Friend: Here's a very clear visual: Article extract:

Profits Hit High, Wages Hit Low

Blodgett boils it down into very simple terms:

Corporate Profits Just Hit An All-Time High, Wages Just Hit An All-Time Low - Henry Blodgett via Business Insider

What’s wrong with this picture?


Corporate profits hit all-time high


Wages hit all-time low

What’s wrong is that an obsession with a very narrow view of “shareholder value” has led companies to put “maximizing current earnings growth” ahead of another critical priority in a healthy economy:

The happiness and well-being of employees.

What those who obsess exclusively about profits forget is that one company’s wages (costs) are other companies’ revenues.

If American companies were willing to trade off some of their current earnings growth to make investments in wage increases and hiring, American workers would have more money to spend. And as American workers spent more money, the economy would begin to grow more quickly again. And the growing economy would help the companies begin to grow more quickly again. And so on.

But, instead, U.S. companies have become obsessed with generating near-term profits at the expense of paying their employees more, making capital investments, and investing in future growth.

When do we finally start marching? When do we begin to form some solidarity-oriented movement of workers?

----- End extract -----

Me:
Back in 1969 I worked on a software project that used 11 years of historical data describing expenditures of an IBM division to produce a set of equations relating each type of expenditure to NIBT (net income before taxes) which could be used to prepare a division budget for the next year. My first version did only (but exactly) what was specified, and one of the predictable (and yet not predicted!) results was that the annual amount budgeted for toilet paper was $0. :-)

It was almost as much work modifying the programs to discover ‘reasonable’ line item minimums and maximums as it was to figure out all the equations and apply them in order to produce a budget.

Friend:
Morris, I’m a bit slow today, can you please join those dots for me?

Me:
Easily. Large corporations manage according to the numbers (believing “The numbers don’t lie”). In the late 60’s and early 70’s the MBA became a passport to high income, and thousands of eager young MBA types fired up their spreadsheet calculators to optimize corporate budgets for maximum profitability.

Superficially, it all made perfect sense – and the MBA crowd produced exactly what they were hired to produce: budgets that maximized their corporations’ profits.

What very few noticed was that profit maximization was not, and could not be, sufficient to a healthy enterprise. The IBM model correctly determined that expenditures for (things like) toilet paper contributed absolutely nothing to the bottom line and so produced a budget that allocated no money for its purchase.

There are other, less obvious, cost centers for which various corporations’ models reduced funding. It’s normally difficult to determine a meaningful correlation between R&D expenditures and profitability; and it’s painfully easy to see how unsophisticated models might call for minimizing employee income and benefits.

I felt lucky that the zero allocation for TP happened to jump out at me and that my IBM clients were able to find that simultaneously hilarious and serious, because it provided us with a heads-up to a problem that might not otherwise have received due consideration.

IBM deserves credit for being willing to absorb the costs associated with moving from a ‘knowledge-based’ system to a ‘wisdom-based’ system. I more than suspect there were many corporations who did not make that same discovery and that of those who did, there were few willing/able to make that large additional software investment.

Does this better connect the dots?

Friend:
Oh look, a crystal, thank you!

[For what it's worth, when the budgeting software went “live” the budget it produced for the following year was used and resulted in an actual 30% NIBT increase over the previous year. The development money appears to have been well spent.  ~MRD]

Copyright © 2012 Morris R Dovey

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