Ever heard that a corporation’s sole duty is to maximize value for shareholders? In the go-go ‘80s, business schools, government organizations, and most public companies took up this mantra. It stuck around.
William Lazonick, emeritus professor of economics at the University of Massachusetts Lowell, has long held that idea to be not only wrong, but disastrous to society — a cause of ills ranging from a vanishing middle class to stymied innovation. Finally America is listening, including the New Yorker magazine, which hails him as “The Economist Who Put Stock Buybacks in Washington’s Crosshairs.” Lazonick speaks to the Institute for New Economic Thinking about how he managed to break through the fog of false consensus.
Interview by Lynn Parramore at INET
Lynn Parramore: The shareholder value idea swept the country in the mid-‘80s, in large part through the work of economist Michael Jensen, hired by Harvard Business School in 1985 when you were there. From the start you have opposed it, a position that has gradually found supporters, including Jack Welch, former General Electric chief, who initially promoted shareholder value but later called it “the dumbest idea in the world.” Why is the idea so terrible and how did it take hold?
William Lazonick: Most economists — whether they’re right-wing conservatives or progressives— have deeply misunderstood how firms produce things and the societal role they play. They pass that misunderstanding on to millions of students every year. A lot talk as if “the market” is supposed to magically allocate all the resources in the economy. They don’t see that in reality, business enterprises do this all the time, by investing in research to create new products, for example.
Yet when most economists think of investments in the economy, they think of finance and what they call “capital flows” in the market. Through financial markets, money is supposed to flow to where it is needed. But that’s not the way things actually work! In a capitalist economy, large business enterprises invest in the ability to employ people, to produce things, and also to make profits — all very important economic activities.
Markets are really just the outcomes of these activities. Markets exist because you decide what products you want to buy from these firms, which jobs you want to seek. The markets for cars and for car designers and salespeople exist because we have firms allocating resources in the economy towards the making of automobiles. Markets don’t exist without them.
We need large, powerful businesses—we need them to make high quality products and mass-produce them so that people can afford them. That’s a big reason we don’t have to live in poverty. When a business enterprise makes profits, that’s a sign of success if it uses those profits to do productive things, like sharing the gains with employees, or making better, more affordable products, or paying taxes so that we have good schools and roads, which benefit businesses, by the way. All these activities are key to a robust economy and healthy society.
In the ‘70s and coming into the ‘80s, there were plenty of successful companies doing these things, often investing and retaining employees over decades, paying them well and providing good benefits. At that point, some people looked around and said: Wait! There’s a huge pot of gold there, and it belongs to shareholders. They didn’t want the profits going to workers or taxpayers. They didn’t think that society, which had supported these companies in all kinds of ways, should benefit. They wanted to the profits going to public shareholders — the group of people who really matter least to the firm’s success.
LP: Who were these people eyeing the pot of gold?
WL: This thinking came from the Chicago school of economics. Economists from that school had no real problem with the economic inequality that the shareholder value idea was going to cause. They had no real problem with the fact that women, blacks, and Hispanics, who had been increasingly entering the job market, were going to be the first ones to get the shaft if a company started trying to concoct schemes to quickly funnel money to shareholders, like jacking up short-term profits by cutting costs through layoffs.
To this day they don’t understand the role of the business enterprise in creating employment and raising standards of living, or the importance to our economic prosperity of the corporate reinvestment of profits.
LP: So shareholder value is basically an idea that rewards those who contribute least?
WL: Correct. Shareholders who liked the idea persuaded business executives to go along with it by giving them stock-based pay and rewarding them not for making great new products, but for things like manipulating stock prices by using profits to buy up their own stock. That way, they could pay out more money to the shareholders.
Companies would focus on avoiding paying workers and paying taxes. All to generate short-term profits and pay out more cash to shareholders — even if it harmed the future of the company. In many cases, the company stopped caring about investing in its labor force or making new products.
LP: You’ve noted that Apple is pretty much just making incremental changes to the iPhone nowadays rather than introducing great new products. Can we thank the shareholder value idea for that?
WL: Yes, we can. Apple uses its profits to do massive stock buybacks and focus on schemes to avoid paying taxes. This has happened in other Silicon Valley companies, like Cisco.
The truth is that a corporation’s profits are not the shareholders’ profits. They’re the people’s profits. The people who do the work, like the employees. The people who fund the infrastructure and the education of the employees, like us, the taxpayers.
Shareholders don’t do any of those things. They don’t even really take on much risk; they can sell their shares in an instant. An employee takes on a lot of risk, investing time and know-how to help the company succeed.
Yet shareholder value ideology has been accepted not just by the right wing of the economics profession, but the left wing, which is supposed to care about income inequality and things like that.
LP: Why is does all of this matter to ordinary people?
WL: Think of how companies say they need lower tax rates because they need to invest. Are they really investing the money in productive activities? Or are they just enriching shareholders? Look at the Republican tax breaks. No one was even denying that companies would just use it to distribute more cash to shareholders, which is what they’d been up to all along under the shareholder value ideology.
You probably expect services from the government, like a good school for your kids. Well, these companies we’ve invested in so that they can become profitable and to whom we’ve granted all kinds of subsidies — they’re not contributing. So you get a deterioration of services or more burden placed on your family to fund them. Or both.
Also, if you’re looking to these companies for employment, you may not realize that the money they could have used to employ you or keep you employed has been handed over to shareholders.
Remember the Carrier air conditioning workers that got laid off back in 2015 that Trump got so such mileage out of? They were working for the parent firm, United Technologies, which had done $10 billion in buybacks that year. If it hadn’t been doing this, it could have easily kept those people employed. It also could have upgraded its capabilities to sustain their careers.
Society loses out in so many ways when the company’s focus is on boosting profits to benefit shareholders. The problem of student loans is connected to this, because companies are not paying their share of taxes. Communities suffer. Jobs deteriorate. People suffer as a result but are unaware of the causes. My role has been to explain why. To open people’s eyes.
LP: With economists so entrenched in shareholder value, how did you keep going with your work?
WL: The more I studied these things, the more I knew I was right. I was lucky to have a job. My first job was in the economics department at Harvard in a position that was created by Kenneth Arrow [a Nobel laureate] to teach Marxist economics!
That was a different time. There used to be more open-minded people within the economics profession. Today that wouldn’t happen, not in a department dominated by people like Greg Mankiw and others. But I was able to make my way in having a well-paid career. In the early 1990s, I made the choice to leave a tenured position at Barnard to help build an innovative economic development program at UMass Lowell.
Also, I got the stuff out there. Most economists ignored my work, but a number did not. And I also found support outside the discipline. I’ve always thought of my audience as being much broader than the economics profession. Seeing how entrenched in their ideas my economics colleagues were, I started to cross disciplinary boundaries. I talked to economic historians and people from various social sciences. Later I talked to business historians, people doing law, people studying organizations.
Eventually I understood the history of American business well enough that I could understand things unfolding in real time; for example, Mustafa Erdem Sakinç and I have recently published an article on how Boeing’s soaring stock price caused its 737 MAX planes to crash. That knowledge makes it possible to start talking to policy makers, turning research into action. Now there’s legislation related to the work that I do, like Tammy Baldwin’s Reward Work Act. I had some input into Elizabeth Warren’s Accountable Capitalism Act. All of which is also related to getting the stuff out in the media.
LP: How have you broken through in the media, which also largely accepted shareholder value?
WL: Well first, from the time we met at the Institute for New Economic Thinking’s (INET) 2011 conference, you helped me expose my stuff on the blogs and through the ebooks you put together. That’s critical, being able to work with people to get the ideas out there without dumbing them down. I have found that it requires long-term partnerships with people who will devote time to understanding the work. Ken Jacobson, also a journalist, has also been a great help.
After working with you, I got an article on stock buybacks published in the Harvard Business Review in 2014. There’s no doubt that that gave me the most visibility and credibility of anything I’ve written. The editor there, Steve Prokesch, is deeply concerned about economic inequality. I didn’t need to dumb things down for him and he was able to work with me on the article for well over a year.
A certain amount of persistence is necessary, and taking advantage of various networks, in my case, networks of people who were critical of the economics status quo. That’s one of the many benefits that I have had from INET.
LP: What advice can you give to economic thinkers, especially young ones, whose ideas threaten the status quo?
WL: Keep learning, because the world is changing and you have to keep up with it. In recent years, for example, through INET funding, I’ve been able to study the pharmaceutical industry, which has been doing a lot of harm. You have to keep asking the questions. Then, once you get out there, you start talking to different audiences, and then they start writing critiques of their own. It carries on.
It has been central to me to have young graduate students to work with. Some of whom, like Matt Hopkins, Yin Li, Erdem Sakinç, and Öner Tulum—all of whom have worked on my INET projects—have embarked on promising careers around the world. They are out there sharing and developing the ideas and I continue work with them. You can’t do these things alone.
LP: How do you see your ideas influencing the public conversation going forward? Do you think they will impact the 2020 elections?
WL: My ideas have now started to be taken up by various institutions. For example, just this month, I’ve spoken to the UN about the importance of the shareholder-value critique to their sustainable development goals, and to the OECD, telling them that, going back 20 years, they should not have endorsed shareholder value ideology as a principle of corporate governance.
Some politicians in the Democratic Party have taken up my ideas; I am in regular conversations with their congressional staffers. Most of the challenge to my ideas is coming from the right-of-center wing of the party. Shareholder value and stock buybacks may indeed become an issue in the 2020 elections. It’s possible. We’ll see.
It’s great to see audiences opening up. I’ve had some great engagement with civil society organizations on the issue of access to medicines. I am deepening this work currently as an Open Society Fellow. People who agree with me now have more confidence in making their argument. More than four decades is a long time to get some wider recognition for one’s work, but the work itself has been worth it.