Arthur W. Page Society

Who or What Will Save the Middle Class and Capitalism as we Know it?

Sometimes, reading management journals transports me back to the Salamanca, Spain of the Middle Ages – where some of the best minds of the period seriously discussed how many angels could fit on the pin of a needle.

Then, someone comes up with an insight or two that makes it all less ethereal.

In an article on Kellogg School of Management’s Insight portal, Adding Friction to the Market, the authors walk through the arguments of whether job security (higher cost of hiring and firing) is a good thing or not.

They find that an open job market might create more jobs, but that any move from a regulated to an open market should be decisive – half measures cause more harm than good.

This seems reasonable, but they forget one aspect.

In Europe, where job markets are generally more regulated, the regulations give governments additional levers to pull when they seek to steer countries onto a growth path.

Looking at the situation in the United States, it seems the government in one of the most open job markets in the world is left with very little apart from persuasive arm-waving when it comes to revitalizing the economy.

As the former Labor Secretary Robert Reich said in a New York Times opinion article which I saw in the International Herald Tribune this morning, unless the middle class is enabled to start building wealth again, little will happen.

In the piece, Reich argues that the economy will not bounce back until US society becomes more equal again.

“The 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics,” Reich says. “When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly.”

So if it is not about flexibility in the work place, is it about equality in society? Reich makes a pretty good argument in his opinion piece, title “The Limping Middle Class”.

“The economy won’t really bounce back until America’s surge toward inequality is reversed,” he writes.

“Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.”

And politically, I would assume, it would be tantamount to suicide to suggest in the present US political climate that a dose of equality would do the economy good.

This situation – a limping middle class in a society plagued by inequality – has a direct bearing on the work of CCOs. Why? Because societal risk factors will increase, as corporations become less trusted and executives are seen to be oblivious to the plight of the average citizen.

But the fix must lie in politics, and someone might have to speak some home truths.

One reason that European countries led alternately since WWII by Social Democrats and Christian Democrats, such as Germany, have healthier economies is partly that they have invested in a better social safety net – partly by protecting employees. That in turn built a broader middle class, “a well that contains enough water.”

Some commentators are now so worried by the state of the US economy – and politics – that they speak about the end of US-style capitalism.

In an article in Management Today headlined Saving Capitalism From Itself, one guru, Roger Martin of Toronto’s Rotman School of Management, is quoted as saying that US-style capitalism “is in danger of rotting out its moral core and destroying itself from within”.

In fact, the magazine says, it hard to find a business thinker who isn’t ringing the alarm.

Henry Mintzberg, the veteran strategy guru at McGill, Montreal, berates short-termism and overweening corporate entitlement for today’s tensions.

Charles Handy, the respected UK business observer, sees yawning inequality bringing capitalism into irreconcilable conflict with democracy itself.

Michael Porter, doyen of strategy teachers at Harvard Business School, and Dominic Barton, global managing director of consultancy McKinsey, see ‘capitalism under siege’ and ‘deep reform’ needed for survival.

In an impressive exposé, the article analyses underlying causes to the malaise – corporate entitlement, excessive shareholder focus, etc.

It lands pretty much where you’d imagine, using, more or less, the words old Newsweek used to end its speculative articles – “only time will tell”.

“It’s the paradox of success. Having triumphed over socialism, capitalism’s only enemy is other capitalists,” the article says.

“In the past, there have always been contrarians and practical reformers – anti-slavery campaigners, Quaker industrialists, New Dealers, trade unionists, even corporate raiders – strong and determined enough to rescue it from its own excesses.

“The question this time is: having done such a good job of bullying, bribing and battering its enemies into submission, is there anyone left to save capitalism from its fundamentalist friends?

For a suffering middle class, leaders with common sense and a little political courage would go a long way.

One question in my mind is, what can business do to lead by example? Because surely companies, as what the United Nations call “organs of society”, must do something.

Bjorn Edlund

Retd EVP Communications, Royal Dutch Shell plc
Principal, Edlund Consulting Ltd.

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