Saving Capitalism

by Robert B. Reich

  Besides, shareholders are not the only parties who invest in the corporation and bear a risk that their investments will drop in value. Workers who have been with the firm for many years may have developed skills and knowledge unique to it. Others may have moved their families to take a job with the firm, buying homes in the community. The community itself may have invested in roads and other infrastructure to accommodate the corporation. By contrast, most shareholders of a large corporation do not put their money into enlarging its productive capacity because most of the value of the stock market has little to do with new infusions of cash. Stocks are more like a vast collection of baseball cards, repeatedly traded. Apple raised $97 million in its initial public offering in 1980. Since then, those shares have circulated among investors who have bid up their price, but the added value has not gone to Apple; it has gone to investors lucky enough to buy them low and sell them high. Activist investors like Carl Icahn have bought enough shares to demand that the firm raise its stock price even higher by, for example, buying back some of its shares. (As I have noted, Steve Jobs’s successor, Timothy D. Cook, was happy to oblige. In 2011 and 2012, during his first two years as CEO, he pocketed $382 million, of which $376 million was in the form of stock awards.) But none of these machinations have anything to do with Apple’s capacity to innovate and add real value, or to be successful over the long term.

  In 2014, the managers, employees, and customers of a New England chain of supermarkets called Market Basket joined together to oppose the board of directors’ decision earlier that year to oust the chain’s popular chief executive, Arthur T. Demoulas. Their demonstrations and boycotts emptied most of the chain’s seventy stores. What was special about Arthur T., as he was known, was his business model. He kept prices lower than his competitors, paid his employees more, and gave them and his managers more authority. Just before he was ousted he offered customers an additional 4 percent discount, arguing that they could use the money more than the shareholders. In other words, Arthur T. viewed the company as a joint enterprise from which everyone should benefit, not just its shareholders—which was why the board fired him. Eventually, consumers and employees won. The boycott was costing Market Basket so much that the board sold the company to Arthur T.

  Market Basket was not a publicly held company at the time, but we are beginning to see Arthur T.’s business model pop up all over the place, even where many shareholders are involved. Patagonia, a large apparel manufacturer based in Ventura, California, for example, has organized itself as a so-called benefit corporation—a for-profit company whose articles of incorporation require it to take into account the interests of workers, the community, and the environment, as well as shareholders. Benefit corporations are certified and their performance is regularly reviewed by nonprofit third-party entities, such as B Lab. By 2014, twenty-seven states had enacted laws allowing companies to incorporate in this manner, thereby giving directors explicit legal protection to consider the interests of all stakeholders rather than just the shareholders who elected them. And by then, more than 1,165 companies in 121 industries had been certified as benefit corporations, including the household-products firm Seventh Generation.

  We may be witnessing the beginning of a return to a form of stakeholder capitalism that was taken for granted in America sixty years ago. But some economists claim that shareholder capitalism is more efficient. They argue that under the pressure of shareholders, corporations move economic resources to where they are most productive and thereby enable the entire economy to grow faster. In their view, the midcentury form of stakeholder capitalism locked up resources in unproductive ways and allowed CEOs to be too complacent—employing workers the company didn’t need, paying them too much, and becoming too tied to their communities.

  Yet when you take a hard look at the consequences of the shareholder capitalism that took root in the 1980s—a legacy that includes flat or declining wages for most Americans, along with growing economic insecurity, outsourced jobs, abandoned communities, CEO pay that has soared into the stratosphere, a myopic focus on quarterly earnings, and a financial sector akin to a casino whose near failure in 2008 imposed collateral damage on most Americans—you might have some doubts about how well shareholder capitalism has worked in practice. Only some of us are corporate shareholders, and a tiny minority of wealthy Americans own most of the shares traded on America’s stock exchanges. But we are all stakeholders in the American economy, and most stakeholders have not done particularly well. Perhaps more stakeholder capitalism is in order, and less of the shareholder variety.

  Germany’s laws and rules on corporate governance illustrate this approach. In Germany, corporate laws require “co-determination,” with a management board overseeing day-to-day operations and a supervisory board for more high-level decisions. Depending on the size of the company, up to half of the members of the supervisory board represent employees rather than shareholders. Workers on the shop floor are also represented by works councils, or Betriebsrate. This structure has made major German corporations, such as Volkswagen, far more receptive to worker rights than their counterparts in America (as was dramatically illustrated in 2014 when VW workers sought to form a union at their factory in Chattanooga, Tennessee; while VW did not object, state and local politicians worried aloud that unionization would harm the state’s economy). It has also limited CEO pay, preserved many high-skill jobs, and resulted in a higher median wage and a far more secure and prosperous working class than in the United States.

  With effective countervailing power, the American corporation could be reimagined and reinvented. Laws would require not only that employees be represented but that they receive voting rights proportional to their stakes and would prevent any single person or stakeholder from keeping most voting rights for him- or herself. The legal privileges of incorporation in America—limited liability, life in perpetuity, corporate personhood for the purpose of making contracts and the enjoyment of constitutional rights—would be available only to entities that share the gains from growth with their workers while also taking the interests of their communities and the environment into account.

  The long-term agenda for countervailing power would not stop here, however. Reinventing the corporation would move us only part of the way toward a more balanced economy. That is largely because the corporation of the future will need far fewer workers. New technologies will be doing much of the work. The coming challenge will be to develop new market rules that spread the economic gains when robots take over.

  22

  When Robots Take Over

  Technological change has spawned many predictions since the dawn of the industrial age, not all of which have been borne out. In his 1928 essay “Economic Possibilities for Our Grandchildren,” John Maynard Keynes foresaw in a century “the discovery of means of economizing the use of labour outrunning the pace at which we can find new uses for labour.” He nonetheless predicted that by 2028 the “standard of life” in Europe and the United States would be so improved that no one would need to worry about making money. It would be an age of abundance. “For the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.”

  The year 2028 hasn’t yet arrived, but we don’t seem to be on the road to a society resembling Keynes’s prediction. Most people, even in advanced economies like the United States, do not feel freed from pressing economic cares. Rather than creating an age of abundance in which most no longer have to worry about money, labor-saving technologies are well on the way to creating a two-tiered society comprising a few with extraordinary wealth and a vast majority getting poorer.

  I have made my share of predictions as well. In 1991, in my book The Work of Nations, I separated almost all modern work into three categories and then predicted what would happen to each of them. The first catego
ry I called “routine production services,” which entailed the kind of repetitive tasks performed by the old foot soldiers of American capitalism through most of the twentieth century—done over and over, on an assembly line or in an office. Although often thought of as traditional blue-collar jobs, they also include routine supervisory jobs involving repetitive checks on subordinates’ work, enforcement of standard operating procedures, and routine data entry and retrieval. I estimated that such work then constituted about one-quarter of all jobs in the United States but would decline steadily as it was replaced by new labor-saving technologies and by workers in developing nations eager to do it for far lower wages. I also assumed that the pay of remaining routine production workers in America would drop, for similar reasons.

  I was not wrong. Using the same methodology I used then, I found that by 2014 routine production work constituted no more than a fifth of all jobs in America, and its median pay, adjusted for inflation, was 15 percent lower than it was two decades before. Indeed, all work that could be codified into software had been replaced by it or was soon to be. Text-mining programs were on the way to displacing many legal jobs; image-processing software was making lab technicians unnecessary; tax software was replacing accountants, and so on.

  The second category I called “in-person services.” This work had to be provided personally because the human touch was essential to it. It included retail sales workers, hotel and restaurant workers, nursing-home aides, realtors, child-care workers, home health care aides, flight attendants, physical therapists, and security guards, among many others. The essence of this work was to sell one to one; to ensure the personal security of others; or to make sure other people were well taken care of, happy, and at ease. In 1990, by my estimate, such workers accounted for about 30 percent of all employees in America, and I predicted their numbers would grow because—given that their services were delivered in person—neither advancing technologies nor foreign-based workers would be able to replace them. But I also predicted their pay would drop, for two reasons. First, they would be competing with a large number of former routine production workers, who could now only find jobs in the in-person sector. And second, they would also be competing with labor-saving machinery—“automated tellers, computerized cashiers, automatic car washes, robotized vending machines, self-service gas pumps”—and that even retail sales workers would be up against “personal computers linked to television screens” through which “tomorrow’s consumers will be able to buy furniture, appliances, and all sorts of electronic toys from their living rooms—examining the merchandise from all angles, selecting whatever color, size, special features, and price seem most appealing, and then transmitting the order instantly to warehouses from which the selections will be shipped directly to their homes. So, too, with financial transactions, airline and hotel reservations, rental car agreements, and similar contracts, which will be executed between consumers in their homes and computer banks somewhere else on the globe.”

  Here again, my predictions were not far off. By 2014, in-person service work accounted for almost half of all jobs in America, and for most of the new jobs. Moreover, adjusted for inflation, the median pay of such work was below what it had been in 1990. But I did not foresee how quickly advanced technologies would begin to make inroads even on in-person services. By 2014 Amazon was busily wiping out retail jobs, working on how to eliminate humans in its warehouses, and even planning future deliveries by aerial robot drone. Even commercial driving was threatened. In their 2004 book, The New Division of Labor, economists Frank Levy and Richard Murnane used driving a truck as an example of the sort of task computers would never be able to perform because it requires complex pattern recognition. But by 2014, Google’s self-driving car posed a serious threat to the jobs of some 4.5 million taxi drivers, bus drivers, truck drivers, and sanitation workers.

  The third job category I named “symbolic-analytic services.” Here I included all the problem solving, problem identifying, and strategic thinking that go into the manipulation of symbols—data, words, oral and visual representations. This category encompasses engineers, investment bankers, lawyers, management consultants, systems analysts, advertising and marketing specialists, professionals in all creative fields such as journalism and filmmaking, and even university professors. Most are well-educated professionals who tend to work in teams or stare at computer screens. The essence of this work is to rearrange abstract symbols using a variety of analytic and creative tools—mathematical algorithms, legal arguments, financial gimmicks, scientific principles, powerful words and phrases, visual patterns, psychological insights, and other techniques for solving conceptual puzzles. Such manipulations improve efficiency—accomplishing tasks more accurately and quickly—or they better entertain, amuse, inform, or fascinate the human mind.

  I estimated in 1990 that symbolic analysts accounted for 20 percent of all American employees, and expected their share to continue to grow, as would their incomes, because the demand for people to do these jobs would continue to outrun the supply of people capable of doing them. This widening disconnect between symbolic-analytic jobs and the other two major categories of work would, I predicted, be the major force driving widening inequality. Here again, I was not too far off, but I had not anticipated how quickly it would happen or how wide the divide would become, or how great a toll inequality and economic insecurity would take. I would never have expected, for example, that the life expectancy of an American white woman without a high school degree would decrease by five years between 1990 and 2008.

  I also failed to anticipate how quickly the combination of digital technologies with huge network effects would push the ratio of employees to customers to extraordinary lows. When Instagram, a popular photo-sharing site, was sold to Facebook for about $1 billion in 2012, it had thirteen employees and thirty million customers. Contrast this with Kodak, which had filed for bankruptcy a few months before. In its prime, Kodak had employed 145,000 people.

  The ratio continues to drop. When Facebook purchased WhatsApp for $19 billion in early 2014, WhatsApp had fifty-five employees (including its two young founders) serving 450 million customers. Digitization does not require many workers. It is possible to sell a new idea to hundreds of millions of people without needing many, if any, workers to produce or distribute it. A friend, operating from his home in Tucson, recently designed a machine to determine traces of certain elements in the air, used a 3D printer to make hundreds of copies of the machine, and has been selling them over the Internet to customers all over the world. All he needs is a drone to deliver them and his entire business will depend on just one person—himself.

  Consider that in 1964 the four most valuable American companies, with an average market capitalization of $180 billion (in 2011 dollars), employed an average of 430,000 people. Forty-seven years later, the largest American companies were each valued at about twice their former counterparts but were accomplishing their work with less than one-quarter of the number of employees.

  We are faced not just with labor-replacing technologies but with knowledge-replacing technologies.1 The combination of advanced sensors, voice recognition, artificial intelligence, big data, text mining, and pattern-recognition algorithms is generating smart robots capable of quickly learning human actions, and even of learning from one another. A revolution in life sciences is also under way, allowing drugs to be tailored to a patient’s particular condition and genome.

  If the current trend continues, many more symbolic analysts will be replaced in coming years. The two largest professionally intensive sectors of the United States—health care and education—will be particularly affected because of increasing pressures to hold down costs and, at the same time, the increasing availability of expert machines. We are on the verge of a wave of mobile health applications, for example, directly measuring everything from calories to blood pressure, along with software programs capable of performing for an individual the same functions as costly medical devices run by
medical technicians (think ultrasound, CT scans, and electrocardiograms) and diagnostic software that can tell you what it all means and what to do about it. Schools and universities will likewise be reorganized around smart machines (although faculties will scream all the way). Many teachers and university professors are already on the way to being replaced by software—so-called MOOCs (massive open online courses) and interactive online textbooks—along with adjuncts who guide student learning.

  Where will this end? Imagine a small box—let’s call it an iEverything—capable of producing for you everything you could possibly desire, a modern-day Aladdin’s lamp. You would simply tell it what you want, and—presto!—that item would arrive at your feet. The only problem is that no one will be able to buy it, because no one will have any means of earning money, since the iEverything will do it all. This is obviously fanciful, but when more and more can be done by fewer and fewer people, the profits will go to an ever-smaller circle of executives and owner-investors, leaving the rest with less and less money to buy what can be produced because we will either be unemployed or in low-paying jobs. The economic model that predominated through most of the twentieth century was mass production by many for mass consumption by many. That no longer holds. The model of the future seems likely to be unlimited production by a handful for consumption by whoever can afford it.

  The underlying problem is not the number of jobs but the allocation of income and wealth. Those who create or invest in blockbuster ideas are earning unprecedented sums and returns. One of the young founders of WhatsApp, CEO Jan Koum, had a 45 percent equity stake in the company when Facebook purchased it, which yielded him $6.8 billion. Co-founder Brian Acton got $3 billion for his 20 percent stake. Each of the early employees reportedly had a 1 percent stake, which would have netted them $160 million each.