Anachronistic indicators

In the 1950 and 1960 "what was good for GM was good for America." Then it made sense to track proxy measure of well being such as GDP or the Dow Jones Industrial Average (an 'index' that tracks the share price of the top 30 largest companies on the New York Stock Exchange).

But in the 1990s a shift took place that had corporations senior managers focusing increasingly if not exclusively on shareholder value. Value appropriation began to dominate value creation. If creating shareholder value is all one cares about, there are far easier ways of doing that than competing with rivals to out-innovate one another.

When firms create value, shareholders generally benefit, but so do consumers, with better or cheaper products. But when value appropriation dominates, for example as industries consolidate and firms raise prices, consumer surplus is reduced as profits and shareholder wealth rises. Firm profits and broad-based societal welfare decouple.

The Economist, in its Briefing section this week, bemoaned corporate consolidation and high profits as a symptom of the tamping down of Joseph Schumpeter's "gales of creative destruction"; yet interestingly it didn't cross the writer's mind that one choice managers make concerns the allocation of resources in the wages paid to employees. Increasing consumer surplus through increased competition is certainly one way of making everyone (except shareholders) better off; but so is a pay raise for the company's employees.

Since few people working two part-time jobs to put food on the table have a portfolio of equity investments, they won't benefit from higher corporate profits, rising stock prices or, when they happen, dividend payments. Those profits in many cases come from the elimination of full time positions and their replacement with part-time ones that don't come with any benefits, not to mention job elimination from off-shoreing and the increasing use of cheapening technology.

And since GDP measures sales, not incomes, and as an average, is distorted by a widening distribution (rising mean but falling modal average) this too doesn't reflect most peoples; lived experiences.