American Corporations Haven’t Changed. Economists Have

We are at an odd point in American political history, where the traditional conflict between right and left has mutated into a fight between centralization and self-determination. Prominent figures on both left and right are increasingly promoting greater government control of the economy (albeit for different reasons), leading to strange scenarios in which progressive heroes such as Senator Elizabeth Warren (D., Mass.) and conservative firebrands such as Senator Josh Hawley (R., Mo.) seem to represent two sides of the same coin. The American Institute for Economic Research’s Samuel Gregg recently explained this as a tendency toward corporatism, i.e., the theory that the state is expected to guide and manage the economy, including the relationship between workers and managers.

One reason we supposedly need to give government planners even more authority over our lives and fortunes is that modern corporations are more foolish and venal than in previous eras. For example, Bill Clinton’s secretary of labor, Robert Reich, frequently insists that corporate greed (rather than loose monetary policy) is the cause of inflation because many industries are apparently greedier than in the past. Members of the Biden administration have also suggested that the price of everything from gasoline to chicken parts is based on the avarice of capitalists rather than supply and demand, suggesting the obvious implication that lower prices in the past must have been the result of corporate altruism. Some conservatives similarly insist that U.S. corporate leaders —once sensible and patriotic — have sold out the interests of their fellow Americans in pursuit of maximizing profits in a global marketplace.

In part, this line of thought is based on a naïve assumption that national planners could implement a better set of policies, but it is also the result of a misunderstanding of history. In recent years, left-wing critics — but increasingly some right-wing ones as well — have embraced an odd narrative of the last 75 years or so of American life. According to this view, a post–World War II golden age of economic fairness and equitable treatment was destroyed by Ronald Reagan (and Margaret Thatcher in the U.K.) via the embrace of the free-market theories of Friedrich Hayek and Milton Friedman. After that, it was all corporate profiteering, public-sector austerity, and social decline down to the present day. According to the theory, this tragedy now calls for massive state intervention.

This prelapsarian age was supposedly characterized by harmony between capital and labor and an economy that was fair to everyone. Several years ago, Steven Pearlstein — who received a Pulitzer Prize in 2008 for “insightful columns that explore the nation’s complex economic ills” — advanced this theory in his Washington Post column. He informed us that the expectation that corporate managers should be maximizing shareholders’ returns “has no foundation in history or in law,” and that only in the mid-1980s did managers — under threat from “corporate raiders” — really start worrying about delivering value to shareholders. This analysis, no doubt, came as a surprise to anyone who had been involved in running a public company over the previous several decades.

More recently, this same premise popped up in reference to Senator Warren’s proposed “Accountable Capitalism Act.” As I wrote for National Review back in 2020, that legislation would provide for an extrajudicial kill-switch by which a future executive-branch official could revoke the federal charter of any large public corporation accused of undefined “misconduct.” The summary of the bill posted on Warren’s website opens with a description of the fall-from-grace theory, informing Americans that “for much of their history, American corporations tried to balance the interests of all of their stakeholders, including employees, customers, business partners, and shareholders. But in the 1980s, corporations adopted the belief that their only legitimate and legal purpose was ‘maximizing shareholder value.’”

This perspective is now bipartisan. Senator Marco Rubio (R., Fla.) published a report in 2019 titled American Investment in the 21st Century (and a related article in First Things), which asserted that a focus on shareholder value only came “out of the economic stagnation of the 1970s.” Apparently, this new obsession ended up causing corporate managers to invest in things such as “financial engineering” rather than “capital- and labor-intensive creation of actual goods and services.” The shift from manufacturing to services has allegedly left the nation unable to provide dignified and rewarding work to a large share of Americans. Rubio’s critique is light on actual economic statistics, but heavy on vague emotive claims, such as the claim that “there is an inescapable sense [among Americans] that their work is not productive in the way it was for generations prior.”

This entire argument is ahistorical and strange, but the left-wing version is likely the one that would be most confounding to previous generations. The entire history of the American labor movement is based on the idea that U.S. corporations, precisely because they are beholden to the financial interests of their owners, need to be regulated and restrained to give individual employees the chance at fair wages and treatment. Imagine traveling back in time to any year between 1945 and 1980 and informing a meeting of union organizers that American corporations are well known for “balancing the interests of all of their stakeholders.” You’d be lucky to make it out of the room.

Senator Rubio’s defeatist nostalgia for a grease-and-rivets industrial past isn’t much better. Populist conservatives in the Rubio mold like to lament falling employment in the domestic manufacturing sector on the premise that manufacturing itself has been in decline. But the main reason that a smaller proportion of Americans work in factories today is not because of a “hollowing out” of industrial capacity, but because they’ve become massively more productive. As two economists at the St. Louis Fed wrote in 2017: “Manufacturing’s roughly constant share of real GDP and declining employment share indicate an increase in productivity of the manufacturing sector relative to the overall economy.” Yes, it’s true that the percentage of Americans who worked in manufacturing in 1980 (about 22 percent) has declined to about 12 percent today. But compare that to the long view of labor-market change in another key, labor-intensive industry. At the time of the first federal census in 1790, over 90 percent of Americans worked on farms. Today, hired farmworkers make up less than 1 percent of all U.S. wage and salary workers. And yet, food is more plentiful and affordable than ever.

To reiterate: U.S. corporations didn’t just start becoming concerned with profits sometime around 1980, either because they were running out of asymmetrical post-war advantages or because they had been brainwashed by neoliberal ideologues. It’s genuinely strange to have to say this, but the reason people give their money to corporations in the first place is that they want and hope to get more money back than they put in. That’s the purpose of a corporation, and it always has been. The Washington Post’s Pearlstein seems to think he’s played a trump card when he mentions a legal scholar who reportedly couldn’t find a single corporate charter that specifically mentioned maximizing profits for shareholders. That’s likely true, but only in the same way that most restaurants don’t offer lessons on how to chew: The goal is obvious. This is true for big-time financiers, small-time retail investors, and hired hands such as pension-fund managers.

Corporations can and do engage in a wide variety of philanthropic endeavors and societal uplift, and they often spend money on things that aren’t directly tied to maximizing revenue. But that doesn’t mean that they should be — or ever were — empty vessels waiting for us to project our hopes and dreams onto them. The process of producing goods, selling them to willing buyers, and earning profits justifies itself. We’ve now come to the bizarre state of affairs, however, where things that were once so obvious that they didn’t need to be stated are now considered never to have been true at all.