Capitalism May Swing Toward a Softer Phase

Has capitalism become too heartless?

Jeffrey Garten, the new dean at the Yale School of Management in New Haven, Conn., thinks so. "If you look at it historically, capitalism has a certain rhythm," he says. "It is like a pendulum which swings to great extremes." And right now, he adds, capitalism is at a "harsh extreme" with many companies downsizing their labor force, often paying wages that don't keep up with inflation, and facing brutal competition.

Corporations laid off 199,505 workers in the first four months of this year, up 76 percent from the same period in 1995, notes a report this week by Challenger, Gray & Christmas, a Chicago outplacement firm that tracks job-cut announcements.

Moreover, Challenger finds that companies engaged in downsizing have become less generous in severance payments. The median severance check peaked at 16.7 weeks of pay in 1993 and slipped gradually to 12 weeks in the first quarter of this year.

But James Challenger, president of the company, suspects that fewer companies will risk significant layoffs as a cost-cutting option until after the November presidential election. "No company wants to subject itself to the 'corporate killers' label," he says.

Mr. Garten, who became dean last November after serving as undersecretary of commerce for international trade in the Clinton administration, foresees a swing away from corporate hardness - one more fundamental than a mere election-year layoff lull.

"The market itself will be inventing a kind of cushion against the inevitable harshness of capitalism," he predicts.

Earlier this century, the abuses of capitalism were restrained by government intervention. The government created the Federal Reserve in an attempt to avoid disruptive banking failures and manage money. It formed the Securities and Exchange Commission to prevent excesses in the financial markets. Antitrust legislation was passed to discourage corporate monopolies and collusion. Congress set up the Social Security system to provide the retired with basic financial means.

Now, Garten anticipates a "new capitalism" with millions of jobs being created as a result of progress in technology. More people will work from home using advanced computers and communications. In an entrepreneurial wave, small and mid-sized firms will take up many of those laid off by giant companies. The health industry, destined for "massive reengineering," will provide work for many as the population ages.

The Yale dean expects corporate enthusiasm for cost-cutting through downsizing to wane, with more-thoughtful executives seeing advantages in retraining employees for different jobs. Training has the merits of avoiding the cost of severance pay and the damage to employee loyalty of layoffs. Further, Garten sees less applause on Wall Street for downsizing. "There is a growing sense in the financial markets that downsizing does not necessarily mean increasing productivity in the long run," he says.

With downsizing drawing more fire from politicians and the press, Mr. Challenger detects an increasing reluctance by corporate executives to announce such measures. "There is a recognition that they may have trod too far," he says. "They are worried about the loss of goodwill on part of their constituencies." Executives are concerned that major layoffs may revive trade unionism and prompt increased government regulation, he says.

Shareholders, employees, customers, and the community are often described as "stakeholders" in corporations. Under pressure from investors, corporate executives have in recent years given shareholders "primacy," Challenger says. Now bosses may be starting to give more attention to the other stakeholders, he says.

Garten maintains that some executives pursue a bad strategy when they treat their employees "as commodities, bought and sold according to market needs" and swings in the business cycle. "They will lose competitiveness and the franchise they have in the market," he says. "It is a downward destructive cycle to engage in massive layoffs if there is another possible route." They will destroy employee loyalty with its accompanying willingness to work hard and sacrifice for the benefit of the company. "A loyal employee is a rare asset to be nourished and cultivated," he says.

The dean doesn't buy the idea, now in vogue, of a new employee-employer "contract" that reads: "I work hard for the firm, and you provide me with the opportunity to get new skills for my next job." That is just "a slogan" to ratify major layoffs, he says.