According to standard economic theory, investment is good and therefore should be encouraged because, among its many other benefits, such as permitting those who save money to make money from their savings, it provides businesses with the money they need in order to buy equipment, rent office or factory space, or expand their operations, and hence, it creates jobs, which increases total employment while diminishing the level of unemployment. One of the practical consequences of this naive belief is that corporate and speculative tax rates have been lowered in many countries in order to encourage investment, based on the assumption that this will assuredly lead to an increase in the total number of jobs. However, as is true of many other economic theories and beliefs, reality does not always agree with this nice, simple economic theory or model of investment. I claim that, far from creating jobs, a significant amount of financial investment today destroys jobs and reduces the number of jobs in various industries.
For the most part, the proprietors of the vast sums of money that circulate around the world’s financial markets looking for investment opportunities, with the goal of making as much money in as short a time as possible, don’t really care how that money is made – as long, of course, as it is not illegal. This is because of the investors’ ignorance, coupled with the distance, whether this distance is physical, emotional, or personal, that separates these people who have more money than they need to satisfy their present needs, and in some cases, far more money than they will need to satisfy their needs for the remainder of their lives, from those who may be harmed by their investment decisions and actions.
In the case of the stock market, there exists a profound disconnection between the owners of corporations whose shares are publicly traded in stock markets and a concern for the corporation’s employees, customers, other people who may be affected by its actions, and its long-term health. This is a very strange situation, since usually when we buy something like a car, house, pet, computer, furniture, or clothes, we make an effort to preserve the object and maintain it in good condition. Most pet owners are solicitous about their pets’ well-being and comfort and seek to ensure that they remain in good health. But the very peculiar nature of corporate ownership has led to the situation where the owners of a publicly-traded company care only about making money and are indifferent to other important things like its long-term health, whether the company does things that cause harm, and how the company’s employees are treated, including how much they are paid. Since there is an inverse relationship between a company’s profits and how many employees it has and how much they are paid, its shareholders have a strong personal interest in keeping the number of employees, and the wages or salaries they are paid, as low as possible.
During the past fifty years or so, it has become increasingly common for a large publicly-owned company to lay off hundreds or thousands of its employees in order to reduce its operating costs and thereby increase its profits. These measures, which were shocking and controversial at first, have become so commonplace that no one bothers to criticize them anymore. They are regarded as a difficult but necessary measure in the globally competitive economic world that we live in today. In the case of a company that is losing money, such cost-cutting measures may of course be necessary. But in the case of a company that is profitable, it is questionable whether they are necessary, since in many cases the increased profits are not used to do sensible things like pay off the company’s debts, invest in research, develop new products, or buy new machinery, but instead are expropriated by the owners or management of the firm, redistributed as dividends to shareholders, or used to buy back shares of the company’s stock, none of which practices helps the company in the long run.
S&P 500 companies have spent $4 trillion on buybacks between 2005 and 2015, representing at least 52.5 percent of their net earnings, and another $2.5 trillion on dividends, which amounted to 37.7 percent. In 2014, buybacks and dividends represented 105 percent of net earnings of publicly traded American companies; in 2015, they reached above 115 percent.[1]
The mass corporate layoffs that are routinely reported in the business news are not motivated solely by the need to remain competitive, as is often erroneously claimed. Because shareholders constantly demand more and more profits,[2] a quick way to do this is by firing a large number of employees in order to reduce labour costs.
And it [General Electric] certainly ceased to be a creator of jobs. By the time Lehman Brothers collapsed [in 2008], GE had gone from being a place where the country’s top engineering grads were hired into lifetime employment to being an infamous downsizer. [Former GE CEO Jack] Welch[3] fired 112,000 people in the first five years of his tenure in an effort to bolster the firm’s stock price by cost cutting[…][4]
The rapid rate at which large corporations are shedding employees has created an impression in some quarters that the firms are losing their power. It is a misleading impression. The Fortune 500 firms shed 4.4 million jobs between 1980 and 1993. During this same period, their sales increased 1.4 times, assets increased 2.3 times, and CEO compensation increased 6.1 times.[5]
Take the question of jobs. For all their economic power, the number of jobs that global corporations provide relative to the world’s workforce is trivial. According to the Top 200, a report by Sarah Anderson and John Cavanagh of IPS, although sales of the world’s two hundred largest corporations are equivalent to 27.5 percent of world GDP,[6] they employ only 0.78 percent of the world’s workers. As we have said, the majority of the world’s jobs are provided even today by small and medium-size enterprises—the same enterprises that are also responsible for creating nearly all new jobs. As corporations get ever larger and consolidate, merge, and consume other companies, they convert to production systems and technologies that reduce jobs rather than increase them.[7]
What is happening in these cases is a massive transfer of wealth[8] from the workers who have lost their jobs, most of whom belong to the middle and lower classes, to the wealthy individuals who own stocks, since the salaries and wages that would have been paid to the workers are either redistributed as dividends to the company’s shareholders or, by increasing the company’s profits, they serve to increase the company’s stock price, both of which outcomes benefit the shareholders at the expense of the fired workers. There is a very clear trade-off between the welfare and well-being of the fired workers and the stock owners. Hence, it is completely absurd to reduce tax rates on these kinds of financial “investments” based on the mistaken assumption that, regardless of its nature, all investment creates jobs, since there are some kinds of investment today that have precisely the opposite effect. That this is what is actually happening in the real world, as opposed to the frequently unreal and imaginary world of economic theory and the models that are based on it, is shown by the fact that corporate profits are at historically high levels.
Instead, there continues to be an implicit argument that companies have no choice but to drive down labor costs in order to survive one existential crisis after another: globalization, digitalization, recession, Walmart. Yet at a time when corporate profits now make up 11 percent of the nation’s total economic output, a share not seen since before the Great Depression, that justification rings more than a little hollow. “Corporate profits as a share of the economy are near their all-time high,” argues Princeton economist Alan Krueger, former chair of President Obama’s Council of Economic Advisers. “So it is hard to argue that companies do not have the ability to support higher wages.”
And yet the culture of the Impulse Society continues to make this argument—sometimes quite publicly. Although many manufacturers won major wage concessions from employees during the recession [that followed the 2008 financial crisis], on the theory that reductions were necessary for company survival, many of those same companies have refused to restore wages to their earlier levels, despite the recovery in corporate profits. When workers at the company Caterpillar demanded to know why the manufacturer refused to relax an earlier wage freeze, despite reporting record profits, CEO Douglas Oberhelman (whose own pay had nearly doubled since 2010) argued that the wage freeze continued to be necessary to keep the company competitive. “I always try to communicate to our people that we can never make enough money,” Oberhelman told Bloomberg Businessweek. “We can never make enough profit.”[9]
The workers who do the work that enriches corporations generally have little or no say in how the corporation is run and how its profits are distributed. Unions were an attempt to give these voiceless and therefore powerless workers a say in these important matters and compensate for the profoundly undemocratic nature of corporations. But in many countries, unions have been weakened due to increased automation and the relocation of factories and offices to countries where labour is much cheaper and non-unionized, both of which widely-adopted practices have significantly reduced the percentage of unionized members in the workforce in some wealthy countries, which in turn has reduced the ability of unions to protect their members’ interests. Another aim of these mass layoffs has been to break the power of unions by instilling fear in the remaining employees, while reducing the compensation, or the part of economic production, that goes to the workers.
Why has predatory investment become so widespread and legitimized? First and foremost, it is because of the strange belief, which has become more and more ensconced as a basic tenet of many publicly-owned corporations, that the primary objective of a company’s executives is, or should be, to maximize “shareholder value,” which means maintaining or increasing the company’s stock price, which in turn is largely dependent on the company’s annual or quarterly earnings and profits. What this bizarre belief means is that the primary goal of every publicly-owned company is, or should be, to make money for those individuals, the great majority of whom – more than 99% – have not contributed a single penny to the company whose stock they own. Another important reason for the prevalence of predatory investment is that most corporate executives – those individuals who have the power to fire the company’s other employees – own shares of the company for which they work, which gives them a strong incentive to engage in this kind of predatory behaviour, since they will personally benefit from a reduction in the company’s labour costs – provided, of course, that this reduction does not include them, since their labour is not deemed expendable, as is the labour of the company’s many other workers – both from a rise in the company’s stock price and from bonuses for generating large profits.
The false assumption behind this frequently-repeated corporate executive mantra is that whatever is good for a company’s shareholders is also good for the company. But clearly this is far from being true all the time. There are many instances where the interests of these financial Don Juans – who, like the fabled womanizer, only care about their own pleasure (care only about their personal investment), are in it only for the short term (seek primarily short-term speculative returns and don’t care what happens to the company in the long term), contribute nothing to the maintenance of the women they have seduced and possibly impregnated (contribute nothing to the company they own), lie about their intentions (claim that their demand that workers be fired is to increase the company’s efficiency), and assume no responsibility for their actions (take no responsibility for the company’s debts, mistakes, or harmful actions) – diverge from the best interests of the company. These selfish, speculating Don Juans who go around the world looking for the highest return on their investment generally don’t care how they make money, whether people’s lives and livelihoods are harmed or destroyed by their actions, or whether entire national economies are ruined or destabilized as a result of their collective and frequently selfish actions.
In what sense do a company’s executives owe anything to these selfish and greedy shareholders who, because of the strange nature of corporate law, namely that shareholders are not to be held liable for the debts and actions of the company they own, are not obliged to take any responsibility for the company’s actions or help pay back its debts?[10] Certainly not from a moral perspective, since the great majority of these shareholders have contributed absolutely nothing to the company they own – not money,[11] labour, ideas, advice, encouragement, or moral support in difficult times. The idea that corporations should be operated primarily to maximize “shareholder value” was a bastard issue born from the union of greed, ignorance, selfishness, and no-responsibility.
There have always been individuals who have tried, by various illegal measures, to take away from others the wealth that they possess or produce. The curious thing about the massive expropriation by individuals who have contributed little or nothing to the success of the companies whose profits they seek to expropriate is that it is completely legal. That this has happened on such a wide scale is another illustration of the very grave defects of the corporate ownership model, for predatory investment is one of the main causes of the growing inequality that is visible all over the world between the rich and everyone else.
Companies have many obligations that, in my opinion, are more important than any fictitious but legally-protected obligations it may have to its non-contributing, no-responsibility shareholders: they have a responsibility to the society in which they operate to ensure that their employees, customers, and other people are treated well and fairly, that they do not harm others by their actions, and that they behave at all times in a responsible manner, in accordance with the laws of that society. The problem, of course, is that, given the nature of corporate ownership and the misleading dictum that competition will, in the long run, make us all better off, if only we let it work its magical, salutary effects, unchecked and uncorrected by government oversight, there will be no significant changes in this ridiculous economic system until we change the manner in which large companies are funded, owned, and operated.
Predatory investment doesn’t even fulfill the function that, according to economists, is one of the primary functions of investment, namely providing funds for new businesses, for most of these financial Don Juans are not willing to take the risks inherent in financing new companies. Because most people want a safe investment for their money, especially those who don’t have much savings, they prefer to invest it in safe ways. This is why most of them prefer to buy the stock of companies that have been in existence for a long time and are still profitable rather than new companies that have yet to make a profit and may go out of business before they do so. Hence, they primarily buy the stocks of mature, established companies that have survived the high-mortality stage of entrepreneurial infancy, when many businesses die because of insufficient revenues and continual financial losses, and then seek to expropriate the profits and wealth that have been created by these companies’ workers, by claiming that they rightly deserve these profits for themselves because of the high prices they have paid for the company’s shares.
Predatory investment is in no sense productive. Instead, it takes what others have built up and produced, and expropriates these hard-earned gains for itself. It is another example of the wealthy using their power, in this case financial power, to wrest money from others and accumulate as much of it as possible for themselves. Predatory investment opportunely expropriates a part of the production, wealth, and profits that are produced by the efforts, labours, ideas, risk-taking, and innovation of others. Instead of helping to increase the company’s sales or contributing a new idea or practice, it callously demands that some of those who have contributed to the company’s success be fired, which increases the work that must be done by the remaining employees, while keeping them subjugated with the threat that they may be next on the chopping block. In the fullest sense of the word, this kind of investment is parasitic. Like bloated vultures or hyenas that opportunely scavenge animals that have been successfully hunted by other predators, predatory investment scavenges the successful business operations and labour of others. To allow it to continue its depredations is to allow the avaricious rich to siphon off the wealth that is created by the working classes of society. It has been made possible by the highly undemocratic nature of corporations, where the owners and their managers or executives are given what amounts to tyrannical control over the workers, to do with them as they please, at least in an economic sense.
Predatory investment is no different from the selfish actions of pirates on the seas and thieves and robbers on land in past ages, who took the wealth that was earned and accumulated by the hard work of others. Certainly the work of these bandits involved toil and risk, but it was in no sense socially beneficially, and so strenuous efforts were made to eradicate these and other kinds of brigandage. The same measures must now be taken to curb predatory financial investment in order to check its harmful effects on societies around the world.
What is true of investment in wealthy countries is also true of certain kinds of investment in poorer countries: their goal is not to help or enrich the poor people who live there, but to enrich the corporations that operate there, which usually means enriching its no-responsibility owners. Such investments are not always mutually beneficial, and neither do they create significant employment for the native inhabitants, while they may cause harm to a significant number of the local inhabitants.
The remedy for this kind of selfish anti-social behaviour is clear: the gains from predatory “investment” – which is really a form of economic expropriation that masquerades as benevolent financial aid that helps to increase a company’s or country’s efficiency and competitiveness – should be taxed at higher rates in all countries in order to discourage this kind of selfish, harmful, and frequently unjust behaviour.
[1] Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar, chapter 4. Crown Business, New York, 2016.
[2] Each time a company’s shares changes hands, the new owner of those shares has not made any money from one’s purchase, and hence, there is a constant demand on the part of shareholders for the company to maintain or increase its profits, since this usually has a direct effect on the company’s stock price. This constant pressure to maintain or increase profits has a significant effect on the behaviour of corporate executives, which most certainly is not always beneficial for the company, its employees, or society in general. This is an illustration of the disparity between economists’ conception of reality and reality itself, for according to economists, it doesn’t matter who owns the shares of a company, for in their theoretical conceptions, these anonymous owners are interchangeable, provided that their ownership does not amount to a significant percentage of total shares. But there is an important difference between a stock owner who bought a company’s stock at a relatively low price when they were first issued or shortly afterwards, has held them for many years, during which time the price has gone up considerably as the company has grown larger and regularly made profits, and then sold one’s shares for a handsome profit. Such a person is not likely to demand higher and higher profits. But when the shares are sold to a new owner, that person has yet to make any money, and so one is more likely to demand that costs be cut in order to increase profits, even if this is an unreasonable or unwise course of action that is unfair to the company’s employees.
[3] Welch was one of the early prominent CEOs to champion the idea that corporations should set maximizing “shareholder wealth” as their primary objective. After his retirement, he declared that it was “the dumbest idea in the world.” However, he only did so after he personally had benefited from this policy in the extravagant bonuses that he received during his tenure as CEO of General Electric.
[4] Makers and Takers, chapter 5.
[5] The Case Against the Global Economy: And for a Turn Toward the Local, p. 26 (“The Failures of Bretton Woods” by David C. Korten). Edited by Jerry Mander and Edward Goldsmith. Sierra Club Books, San Francisco, 1996.
[6] If these are gross sales figures, then the amount which these corporations contribute to global GDP is being overstated. For example, a large retail company like Wal-Mart does not produce any of the many different things which it sells in its stores. Hence, the amounts it pays to its many different suppliers must be deducted from its sales figures in order to compute its net or actual contribution to a country’s GDP. The original statement in the quoted document – “The combined sales of the world’s Top 200 corporations are far greater than a quarter of the world’s economic activity” – does not make clear whether the authors are talking about gross or net sales. However, this discrepancy does not negate the authors’ assertion that there is a very large difference between how much these companies produce and the percentage of the world’s work force that they employ.
[7] Alternatives to Economic Globalization: A Better World Is Possible, pp. 298-299. Edited by John Cavanagh and Jerry Mander. Berrett-Koehler, San Francisco, 2004.
[8] To give an example of how much money is involved in these transfers from the middle class to the rich, a job cut of 10,000 employees who earned an average of $50,000 a year means a loss of $500 million per year by the first group. How much the rich gain by this measure is not certain, since this is not a precise mathematical monetary transfer: it could be more, or it could be less than the amount that the middle class have lost. Of course, this is assuming there is no change in the company’s total revenue or other costs as a result of these mass layoffs. In some instances, such as leveraged buy-outs, where an equity firm uses large amounts of borrowed money to purchase the company and then proceeds to lay off many of the company’s workers or pay them less than they earned before the buyout, a significant part of the savings are directly transferred to the management, bankers, and others. This clearly represents an expropriation of the workers’ former salaries by the wealthy, who vie with each other in order to obtain as much of the corporate booty as possible. Instead of guns and knives, which were the weapons used by pirates in olden days, these corporate pirates use dismissals, the threat of more dismissals, and the threat of relocating to a country or region where labour costs are lower, in order to obtain what they want.
[9] The Impulse Society: America in the Age of Instant Gratification by Paul Roberts, pp. 169-170. Bloomsbury, New York, 2014.
[10] Anyone over the age of fifteen should be able to understand that allowing stock owners to receive some of the profits of a company whenever it makes profits, while exempting them from having to pay the company’s debts when it loses money or must borrow money to cover its losses, will lead to a highly skewed, irrational, and less-than-optimal outcome.
[11] There is, of course, the money that was originally paid for the stock shares, which may have helped the company to grow. However, there are many successful companies whose stock trades at many times the value of this original investment, and not a single cent of this increase in the company’s stock price goes to the company, even though in most cases this price is directly related to the company’s financial performance. Moreover, as I explain in the essay “The Very Strange Nature of Corporate Ownership: An Alternative to the Rumpelstiltskin Model of Raising Funds,” I believe that surrendering control over the company is an exceedingly onerous concession to have to make in order to acquire a limited, one-time injection of operating capital. When a company acquires money in other ways, such as through a bank loan or by issuing bonds, it does not give up any control over the company to the creditor, including the manner in which it is operated.
Homo Stupidus 