The AI Boom Runs on an Even More Dangerous Machine (Part 1)

Thomas Ferguson isn’t easily surprised. He’s spent decades following the trail of money through America’s economy and political system, exposing patterns people like Jeff Bezos might prefer you didn’t see.

Recently, Ferguson, who directs research at the Institute for New Economic Thinking, was working with colleagues Servaas Storm and Jie Chen on a long-term chart tracing how national income is split between labor and capital – just at a moment when U.S. worker compensation dipped to one of its lowest levels on record.

Something jumped out. He assumed the biggest shifts in worker pay as a share of GDP would show up during the economic mayhem of the 1980s or the China shock after 2002. But there was also an unexpected drop in 1999.

The timing seemed odd. It predates the surge of Chinese imports that many economists later blamed for pressure on American workers. Ferguson figured that trade agreements like NAFTA had to be part of the ill wind blowing towards workers at the time, but still, they seemed unlikely to explain the sharp break he was seeing.

He thought it might be something most people aren’t even aware of — a phenomenon his colleague William Lazonick had been investigating for decades.

1999 happened to be the year stock market valuations went to the moon, peaking in early 2000. It was the bubblicious height of the dot-com boom, when it seemed like the old rules of business had been rewritten. By then, a once-controversial idea had taken over corporate America: that a company’s primary purpose was no longer simply to grow, make things, and create jobs — it was to keep the stock price ticking up and the rewards flowing into the pockets of people who, as a rule, had little to do with the company’s success.

To Ferguson, the timing wasn’t a coincidence. The stock market boom reflected a deeper shift in corporate priorities, one that was cutting off workers from the economy’s gains.

William Lazonick, an economist and business historian known for his critique of what he calls “shareholder value ideology,” argues that this alteration in how American business are run – and for whom — has suppressed wages and made job security a distant memory for most. According to his view, it has also undermined innovation, hollowed out the middle class, increased inequality, and encouraged financial chicanery that ultimately weakened U.S. businesses at their core across whole industries.

Today, the idea that a company’s first duty is to boost its stock price and enrich shareholders can feel like common sense. It’s the water we swim in. But it is anything but that. For much of the postwar era, many Americans would have seen it as a profound betrayal of the corporation’s broader purpose.

To understand why American workers have become more productive while others enjoy the rewards, the shareholder value obsession is a crucial piece of the puzzle. I caught up with Lazonick to talk about how we got here and what’s coming in the next phase.

It turns out that few ideas have had a bigger impact on today’s economy while staying invisible to the people most affected. Even many of capitalism’s fiercest critics underestimate its role, and unless we get serious about reforming corporate governance, Lazonick warns, the AI boom will only supercharge the problem.

Let’s dive in.

A Really Bad Idea Sweeps America

By declaring that making shareholders wealthier comes first, American executives were openly embracing something that many supported but feared to say publicly.

Imagine a hospital chief saying her main goal is to make lenders happy. Or someone running a school saying his principal responsibility is to make money for bondholders. It would sound backwards that the first obligation would be to enrich those seeking returns rather than do the job they’re meant to do.

But wait, corporations are profit-making businesses. Isn’t that different?

Well, not entirely. Not so long ago, people tended to view corporations as public institutions as well as private enterprises. Their duties were thought to extend to serving customers well, treating workers fairly, supporting communities, and contributing their share to society through taxes. The corporation’s charter was a privilege granted by the people, and it came with obligations.

As corporate America expanded in the late 19th and early 20th centuries, the same companies that powered extraordinary growth also stoked fears about whether a small circle of private institutions had grown too influential for the public good. The crash of ‘29, followed by the Great Depression, provided the sobering answer: unchecked corporate power could wreck the whole financial system.

Accordingly, the nation’s expectations of business got a reset. By the time the New Deal, wartime mobilization, and the postwar boom had settled into public consciousness, most Americans accepted that companies should pursue profits, but they had to be responsible to the society and the people whose labor, resources, and trust made those profits possible.

In a famous 1951 article in the Harvard Business Review, Frank Abrams, Chairman of Standard Oil of New Jersey, echoed this perspective.

“None of the great, recognized professions is without a strong sense of responsibility to the community,” he declared, insisting that the management professional was charged to “maintain an equitable and workable balance among the claims of the various directly interested groups.” That included not just stockholders, but “employees, customers, and the public at large.”

Abrams maintained that those with a financial stake in the company were only entitled to profits that were “fair” and “reasonable.” More important was a well-paid workforce — not only valuable beyond what might appear in a “dollars-and-cents valuation in the balance sheet,” but a key measure of corporate success.

Those were not the words of a progressive activist, but from one of the country’s leading corporate honchos.

This view remained the norm for the next several decades, from the GI Bill and the interstate highway system to the Summer of Love and the dawn of the personal computer. Workers shared more fully in the nation’s prosperity as stable jobs and defined-benefit pensions allowed many of our parents and grandparents build solid middle-class lives — and buy those televisions that let them watch the moon landing.

Shareholders earned healthy yields from dividends and, if they sold the shares, stock-price gains. Some got quite rich — but maximizing their wealth wasn’t seen as the company’s main job.

Not everyone was pleased with these arrangements. Free-market economists like Milton Friedman argued that shareholders ought to get more, insisting that they were the ones taking all the risks. This view ignored the workers who risked their time, effort, and livelihoods to make businesses succeed, the communities that built around local industries, and the taxpayers who funded the infrastructure and the research that businesses relied on — the same taxpayers that often absorbed the fallout when they failed.

Shareholders were just people and institutions buying and selling a company’s stock on the open market, like baseball cards, usually with no role in building the business, developing its products, or serving its customers. For decades, the notion that they were the ones most entitled to benefit from a company’s success would have sounded wrong, if not immoral.

But beginning in the 1960s, the tide began to turn. Giant conglomerates bought up dozens — even hundreds — of companies on the questionable theory that good managers could run anything. For example, under Harold Geneen, ITT transformed from a telephone company into a sprawling empire of hotels, insurance companies, and manufacturers. For a while, the strategy looked like a triumph of managerial genius. Until the whole thing began to unravel, and ITT started selling itself off piece by piece.

The implosion of these conglomerates in the ‘70s and ‘80s helped fuel a new critique of corporate America. Managers, critics argued, had become too preoccupied with building empires and not focused enough on boosting shareholder wealth. A new shareholder-focused philosophy was taking shape.

In the 1980s, that philosophy found powerful allies on Wall Street. Aggressive financiers like Michael Milken used risky “junk bonds” to bankroll takeovers, allowing corporate raiders to buy companies, slash jobs, sell off valuable assets, and enrich shareholders by jacking up stock prices – even when these moves weren’t good for the underlying businesses. At the same time, Wall Street itself was shifting away from financing productive enterprises and toward making money from trading and financial engineering — a transformation known as financialization. With the rise of markets like NASDAQ and cheaper stock trading, Wall Street increasingly became more about rewarding speculation. It was starting to look less like a place to build businesses and a whole lot more like a casino.

The Reagan Revolution and the go-go ‘80s pushed the market-first mindset into the mainstream. Corporate America increasingly judged success by what happened on Wall Street, like higher stock prices, bigger deals, and ever-rising returns for people holding shares.

By the mid-eighties, American companies had landed on another powerful way to funnel money to shareholders: open-market stock repurchases, better known as stock buybacks. Rather than investing profits in workers or the business itself, companies could suddenly spend gargantuan sums buying their own shares to artificially inflate the stock price. The executives who authorized those buybacks often knew precisely when the price would jump, and could sell their own stock at the inflated prices. Before 1982, regulators generally frowned upon this activity. But then the SEC reversed course, adopting the controversial Rule 10b-18 and giving companies legal cover to do what had long been treated as a form of market manipulation.

Lazonick and his colleague Ken Jacobson denounce this change as a “license to loot.”

America was rapidly shifting from “stakeholder capitalism” to a model centered on shareholder value. The transformation accelerated into high gear in 1985, when economist Michael Jensen arrived at Harvard Business School with a provocative message that corporate managers were sitting on too much cash and needed to “disgorge” it to shareholders. The word was telling, implying that the money kept inside a company wasn’t fuel for future growth, but cash managers were wrongfully holding on to. The contrarian Jensen, known for his proselytizing passion, insisted that executives had too much freedom to pursue their own priorities and too little pressure to get money moving into shareholder pockets.

In 1990, Jensen and his colleague Kevin Murphy helped popularize stock-based pay for executives, tying their fortunes directly to the company’s share price. Because buybacks, often running into the hundreds of millions or even billions of dollars a year, could push that price higher, they became one of the fastest ways for CEOs to balloon their own wealth. For many, if that meant cutting jobs, holding down wages, shelving critical investments, or dodging taxes, so be it. The incentives were clear: what lifted the stock price lifted the CEO.

The buyback binge turned the corporate treasury into a cash pump for shareholders. Lazonick studied more than 2,000 of America’s largest companies that remained in the S&P 500 from 1981 to 2019, including giants like General Electric, IBM, Pfizer, Intel, Apple, and Walmart. He found that buybacks consumed just 4% of net income in the early 1980s, but over time, they overtook the steadier practice of paying dividends and became the dominant way corporations funneled cash back to shareholders. By the late 2000s, buybacks swallowed 62% of corporate earnings — money that could have gone toward higher wages, stronger benefits, more secure jobs, or investments in the next generation of products and technologies.

Corporate boards embraced the new gospel of maximizing shareholder value because it gave them a simple scorecard in the stock price. CEOs were all for it because it justified ever-fatter stock-based pay packages. Shareholders loved it because it put their interests ahead of everyone else’s. Before long, consultants, lawyers, and business school professors were all singing the same tune. Focusing on stock prices became the way to run a company. Jensen became one of the most influential economists in America, what one Bloomberg writer called “the high priest of the greed-is-good era.”

The 1990s delivered yet another gift to Wall Street. As corporate America decided it didn’t want to foot the bill for traditional pensions, millions of workers were pushed into 401(k) plans, directing their retirement savings to the stock market and turning them into shareholders by default — whether they wanted to be part of the casino or not. But the new shareholder economy was never a fair one. When the buyback boom arrived, the biggest rewards went to those already holding the most stock: CEOs and wealthy households with millions of shares to sell. Unlike dividends, which are distributed to all shareholders, buybacks concentrate their benefits among those positioned to cash in when prices rise, like those executives who often help decide when the buybacks occur.

In effect, workers’ retirement savings helped create the deep pool of money flowing through the stock market, while the biggest benefits accrued to those already sitting at the top. At the same time, buybacks encouraged layoffs, wage restraint, and cuts to critical investment. It should therefore come as no surprise that today’s typical 401(k) balance is a mere fraction of what’s needed for a decent retirement, despite decades feeding the stock market.

In the Wall Street casino, the house always wins.

To sum up: in the new millennium, the idea that corporations should serve anyone besides shareholders got tossed out the window, and working Americans got defenestrated right along with it. The late nineties slowdown in worker pay Ferguson and his colleagues spotted was the predictable result of a new operating system that measured corporate success by the size of shareholders’ wallets. Instead of investing in and rewarding the people who built the business and made it run, corporate leaders fixated on boosting the stock price – often while running their businesses into the ground.

The Price of Putting Shareholders First

As the shareholder value model took hold, executives discovered they could make the stock go up without making the company better — and walk away with a new yacht (or a whole fleet) anyway. For the people designing this system, the beauty was that the costs got dumped on everybody else.

The early 2000s brought an ignominious parade of companies where the Wall Street numbers looked great while the actual business rotted underneath: think Enron, WorldCom, Lucent, and other spectacular blowups. In a 2005 paper, Jensen himself admitted that inflated stock prices can create powerful incentives for executives to manipulate earnings, pursue value-destroying strategies, and even commit fraud.

Unfortunately, the shareholder value machine rolled on. In subsequent years, companies like Motorola, IBM, HP, and Intel may have avoided scandal, but they spent staggering sums doing buybacks while falling behind in the investments that had once made them industry leaders.

“When shareholder value takes over, you want to boost the stock price at all costs,” Lazonick explained. “You get busy grabbing cash for shareholders. You channel corporate profits into dividends and, especially, stock buybacks — sending money out the door to shareholders instead of reinvesting it in the business. You start cutting labor costs. You do layoffs, even if you’re losing valuable expertise and hurting innovation. You steal from your own company.”

The name of the game: extract value to make the rich even richer instead of building for the future of the hard-working people whose labor creates American businesses.

Buybacks exploded between 2003 and 2007, helping to set the stage for the 2008 global financial crisis. Companies briefly retreated on buybacks during the crisis, but since then appetite for them has been insatiable. Over the past decade alone, large U.S. companies have spent trillions on them — money that could have gone toward innovation, employment security, higher wages, or, heaven forbid, paying taxes.

Lazonick and his colleagues have examined a range of companies that poured cash into stock buybacks while their productive capabilities fell apart, including Boeing, IBM, Cisco, Intel, General Electric, General Motors, and Apple.

Take Boeing. From 2013 to early 2019, the company spent about $43 billion on buybacks. Much of that happened while it was profiting nicely from its 737 MAX airplane. Instead of putting more of that money into things like engineers, research, worker training, or new technology, Boeing used a huge chunk of it to boost its stock price. The biggest winners were executives with stock-based pay and people who owned large amounts of shares.

Then came disaster. Two 737 MAX planes crashed in 2018 and 2019, killing 346 people. After the first crash in October 2018, investigations began to uncover serious problems with the aircraft’s design, Boeing’s safety practices, and regulatory oversight. Yet Boeing’s stock price continued climbing, reaching an all-time high on March 1, 2019. The company kept buying back its own shares the following week, until the second crash on March 10 forced the crisis into the open and brought the shareholder value frenzy to an abrupt halt.

Boeing’s reputation took a massive hit, and the company eventually paid billions in costs and penalties. As Lazonick sees it, Boeing’s focus on boosting its stock price had come at the expense of investing in the people and systems needed to build safer airplanes.

By this time, even Jack Welch, the legendary former General Electric chief, was criticizing shareholder value doctrine, calling it “the dumbest idea in the world.”

Now comes AI, ready to put the whole ugly system on steroids. Make no mistake: the new technology is getting plugged straight into a machine built to squeeze workers and shovel the gains upward. And it’s already happening.

*Stay tuned for the second part of this article.