A Revolution Only Markets Could Love
Michael C. Jensen
Harvard Business School; Social Science Electronic Publishing (SSEP), Inc.; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Wall Street Journal, p. A6, January 3, 1994
We meet in the midst of a nation brought to the verge of moral, political, and material ruin. . . . The fruits of the toil of millions are boldly stolen to build up colossal fortunes for the few, unprecedented in the history of mankind; and the possessors of these, in turn, despise the republic and endanger liberty. From the same prolific womb of government injustices are bred two great classes of tramps and millionaires.
This quote could have been lifted from yet another television drama disparaging the boom years of the 1980s. In fact, it comes from the Populist Party platform adopted at the party's first convention in Omaha, Neb., on July 4, 1892. Just as the takeover specialists of the 1980s have been condemned by managers, policy makers and the press, the so-called Robber Barons of the 19th century were similarly vilified. But like their Populist predecessors, the anti-greed pundits of the 1990s have missed a far larger phenomenon.
We are today in the midst of a third industrial revolution, comparable in scope to the previous two - the first having occurred in England from the late 18th through the early 19th centuries, and the second taking place primarily in the U.S. from the mid- to the late 19th century. Revolutions such as these lead to steadily rising productivity, dramatic reductions in labor costs and significant increases in living standards. Many industries experience substantial excess capacity as fundamental technological, political, regulatory and economic forces radically change the global competitive environment. The merger booms of the 1890s and the 1980s played a major role in helping industries restructure, thus speeding the adjustment to the new business environment.
While these revolutions brought prosperity, the large costs associated with the obsolescence of human and physical capital in certain industries generated substantial hardship, misunderstanding and bitterness. In both the 19th and 20th centuries, criticism on the part of those who could not or would not adjust to modernization was followed by public policy changes that restricted the capital markets: in the 19th century, through the passage of antitrust laws restricting combinations; in the late 1980s, with the re-regulation of the credit markets, antitakeover legislation and restrictive court decisions. These restrictions were based on specious claims about economic decline that are in complete conflict with the data now available.
Keywords: Third Industrial Revolution, Leveraged Buyouts, Takeovers, Restructuring, Downsizing, Excess Capacity, Mergers, Incentives, Productivity, RegulationAccepted Paper Series
Date posted: December 16, 2003
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