Is Big Business Bad Business?

Cowen’s own love-hate relationship

I wish Cowen hadn’t organized the book around the rhetorical technique of identifying everything people hate about big business and then rebutting their arguments. It gives his “pro-business manifesto” a negative tone that is hard to shake. In his “road map” through the book, he begins by conceding that business can be hard to love:

I am not entirely comfortable with ceding so much of the daily human realm to apparently selfish, profit-maximizing, and even sometimes corrupt entities.

He then pauses to acknowledge that, despite the previous sentence, the book is a pro-business, not anti-business, manifesto:

At its best, business gives our lives more scope for the heroic and the noble, as we can use the outputs of business to satisfy our own creative desires and to better our lives.

But he then switches to the defensive, presenting the book’s outline, which is organized around the complaints about big business: fraud, high CEO pay, the frustration of work, monopoly, the evil ways of Big Tech, the uselessness of Wall Street, and crony capitalism.

Admission against interest is the oldest trick in the rhetorician’s book. And Cowen demolishes these bêtes noirs effectively. But the reader could be forgiven for thinking that he has his own love-hate relationship with the business world.

...but, Dad, you’re so unfair!

So, why do we hate big business? Cowen says it’s because big business reminds us of our parents. We can’t do without them, they’re bigger than we are, and, while professing to care for us, they sometimes do things that don’t seem very nice.

But that isn’t an entirely valid analogy (nor does he say it is). When our parents displease us, it is usually because they are trying to help us learn a valuable life lesson. Businesses do not hurt us in an attempt to help us. They help us in an attempt to help themselves. It is not from the merchant’s beneficence that we expect our dinner, but from the merchant’s desire to have dinner himself. That this “works” is the beauty of the market economy. A family is more like a little socialist economy, with Mom or Dad the benevolent dictator.

...or do we love big business?

Yet, while we rail at the unfairness of it all – businesses take our money, appear to give us as little as possible in return, and sometimes produce bad products or even fire us – our kids, at least the ambitious ones, want to grow up to be Steve Jobs or Bill Gates. Our great-grandparents wanted to be Thomas Edison or George Westinghouse. What is going on here?

A few are just saying, “I want to get rich.” But, more typically our kids or great-grandparents see these business icons as inventors and recognize the importance of their contribution to society in that role. I’m not sure they want to organize large groups of people to produce and sell a product; that sounds like a boring and difficult way to get rich.

But that is what businesses do. Only a few businesses prosper through new-product introduction or invention. More typically they add to our quality of life on the margin, by delivering better, cheaper, more convenient, or just slightly different versions of goods and services that already exist.¹ The social value of this function of business is underappreciated and is something that Cowen could well have afforded to emphasize more vigorously.

Are corporations people?

Corporations are, of course, groups of people organized to pursue a common goal.² What else could they be? Yet, when this is pointed out, the pushback is immediate and predictable.

Cowen tells this story: In the 2012 presidential campaign, Mitt Romney was – with his usual sincere awkwardness – trying to say that corporate taxes don’t make any sense because they are ultimately paid by workers, executives, shareholders, or customers. That is, a tax on corporations is just a disguised tax on individual people. The corporation doesn’t have any money of its own; all the money in the company’s coffers is legitimately claimed by somebody.

Almost all economists agree on this, but it rubs listeners the wrong way. And the former governor (now senator) and big businessman played into the bias: “Corporations are people, my friend,” he intoned, without preparing the listener for the important part of the argument, which I made in the last paragraph. A heckler immediately responded, “No, they’re not.” While Romney was at least partly right, he lost votes instead of gaining them.

Why? Because of an understandable cognitive error that arises from our evolutionary heritage. We’ve benefited by having an advanced mammalian brain that just “knows” what is and what isn’t a person. We see corporations are aggregations of buildings, trucks, bank accounts, patents, and so forth. All those physical and ephemeral goods are owned by people and were assembled to provide goods and services to other people. And the largest asset of most corporations is its people, the human capital that walks out the door every night. But that’s not what we’re thinking when we see or hear the word “corporation.” We think of a big, impersonal thing.

This is the ultimate source of the bias against business. That and the fact that you don’t really like to have needs; you’d rather be self-sufficient. But, because you do have needs, you have to give businesses your hard-earned money.

I’ve written that economics is a branch of animal behavior, or maybe evolutionary biology. Cowen’s Big Business convinces me more than ever that I’m on to something.

A brief tour of Big Business

Let’s look at Cowen’s book, chapter by chapter, starting with fraud, because that’s where he starts. That decision surprised me, because outright fraud by businesses is relatively rare. When I think about my own problems with big business, I think about incompetence, not fraud, but maybe that’s because I spend too much time on the phone to so-called help lines. Businesses are actually remarkably competent, delivering, as Cowen says in the introduction, “ships, trains, and cars; electricity, lighting, and heating equipment; most of our food supply; most of our lifesaving pharmaceuticals” – and on and on. Pretty impressive if you consider the alternative, which is trying to produce all this stuff yourself, and almost completely failing. Anyway, I digress.

Fraud

“Are businesses more fraudulent than the rest of us?” Cowen inquires. He begins by listing some fraudulent business practices (including “billions” spent on penis enlargement, which doesn’t work). But, he notes, we’re all somewhat fraudulent, including in our personal lives: 53% of people admitted to having lied in their dating profiles, and those who lied but didn’t admit to it can be added to that number. (I don’t date because I’m married, but I’ve told made-up stories about myself to strangers on airplanes. Along with Cowen, I think that a certain degree of fabulism is part of human nature.) Cowen finds no evidence that businesses lie or commit fraud any more than people not engaged in business.

In fact, Cowen notes, the data support the old Enlightenment idea, attributed by Cowen to Montesquieu and repeated through the centuries, that a commercial culture fosters honesty and trust among strangers.³ Such a culture cannot operate if the only people you trust are your family and closest friends. You have to believe, when you make a deposit in a bank, that you will get your money back.

Infrastructure supporting a culture of trust is important too: when you buy groceries, you may not trust the grocer fully, but you probably believe the Bureau of Weights and Measures is not in cahoots with the grocer to cheat you. The Food and Drug Administration and the local board of health make pretty sure that the new restaurant is not going to poison you. As Cowen acknowledges, government has a role in fostering the culture of trust-with-caution that a society based on business enterprise requires.

High CEO pay

Some of us look at huge CEO paychecks – hundreds of times the median worker’s compensation – and conclude that the CEOs and the directors who choose and pay them are ripping consumers, employees, and shareholders off. Not so fast, says Cowen. Huge paychecks can be a natural consequence of competition for scarce skills.

We don’t particularly flinch when Tiger Woods earns close to a billion dollars in a lifetime or when the baseball player Manny Machado makes $45,181 per turn at bat.⁴ But most of us have tried to play golf or baseball and know we’d be pikers compared to any professional athlete, much less Woods or Machado, so we acknowledge the superiority of the best players.

But, in business, the top executives don’t seem that impressive by comparison to ourselves or to the talented, but not super-rich, business men and women whom we know. Is that a fair judgment? We non-CEOs don’t have much of a feel for what it takes to manage a very large organization that faces fierce competition from other companies led by similarly gifted executives, but it sounds hard – OK, just about impossible – to me. I would not begrudge a CEO his or her large paycheck if they were making me rich too. Digressing a little from Cowen’s script, let’s look at this possibility in some detail.

Exhibit 1 shows the co-evolution of executive pay and the total return on the S&P 500, both portrayed in real (inflation-adjusted) terms from 1965 to 2013 (the latest date for which I could get executive pay data).

Exhibit 1

CEO pay vs. S&P 500 total return, in real (inflation-adjusted) terms, 1965-2013

Source: CEO pay: redrawn by the author using data from Economic Policy Institute. The sample used to estimate CEO pay is described therein. Real (inflation-adjusted) S&P 500 total return, including dividends: Morningstar Direct, data used by permission.

That’s about as close a correspondence between two variables as you get in economics! It looks like CEOs got the better deal by a hair, but not since 2000, and investors prospered mightily over most of the period due to something. Correlation is not causation, and we can’t tell from the chart whether stocks went up because companies were managed by better CEOs, or CEOs got bigger paychecks because stocks went up. But it’s certainly possible that the fierce competition for top executive talent in the last half century had something to do with the 13-to-1 increase in real wealth experienced by investors.

And it shows that this new century has not been an economic miracle for either CEOs or shareholders.

Median worker pay is another matter, but the proportion of the U.S. workforce occupying routine, unskilled or semi-skilled jobs has gone way down. So has the number of workers per unit of output (this is another way of saying that labor productivity has risen). Comparing median worker pay in 1965 and 2013 (or 2019) is not an apples-to-apples comparison. The reason is that most of the jobs added since 1965 have been in health care, technology, finance, education, and government – not manufacturing – and those are, on average, much better-paying than the routine jobs in “sunset” industries.

Is work fun?

Cowen shines in the chapter on work. Beginning, as usual, with a restatement of the charge that work is the exploitation of labor by capital, he counters:

I’d like to suggest that productive work is one of the most fulfilling sides of our lives. For the most part, it makes us happier, better adjusted, and better connected to the social world. It gives balance to our home lives. It helps us realize who we are as human beings. This is one of the subtler ways in which capitalism is a creator – namely, a creator of our better selves.

Hallelujah! I couldn’t agree more...but I’m a professional writer, sitting in my wood-paneled office or on the beach, thinking either noble or foolish thoughts (you decide) for a handsome fee. Try and tell the same story to a beat-up manual worker who is 57, physically barely able to still do his job, and trying to hang in there until he qualifies for early and meager Social Security benefits at age 62. There are two sides to this tale.

“Work is in not every way fun,” Cowen admits, noting that, “they have to pay you to do it.” There are some workers, myself included, who would do the same work (but maybe a little less of it) for free if we were rich. But a majority of workers would rather be doing something else, and look forward to retirement.

How can one reconcile the fact that most workers would prefer not to work with the idea that work is ennobling, healthful, and creative?

Cowen draws a distinction between the propensity to work versus doing something else at any given moment, and the net reward from making paid work a major part of one’s life. At any point in one’s workday, it’s likely that some other activity, or rest, is a more attractive proposition. But the long-term picture is different. The net reward – the worker’s total compensation plus social, physical and mental health benefits, minus an allowance for the worker’s effort – usually adds up to a positive number over time. (The unemployed tend to be very unhealthy.) In a RAND Corporation survey, an astonishing 82% of all workers, not just professional, managerial, and technical workers, say that, “their jobs consist mainly of ‘solving unforeseen problems on their own’,” a creative task.⁵

I would have guessed 25%. Maybe the guy at the hardware store helping you find the right part for a home improvement project is having more fun than you thought.

How monopolistic is big business?

Not very. All businesses try to create a temporary monopoly or quasi-monopoly, which we now call a “moat” because it sounds better. Otherwise they would just earn the market rate of return, adjusted for risk.

All moats disappear with time. What matters is how long, and how profitable the company is during that period. Kodak’s moat lasted from 1888 to about 1999, probably not a record, but a good example of how moats are created and are then destroyed, as Joseph Schumpeter would have predicted.⁶ Competition, new technologies, and the company’s own lack of vision all took their toll, and in 2012 Kodak entered the corporate graveyard, already populated by Penn Central, Pan American World Airways, Montgomery Ward, and other giants of the past.

But Cowen is, properly, concerned with market share concentration in certain industries. The test of monopoly power is whether companies with large market shares can charge monopoly prices. Google and Facebook fail the test: their most important services, web search and social networking, are free. Telecommunications companies charge high prices, but that’s not a big surprise because it is a regulated industry, the traditional bailiwick of monopolistic practices sanctioned by various levels of government.

The parts of the economy that have suffered the most inflation are health care and education, plus real estate in a dozen select metropolitan areas that offer high-paying jobs. In each case there’s a reason for the high prices.

About health care, Cowen says, cautiously, “Observers differ whether we should blame Obamacare or blame Republicans for not supporting Obamacare properly (or a bit of both).” I suspect that Cowen doesn’t know the answer, so we can expect a book from him on the topic after he’s researched it.

In education, he says, it’s mainly high expenses rather than monopolistic pricing that’s the problem. Evidence of this is the fact that second-rank private colleges cost almost as much as Harvard. In a purely competitive market there would be a huge premium for the very best, just as a Rolex watch can cost 100 times as much as a mid-priced Michael Kors watch, which looks similar but doesn’t contain real gold or diamonds. Real estate prices are high partly due to natural monopoly (if everyone wants to live in San Francisco or Manhattan, they can’t) and partly because of NIMBYism restricting the supply.

Cowen concludes that, “the business-driven monopoly problems in the American economy are pretty easily identified and are fairly few in number. We could and should fix them.”

Is Big Tech evil?

It sure feels that way when tech companies produce software to help authoritarian governments spy on their own people. But the good they do almost certainly outweighs the evil. That is not a great balance, and criticisms of Big Tech sometimes resonate, even with tolerant people like me.

My biggest concern, which Cowen also addresses, is the loss of privacy. I might have had too much to drink on December 31, 1979. If facial recognition software were widespread at the time, the episode might still be haunting me – keeping me from getting security clearance at a government agency, barring me from top-notch jobs or, if I lived in China, making it difficult to purchase a train ticket 40 years later. This is a real concern, not science fiction – but it’s not, strictly speaking, Big Tech’s fault. If a government or someone else wants facial recognition software and Big Tech, on ethical grounds, refuses to develop it, Small Tech will build it instead, and become Big. There are downsides to an open society where everyone is allowed to do what they want.

Most of the rest of the complaints about Big Tech that Cowen rebuts – Google’s quasi-monopolistic position, the time-wasting aspects of Facebook and Instagram, the annoying ads for everything – sound to me like the whining that accompanies every technological change. Google provides the best search results so of course it’s dominant. Nobody makes you check your Facebook page hourly. You do not have to buy any product that you see advertised.

Cowen concludes his defense of Big Tech with some inspiring thoughts:

[T]he tech companies have brought human beings into closer contact with each other than ever before... They also have placed so much of the world’s information at our fingertips... Whatever problems these developments may have brought in their wake, they are unparalleled achievements and arguably the greatest advances of the contemporary world.

I recently finished writing a complex, somewhat scholarly book. Without the Internet and the personal computer, I would have had to hire three research assistants, pay for them to use an academic library, and engage a secretary to type up the notes and then my manuscript. I can’t afford all that and I wouldn’t have bothered. Thank you, Big Tech!

Is Wall Street useless?

No, it’s not. I occasionally teach finance classes, and someone always asks what good the financial services industry does, other than by providing checking accounts, savings accounts, and ATMs. I ask, “How did you get to school today?” and the student typically says, “I took the bus.” “Who paid for the bus – not the bus fare, but the bus itself?” “The city.” “The city is hundreds of millions of dollars in debt, partly because it bought buses. Who do you think lent the city the money?” “I don’t know, a bank?”

“That’s right,” I reply, “Wall Street” – skipping over the difference between a bank directly lending out depositors’ money and underwriting a securities transaction. “Wall Street is just a bunch of what we now call banks, but they used to be called stock or bond brokers. To help a city buy buses, they sell municipal bonds, issued by the city, to people saving for retirement or to some other type of investor. The proceeds of the bond sale, minus the bank’s fee for the transaction, go to the city, which has to pay the money back with interest. In other words, Wall Street paid for the bus, and you just helped pay Wall Street back.”

No reader of this article needs this explanation, but almost everyone else does. To help people better understand Wall Street, Cowen emphasizes the creative role of venture capital, which is perhaps easier to grasp than the social function of loan securitization or index arbitrage. But his appreciation of Wall Street goes well beyond venture capital, which he uses as a gateway to explaining the purpose of the rest of the financial services industry:

Sometimes you will hear the claim that venture capital is “good finance,” as compared with the broader category of “bad finance”... But venture capital does not operate in a vacuum... It is integrated into a system of bank backstops and letters of credit, efficient asset management..., orderly initial public offerings, and liquid securities markets.

All of these somewhat obscure pieces of financial infrastructure are needed for Steve Jobs or Bill Gates to get the financing they need to revolutionize mobile telephony or software.

Anyway, the reason many people hate Wall Street is the big paychecks for work that looks easy – sitting at a desk and manipulating symbols on a computer. And the paychecks aren’t always doctor or lawyer big – they can be Tiger Woods or Manny Machado big. That and the fact that Wall Street has always attracted fraudsters and hucksters. But jealousy, or frustration at having chosen the wrong profession, isn’t a good reason to hate anybody. And the work isn’t that easy.

Business and government: Crony capitalism

Crony capitalism, to use a technical term, sucks. The buddy system whereby government helps specific businesses – that’s what we usually mean by “crony capitalism” – is anti-competitive, anti-market, and anti-people. But Cowen argues that business does not have much influence over government, except in narrow areas like intellectual property law and trade regulation.

There’s some regulatory capture, as we’ve seen with the interplay between the Federal Aviation Administration and Boeing, which I’ve regarded in the past as one of the finest collections of engineering talent ever assembled. I’m deeply disappointed at what I’m finding out about that company.

But if corporations really decided what happens in government, entitlement spending would not have mushroomed to two-thirds of the federal budget. No corporation would want that. Instead, governmental decisions are made to please voters and to re-elect politicians, something that often involves anti-business legislation. Cowen points out that an increasing share of corporate budgets go toward complying with complex product and process regulations, avoiding or resolving human resources hassles, and dodging lawsuits. That’s not what a government dominated by business interests would look like.

Cowen is a small-L libertarian, which means that, all other things being equal, he favors market mechanisms over other decision processes. But favoring market outcomes means not favoring specific businesses. Instead, it means leaving businesses alone (“laissez faire”) to fight it out, and accepting the outcome as the end product of consumer sovereignty. It is the opposite of crony capitalism.

Conclusion

Despite its defensive tone, Big Business is a must-read for everyone who needs to justify his or her commercial livelihood to the omnipresent critics. While not a particularly amorous “love letter to an American anti-hero,” it is a well-crafted and thought-provoking apologia for an institution that, as the late comedian Rodney Dangerfield said, “don’t get no respect!” Despite its many flaws, the business world deserves, if not love, then certainly a great deal more respect than we typically give it.

It is the hand that feeds us.

Larry Siegel is the Gary P. Brinson Director of Research for the CFA Research Foundation and an independent consultant. Prior to that, he was director of research in the investment division of the Ford Foundation. His book, Fewer, Richer, Greener will be published by Wiley in 2019. He may be reached at [email protected] and his web site.

¹ A worthwhile discussion of this “incremental product and process innovation” is in Breznitz, Dan, and Peter Cowhey. 2019. “Reviving America’s Forgotten Innovation System: Fostering U.S. Growth through Incremental Product and Process Innovation,” in David E. Adler and Laurence B. Siegel, editors, The Productivity Puzzle: Restoring Economic Dynamism, Charlottesville, VA: CFA Institute Research Foundation, forthcoming. Preprint available from me at [email protected].

² The ideas in this section have nothing to do with the Citizens United Supreme Court decision in which it was decided (or reiterated) that corporations, like individual people, have the right of free speech. That is a question for another day, although I’d point out that the idea of a corporation as a “legal person” as opposed to a “natural person” (human being) is two centuries old (Dartmouth College v. Woodward, 1819). No one is seriously claiming that a corporation is a natural person.

³ Actually Charles-Louis de Secondat, Baron de La Brède et de Montesquieu (1689-1755). French names can be daunting. His key work on the topic (and on many other topics) is The Spirit of the Laws.

⁴ Machado is a strong hitter but not the best in baseball. He had a .297 batting average in 2018. For the non-baseball fans among us, the National League batter with the highest batting average that year batted .326, and Machado was tied for tenth, although he is a very competent all-around player. My earnings-per-at-bat estimate is based on the $30 million per year he earns, divided by 664 at-bats per year, the largest number of at-bats recorded by any National League player in 2018. Of course, baseball players have responsibilities other than batting.

⁵ Cowen’s source for this is Maestas, Nicole, et al. 2017. “The American Working Conditions Survey Finds That More Than Half of Retirees Would Return to Work.” RAND Corporation Research Briefs, https://www.rand.org/pubs/research_briefs/RB9973.html, p. 40.

⁶ In Capitalism, Socialism, and Democracy [1942], Schumpeter popularized the phrase “creative destruction.” He is the godfather of Clay Christensen’s theory of disruption (Advisor Perspectives, April 8, 2019).

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