Advertisement

Sorry, but it's not a 'law of capitalism' that you pay people as little as possible — it's an excuse

Depression tent
Depression tent

(Library of Congress)

One reason U.S. economic growth is still weak is that average American consumers are still strapped.

Consumers account for ~70% of the spending in our economy, so when they're hurting, we're all hurting.

The reason average consumers are strapped is that, for the past 35 years, we have increasingly told ourselves that the only thing companies are supposed to do is "maximize profit." We have forgotten that great companies can serve other constituencies in addition to shareholders — namely, customers and employees. We have come to treat employees not as dedicated, hard-working teammates who create value, but as "costs" to be minimized.

One result of this "profit maximization" obsession is that our big companies now have the highest profit margins as a percent of our economy in history:

Corporate profits
Corporate profits

(Business Insider, St. Louis Fed)

Another result of it is that our big companies now pay the lowest wages in history as a percent of the economy:

Wages
Wages

(Business Insider, St. Louis Fed)

A third result is that all of the income gains in this country over the past three decades have gone to the top 10% of American earners — the ones who own and control our largest businesses. These top earners — especially the top 0.1% of earners — now take home more of the country's national income than at any time in the past century, including the "Gilded Age" of the 1920s:

income inequality
income inequality

(elsa.berkeley.edu)

Fairness aside, the problem with a handful of Americans running off with such a high percentage of the country's loot is that it starves everyone else of purchasing power. No matter how rich they are — and they're mind-bogglingly rich — the top 0.1% of Americans don't actually buy that much stuff. The folks who buy most of the stuff sold in America are average American consumers, whose earnings are stagnant or declining.

Back in the 1940s, 1950s, and 1960s, income gains were more evenly distributed. The top earners did well, but so did everyone else. There was a universal sense — an accurate one — that we were all in this together. And the idea that rich companies should share more of the value they create with the people who created it — their employees — was well-established.

That was great for our economy.

But now the idea that we're all in this together has been replaced by the mantra that it's every man for himself.

Again, even if you hate the idea that someone who dedicates his or her life to creating value for a company should share more in the value he or she creates, you should understand that "minimizing wage costs" is bad for the economy.

If average Americans don't get paid living wages, they can't spend much money buying products and services. And when average Americans can't buy products and services, companies that sell products and services can't grow. So the profit obsession of America's big companies is, ironically, hurting their ability to grow.

The idea that the only purpose of a company is to "maximize profit" is also an insult to anyone who has ever dreamed of having a job or company that is about more than money. And it is a short-sighted and destructive view of capitalism, an economic system that sustains not just this country but most countries in the world.

This view has become deeply entrenched, though.

These days, if you suggest that great companies should serve customers and employees in addition to owners, you get called a "socialist." You get called a "liberal." (Even though this has nothing to do with politics.) You get told that you "don't understand economics." You get accused of promoting "wealth confiscation." You get told that, in America, people get paid what they deserve to get paid: Anyone who wants more money should go out and "start their own company" or "demand a raise" or "get a better job."

In other words, you get told that anyone who suggests that great companies should share more of the value they create with the people who create it is an idiot.

After all, these folks say, it's a law of capitalism that employers pay their employees as little as possible. Employees are just "costs." You should try to minimize those "costs" whenever and wherever you can.

This view, unfortunately, is not just selfish and demeaning to everyone who works for a living. It's also economically shortsighted. Those "costs" you are minimizing (your employees) are also current and prospective customers for your company and other companies. And the less money they have, the fewer products and services they are going to buy.

Obviously, the folks who own and run America's big corporations want to do as well as they can for themselves, and we obviously need to maintain an incentive for them to do so. But the key point is this:

It is not a law that they pay their employees as little as possible.

It's a choice.

It's a choice made by senior managers and owners who want to keep the highest possible percentage of a company's wealth for themselves.

It's a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees ("associate," "partner," "representative," "team-member"), they, in fact, don't really care.

These senior managers and owners, after all, are taking home record profits and earnings while choosing to pay their employees so little in many cases that the employees have to live in poverty.

It is no mystery why America's senior managers and owners describe the decision to pay employees as little as possible as a "law of capitalism." Because this masks the fact that they are making a selfish choice.

But that's exactly what they're doing.

If we want to get our economy humming again, we need to remember that the economy is an ecosystem and that healthy ecosystems are balanced. We need to encourage our companies to maximize value, not profit. And we need to encourage great companies and managers to serve three important constituencies — customers, owners, and employees — instead of just one.

SEE ALSO:

* Greed WAS good ... Then we overdid it

* There's hope, America! Smart, successful people are finally talking about what's wrong with our country

NOW WATCH: What the Chinese saying 'The ugly wife is a treasure at home' actually means



More From Business Insider