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Postwar Economic ‘Golden Age’ Wasn’t as Golden as We Remember
A currently unfashionable notion: A corporation should be run primarily for the benefit of its shareholder owners by maximizing its value. The most provocative distillation of the idea is Nobel laureate economist Milton Friedman’s famous 1970 essay in the Sunday magazine of The New York Times, “A Friedman doctrine– The Social Responsibility Of Business Is to Increase Its Profits.” The most-repeated bit in that piece is actually Friedman quoting an attack on “social responsibility” from his own book, Capitalism and Freedom: “… there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
For a great analysis of why Friedman’s emphasis on what came to be called “shareholder primacy” remains a valuable analytical and conceptual lens, please check the new AEI essay “For whom should corporations be run?” by Sanjai Bhagat, a finance professor at the University of Colorado, and Glenn Hubbard, an AEI visiting scholar and economics professor at Columbia Business School. Also of interest is a big reason why the Friedman Doctrine is currently under fire as never before. Some critics view the immediate postwar decades as an economic Golden Age that never turned into a Golden Century (or at least half-century). And that failure, they say, is partly because of the rise of a short-sighted, rapacious capitalism that Friedman supposedly recommended. This new cold-blooded, cutthroat capitalism eventually ended the cozier-yet-wildly-successful capitalism variant of the 1950s and 1960s that had created a fast-growth, high-productivity, low-inequality economy built on a cooperative and stable relationship between Big Business management and labor.
But the Golden Age was not as golden as we remember, though this might surprise populists of the left and right. The productivity boom that helped drive fast economic growth and fast-rising living standards was built on key innovations from earlier decades. The postwar decades seem to have exploited and emptied this reservoir without adding to it. Indeed, what Robert Gordon in The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War called a “special century” of fast productivity growth ended in the 1970s. In A Great Leap Forward: 1930s Depression and U.S. Economic Growth, economist Alexander Field calls the quarter-century after World War II one of “moderate innovative advance.” The era’s stability was its undoing. Field:
Many corporations offered something equivalent to lifetime employment security. Through marketing and planned obsolescence, the disruptive force of technological change—what Joseph Schumpeter called creative destruction—had largely been domesticated, at least for a time. Whereas large corporations had funded research leading to a number of important innovations during the 1930s, many critics now argued that these behemoths had become obstacles to transformative innovation, too concerned about the prospect of devaluing rent-yielding income streams from existing technologies. Disruptions to the rank order of the largest U.S. industrial corporations during this quarter century were remarkably few.
Of course, companies could get away with all that because of a lack of competition, particularly from global competitors recovering from World War II. But other rich nations were not going to stay down forever. As Alan Greenspan and Adrian Wooldridge write in Capitalism in America:
The 1970s was the decade when America finally had to grapple with the fact that it was losing its leadership in an ever-widening range of industries. Though the best American companies such as General Electric and Pfizer powered ahead, a striking number treaded water: they had succeeded during the long postwar boom not because they had any particular merits, but because Europe and Japan were still recovering from the devastation of the Second World War, and they collapsed at the first sniff of competition.
All this is necessary context to understanding the Friedman Doctrine. Bhagat and Hubbard:
Published in EconomicsDeparting from the owner-managed enterprises of earlier times, capitalism in the twentieth century featured managers as leaders of large corporations with many diverse shareholders. Managers run the corporation on behalf of shareholders represented by a board of directors. Without proper monitoring and rules of the road, managers may pursue other objectives than the long-term value of the enterprise for its owners — shareholders. Such concerns rose prominence among both economists and business leaders in the 1960s and 1970s.
I agree that a focus on shareholder value makes sense for a CEO. I do not expect them to do otherwise. I do think some of them need a longer time horizon – perhaps a long-term investment instrument as opposed to the instant stock price? If management is not around for a long time, things that have a payoff on a decade scale will not be implemented very often.
I refuse to grant that maximizing shareholder value is therefore a moral position. Like all of capitalism, it is as amoral as the laws of physics. It is valid to say that a competing interest is more important than shareholder value, and regulate a corporation
No mention is made of inflation – an economic engine that makes things difficult for the very middle class that has traditionally sponsored the mom and pop enertprises which employ as much as 33% of all Americans.
A head of household could support of family of four in Chicago in 1950 to 1955 on $ 5,000 and not only support them, but have $ 1,000 in savings.
That $ 1,000 would have paid rent for ten months or more, if he or she was laid off.
Zoom ahead to 1970, and that $ 5,000 would just maybe support a single person. Who would have had to pay $ 500 in Fed taxes on that amount. Also that person would not have $ 1,000 in savings.
Leaving the discussions of all the increases in wages necessary to meet with the rising demands of both inflation and the increased taxation out of the discussion is puzzling.
Carol Joy: “No mentioin is made of inflation” or the the enormous amount of regulation that spawned it. From the mid-70’s on the Democrats followed Jerry Brown’s “
Era of Limits” philosophy that made America far less wealthy. The Democrats went from the party of the Little Guy to the Party of the Psuedo-Enviormental Fat Cat who loved to manipulate the regulatory system to enrich themselves.
Sorry, James you post is pure hooey without any substance or support. Maybe you are not old enough to remember the fifties, sixties and seventies where life was much simpler and much easier to make ends meet and the middle class thrived.
JimP,
Of course, this wasn’t the reason for the end of the wildly successful capitalism of the 50s and 60s. The cozy capitalist arrangement ended itself. With the election of 1964 and the massive majority for the cozy relationship in total power, all restraint from conservative forces was removed. Now the cozies ran wild and were the cause of their own demise.
Parasitic public employee unions, a totally failed war on poverty, a fight against communism in a rice paddy 7,000 miles away with an M16 while instituting communism at home, unions forcing the price of American labor so high as to destroy the competitive position of American industry, environmental policy to institute technology that didn’t work to solve a problem that didn’t exist, and the destruction of the best merit-based educational system in the world to create an imaginary pseudo-equality that destroyed impartial justice as a principle wrecking the lives of minorities & women while undermining the family.
All of the above were caused by the cozy relationship, not by Milton Friedman. Don’t get me wrong, Milton was a wonderful guy and very influential (for a conservative). However, it was the Great Society’s total political hegemony of the liberals that produced the destructive unrestrained policies that ended the post-war growth years. The Trump economy of the last 3 years is a taste of what that growth economy was like.
If we could defeat the Marxists, the Coronavirus, and the Democrats (all seem to be from the same source) then we could get back to experiencing what a real growth economy was like. I can hear Milton laughing about this from Heaven.
Regards,
Jim
Regulation was not over the top in the eras I mentioned. (1950 and 1970.)
However our involvement in Vietnam, a war beginning for the USA in 1963 and still going on in 1970, meant that there had to be both inflation and Fed taxation.
Every single person I knew growing up in what could only be described as a working class neighborhood had one working parent and one stay at home parent. No need to pay taxes on two incomes; no need to have baby sitters or day care.
My family was not unusual in that every three or four years, my parents walked into the Ford dealership to trade in their old car and come out with a new one. (Paid for without financing and by cash in hand.) My dad hated trading in the older cars, shaking his head and saying “If it wasn’t for salt on the highways, I’d keep this baby another couple of years.”
Two and three week vacations were the norm.
Our neighborhood was so pleasant that several very well to do families lived there. No pressure living in that area – no need for ballet classes for the girls and martial arts for the boys. Instead, we kids rode bikes in summer, ice skated or tobaggoned in winter, played kick ball, one catch all, baseball and football, girls and boys both, mostly in the back alleys. We put on mini dramas in which we kids were James Bond, Pussy Galore or some evil henchman; also cowboys vs Indians and Nazis vs US GI’s.
Three most affluent guys in the hood in the 1950’s and early 60’s: two were construction firm owners, one was a VP at a Chicago bank.
By 1980, a book called “The Peter Principle” would be out and read widely. It described the reality that inside mid to larger firms, an employee would be promoted until the last place he or she held was above and beyond their abilities.
I will always hold the endless Vietnam war partly responsible for how society changed. Where Truman and Eisenhower used vast amounts of money to build community colleges and community hospitals, Vietnam made Washington DC forget about community projects. The Fed tax monies went to Honeywell, Raytheon, Lockheed and Dow Chemical.
The post-WWII period cannot be compared with any other period, because of this. There was a huge labor shortage as America was in a position to be the world’s manufacturer.
The Federal tax grew from 1% to 90%, stayed there throughout most of the 20th century after Coolidge until Reagan. Kennedy lowered it to 70% Reagan to 30% but didn’t cut the monster down to size. Centralization of corporate and Washington power is reason for the slower growth, and lower innovation. Corporate change of character going from owner management to professional managers was part of it but don’t know if it was as much a result or a cause. We’re so into it, it seems so normal, even our Republican economists can’t see it.
Well, from 2017-2019, GDP growth averaged 2.4%. That’s marginally better than Obama’s record but still a full percentage point lower than the post-WWII average of 3.4% (1945-2010).
https://fred.stlouisfed.org/series/A191RL1Q225SBEA
Floppy,
It’s significantly better than Obama. With Ryan and the Dems screwing the President it’s amazing. We were set to go 3% when we got COVIDed. Remember this is GDP growth without inflation. With the cost of living down and wages up the positive effect was maximized for the average to low wage worker. It was a very effective economy for these workers. The unemployment rate kept going down which if not for COVID would have continued to their advantage.
Regards,
Jim
Point taken on wage growth. Unemployment, however, was trending down ever since the end of the Great Recession. Also, I find it interesting that whenever I would point this out during the Obama years I was lectured on how biased/flawed unemployment rate is as a general measure of economic health and how the Labor Force Participation Rate is a better metric. Now that we have a Republican president unemployment rate is back in favor and LFPR is forgotten. That noted, LFPR has stopped falling during Trump’s tenure so to the extent that any President can take credit for economic performance that’s another entry in his credit column.
Floppy,
The real estate market crap that had caused the recession was cleared out by 2011. For 5 years the “trending” was almost imperceptible until Trump kicked the economy in the @ss. Someone as politically far to the left as Obama doesn’t want the economy to be strong. It undermines his power base. Remember the phrase “the new normal”. If you are satisfied with 1.5% growth that is what you will go on getting. Especially if it suits your purposes.
Regards,
Jim
Unemployment fell by over 5% during Obama’s term in office. Not sure I would characterize that as imperceptible. Also, average GDP growth during Obama’s term was 2.3% (3rd qtr of 2009 to end of 2016). Note I’m excluding the Great Recession from the Obama average since he wasn’t in office when it started. I agree wholeheartedly that all things considered the Trump economy is better than the Obama economy. I think it’s possible to make that case on its own merits.