When More is Not Better
2021-02-21 · Guest: Roger L. Martin (Professor Emeritus at the Rotman School of Management) · 52:28
Economic efficiency and the stagnation of median incomes
Bob Zadek interviews Roger L. Martin about his book, When More is Not Better, exploring how America’s obsession with economic efficiency has led to stagnant median incomes and a fragile economy. They discuss the shift from a resilient “bell curve” distribution of wealth to a precarious “Pareto distribution,” the difference between short-term efficiency and long-term effectiveness, and why business models like Costco and Southwest Airlines succeed by valuing human capital over raw cost-cutting.
Topics: Economic Efficiency, Income Inequality, Democratic Capitalism, Shareholder Value, Business Strategy, Pareto Distribution, Median Income, Costco, Amazon, Southwest Airlines
Speakers:
- Bob Zadek - Host
- Roger L. Martin - Professor Emeritus at the Rotman School of Management, University of Toronto; Author of When More is Not Better
Introduction to Economic Efficiency [00:17]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. The show of ideas, never once the show of attitude. Thank you so much for listening this Sunday morning.
We’re going to start off introducing our show by me uttering a phrase I thought I’d never utter in my life. I say that because in better times without COVID, my primary source of sustenance is all-you-can-eat restaurants. The Sizzler is high on my list. To me, the concept of all-you-can-eat always made sense, and it would in fact describe every meal that I ate. Why would you get up from the table if you hadn’t eaten all you can eat, I would ask myself?
Well, this morning’s guest has written a book, and it’s hard for me to say the title, but I will: When More is Not Better. Well, as soon as I saw the title of the book, I got really curious. How could more not possibly be better? Of course it’s better. If something is good, more is better. And that may be true when it comes to salad bars; it’s not true, as I have learned, when it comes to economics.
This morning’s guest, Roger L. Martin, is a Professor Emeritus at the Rotman School of Management at the University of Toronto. He served as the Dean there from 1998 to 2013. He is, of course, a trained economist, has written about a dozen books—maybe we can round it down to 11 books—but anything over one is of course quite a feat. And Roger’s current book, quite an interesting read: When More is Not Better: Overcoming America’s Obsession with Economic Efficiency.
Well, this morning’s guest does two things in the title. I would have thought that you cannot have too much economic efficiency, like you cannot be too young or too thin or too rich. But Roger has taught me that may not necessarily be true. Roger also has taught me in his book, When More is Not Better: Overcoming America’s Obsession with Economic Efficiency, that while in general in times past more may have been better or maybe not, but it no longer is the case. And Roger’s book worries about the trends in the US economy, although I suspect Roger’s viewpoints would apply in any free market system, any capitalist environment around the world. To help us understand when and why more is not better, and to help us understand the obsession with economic efficiency, I’m happy to welcome Professor Roger Martin to the show. Roger, welcome to the show this morning.
Roger L. Martin: Thanks for having me on, Bob.
The Stagnation of the American Middle Class [01:56]
Bob Zadek: Okay, Roger, you’re now picking a fight with me by saying more is not better. Of course it is. I want more of everything that I like. So tell us, introduce us to the premise of your book, and then we’re going to spend the rest of the hour drilling down and understanding how and why you’ve reached these conclusions. And most importantly, Roger, for our audience, our lay audience—although I’m quick to say your book is almost a must-read for anybody who is the CEO or the CFO of any business enterprise of any size—so your book is both a how-to-do-it book for those who are seeking to run a business in a free market, in a capitalist environment, or those who buy things or who vote. So I think, Roger, you have cleverly captured almost anybody with a pulse, if I describe your potential audience that way. So tell us, if you will, just so we can start our conversation, what is the core premise and the assumption of your book, and what troubling signs that you have observed prompted you to write the book?
Roger L. Martin: Sure. And on the “when more is not better,” I think Bob, you and I would agree that we probably both like ice cream, and I like more ice cream. But at a certain point, if I keep eating ice cream all day long, my doctor is going to tell me that more is not better for you, Roger. And that’s the way I think about efficiency.
Pursuing efficiency has been great for America, right? It’s increased our productivity, made us the richest large country on the planet. So in many respects, more efficiency is good. But what’s happened over the last 40 years is this troubling trend where over the last 40, 45 years, what’s happened is that the median income in this country has really stagnated in a way that it has never stagnated before.
And so the question is, what’s caused that? Because historically, America has become the great economic power it has by in almost every year of its existence—over 90% of the years—the average or the median income, when we started measuring that, marches upward quite smartly. And that’s caused everybody to say, “This is a good system,” and to support the fundamentally capitalist system that America has.
But what happens is it turns out that if you take a system that works like the American economy has, which has produced a large, vibrant middle class that gets more well-to-do every year, and has a tail of rich people, a tail of less well-off people, but they all march, if you will, in the right direction. If you keep applying more and more pressure to that system with more and more application of kind of pressure for an obsession for efficiency by doing things like opening up completely to trade, not worrying about antitrust laws, grinding down labor costs as much as possible—if you obsessively push those things, what it turns the distribution of outcomes, rather than being this what you can think of as the bell curve, right? Big middle class, small tails on either side, starts to convert to a different kind of curve, which is the 80/20 curve, where very few people get the benefits of more economic growth.
The Shift from Bell Curve to Pareto Distribution [03:01]
Roger L. Martin: And that’s what’s been happening since about 1976, since our bicentennial. Since our bicentennial, median incomes have almost entirely flatlined, and the economic growth in the country is going to the extremely well-to-do. And that’s called a Pareto distribution by people who study these technical things. But what that means is that no longer can a median American family say, “Hey, my children are likely to be twice as well-off as I am,” which has been the case leading up to 1976. The median income doubled every 30 years.
Hedonic Adjustments and Real Income [04:21]
Bob Zadek: Now Roger, just… you said so much packed into what you just said, all of it important. I want to break it down just a bit. First observation: median income has gone down. Now, income by that, in general, we’re talking about how much an employee is paid by selling an hour of his or her time. That’s what wages are, obviously. It’s an exchange; I, the employee, will give my employer an hour, and the employer will pay me X.
Now, one can observe, and that’s nothing but a bargained exchange between two uncoerced adults who are competent. Okay, if we start there, there’s no dispute that the cost of most consumer goods has gone down profoundly, even if you start with your starting point of 1976. Fair enough, we can start with any period. The cost of computing power has gone down, the cost of TVs has gone down, the cost of every consumer good has gone down. And I don’t think there’s any dispute that that’s a good thing because consumers get to improve the quality of their life at a lower cost.
So why is it bad per se if the value of somebody’s time has gone down? Isn’t that simply a function that the employee is selling something that is simply worth less? I’m a professional, and if I demand more from my clients than my clients deem it to be worth, that’s not an economic problem; that’s my problem. I have to find a way to make an hour of my time valuable enough to the employer that the employer will pay for it. So why is that a systemic problem as opposed to not a personal problem?
Roger L. Martin: Oh, it becomes a problem if you want to have a democracy, right? If you want to have a democracy where 51% of people decide on the system of government and what government does, that’s the problem. And you have to be careful. What you’re talking about is what geeky economists call hedonic adjustments, right? To say, “Oh no, no, no, wages don’t really count, GDP isn’t really right, we have to adjust for all these things that have gone down in price for the value,” and everybody because of Moore’s Law, that’s the case in computing. But lots of things have gone way up in real terms in prices: education, healthcare being two big ones.
You can make all of those hedonic adjustments and show that median income has not done quite as badly as it has. But all the people who do those hedonic adjustments that you’re speaking of pick a base year. They’ll say, “Ah, but since 1976, we’ve had this much decrease in the prices of various things, so rather than median income growing at 0.4 of 1%, it grows at 0.6 of 1%.” And the 0.6 isn’t that bad compared to the 2.4 before that. But what they don’t do is go back to say 40 years before 1976 and say what would GDP growth have been at if you’d have done the hedonic adjustments in that period.
So it’s a little bit of lies, lies, and damned statistics in my view. What we’ve had is a dramatic decrease in the pace at which median families move forward. And I agree, it’s the natural outcome of the economic system the way we’re running it. And the broader consequences are a rise in the percentage of the US population who says things like, “Oh, socialism would not be a bad thing to try,” right? And that scares the bejesus out of me, Bob. I do not want people to think that a dramatically different system that has never ever worked is the right recipe for this stagnation of the middle class.
Who is Obsessed with Efficiency? [06:11]
Bob Zadek: Now you point to in your book, obviously the subtitle of your book deals with efficiency. And in your book, with statistics and with passion, you bemoan the fact that we have become, in your opinion, obsessed with efficiency. Now, I may focus on this innocent pronoun often during our hour together, but I’m going to… and the pronoun is “we.” Who exactly—and not by name and driver’s license number, but who in terms of status in the economy—who is actually obsessed with efficiency? When you say “we are obsessed with efficiency,” who is the “we” that you are addressing? And isn’t efficiency a good thing? Because it means you and I, every possession we have, we pay less for it, which means our standard of living goes up the more efficient. Now sure, there are victims; we’re going to discuss those victims because part of your book addresses income redistribution, not as a driving force in your book, but you mention it. But who is the “we” who is obsessed with efficiency, and don’t we all benefit from that obsession?
Roger L. Martin: Well, you’re going back to the same argument, Bob, which is the hedonic adjustment, so you’re saying, “Oh no, no, no, we’re all better off because of these,” and I’ve crunched the numbers and it’s just not—it’s just kind of not true. In terms of the answer to your question of who’s the “we,” the “we” that I refer to in that way are two main actors, and that is business leaders and economic policy makers.
So I would say, for example, the Washington consensus is efficiency-obsessed, right? If you just read the tenets of it, it is an efficiency-obsessed kind of viewpoint of the world. Kind of open up everything, economies to trade, kind of deregulate, focus on allowing things to merge. There’s now the efficiency defense against antitrust that says as long as you can show that you’re going to be more efficient in the short term, you can merge. All of these public policy things you can merge together all of the stock exchanges because that will be more efficient.
And in business people, they’re saying, “Well, if we can grind down labor costs, if we can offshore work, all of those things are pushing efficiency to the absolute maximum.” And it’s using proxies for efficiency that are not actually things that give you long-term effectiveness, right? If you say, “My—it’s going to be more efficient for me, I’m a hospital, it’s going to be more efficient for me to have less working capital tied up in personal protective equipment, and it’s going to be more efficient for me to have fewer emergency room nurses. Let’s get rid of all the slack in that system and make sure we have the absolute minimum of both,” right? That feels efficient until such time as you have a bump in the requirement for those things, at which case you show yourself not to be resilient at all.
So what we’ve done is pursued efficiency with these very short-term oriented proxies. And the “we” is people like hospital administrators, people like corporate executives, people like economic policy folks, and all are believing that they’re doing something good. I’m not saying anybody’s got a nasty evil agenda to destroy the economy through efficiency. They all think they’re doing the right thing and will absolutely say this at shareholder meetings: “You know, we’ve gotten labor costs down by this percent, we’re more efficient.” And that’s what retailers will say. They’ll say, “We’ve got labor costs down, we’re hiring at a cheaper rate, and we’re having lower staffing on the store floor, and so we’re more efficient.” And then they figure out that for some odd, inexplicable reason, fewer customers are coming into our stores, and when they come in, they’re buying less stuff. You know, I don’t know, that’s just some weird thing that’s happening. And they have no connection between that and their drive for efficiency.
The Myth of Maximizing Shareholder Value [07:51]
Bob Zadek: So you’re exactly—you’re obviously exactly right, and you make an important point when you remind those who manage businesses in America that efficiency is not the end in itself. The end in itself is to maximize long-term wealth to the shareholders. Now, there’s a conversation going on in America: who are the stakeholders? That’s becoming—and it scares me, but that’s for another show—to whom do managers of corporations owe their fiduciary duties? Do they owe it only to shareholders? The answer by me—my answer is of course that’s the only entity they owe or the only group they owe their loyalty to.
Roger L. Martin: That’s certainly not the law, Bob. That’s certainly not the law. Their fiduciary duty to their company is the law.
Bob Zadek: And the company is owned by the shareholders. But I want to just get past that, because Roger, you and I could do a show on that, and maybe we will.
Roger L. Martin: Well, I’ve written a whole book on this, and again, I’m into effectiveness, Bob. And it turns out ever since we’ve moved towards a doctrine of the job of a company is to maximize shareholder value, we’ve done a worse job on maximizing shareholder value. And it goes back—this is not—I’m not making an anti-shareholder statement. I’m saying saying that’s the case is less effective. It’s like when Aristotle said, “If a man sets out in life to be happy, he’s unlikely to end up happy. If instead he seeks to serve, live a life of servitude, by which he meant sort of to do well within your community, you’re likely to end up happy.”
The same thing happens in corporations. The corporations that say, “Our goal is to maximize shareholder value,” all the customers say, “Oh what, so I got a big target on my back? That’s all I mean to you?” Employees say, “Oh, I’m supposed to hop out of bed in the morning and say I’m going to work to maximize shareholder value?” Directly attempting to maximize shareholder value is a dreadful way to maximize shareholder value. Serving customers in a fantastic, unique way is what maximizes shareholder value. That’s effectiveness versus efficiency.
Bob Zadek: And we 100% agree, 100%. There is not any space between us. And what you have said better than I said it is that we kind of agree—I’m not trying to put words in your mouth—that maximizing shareholder value is important, but the way to do it is not automatically by underpaying workers, by screwing your customers, because that may give a short-term benefit; in the long run, you fail. Macy’s will fail because it didn’t focus on the customer.
Roger L. Martin: And that’s the dominant motif in the corporate world now, Bob. It’s sad. And it’s wrong, of course it is wrong. And it’s all, in my view, part and parcel of this obsession, right? This notion that it must be a good thing I’m doing. And I’d just love people in corporations, people in government, to step back and say, “Kind of is it really? Is the way I’m pursuing efficiency, with the magnitude I’m pursuing efficiency, is that actually a good thing?” And right now it’s done unthinkingly. And I would just like them to step back and just ask, “Hmm, how’s that been working out?” And it hasn’t been working out as well as it used to work out, which to me says, “Well, how could that be? How could something that was good be less good now?” And I think the answer is for everything in life, right? More is only a good thing up to a point, when it becomes too much. Love is great, more love is great, obsessive love is what causes people to murder the object of their love. So obsessively pursuing something is the danger here.
Democratic vs. Totalitarian Capitalism [09:51]
Bob Zadek: In your book, you use the verb “works.” And you point out that capitalism—you use the phrase “democratic capitalism,” we’ll discuss that in a moment—but capitalism has stopped working. And the evidence that it has stopped working is the bell curve, the traditional bell curve, large middle class, tails as you have said at either end for the above middle class and below middle class, but the bulk of society is in the big fat bell in the middle, the bell curve. And you have said the change in shape of the bell curve to a ski slope or whatever metaphor you want to use is evidence that the system doesn’t work.
I want to focus on “work,” because I found that to be—and it often is—a concept that you have to nail down. And the sign of whether something is working to me depends upon what the goal is, what the goal is of, let’s say in this case, an economic system. Now, what I’m driving at is I—to me, the goal of an economic system, the primary goal, is people are free to order their lives in the way they want. And if that system of freedom means that some people who are really bad at earning a living, really bad at functioning in society, and therefore they are left behind economically, that to me is a sign of the system working, not of the economic system not working. And income inequality, which you mention and discuss in your book, the increase in income inequality by the numbers is a sign that the system is not working. That would mean that the system works to the extent that it imposes redistribution. So help me understand where redistribution, which is…
Roger L. Martin: No, no. I just—what you said is not consistent with what I think I said in the book.
Bob Zadek: Good. By the way, I love to be corrected, so go ahead.
Roger L. Martin: So for me, the combination of democracy and capitalism is precious, right? And so when I say I think a system working is it is working to continue democratic capitalism. My greatest fear now for America is that there’s another form of capitalism that is now a challenger, right? So for what it’s worth, I never worried about communism as a challenger, even though there were two superpowers, because it was bankrupt and it did—it did die from within.
But what we have now in China is totalitarian capitalism. And so what I want to see happen is for democratic capitalism to prosper. And for that to prosper, in my view, it means that the swing voter, right? The 51st percentile voter, if we just sort of imagine them that if you line up the incomes from lowest to highest, that in some sense the 51st percentile family is the swing voter. Now of course that’s not exactly true, but the band around that median voter is the swing voter. And that swing voter has to say, “Capitalism is working for me enough so that they don’t say let’s try something else.”
And the polls show that they’re saying, “Let’s try something else,” to a much greater extent than ever before. And you remember what happened in the Great Depression? Great Depression, 1929 to 1938, whenever you want to say it ended, was, you know, Americans think of it as this terrible time for America, but it was a terrible time for the world. And during that terrible time for the world, median incomes, as best we could measure them—we have good numbers on average—kind of dropped precipitously, right? And they did in lots of countries around the world. And what happened to lots of countries around the world? They went fascist or socialist, right? Many European countries, Japan went. And if you look at what happened in the Great Depression, bless America, America said, “No, we’re going to stay capitalist.” Now there was a move to the left, but it was still a capitalist system.
This stagnation of median incomes is worse than the Great Depression. It’s lasting much, much longer, and the recovery is less good than it was in the Great Depression. So when I say “work,” what I mean is not—I’m not saying I want a flat income distribution or anything. I’m—and I mean, again, one thing that people need to understand about income inequality is there’s two things that can drive income inequality, right? The poor getting poorer, like the 5th percentile or the 1st percentile getting poorer than the 50th percentile, or the 99th percentile getting richer than the 50th. All the income inequality increase in America is the latter: the 99th going gangbusters over the 50th. So the poor aren’t actually getting poorer rather than the average; the rich are just getting richer. And the only problem, Bob, is that if the tail of the distribution, if the 1% take too much of the economic growth—I mean, it’s their right, right? They’re being productive, etc., it’s their right. The knock-on effect is simply that the median will experience what they’re experiencing now, which is on the current course we’re on, it’s going to take a century to double the median income of an American worker. A hundred years, a century. That’s never happened before in America, and it ain’t even close, right? It’s been 30. And so that’s—you want to know what I mean by working? That’s what I mean by working. It works so as to encourage the band around the median, let’s say 5% on either side of the median, to say, “Capitalism, that’s a system that works for me.”
Democracy as a Check on Government [11:46]
Bob Zadek: So I think—it’s interesting how we have this exchange right now on the show, and we always end up getting real close to each other, and if not totally aligned. And let me see if I can restate, and with some reading into what you have said. The—a free market system is free, and therefore it has going for it freedom. And to me, freedom is the goal. A system only works to the extent that it doesn’t rely upon coercion. People are free to order their lives.
Roger L. Martin: And can I interrupt you just to check on what role does democracy play in freedom for you?
Bob Zadek: Well, democracy is a political system. It says who decides who the leaders are and who decides what the content of the laws are.
Roger L. Martin: And is it important to freedom, Bob, in your way of thinking about it? I’m honestly asking the question. In your way of thinking about it, is democracy important to freedom? Can you have freedom in a totalitarian system or a fascist system where you don’t get a vote?
Bob Zadek: It’s possible to have economic freedom. Singapore has a large amount of economic freedom and a profoundly diminished amount of political freedom. And so there’s always this dichotomy.
Roger L. Martin: But it’s still a democracy, right? You still—Lee Kuan Yew for all those years had to get elected every year. He was just doing the best job of any economic administrator maybe the world has ever seen, and so the Singaporeans sort of said, “You know, what’s not to like about this? We’re advancing more. Look at Malaysia right across the wire, we’re sprinting ahead.” But it was always a democracy.
Bob Zadek: Of course, of course. So to answer your question, to me, democracy is a system that enables us citizens to have ultimate check on the government. It’s a way to slow down government, to redirect government.
Roger L. Martin: To defend our freedom, right? We wouldn’t have any of the economic freedoms you want or control over said freedoms without democracy. So that’s why I care so much about the maintenance of democracy.
Economic Fragility and Social Unrest [13:31]
Bob Zadek: Now what I read into or hear into what you have said—but it’s my taking liberties with what you have said, so I’m not putting words in your mouth, I’m telling you how I process what you have said. And I’ve heard the thought I’m about to mention I have heard before many times and read many times in the literature on this subject. And that is that if the only goal was to improve the quality of life for everyone, then the more efficiency, the more free market the better.
The problem is that it results in—maybe it’s short-term, maybe not—it results in a lot of people who, whether it’s because of their own failings or circumstances or accident of birth, for whatever reason, most of which are beyond their control, they are left behind economically. And to the extent that the people left behind increase in number, again to a large degree for no fault of their own—accident of birth, bad parenting, they live in an economically depressed area, whatever the reasons are, they’re complex—they end up not having enough by their own standards. And therefore, as that number grows, society becomes more vulnerable, more fragile. People are angry, they’re not happy, they have no stake in the system. And therefore, to keep everybody calm, to do a sensible thing, which is make sure they—in effect, buy peace. And I’m not trying to be crass about it. But if you do wealth transfers, we’re not doing wealth transfers to correct an imperfection; we’re doing wealth transfers so that there is not a growing class of people who are unhappy enough and feel they have no stake in the system because the system has left them behind that they will cause unrest. And it’s buying peace, but buying peace kind of in a good way. It makes sense to do it. It’s not like paying protection money so your store doesn’t burn down. And I think when you fear, as I and I do too, that democracy is being threatened, it’s being threatened by simply the unhappiness of people who feel there’s nothing they can do to catch up, and therefore they upset society and they cause unrest. Am I reading too much into what you have said?
Roger L. Martin: No, no. I mean, I think you emphasize something more than I would emphasize it, which is that I don’t think they want to catch up, that that’s their goal. The goal is just having a better future. And if they stop feeling like there’s a chance for a better future, that’s when I think people become unruly.
The other thing I’d say is kind of a different twist on it is I’m much more obsessed about the band around the median than I am about the tail of the distribution in this. Now, it’s not that I don’t care about that; in fact, I believe that a good society is a society in which willingly those who have more willingly help those who have less. But I think the trigger for America is more as and when the middle of the distribution gives up and says, “This is not working.” And so yes, they will be unruly.
Effectiveness Over Efficiency: Costco vs. Amazon [15:31]
Roger L. Martin: The other thing I’d say is that you talk about income redistribution. I’m much for not being stupid, right? So is Costco into income redistribution? So Costco is one of the absolutely most successful retailers in America, dominates their category of club stores, and has a policy of paying its lowest-paid workers in excess of 20 bucks an hour. So minimum wage is irrelevant completely to Costco. Is that income redistribution? I think not. I think it’s being non-stupid, right? It’s saying, “You know what? If we really pay our workers well, they’ll come to work kind of happy and not worrying about making ends meet at home. They will care a lot about the company, they’ll care a lot about their customers, the customers will experience a wonderful time when they’re in a Costco, they’ll come more often, they’ll buy more stuff.” And if in addition to that, we say we promote entirely from within, entirely, we don’t parachute in MBAs into the top ranks so that anybody who’s on the store floor, if they’re doing a good job, has a shot to be CEO of Costco someday.
If that’s income redistribution, I like it. But most people don’t call that income redistribution, and I don’t call it that. I call it a smarter strategy that is about effectiveness over efficiency. It’s about resilience, not short-term efficiency. And we wouldn’t need as much income redistribution as some people call for if we had more businesses being smart about it and recognizing that it’s a positive-sum game. For Costco, it’s a massive positive-sum game, right? Its employees get rich, its shareholders get rich, like super rich, and the economy does better. What’s not to like about that?
Bob Zadek: And my response is—and I should mention, Roger, that you have had an incredibly successful career advising the likes of senior management at Costco and the like. Maybe even Costco, I don’t know, but that’s the world that you have thrived in. That’s your world where you have been called upon by those very CEOs to help them understand. As to Costco paying $20 an hour or Amazon paying more than the minimum wage, my response is I have no doubt that every single employee who is paid $20 an hour by Costco is to the penny worth it, or else Costco wouldn’t pay it; it would be 18. So that is nothing other than Costco has found a way to create a job that is worth $20 an hour. So they have created—they have helped the employee, the seller of the hour of time, they have helped that employee in effect create value in that employee’s own time. Costco, of course it is not doing a wealth transfer.
Roger L. Martin: They give the employee a context in which that employee can make the most of themselves rather than the least of themselves. That’s absolutely right. And that’s simply what we’ve got to do more of across the economy. Any company can do that, but Costco, what’s the key feature of Costco is it’s not obsessed about these proxies for efficiency. And sometimes they get beaten up for it. It’s like, “Why are you paying so much? If you cut your wages back to your competitive wages, you’d put whatever a billion dollars to the bottom line this year.” And Costco’s response is, “Yeah, if we were complete fools and idiots and wanted to destroy shareholder value, we could put that billion dollars on, but the store experience would go to hell in a handbasket, employee turnover which is epically low in our company versus others would shoot through the roof, so we’d be spending our time hiring new people who don’t know dick about this store. So yeah, sure, we could put your billion dollars on at a cost of perhaps $50 billion in shareholder value.” We just need more business people to be thinking that way and economic policy people thinking that way.
The Southwest Airlines Model [17:31]
Roger L. Martin: This is where I like Southwest Airlines, right? Southwest Airlines, most successful airline in America in the last 50 years and it isn’t even close in terms of shareholder value creation. They’re number one in passenger seat miles in America now. They have the highest customer satisfaction, they have the highest employee satisfaction. And everybody assumes, right, that Southwest because it’s a low-cost carrier must be non-union and must have really low wages. Both of those assumptions are utterly wrong. They’re as unionized as any other airline, there’s just no difference, they’re about unionized to about the same extent, and they have generally speaking the highest wages in the entire industry.
And so you say, “Well, how the heck does that work? How can you be the low-cost airline with the highest wages?” Well, it’s because they say, “Here’s what we’re going to do. We’re going to create a business system that’s unlike anybody else’s that results in the lowest number of labor hours per passenger seat mile. So that we can pay more per labor hour because we use fewer of them per passenger seat mile by having only one kind of aircraft so we don’t have to shift the gates around, not having interline baggage checking, not having pre-assigned seats, all of these things cause us to need fewer employees to fly Bob from X to Y.” That’s effectiveness. And we are obsessed about efficiency, and that’s what the other airlines are doing. All the other airlines, “Let’s merge, let’s get bigger so we’ll be more efficient, so we can cut costs when we merge, we’ll cut $2 billion out of the cost structure.” All of that stuff is just a recipe for one, mediocrity, and two, getting the least out of human beings. And when you get the least out of human beings, you can pay them the least. It all works like it’s all self-sealing. You treat a person like a robot, they won’t be very valuable. They’ll be a crappy robot, as we know from the assembly lines, right? You might as well replace them with an actual robot because they’re a crappy robot. When you ask a human being to use the muscle between their ears to be creative, to be nimble in serving the customer, guess what? They become really valuable. And that is what will make America great.
The Danger of Monopolies and Consumer Loyalty [19:21]
Bob Zadek: We have only a couple of minutes left. My last question, Roger, if you can do it in about a minute. In your book, you have a wonderful section towards the end about how each of the players in the economy—citizens or purchasers, consumers, I’ll use consumers, executives, and government—all have a role to play. And we only have a minute, Roger, regretfully, but you cautioned or advised consumers not to be loyal like to Amazon. Now we only have a minute left, Roger. I wondered about that because I am profoundly loyal to Amazon because they give me exactly what I want at the price I’m willing to pay. So I want to encourage that behavior, not encourage the behavior of others. Now, if you can do it in like 45 seconds, I know it’s an unfair question.
Roger L. Martin: So the reason I don’t want you to be loyal to Amazon is that you’re making them a monopoly, and as companies become monopolies, they start abusing the very customers that they used to give great service to. And Amazon is already abusing you, right? It’s by now deceiving you as to what is the most recommended product. They didn’t used to do that. That’s how they got to be a monopoly by serving you super well. But if you buy everything from them, you are contributing to them being a monopoly, and when they become enough of a monopoly, you’ll rue the day that you did it. So I’m just saying if you love Amazon, buy 50% of your stuff, 60%, but buy some other online services, buy from your local store because you need a resilient environment because you are not going to like it when they truly have monopoly power.
Bob Zadek: And I say right now I encourage them, I will give them all my business. When they start behaving like monopolists, I’ll close my account.
Roger L. Martin: It’ll be too late. You will have destroyed all the good alternatives in the meantime, Bob. So good luck to you on that.
Bob Zadek: This is Bob Zadek, I’ve been speaking to Roger Martin. Roger has written When More is Not Better, a must-read if you’re curious about how the economy really works and to the extent that you’re unhappy with it, what you can do as a citizen and as a voter to change it. Roger, thank you so much for your book. You’ve helped me understand that my eating habits have to be adjusted, and I’m better for it. So Roger, thank you so much. And to my friends out there, enjoy the rest of the weekend.