Monday, December 06, 2010

The Company in America Since 1975

Chapter 7 of Micklethwait and Wooldridge's book, The Company: A Short History of a Revolutionary Idea, is titled "The Corporate Paradox, 1975-2002. It brings the history of the corporation, and especially the corporation in the United States, up to the time that the authors were writing.

I note that during the period involved, information and communications technologies were developing rapidly and the information and communications infrastructure were evolving rapidly and creating the Information Revolution. It was also a time in which oil prices were quite high for some time. It was also a time of globalization in which it was not only easier to send a message from place to place, but to move physically from place to place and to ship goods from place to place.

In countries in which wages were high, there was a long term trend to either automate functions and replace workers with devices, or to move the work to a country or region in which wages were lower. Not only were manufacturing functions often outsourced to other nations, but some services became tradable and were outsourced. We saw jobs for secretaries, gas station attendants and unskilled assembly line workers disappear from the United States, automobile manufacturing jobs move from the dust belt to southern states, and call centers move to India.

We also saw a rise in the percentage of the U.S. workforce with college degrees, graduate degrees and even doctoral degrees. We also saw an increasing inequality of incomes in the nation. I would suggest that the degree heavy knowledge workers brought a new form of human capital to the companies for which they worked in white collar jobs, and successfully demanded remuneration commensurate not only for their labor but for the depreciating intellectual capital which they invested in the firms.

Micklethwait and Wooldridge do not emphasize these changing conditions in which companies existed, but they emphasize others. For example, pension plans changed from defined benefits to defined contributions and pension funds became major players in the stock market and in the ownership of companies. Mutual funds also grew and similarly became more important relative to the individual stockholder in the market and in the ownership of companies. The decades saw the development of junk bonds and leveraged buy outs, leading to dismantling of some conglomerates that were composed of parts worth more than the whole.

Perhaps surprisingly, even though the period saw a huge increase in management consulting activities, the professional managers seemed to maintain their control of the corporations (and to increase their ability to extract money from those companies).

The authors recite round after round of deregulation, abuse of freedom and reregulation. I might have focused on the invention of new instruments such as junk bonds, derivatives and the financial instruments used by Enron. I suspect that not only did these instruments escape effective regulation by their novelty, but they tended to be so complicated that few (if any) people understood the risks that their wide spread use implied.

Perhaps the point could have been made more strongly that there is a very fine line between over regulation that requires too much red tape and which slows companies versus too little regulation that results in events such as the sub-prime mortgage meltdown or the saving and loan breakdown. Perhaps with our clunky legislative processes there is no better alternative than a swinging pendulum between regulation and deregulation.

The period of course saw the growth of new large corporations such as Microsoft, Intel, Amazon and Google that rode the wave of the new technologies and industries. While some big companies disappeared, typically in mergers, (perhaps surprisingly) some remained among the largest in the country. I am not sure that Micklethwait and Wooldridge do justice to the development of new chains in the service industries such as McDonalds and Walmart, and for that matter the impact of the invention and development of franchizing.

The authors do reflect on the phenomenon of Silicon Valley. The region is characterized not only be companies that lead in the new high technology industries developed in recent decades, but in new ways of doing business. I wonder whether the new industries have called forth the new ways of doing business. Perhaps, but perhaps it was the new ways of doing business in Silicon Valley that allowed the region to be more successful than others in exploiting the openings created by the technology. The other centers of innovation that are developing around the world seem to be replicating Silicon Valley's way of doing business.

I am enjoying the book, and highly recommend it.

This is one of a series of postings on the book. Others are:

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