Sorry, It's Not A 'Law Of Capitalism' That You Pay Your Employees As Little As Possible

One of the big reasons the U.S. economy is so lousy is the American companies are hoarding cash and "maximizing profits" instead of investing in their people and future projects.

This behavior is contributing to record income inequality in the country and starving the primary engine of U.S. economic growth--the vast American middle class--of purchasing power. (See charts below).

If average Americans don't get paid living wages, they can't spend much money buying products and services. And when average Americans can't buy products and services, the companies that sell products and services to average Americans can't grow. So the profit obsession of America's big companies is, ironically, hurting their ability to accelerate revenue growth.

One obvious solution to this problem is to encourage companies to pay their people more--to share more of the vast wealth that they create with the people who create it.

The companies have record profit margins, so they can certainly afford to do this.

But, unfortunately, over the past three decades, what began as a healthy and necessary effort to make our companies more efficient after the malaise of the 1970s has evolved into a warped consensus that the only value that companies should create is financial value (cash) and that the only thing managers and owners should ever worry about it making more of it.

This view is an insult to anyone who has ever dreamed of having a job that is about more than money. And it is a short-sighted and destructive view of an economic system that sustains not just this country but most countries in the world: Free-market capitalism.

This view has become deeply entrenched, though.

These days, if you suggest that great companies should serve several constituencies (customers, employees, and shareholders) and that American companies should share more of their wealth with the people of generate it (employees), you get called a "socialist." You get called a "liberal." You get told that you "don't understand economics." You get accused of promoting "wealth confiscation." You get told that, in America, people get paid exactly what they deserve to get paid: Anyone who wants to get paid more should go out and "start their own company" or "demand a raise" or "get a better job."

In other words, you get told that anyone who suggests that great companies should share the value they create with all three constituencies instead of just lining the pockets of shareholders is an idiot.

After all, these folks say, one law of capitalism is that employers pay their employees as little as possible. Employees are just "costs." You should try to minimize those "costs" whenever and wherever you can.

This view, unfortunately, is not just selfish and demeaning. It's also economically stupid. Those "costs" you are minimizing (employees) are also current and prospective customers for your company and other companies. And the less money they have, the fewer products and services they are going to buy.

Obviously, the folks who own and run America's big corporations want to do as well as they can for themselves. But the key point is this:

It is not a law that they pay their employees as little as possible.

It is a choice.

It is a choice made by senior managers and owners who want to keep the highest possible percentage of a company's wealth for themselves.

It is, in other words, a selfish choice.

It is a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees ("associate," "partner," "representative," "team-member"), they, in fact, don't give a damn about their employees.

These senior managers and owners, after all, are earning record profits while choosing to pay their employees so little in many cases that the employees have to live in poverty.

And the senior managers and owners add insult to injury by blaming the employees for this: "If they want to get paid more, they should start their own company. Or get a better job."

It is no mystery why America's senior managers and owners describe the decision to pay employees as little as possible as a "law of capitalism" -- because doing this masks the fact that they are making a choice.

But paying employees so little that they must live in poverty is not a law of capitalism.

It's a choice.

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If American companies were struggling to earn money, as they were in the early 1980s, we would not be having this conversation. But the "efficiency" and "shareholder-value" drive that began back then has now gone way too far the other way. If you don't believe that American companies can afford to invest more and pay their people more--and that their refusal to do this is hurting the economy--take a look at these charts.

CHART ONE: Corporate profits and profit margins are at an all-time high. American companies are making more money and more per dollar of sales than they ever have before. Full stop. This means that the companies have oceans of cash to invest. But they're not investing it. Because they're too risk averse, profit-obsessed, and short-term greedy.

CHART TWO: Wages as a percent of the economy are at an all-time low. Why are corporate profits so high? One reason is that companies are paying employees less than they ever have as a share of GDP. And that, in turn, is another reason the economy is so weak. Those "wages" represent spending power for American consumers. American consumer spending is revenue for other companies. So the profit maximization obsession of American corporations is actually starving the rest of the economy of revenue growth.

CHART THREE: Fewer Americans are employed than at any time in the past three decades. Another reason corporations are so profitable is that they don't employ as many Americans as they used to. This is in part because companies today regard employees as "costs" instead of human beings who are dedicating their lives to the organizations that, in turn, are supporting them and their families. (Symbiosis! Imagine that!) As a result of frantic firing in the name of "efficiency" and "return on capital," the U.S. employment-to-population ratio has collapsed. We're back at 1970s-1980s levels now.

CHART FOUR: The share of our national income that American corporations are sharing with the people who do the work ("labor") is at an all-time low. The rest of our national income, naturally, is going to owners and senior managers ("capital"), who have it better today than they have ever had it before.

In short, the obsession with "maximizing short-term profits" that has developed in America over the past 30 years has created a business culture in which executives dance to the tune of short-term traders and quarterly earnings reports, instead of balancing the value created for employees, customers, and long-term owners.

That's not what has made America a great country. It is not what has made some excellent American corporations the envy of the world. It's also hurting the economy.

SEE ALSO: Greed WAS Good...Then We Overdid It

Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.