Apart from Thou shalt not commit adultery, I doubt whether any text has ever been so frequently cited but so often ignored as Adam Smith’s Wealth of Nations. Regularly wafted like incense in the general direction of whatever ritual idiocy the corporate world is currently performing, on closer examination he comes up smelling of roses – of the kind European social-democrats typically wave.
From time to time, the financiers of the world decide that sacking lots of workers and paying the survivors less is the quickest route to the pot of gold at the end of the rainbow. In a similar process, the lemmings of Norway rush headlong to the coast, jump over cliffs and carry on swimming into the sunset until a few of them wise up and turn back. The rest of them drown. It is a brutally Darwinian learning process.
But even the cold water of depression and recession never really seems to teach Wall Street the lesson that downsizing makes dwarves. As Adam Smith said, ‘In the long run, the workman may be as necessary to the master as his master is to him.’ And he added, ‘It is not in the richest countries but in the most thriving, or in those which are growing rich the fastest that the wages of labour are highest.’
Of course, nowadays, the ‘workman’ may be a salaried woman with more degrees than a compass, and the masters may be the owners of several hundred million shares in the company. But the basic principles still hold. Good management nurtures and exploits the productivity of its workforce. It sees potential profits where accountants only see costs.
The crusty old Scot would not have rushed to tell Alan Greenspan to hike interest rates because wages were rising and unemployment falling. On the contrary, ‘The liberal reward of labour.. increases the industry of the common people… Where wages are high… we shall always find the workmen more active, diligent, and expeditious than where they are low.’
I suspect that he would now write that those companies and countries whose CEOs pay themselves astronomical bonuses in a supernova of pink slips for everyone else, will in the long run find their workmen and women less active, less diligent and less expeditious than otherwise. But by that time the options will have been cashed in and investors will have paid their glowing tribute.
To those who see pink slips, downsizing and high interest rates as the keys to economic stability, old Adam rips off the fig leaf: ‘No society can surely be flourishing and happy of which the far greater part of the members are poor and miserable. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull: the declining melancholy.’
The reason is self-evident. High wages and salaries give an incentive to capital investment, to productivity measures. Or once again, as Smith said so perceptively 200 years ago, ‘The same cause, which raises the wages of labour, the increase of stock, tends to increase its productive powers, and to make a smaller quantity of labour produce a greater quantity of work. The owner of the stock which employs a great number of labourers necessarily endeavours, for his own advantage, to make such a proper division and distribution of employment. For that same reason, he endeavours to supply them with the best machinery which either he or they can think of.’
Henry Ford, no pinko, recognised that if you are going to produce expensive commodities, then your workers have to be paid enough to buy them as well.
So why, in the face of all this wisdom, are the industrialised world and the companies which populate it currently engaged in a beggar my neighbour strategy that diminishes the market for all? One reason might be that far from being philosophers like Smith, the economists who dominate what passes for thinking in today’s world are actually just glorified accountants.
Now some of my best friends are accountants, but I’m not sure I’d want my daughter to marry one (and that’s not just because any accountant would take one look at my numbers and declare me bankrupt). But accountants are desperately seeking something to count; and salaries and the number of employees are much easier to quantify than the myriad other costs of running a business, even though labour costs are a rapidly diminishing proportion of the costs of doing business. In the same way, interest rates and financial instruments are so much easier to factor in than the myriad complexities of a real, thriving entrepreneurial economy.
So, as long as Wall Street continues to push up the price of stock with each announcement of downsizing, we will continue to get bloated CEOs and dwarfed corporations. It’s a bit like amputating an arm and a leg to lose weight, rather than embarking on a diet and an exercise regime.
Of course, there are times in the business cycle when companies have no option but to shed labour. We can assume that in those cases the CEO takes a salary drop. At all other times, they should keep those pink slips in the boudoir and out of the workplace.
– The Speculator
