The Invisible Handcuffs of Capitalism: How Market Tyranny Stifles the Economy by Stunting Workers (31 page)

In a rational society, such efforts would be unnecessary. Everybody would have a stake in developing more efficient technology, since all could share in its benefits. The capture of workers’ knowledge has a long history, dating back at least as far as William Petty’s History of the Trades Project. Petty was in some respects more advanced than the management of General Electric because he understood that knowledge creation was a collective activity.

Not surprisingly, Charles Babbage offered one of the more sophisticated analyses of knowledge capture. Note that, as a prisoner of his time and class, Babbage blamed workers’ failure to share their information on their “erroneous” distrust of capital:

A most erroneous and unfortunate opinion prevails amongst workmen in many manufacturing countries, that their own interest and that of their employers are at variance. The consequences are,—that valuable machinery is sometimes neglected, and even privately injured,—that new improvements, introduced by the master, not receive a fair trial,—and that the talents and observations of the workmen are not directed to the improvement of the processes in which they are employed.
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Babbage got things backwards. A more cooperative system of social relations—one not based on class—could offer a better quality of life for employers as well as workers. Class division is so destructive that even the winners turn out to be losers.

Bureaucratic Control

Bureaucracy is one of the chief organs of Procrusteanism. The scale of bureaucratic control has grown alongside the rapidly expanding scope of the giant corporation.

Just compare Alfred Marshall’s description of the early firm with the state of the contemporary mega-corporation. In the early twentieth century, Marshall was witnessing the end of an age in which business owners could still have a detailed command of their operations. In Marshall’s words:

The master’s eye is everywhere; there is no shirking by his foremen or workmen, no divided responsibility, no sending half-understood messages.
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In Stephen Hymer’s more forceful expression, by the mid-twentieth century, the employer during the early stages of capitalism ideally “saw everything, knew everything, and decided…. everything.” But then, Marshall’s employer had relatively little to know compared with the expanded span of a modern corporation, which employs many thousands of workers serving markets around the world. As Hymer put the matter:

The Marshallian capitalist ruled his factory from an office on the second floor. At the turn of the century, the president of a large national corporation was lodged in a higher building, perhaps on the seventh floor, with greater perspective and power. In today’s giant corporation, managers rule from the top of skyscrapers; on a clear day, they can almost see the world.
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In reality, their vision is largely filtered through abstract account sheets rather than the actual functioning of the world. An excessive layering of bureaucracy clouds their vision even further. For example, by the 1980s, Ford had built twelve layers of organization between the factory floor and the chairman’s office. Any child who has played the game of telephone could predict the quality of the resulting communication.

General Motors was no better. John DeLorean, head of the Chevrolet division and known as a flamboyant and innovative executive at General Motors until he got involved in a drug deal to finance his floundering automobile company, reported a similar organizational maze. A plant manager had to go through five layers of management to reach DeLorean’s office. A worker on the shop floor did not have immediate access to the plant manager, and DeLorean himself probably had to jump through a few hoops before he could see the chairman.
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Although DeLorean attempted to reduce the number of layers within Chevrolet, he was dismayed by the increasing centralization of the company:

As I progressed in the corporation, I watched GM’s operations slowly become centralized. The divisions were stripped of their decision-making power. Operations were more and more being made on The Fourteenth Floor.
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In 2007, almost thirty-five years after DeLorean left General Motors, the automobile industry had still not improved its channels of communication. Here is how
Business Week
described the organizational structure at Ford:

In the royal hierarchy at Ford, an elaborate system of employment grades clearly established an employee’s rank in the pecking order. The grades also had the unintentional effect of quashing ideas and keeping information tightly controlled. When [Mark] Fields, now president of Ford Americas, first arrived at the company from IBM in 1989, he couldn’t make a lunch date with an executive who held a higher grade. People asked him what his grade was “as a condition of including me or socializing with me,” Fields recalls. And he was discouraged from airing problems at meetings unless his boss approved first.

Ford … is today: a balkanized mess. It has four parallel operating units worldwide, each with its own costly bureaucracy, factories, and product development staff…. Examples of Ford losing opportunities
because of its byzantine corporate structure abound. A recent example involves Sync, a system that allows voice-command control of a cell phone and MP3 player. It was a big success at last January’s North American International Auto Show. Ford developed it with Microsoft Corp. last year and will start rolling it out this fall. Although Volvo and Land Rover are also dying to offer Sync, neither will get the system because the electrical architectures of the Swedish and British cars are incompatible with Ford’s.
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Even as the major U.S. automobile companies stumbled into bankruptcy, little changed. Steven Rattner, the financier the government charged with overseeing the bailout of General Motors, reported:

The cultural deficiencies were … stunning. At GM’s Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).
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Despite the inhospitable climate for communication, poor design, outsized executive salaries, and outrageous fuel consumption, blame for the dire straits of the U.S. automobile corporations fell largely on workers. How dare they demand decent wages, pensions, and medical care!

In a sense, labor might bear some responsibility for the decline of the automobile industry. Had the United Automobile Workers not agreed to the Treaty of Detroit and demanded more control on the shop floor, the automobile industry might have turned out to be much healthier.

The problem of bureaucratic control is not limited to the automobile industry. More than fifteen years ago, in a moment of Cold War triumphalism, Peter Huber compared the corporate command structure of U.S. megacorporations with the overthrown planning system of the Soviet Union:

As market forces and the rise of the information age ultimately forced the unbundling of the Soviet Union, so they are forcing America’s largest economic organizations to break up into more efficient pieces. If you’ve grown accustomed to a sheltered life inside a really large corporation, take pity on the unemployed apparatchiks at the Kremlin. The next Kremlin to fall may be our own.
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Huber was correct to predict change, but its direction was not what he expected. The U.S. Kremlin is more powerful than ever. While many corporations spun off or shut down divisions, the trend in the concentration of the corporate sector continued unabated. Huber is still correct that the byzantine management structure remains a certain recipe for failure.

Financial Control

By the time Huber was writing, the locus of corporate control was shifting from the CEO’s office to Wall Street and owners of private equity funds. The power exercised by outside financial interests has further insulated the decision makers at the top from the people who are doing the work on the ground. Adding this new layer of control on top of an already dysfunctional bureaucratic control makes disaster even more certain.

Like bureaucratic control, financial control takes a top-down view of the world. The masses of workers at the bottom of the hierarchy exist almost as pure abstractions, except to the extent that wages cut into profits. Yet, in a sense, financial and bureaucratic controls are polar opposites. Bureaucracies tend to be lethargic, wedded to past procedures. In contrast, finance moves with lightning speed. In the world of finance, the past means nothing compared to a chance to turn a quick profit.

With the rise of financial control, the stock market has become the crucial arbiter of corporate management. Financial markets use the current stock price as indicators of success. Because money can exit
industry in seconds, management cannot afford to let stock prices sag, even for a relatively short period. In addition, CEO compensation largely depends upon stock prices.

Hedge funds, pension funds, and a handful of extremely wealthy shareholders make strong demands on corporate leadership, removing CEOs who do not meet their expectations of financial success. Corporate executives cannot appear to resist these expectations, even when these are unreasonable.

Even more directly, financial organizations take over firms under the pretext that they can “add value” by reorganizing the business. Generally, the objective is to repackage the company in order to sell it to unsuspecting investors, but only after charging large fees and loading the company with so much debt that it is vulnerable to failure. All too often when companies find themselves in this position, they try to save themselves by squeezing more out of their workers in terms of wages, workload, and safety.

Corporate executives were once insulated from such pressure. But by the late twentieth century, the stock market became a prime concern for CEOs. According to a former U.S. Treasury secretary, “It is not uncommon for the chief executive officers of major U.S. corporations to spend a week or more each quarter telling their corporate story to security analysts.”
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The analysts’ predictions of quarterly earnings reports are a major determinant of stock prices, and stock prices determine the fate of the CEOs. CEOs who can hold on to their positions by satisfying the financial markets can command more money, while protecting their managerial reputations.

Given the pressing financial imperatives, management must focus on the next quarterly earnings target, rather than measures that would make the company more productive in the long run. As a result, financial pressure often makes business reluctant to put money into expensive investments in physical capital or training workers, which could increase future productivity.

Even companies not directly under siege by financial interests often behave more like a financial than an industrial operation. For example, in July 2007, Exxon reported the fourth-largest quarterly
earnings that any corporation has ever earned—$10.26 billion. One might have expected that such enormous profits would be a cause for celebration. However, because this amount was slightly lower than the $10.26 billion for the second quarter of 2006, Wall Street pummeled Exxon’s shares, knocking them down 4.9 percent. To please shareholders, Exxon had been spending more on buying back its stock than on capital expenditures.
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Finance represents another threat to the economy. Just as Procrusteanism makes real handcuffs become invisible, it makes imaginary wealth seem real. Once the recent economic meltdown began, trillions of dollars of wealth seemed to disappear overnight. People had invested in houses and securities under the illusion that their wealth was growing, even though the market values were to a great extent imaginary. Had people paid more attention to the real productive wealth-producing activities that form the foundation of any economy, they might have been more skeptical about the prospects of those investments. Here again, the efforts of economists to render work and workers invisible contributed to the disastrous aftermath of the bursting of the bubble.

The Toxic Mix of Bureaucracy and Finance

When financial interests demand immediate increases in profits, corporations can mislead investors by manipulating their earnings reports, but sooner or later this deception will be uncovered. In the short run, management might be able to improve stock prices by currying favor with financial markets, convincing security analysts that their stock deserves a high price. Eventually, however, management has to create real profits. In any case, the efforts to inform or mislead investors or stock analysts will be a waste of time that might have been spent on something productive.

In its effort to jump-start improvements in profits, business also suffers the consequences of clumsy bureaucratic structures. Those at the top of such structures can have no real idea of what happens on the
ground floor. As financial pressures began to grow in the early 1980s, flattening the command structure became a popular managerial mantra, but flattening did not mean a shrinking of the distance between top management and the bulk of the workforce. Instead, layers of middle management disappeared, while the central office imposed goals and quotas on lower-level managers without real knowledge about feasibility.

Regardless of such structural changes, corporations eventually resort to a meat ax approach as a quick fix to improving profits. In one egregious example, Circuit City dismissed 3,400 people, about 8 percent of its workforce, in April 2007, not because they were doing a bad job and not because the company was eliminating their positions. Instead, executives said the workers (who earned $10 to $20 an hour)were being paid too much and that the company would replace them with new employees who would earn less. It was the second such layoff at Circuit City in the last five years, and it offered an unusually clear window on the ruthlessness of corporate efficiency.
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