered is “you decarbonize/we keep the money,” then all they will give back is more Trumpism. (Blyth and Oatley 2021)
To which I think we should simply add one fact about Carl Icahn, the anti-hero of this book’s chapter six: he was, at one point, considered for appointment as Donald Trump’s Treasury Secretary. A good point at which to draw this commentary to a close.
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