I’ve been mulling over a December op-ed by Paul Krugman, “Robots and Robber Barons,” in which he wonders why corporate profits are at a record high in today’s depressed economy while wages are down. My attention was drawn by his question: “The pie isn’t growing the way it should – but capital is doing fine by grabbing an ever-larger slice, at labor’s expense. Wait – are we really back to talking about capital versus labor? Isn’t that an old-fashioned, almost Marxist sort of discussion, out of date in our modern information economy?”
“As best as I can tell,” he goes on to say, “there are two plausible explanations, both of which could be true to some extent. One is that technology has taken a turn that places labor at a disadvantage; the other is that we’re looking at the effects of a sharp increase in monopoly power.“
In a response to Krugman’s column, Alternet writer William Lazonick holds that automation is not the problem. “As part of a process that could reconnect profits and prosperity, the US economy needs more, not less, corporate investment in automation. … Companies that invest in automation have to build organizations to ensure steady supplies of high-quality materials, improve and maintain machinery, and capture sufficiently large market shares to achieve economies of scale. These investments in the development and utilization of automated facilities create lots of high-value-added jobs,” he argues. Then he asks “why US corporations are failing to reinvest these profits in new products and processes that can create large numbers of new high value-added employment opportunities in the United States.”
The problem with both points of view is that they retain the conception that corporations are still large, vertically-integrated units that manufacture products and sell them to the retail channel via wholesalers. However, since the early 1990s, major structural changes have taken place that have drastically hollowed out the domestic economy.
Barry Lynn, in his 2005 book End of the Line: The Rise and Coming Fall of the Global Corporation, writes that the kind of self-contained organizations most of us think of when we hear the names Dell, GE, Cisco, IBM, Cargill and Boeing, for example, have been systematically taken apart and actual production outsourced to smaller entities, many of them offshore, leaving only the company name and marketing functions intact.
The recent issues with the Boeing Dreamliner’s batteries catching fire attest to some of the risks inherent in this outsourcing model. But these are being ignored in favor of high and immediate corporate profits. Lynn writes: “By placing erstwhile internal operations on the other end of a contract or series of contracts, these lead firms gain much greater overall leverage vis-à-vis the individual supplier, worker, and government. … Today’s arbitrage-oriented firms … are designed to focus much more on using their power over their production systems to wring out wealth immediately, rather than to devote resources to technologies that might create wealth years from now.”
The poster child of this arbitrage business model is Walmart, whose role in Bangladesh, as in other countries, was to strip value from producers to the point where basic safety was compromised and a disastrous fire took place. A more telling example, however, is Apple Computer. In the early 1990s Apple had two major plants in the U.S. turning out desktops and Powerbooks. Demand was high, but mismanagement at Apple meant that profits were sagging. Even though their production plants were working efficiently, Apple sold them in 1996 to an outsourcing specialist called SCI Inc. who kept on producing Macintoshes for Apple.
In 1998, Steve Jobs, who had experience with outsourced production for his NeXt computer, moved manufacturing completely offshore. According to the Philadelphia Inquirer, “The move to China came about quietly and was little noticed at the time because of the way Apple went about creating its offshore presence. Rather than build plants that proudly displayed the Apple name, as it did in California and Colorado, the company turned to outsourcing firms that partnered with the Chinese to establish plants where the products are made. Apple’s plants in mainland China bear the name of their Chinese contractor, but inside they are making Apple products.”
In a 1997 paper which specifically examined the sale of Apple’s plants to SCI, MIT scholar Timothy Sturgeon wrote: “The evidence provided here suggests that American electronics firms are developing new ways of exerting substantial market power without the fixed costs of building and supporting a gigantic corporate organization. The strategy for brand-name systems firms is to outsource all of those functions that do not have direct relation to the establishment and maintenance of market power. Brand names, product definition and design, and marketing are being kept in-house, while manufacturing, logistics, distribution, and most support functions are being outsourced.”
Market power is the key to the lead system firm’s dominance over producer firms. By its control over design specifications, distribution and retail, the lead company can exert considerable pressure on its suppliers, who have no direct access to the consumer, to meet harsh production targets and price points. Cutbacks in orders can destroy the profitability of suppliers, who have already invested heavily in automated technology to manufacture components and need to keep production levels over a breakeven point. As a result of this unequal power relation, the lion’s share of surplus value in the commodity chain goes to the lead company. In the case of an iPhone or iPad, only about 2% of the value added (about $10) is retained by assembly companies in China, and 5-7% by Korean companies who supply display and memory chips, compared to between 30-60% going to Apple and its shareholders.
The push by the one percent for continued high share prices and profits means that corporate capital has been directed to the control of market share at all costs, and diverted away from investment in the development of automated facilities. Even if manufacturing were to return to the U.S., it would not create the kind of jobs that sustained a growing middle class after World War II. The answer to Krugman’s and Lazonick’s questions is that it is the way monopoly power has been able to reorganize the economy around globalized production that enables corporations to keep wages low, not as a separate factor from automation, but interacting dynamically with it. It’s still capital versus labor, but in a different configuration.
No amount of money thrown at the banks, or even bringing supplier companies back into the U.S., will undo this reality. While resistance has been quiet around the period of Obama’s reelection, discontent lies just below the surface and determined efforts by low-waged workers to organize are harbingers of major battles ahead. Rather than making workers in America or other countries unemployed, control of corporations must be taken out of the hands of the plutocracy and put in the hands of the people