Political Economy of Growth and Development

Political Economy of Growth and Development

In his book, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, William Lazonick speaks about many issues that are highly relevant in the world today. William had a passion for business and economics but decided to delve into the world of human resource studies, organizational behavior and labor relations. These form the principal themes of his book. Williams’ book derives information from real-life situations where the basic economic principles have failed societies in the past as well as presently. The storyline is based in the United States but with a focus on the economic sector. Much of William’s work was historical and sought to enlighten readers on the economic decisions made by former leaders that had an impact on the current economic order within United States of America.

Labor

One of the principal themes that William talks about in his book is the position held by the labor force in relation to the US economy. The liberalization of America’s economy created a new world order in which all economic activities were left to the dogs. The labor sector was among those worst hit by this new approach of letting the market forces of supply and demand run everything. The result of this was increased innovation that catapulted the rise of the new economy that was based on advances in information and communication technology. This was the backdrop for the inception of the Silicon Valley and other ICT hubs. According to William, the market forces were partly to blame for the condition in which American middle-income and low-income laborers have found themselves.

While this New Economy Business Model (NEBM) was hailed by most of America as the commencement of prosperity, William saw in it the beginning of the end. Americans were increasingly unable to reconcile innovation and equity as the rise in the stock market prices was accompanied by higher unemployment rates. William writes that even though the ICT sector offered many employment opportunities particularly for white-collar educated workers, this was paralleled by a simultaneous decrease in quality jobs for workers in the high school level of education. Furthermore, he states that the increasing job insecurity was becoming a dominant feature in the US economy. Most ICT companies were relocating and transferring their high-skilled workers to low-wage locations (Lazonick, 2009). Quoting a study done in 1973 all the way up to 2006, the results showed that members of the U.S. labor force experienced shorter job tenures. Education and job experience suddenly did not guarantee one employment security.

The labor force within America during the inception of the New Economy Business Model also faced minimal benefits from their various firms who sought to minimize employee costs. Most New Economy companies such as Microsoft, Oracle and Dell were cited by William as offering minimal insurance cover as well as investment plans. The recession setting in at around 2001 only served to increase the demise of the labor force in America. Most firms began to layoff their employees as a strategy to ensure profitability. William cites Hewlett Packard as an example of such a firm. HP announced that it would chop 6,000 jobs and later sent packing around 4,000 employees. In September, HP announced its merger with Compaq, which resulted in further downsizing. All these unemployed workers had little hope of getting jobs elsewhere.

Douglass North also shares similar sentiments in his book, Structure and Change in Economic History, when it came to the investigation of the impact that new technologies had in shaping the economic institutions. In particular, Douglass analyzed the system of property rights, and how conducive it was to investment and technological change. Similarly, he discusses the different market forces that constitute the economic systems. Douglass, however, focused on the distribution of scarce resources that oversaw the development of the system of property rights. He attributes the different economical events that have occurred over time to the arrangements by individuals and groups alike to deal with the insatiable need f managing scarce resources.

Therefore, these two writers, Lazonick and Douglass both had similar thoughts when it came to explaining the ICT phenomenon that revolutionized the old economy businesses into institutions that had different priorities, interests and techniques. They both agree that the labor force was directly affected by the change in the job security receded significantly as well as erosion of other employment benefits for example healthcare and retirement packages.

Organizational change

William Lazonick also speaks at length about the change in the organizational structures. William mainly compared OEBM and NEBM’s different ways of operations. The New Economy brought with it greater horizontal and vertical mobility of labor as high-tech labor moved from one company to another. Most start-ups that mushroomed around this period did not really hold out the expectation of employee security and opted for employee stocks to attract well-educated and experienced personnel. These stock options completely eroded the idea of employee security as they were use to attract and retain skilled staff.

The prime function of stocks was transformed to “manage inter-firm mobility on the labor market by attracting and retaining labor” (Lazonick, 2009, 52). Most of the OEBM adopted new employment practices like mobile retirement schemes that only served to increase the labor –market insecurities. In terms of employment preferences, IT firms chose to hire cheaper, less competent executives while at the same time, sending highly trained workers to offshore branches that were relatively inexpensive and paved the way for these cheaper employees.

Inequitable and unstable economic growth

The United States economy is predominantly dominated by the numerous business corporations who employed over 30.9 billion people worldwide. Therefore, the executives decide on the allocation of resources that in turn have an impact on innovation and income distribution. The decisions to invest a particular way rest on the judgments of these executives in control. The financialized corporation of America draws from the above definition where top executives view the business as a financial asset from which value can be extracted. Profit maximization could be transformed into rent-seeking activities through the concept of stock buybacks that perpetuate inequity and instability in the US economy.

William investigated the high stock price yields that occurred during the 1990 stock market boom and discovered that it was mainly attributed to the manipulation of the distribution of income in favor of shareholders. Manipulation occurs when the top executive who control the resource allocation distribute it in a manner that increased their earnings per share. This was in a case where there was no innovation and speculation by stock market watchers. Most NEBM companies however not only manipulated their stock but reinvested almost all their profits and only depended on their innovation.

According to Lazonick, it is the NEBM companies who engaged in intense repurchase of stocks as a solution to offset the dilution from their stock option programs. Most executives claimed that buybacks were their way of investing in the company thus showing a confidence in the future of the company. Doing this would mean that the stock will be sold by the company at a higher price in order to gain profit which is never the case. Instead, in the 1990 boom, corporate executives acting as personal investors sold their own stock to reap speculative gains. The fall of OEBM and the consequent replacement by NEBM was the key reason for the trend towards greater employment instability and income inequality. The NEBM companies that took over like Microsoft, Intel and Oracle shifted their employee relations strategy from the traditional life-long employment system with full pension to a focus on mobile employees and portable pension systems (Lazonick, 2009, 33). A prime cause of the growing inequity and instability in the US economic system therefore is the stock-based compensation of the executives who run the nation’s leading industrial and financial corporations.

Peter Lindert’s thoughts on the nature of redistribution of incomes in society are quite similar to that of Lazonick’s’. In his book “Growing Public: The Story: Social spending and economic growth since the Eighteenth Century”, However, Peter discusses the redistribution process as being a constraint on the realization of economic growth. This is where he and Lazonick differ. William Lazonick categorically condemns the inequality present in America as resulting from skewed distribution of resource by the top executives of major corporations. Lindert, on the other hand, argues that it is the social policies that hinder growth and development. Placing his blame on social spending, Lindert expounds on his two paradoxes: the “Robin Hood” and “free lunch” paradox. These are theories on the correlation between poverty and social spending. His other nine findings mirror his whole paradigm as explained above (Lindert, 2004).

Globalization

Lazonick also compared the OEBM and the NEBM in terms of globalization. While OEBM had companies that tended to locate branch facilities within their domestic jurisdiction, NEBM invested more in global value chains that provided them with the major part of their revenues. OEBM had no real incentives to go international apart from an interest to reduce losses arising from tariffs or to reduce transportation costs. Multinationals that could venture outside their boundaries were almost exact replicas of their mother companies. However, under NEBM, most companies are in a hurry to go overseas with the biggest targets being China and Asia. Malaysia, Hong Kong, Taiwan and the other less developed countries were the target of startup ICT firms that sought new, untapped markets.

The United States tariff policy was partly to blame for this offshore movement as the state literally promoted multinational activities. Section 806.3 of the Tariff Schedule permitted goods that had been exported from the US for foreign assembly to be imported with duty charged only on the value-added abroad (Lazonick, 2010). The United States also encouraged immigrants to work and live in America under specific regulation. However, the criterion used to select who migrated to America was based largely on competence in computer-related fields. The new work force that invaded the streets of USA brought down the value of labor as it was now in surplus.

Mancur Lloyd Olson was a scholar who did numerous studies on institutional economics. Much of his works bordered on the role of private property, taxation, public goods and contract rights in economic development. In his book, “The Rise and Decline of Nations”, Mancur explains states economic life cycles. In it, he tries to explain the reasons why states struggle, prosper, and eventually flounder. He categorizes his work into these three stages. First, interest groups form over time to influence policies to their advantaged. These policies are obviously protective of their interests, and they will end up harming economic growth. The public however will have little or no resistance, as the interests are pushed by a strong minority, and they will therefore stay. As time progresses, these interest groups coalesce and pull the nation into a possible recession.

Mancur tends to agree with Lazonick on the joint effort of the strong minority who use lobby groups or other associations to influence policy. Lazonick’s illustration of a league of top executives who determine the allocation of resources is quite similar to this. The two scholars both acknowledge the influence that the corporate groupings have on the economy. They also both agree that profit maximization is the number one priority for the firms that can be seen in their pursuit of increased revenue. In doing so, they neglect other forms of service to the society like ensuring health security for their employees (Mancur, 1982).

In the final chapter of this work, he suggested that his argument could lead to an overturning of the “orthodox” theory of pressure groups that saw them as a positive force for democracy and efficiency. Special interest groups representing small numbers of firms in oligopolistic industries could support monopolistic or protectionist legislation. Such legislation could damage the broader economy, especially groups unable to organize themselves that would then have to “suffer in silence.” While he rarely used the term, this argument can be seen as foreshadowing the later theory of rent seeking, and in his later works, he more openly recognized the affinity of his ideas with the public choice school of thought. The sixth chapter, “Inequality, Discrimination and Development,” moves to history and the less developed world, blaming stagnation in pre-Communist China on the entrenched power of strong guilds and the stagnation of India on its caste system, despite the highly laissez-faire system that the British maintained there during the Raj (Mancur, 1982).

Gregory Clark in his book “A Farewell to Alms: A Brief Economic History of the World”, discusses the income disparities that exist between individuals, groups and states within the world. Clark tries to explain the reason for industrial revolution in England based on cultural change. He states that it was cultural and not institutional change that led to the development of economic habits of hard work, rationality and education. His particular focus was on the Industrial Revolution which many scholars credit as having originated from England. This forms one of his topics of analysis as he tries to understand the reason why only England realized this fast economic growth (Clark, 2007).

Lastly, Stanley L Engerman and Kenneth Lee Sokoloff both discuss a similar topic to that of Lazonick’s. Their main theme revolves around the differences in the degree of inequality in wealth, human capital and political power. Also interested in institutional factors that affected economic growth, Sokoloff in his book, discussed alongside Engerman, the impact of countries initial factor endowments. They used this framework to analyze the prosperity of USA and Canada in the late 19^th Century (Engerman & Kenneth, 1994).

Conclusion

Business enterprises have a mandate to transform their knowledge base into affordable products for the masses. In order for this to happen, firms need to incorporate organizational learning into their investment strategies. The NEBM has effectively excelled in remaining competitive within the global environment; a feta which would have been impossible with industries using OEBM. However, in Terms of equity, stability and economic security, OEBM has surpassed NEBM in performing collective business functions. With the increased presence of the state in economic affairs, most of these neglected functions have been taken up by the government. The state is once again ensuring employment security and retirement security by implementing welfare programs, ensuring health security as well as other benefits.

 

References

Clark, Gregory. 2007. A farewell to alms: a brief economic history of the world. Princeton: Princeton University Press.

Engerman, Stanley L., and Kenneth Lee Sokoloff. 1994. Factor endowments, institutions, and differential paths of growth among new world economies: a view from economic historians of the United States. Cambridge, MA: National Bureau of Economic Research.

Lazonick, William, (2010) Marketization, Globalization, Financialization: The Fragility of the US Economy in an Era of Global Change, March 2010

Lazonick, William. 2009. Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Lindert, Peter H. 2004. Growing public: social spending and economic growth since the eighteenth century. Cambridge, UK: Cambridge.

Olson, Mancur. 1982. The rise and decline of nations: economic growth, stagflation, and social rigidities. New Haven: Yale University Press.

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