Teldar Paper has 33 different vice presidents, each earning over $200,000 a year. I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is [Teldar] lost $110 million last year, and I’ll bet half … was spent on … paperwork going back and forth between all these vice presidents… …[I]n my book you either do it right, or you get eliminated. In [my] last seven deals … 2.5 million stockholders … made a pretax profit of $12 billion... …I am not a destroyer of companies; I am a liberator of them! Gordon Gekko Gekko, the takeover artist in the 1987 film Wall Street, ranks 24th on the American Film Institute’s list of top movie villains. His next words–– “Greed is good”––put him there. But notice Gekko was not talking up materialism; he wanted Teldar’s management to put shareholders first. Michael Jensen of Harvard University argues the U.S. is undergoing a “modern industrial revolution.” Changes in productive technology, global competition, regulatory/tax policy, and management technique have created excess capacity, which necessitates movement of land, labor, and physical capital from overproducing industries to firms with growth potential. Four forces can make this happen: (i) the capital markets (by financing mergers, acquisitions, and leveraged buy-outs); (ii) the legal, political, and regulatory system; (iii) the market for final products, and (iv) internal control systems, starting with the board of directors. Jensen sees the capital markets as the most effective, in part by providing growing firms with the funds to boost capacity through strategic acquisitions. Capital markets also underwrite financial mergers or leveraged buyouts, which force troubled companies to cut production and costs. Absent such pressure, management in declining industries can hold off needed change because the legal/political/regulatory system is too blunt to force restructuring while product markets and internalcontrol systems take too long. But why is it important to reallocate resources quickly? Economic history provides a big-picture answer. Income per capita around the world was stagnant before 1800; since then advances in technology have raised Western living standards by well over 10 times, with unskilled labor reaping most of the benefits. For per-capita output and income to continue growing, scarce land, labor, and physical capital must migrate from low- to high-value uses following disruptive shocks. Put another way, firms benefiting from technological breakthroughs cannot grow, creating income and jobs, unless industries disadvantaged by those breakthroughs release resources. From a narrower perspective, stockholders profit when resources are liberated in the wake of economic shocks. Owners of firms in expanding industries will see their wealth rise as additional land, labor, and capital are used to boost output, profit, and dividends. In declining industries, slowing the outflow of resources punishes shareholders because maintaining unprofitable business lines––a negative NPV investment––causes further declines in stock prices. Better to scale back operations, so owners can invest the savings in companies that can create jobs and pay dividends.

Technological change may raise average living standards over the long run, but in the short run, workers in declining industries with firm-specific skills will lose jobs and income. How should a CEO view the tradeoff between the shareholder and worker interests?