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Capitalism CAN BE Compatible with Caring

September 4, 2012

This past Sunday’s NYTimes featured an article by Hedrick Smtih entitled “Henry Ford, When Capitalists Cared”. This article describes Henry Ford’s then revolutionary idea that assembly line workers needed to be paid enough so that they could afford to buy the cars they were manufacturing. That idea of  a virtuous circle— where employers provided workers with a decent wage, good health insurance, and a good retirement plan in exchange for a long term commitment to the company— swept the country in the years that followed the advent of the Model T and especially in the years that followed World War II. Smith writes (emphases added):

Riding the dynamics of the virtuous circle, America enjoyed its best period of sustained growth in the decades after World War II, from 1945 to 1973, even though income tax rates were far higher than today. It created not only unprecedented middle-class prosperity but also far greater economic equality than today.

The chief executives of the long postwar boom believed that business success and workers’ well-being ran in tandem.

Frank W. Abrams, chairman of Standard Oil of New Jersey, voiced the corporate mantra of “stakeholder capitalism”: the need to balance the interests of all the stakeholders in the corporate family. “The job of management,” he wrote, “is to maintain an equitable and working balance among the claims of the various directly affected interest groups,” which he defined as “stockholders, employees, customers and the public at large.”

Earl S. Willis, a manager of employee benefits at General Electric, declared that “the employee who can plan his economic future with reasonable certainty is an employer’s most productive asset.”

From 1948 to 1973, the productivity of all nonfarm workers nearly doubled, as did average hourly compensation.

But things seemed to change somewhat abruptly in the late 1970s (emphases added):

Although productivity increased by 80.1 percent from 1973 to 2011, average wages rose only 4.2 percent and hourly compensation (wages plus benefits) rose only 10 percent over that time, according to government data analyzed by the Economic Policy Institute.

At the same time, corporate profits were booming. In 2006, the year before the Great Recession began, corporate profits garnered the largest share of national income since 1942, while the share going to wages and salaries sank to the lowest level since 1929. In the recession’s aftermath, corporate profits have bounced back while middle-class incomes have stagnated.

Today the prevailing cut-to-the-bone business ethos means that a company like Caterpillar demands a wage freeze and lower health benefits from its workers, while posting record profits.

In our country we are told that in order to maintain our global competitiveness we need to cut wages and benefits and cut government spending. Other countries are not doing this and are remaining head of us on many quality of life measures AND productivity (emphases added):.

In Germany, still a manufacturing and export powerhouse, average hourly pay has risen five times faster since 1985 than in the United States. The secret of Germany’s success, says Klaus Kleinfeld, who ran the German electrical giant Siemens before taking over the American aluminum company Alcoa in 2008, is “the social contract: the willingness of business, labor and political leaders to put aside some of their differences and make agreements in the national interests.”

In short, German leaders have practiced stakeholder capitalism and followed the century-old wisdom of Henry Ford, while American business and political leaders have dismantled the dynamics of the “virtuous circle” in pursuit of downsizing, offshoring and short-term profit and big dividends for their investors.

My essay “Broken Covenants” describes how downsizing, off-shoring and short-term profit changed the way one corporation, DuPont, operated over the past three generations. My Grandfather and Father both worked during the era of the virtuous cycle and retired with decent health benefits and a strong enough retirement that they both bought Cadillacs when they were in their 70s. My brother’s job was off-shored after 22 years. He won’t be getting any benefits from DuPont and a Cadillac (if he wanted one) would not be in the offing thanks to DuPont. I think their shareholders, though, are satisfied.

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