Why it's naive to expect corporations to be nice to their workers

Henry Blodget had a welcome moment of moral exasperation in Business Insider on Sunday: "It is not a law that they pay their employees as little as possible," he fumed, ripping into American business managers and owners. "It's a choice."

And he's absolutely right. Take Walmart, the country's biggest private employer and the poster child for insisting your business model requires dirt cheap pay. It does, in fact, have the room in its profit margin to pay its employees several thousand more a year. And Blodget is right that inequality — the natural result of the perpetual drive to "minimize wage costs" — guts the consumer base, making the American economy less stable and sustainable.

But Blodget is naive in his explanation for why we went down this path. He blames a shift in values: mid-century, the economic elite believed "we were all in this together" and understood that compensating employees well would strengthen the economy's ecological feedback loop. Then things changed, and now the elite have embraced greed, selfishness, and profit maximization.

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This is a pretty common story liberals tell. Other variations bring up the arrival of "shareholder value maximization" as a corporate governing philosophy, and Milton Friedman's infamous assertion that companies have no social responsibility beyond making a profit.

It's basically the liberal version of conservatives insisting that changing social norms and the sexual revolution undid the working class family. Certain values were widely held, and then they just...changed, and everything went to hell. Both stories are frustrating because they treat culture as a kind of all-purpose black box to explain stuff. Why did culture change? How do you change it back? No one knows.

The much simpler and more persuasive explanation for what's happened to poor and working-class families is that, over the last four decades, the economy changed in key ways that made it much harder for those families to hold together. Likewise the shifting behavior of businesses and the elite: they changed because the structure of the economy changed.

First, unions were strong through the mid-century period Blodget points to, giving workers far more power to bargain over their share of the revenue their companies generated. Then unions began declining in the 1960s, and fell off a cliff around 1980.

Taxes went through the same pattern: income, corporate, and capital gains taxes shot up in the 1930s, then began to unwind in the 1960s, and are crazy-low today by historical standards. While taxes raise revenue, they also force money to flow through the economy in particular ways. High marginal income tax rates discourage employers from even bothering with hefty payouts at the high end, and the right mix of corporate taxes and capital gains taxes can encourage firms to plow as much of their revenue as possible back into job creation.

Regulations aimed at controlling business power and ensuring the economy worked for the common good also came under attack starting in the 1970s. Enforcement of anti-trust law turned anemic, coddling concentrated corporate power. And the gobbling up of the U.S. economy by the financial industry went hand in hand with financial deregulation.

Other changes, like the post-1980 monetary policy obsession with controlling inflation, also played a big role.

Put it all together, and you have a pretty concrete explanation for why the pre-tax incomes of the 1 percent were so low mid-century, why employment and wage growth for the bottom was comparatively good, and why both those trends reversed.

Culture matters, but it's largely at the mercy of economics. There's plenty of sociological evidence that the absence of opportunity — especially the absence of jobs and good incomes for men — is why the working class has acquiesced to (not embraced) single-parent households, chaotic relationships, and haphazard childbearing. Similarly, it's not surprising that a culture of greed and selfishness would arise among the elite when regulatory and tax changes permit those behaviors to flourish.

But perhaps the biggest weakness of the cultural explanation for why businesses are shortchanging their workers is that it leaves us at the mercy of the elite. We don't need to take their wealth and power away from them, we just need to change their values! If we convince the elite to be nice to everyday working Americans, then we can trust them again.

There's an implicit, but really important, assumption about human nature here: that having outsized wealth compared to everyone else is itself neutral in its effect on the individual or social moral conscience. But that's certainly not what the major religions have taught. Nor does it square with what social science is telling us, or with the fact that the political mobilization of the business community and the wealthy is arguably what gave us all the above changes.

Students of Karl Marx also instinctively get this: where profit is the engine of economic activity, powerful forces will always push to remake society so that as much surplus value as possible gets sucked up by elites. The problem is that Hayek wasn’t entirely wrong either: a completely planned economy that abandoned profit as a coordinating signal and actually achieved total equality would almost certainly require the worst kind of tyranny. Which leaves us in a perpetual no man’s land between two competing drives, trying to come up with new and better ways to strike the balance, and to avoid pitching into oligarchy from either direction.

But at the present juncture, we've erred much too far in favor of capitalism unbound.