On August 2, 2017, the Dow Jones Industrial Average hit a record-breaking 22,000—its fourth 1,000-point advance in less than a year. That same day, I read the first sentence in Peter Georgescu’s new book, Capitalists Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation: “For the past four decades, capitalism has been slowly committing suicide.”
How does Georgescu, the chairman emeritus of Young & Rubicam (Y&R) and a 1963 graduate of Stanford Graduate School of Business, reconcile the Dow’s ascent with his gloomy assertion?
“The stock market has nothing to do with the economy per se,” he says. “It has everything to do with only one thing: how much profit companies can squeeze out of the current crop of flowers in the garden. Pardon the metaphor. But that’s what corporations do—they squeeze out profits.”
In the latter half of the 1990s, Georgescu shepherded Y&R through a global expansion and an IPO. He has served on the boards of eight public companies, including Levi Strauss, Toys “R” Us, and International Flavors & Fragrances. He also is the author of two previous books, The Constant Choice: An Everyday Journey from Evil Toward Good and The Source of Success. An Advertising Hall of Fame inductee, the 78-year-old adman is still pitching corporate leaders. Now, however, he is trying to convince them to fundamentally rethink how—and for whom—they run their companies.
The fault lines in capitalism
Capitalism is an endangered economic system, Georgescu says. He sees a dearth of demand across the global economy, even as American corporations record their highest profits ever. “How does this magic happen?” he asks rhetorically. “You engineer it. You buy back your stock at 4% and change. Your earnings per share go up and the market says, ‘We like that.’”
What does he mean? He cites the seminal research by economist William Lazonick, who studied S&P 500 companies from 2003 to 2012 and discovered that they routinely spend 54% of their earnings buying back their own stock (reducing the number of outstanding shares and driving up share prices) and 37% of their earnings on dividends—both of which benefit shareholders. That leaves just 9% of earnings for investment in their business and their people.
This financial legerdemain obscures two fundamental fault lines in capitalism, and particularly in the US economy, according to Georgescu. The first is a lack of investment by companies in their own futures. “Our companies are not competitive because they don’t invest in themselves,” he says. “Total R&D investment is down. Total basic research, which is the precursor of innovation, is down dramatically. Investment in infrastructure has fallen to critical levels.”
The second fault line is the lack of investment by companies in their employees. “Innovation is the only real driver of success in the 21st century, and who does the innovation? Our employees. How are we motivating them? We treat them like dirt. If I need you, I need you. If I don’t, you’re out of here. And I keep your wages flat for 40 years,” says Georgescu, who points out that growth in real wages has been stagnant since the mid-1970s.
Read more at Quartz.