David Simon, creator of The Wire and Treme, said in an interview with Bob Edwards that America is a “prisoner of short-term gain.” I thought this a most elegant summation of this country’s evolution into the ethical swamp that appears to threaten its very existence. He further indicated that our collective inability to deal with Katrina and its aftermath was best seen as a marker of the end of our “can do” self-image. When asked the answer to the question posed in the first episode of Treme, “What nation does not rebuild its major cities?” he noted the obvious truth — only failed nations. In the short-term, closing New Orleans down and making it a movie set may have been the smart-money move.
Some thirty-five years ago, while teaching business management in one of my earlier incarnations, I happened upon an article that gnawed at me until, years later, I jumped from the toxic business-teaching ship with the sinking feeling that I was a preacher in the tower of Babel. While not yet infected, I was a carrier, dispersing a simple societal virus. (Ok, I like metaphors, so shoot me.) Insight always begins with a thin light in a dark room, which eventually illuminates the rather nasty things one has been, heretofore, blindly bumping into.
The article noted that it had been discovered by Harvard Business School researchers that MBA programs — lead by Harvard Business School — had somehow (they didn’t mean to) been teaching their students that their career paths should be measured in approximately five-year increments. So there! That’s it. The insight that should have led me to cry that the sky is falling early enough to avert several catastrophes and the decay of the American dream. (I like hyperbole too.) (And parentheses.)
Of course it sounded rather harmless on the face of it, especially c. 1975. I had neither the wisdom of age, the advantage of hindsight, nor even a small soapbox from which to proclaim the potential damage this would do to the ten’s of those who might have listened. This probably happens a lot in history, but it isn’t recorded in history because it doesn’t create history. So I am quite safe from the accolades of future observers, as I am a tad late in coming forth with this little insight.
I’ll oversimplify (after all, oversimplification is the essence of current news and politics) this small insight’s powerful impact as the Gospel of Short-Term Gain (GSTG) with the following short lecture.
A. The Garden
In the beginning there was the industrial revolution. Industrious entrepreneurs created businesses, and that was good. They then hired employees and they made things employees and entrepreneurs bought, since someone had to be the consumer. The entrepreneur kept a big part of profits — after all, it was their idea — but the employees got enough in wages to ultimately reach toward their middle-class dreams and buy the stuff they made. Toss in a little innovation and a few productivity increases so more money is created and the first world is a mostly happy place. Even when the owner/entrepreneur dies, the kids picked up the ball and kept things running for their own kids’ inheritance. If nobody gets too greedy, everybody wins. (I’m now mixing micro and macroeconomics rather haphazardly. The Invisible Hand coming soon.) Short-term gain is not really substantially different from long-term gain in the beginning. The “circle is unbroken,” as a Sunday school hymn I remember says. “Hallelujah, thine the glory.” Walmart, Wall Street, and the USofA score.
Now, remember that these two hyphenates – owner-manager, and employee-consumer – are one big happy (or not) family. They may have even cared about the employee as customer for reasons other than the filthy lucre that could be extracted from them (after all, they were supposed to buy the stuff that got made and sold). Those were the olden days. The company had to survive and grow short-term and long-term in order to make sure all these people were happy forever and ever. If the owner-manager-worker-consumer arrangement worked, then microeconomics is alive and well. This gives birth to macroeconomics and the Invisible Hand would lead us to democratic/capitalistic utopia – the promised land before the next promised land. The second promise is from a different gospel. Economic morality and ethics aren’t the same as the religious versions. Well, I’m not so sure on that point.
By the way, the Invisible Hand is a concept formed by the great economist Adam Smith. It states that there is a common need for all the parties in a large capitalist system to optimize each segment’s benefits in order to sustain an optimum economic system. Since all are out for their own optimum gain, the whole system acts as a self-regulator involved in constant correction for the perfect balance among the parts that sustain the whole. (Consider the word optimum in both the short-term and the long-term here.)
B. The Corporation
And then the corporation slithered down the tree of knowledge and … wait up, I’m off in the wrong gospel again. Anyway, so what is a corporation you ask? Let’s skip the legal parts that read like the IRS Tax Code and get right down to it. A corporation takes what was a family owned business and cleaves it into stockholders, trustees, managers, and employees (and customers, but they don’t count much, except for their money and, hopefully, lack of economic insight). These parts are non-hyphenates – a very important point.
Now the GSTG’s origins become rather simple and revolve around the mighty concept that helped lead to America’s enormous economic success – again, the Corporation. A lovely concept originally. The industrial revolution had allowed those who followed Horatio Alger’s path from rags to riches to evolve into a few mega-rich monarchs who made stuff. (They long failed to notice that making things was child’s play compared to the coming money movers.) The initial “too big to fail” corporations which made stuff needed large infusions of fertilizer (capital) to continue feeding the “plants” – pun intended. Hence, the corporation became business king, with the separation of stockholder from manager resulting in the use of Other People’s Money. Note also that a lot of top managers and the trustees were stockholders as well.
Not too far into this socio-evolutionary process, strong corporations started buying weaker corporations. Sometimes, just so the Harvard MBA’s could show their five-year prowess, the smaller corporation got bought, gutted and resold for unrealistic short-term returns. FlipACorp 101. Seems oddly familiar as one sees smaller players trying to flip a house and count on greed to cover the lack of true value being infused into the home (or corporation – whatever, houses and corporations are just derivatives when you toss it all into the finance sausage where none of us want to look. And, it smells to high heaven too!).
C. Micro Begets Macro – Or Where is That Damn Invisible Hand?
Microeconomics is about the small, of course, and macro the large. Corporations (eventually to become people, thanks to the Supreme Court) became so big that their aggregate economics made them excessively powerful units in the grand macroeconomic equation. They also morphed in many cases into financial institutions, which didn’t make stuff at all.
Now, if corporations were buying and selling corporations, the abstraction could be extended via financial institutions that could buy and sell the illusory products of the corporation (pork bellies), and then the well being of corporations, and eventually the financial corporations started buying and selling parts of each other (derivatives for instance – hey, it’s just finance trading finance.). Pretty soon Enron was trading in weather futures for god’s sake. (Excuse me – different gospel again.)
Well, even that is getting into another sorry story of modern business. Best to look at it later. But do note that Smith’s invisible hand is supposed to be self-regulating and, therefore, government regulation, such as the Glass–Steagall Act of 1933 should have no purpose – even though its corporate/financial regulations helped stave off more Great Depressions as was its intent. So Bill Clinton did away with it – it being useless and all.
So these corporate/finance chunks were divided into smaller chunks, bundled and sold separately, so even the large financial companies finally didn’t know what they were buying and selling. After all, diversification is one of the ten or so commandments of business, served as gospel in business schools.
So how did bright MBA’s from Harvard get into the too big to fail league? The good old GSTG!
By now looking not five years, but a few weeks into the future, they could be rich in six months and robber barons a year out. Looking out for number one was easy. The gap between managers and all stakeholders was now huge and filled with dense smoke and immense mirrors.
Of course, this all was made possible by power and distance. Distance we just glanced at – separating the economic players. Power is just a means to speed up short-term decisions that mean long-term disaster. None of this was inevitable. It was just empowered (hey – it’s my post) by the lack of individual concern for long-term stability and profit optimization. What is that?
Over forty years ago, we business teachers taught that profit maximization alone was very dangerous. One example was the fact that environmental pollution of your marketplace would eventually (long-term) lead to governmental penalties and loss of dead and deformed consumers in your marketplace. So, killing and maiming customers/employees was a bad thing if you wanted to stick around for your grandchildren to inherit the business. Hence, some returns spent on such things were profitable, but only in the long run.
Barring any direct responsibility beyond the very few years while they covered their messes with sand and quickly moved out and up, meant it was somebody else’s problem after the corporate manager was long gone. Hence, the invisible hand was not really there! But, the myth was still believed, and deregulation kept the smelly mess under the sand longer.
Sadly, here we sit in the long term and once again the consumer feels corporate failures are not even punishment for the corporate MBAs, since Too Big To Fail has re-centered the consequences where they belong – on the poor consumer/employee. Yeah, the customer is so far out of the loop that financing them via wages is not a viable goal. Corporations market to them like every day is Superbowl Sunday. They just don’t finance their purchases.
Thus, the corporation continually tries to hold down wages (which create buying power for the potential customer). Every nickel squeezed out of profits is put in the hands of the stockholders, trustees and managers. Wages stagnate or fall.
Our whole political system is divided into a group who wants to control wages – to see greater profits go to the rich and trickle down on somebody, and another group who want to control corporate excesses and see wages rise via big government. They both believe theirs is the only solution. None remember that the initial utopia was to be created from optimizing each player’s stake in the system. The Invisible Hand is now shooting the bird at the consumer-employee. The other players are too far distanced to know or care much about the needs of consumer-employees, who have been pretty well neutered by union breaking, consumer manipulation and short-term gains.
So there you have it – a mini-history of the evolution of our economic problems. The separation of the participants supported by the introduction of the corporation and the resulting abuses of that separation via the introduction of the Gospel of Short Term Gain, courtesy of Harvard Business School and others. Now you can watch all those talk show pundits with insight few evidence in their insatiable babble.
And might I modestly suggest that this GSTG can be observed in many places beyond large-scale economic systems? Politics anyone? That and the 80-20 principle answer most major concerns in our current bafflement regarding why and how we got here. (The 80-20 principle later.)