Capitalism's Washing Machine
How the working class undermines itself with its own money.
Sometimes a single, throwaway comment can reveal a lot about how the world works, like catching a momentary glimpse of all the whirring factory machinery through an open door. I read one such comment yesterday. Now we will talk about it.
It came in a Q&A between reporter Megan Greenwell (who is writing a book about private equity that you all should buy one day) and Pete Stavros, the co-head of private equity at the gargantuan firm KKR, which recently bought the publishing house Simon & Schuster. Stavros was—I will use a rude word here but one I think is accurate—bragging about a KKR program that shares a small portion of the eventual profits of a private equity deal with the employees of the company in question. Greenwell asked him why it wouldn’t be better to just raise the low salaries of Simon & Schuster employees instead.
Stavros replied:
Simon & Schuster, without getting into numbers, is not a highly profitable business. And we are managers of other people’s money. So to give you an extreme example, we [KKR] manage teachers’ retirement funds. We also manage wealthy people’s money, so I don’t want to cherry-pick, but I’m just giving you a flavor for why this is so tricky. If you’re managing teachers’ pension money and you want to just raise everyone’s salary, that is on the backs of teachers, which is not ethical, and it’s not our money.
Contained within that last sentence are enough implications to fill a graduate course on the perils of capitalism. What Stavros is referring to, in an offhand way, is a mechanism at the heart of the craftiness of capitalism itself. Consider this typical process:
Oppressed by the unchecked power of capital, workers form a union.
Unionized workers use their united power to negotiate a pension plan for themselves.
That pension plan takes money from the workers and gives it to investment firms like KKR, with the mandate to grow it.
Investment firms take the workers’ money and buy other businesses, full of other workers.
The investment firms economically oppress the workers at the companies they own, in order to maximize profits.
The profits reaped by the exploitation of the new workers fund the retirement plans of the old workers.
Your average financial consultant would probably not use inflammatory words like “oppression” and “exploitation,” but they would otherwise describe the basic functioning of pension plan investments in this way. This is how it works. You can see the structural problem here. The very same workers who unionized in order to exercise solidarity with one another and become an opposition force to capital are drawn into becoming market participants, and immediately find that their own incentives have become aligned with the most cutthroat vulture capitalists—the precise sort of inhuman owners that are likely to spark a union drive, as a matter of fact. You gotta hand it to capitalism on this one. This is pretty fucking nifty.
This is a simple machine that reflects the incentives of capitalism. As soon as you begin to participate in this system (which anyone who wants to not retire in poverty must do) you find that your own incentives have been arranged in the same bloodless direction. To hear a private equity executive speak of the idea of raising workers’ salaries as “not ethical” because it would hurt investors—who are hardworking teachers, after all!—is so emblematic of the monstrously clever nature of this system that I almost have to respect it. (Note that this passion for being a good steward of every last precious dollar for the teachers does not prevent private equity executives from taking a huge slice of the profits for themselves.)
If we want to have large-scale conversations about the balance of power between labor and capital, we really have to grapple with this stuff. On one hand, the pool of money that sits in union pension plans is potentially a source of power equal to or greater than workers’ ability to do things like go on strike. According to the excellent labor researcher Chris Bohner, the total combined financial assets (cash, investments, real estate) of American labor unions are a little more than $30 billion. But the total assets of private collectively bargained pension funds are nearly three fucking trillion dollars. And public pension funds have another four and half trillion on top of that. Lay your head back for a moment, close your eyes, and dream of what could be accomplished if organized labor could invest those trillions of dollars in ways that bolstered the power of the working class, rather than undermined it. Mmm. Yeah. That’s nice.
On the other hand, business interests understand quite well how bad such a thing would be for them, and so America has erected an entire edifice of laws reining in what can be done with pension money, and who can make the decisions. (The current Republican crusade against all forms of ESG investing is motivated by this underlying realization that it would be bad for right wing political goals if the largest pools of capital in the country can be wielded in service of non-right wing political goals.) Beyond the weaponization of “fiduciary duty” rules to force pension trustees to think only about profits, there is also… human nature, which makes pension trustees think only about profits. Only a small fraction of union members are conscious of the political implications of all this, but a very large fraction of union members like money. Even if union pension funds had total legal freedom to invest however they wanted, they would still be under great internal pressure to maximize returns. In the absence of a very strong political culture, personal greed will often supersede ideological unity.
To be clear, this discussion is not about “Let’s take your hard earned pension money and spend it all on COMMUNIST LEAFLETS.” The general idea is that pension funds can create sets of standards that guide what they invest in, to make sure they are not funding the direct oppression of some other union workers (or child labor in their supply chains, or environmental destruction, or whatever), and also that pension funds can create lists of demands that they attach to their money, for any investment firms that want to manage it. To give one obvious example, a union pension fund could say that any private equity firm that wants its money has to agree to neutrality in any union campaign that arises at any of the companies it manages. Stuff like that. If you try to have this discussion in the political arena the other side will go directly to “They want to lose all your retirement money by giving it to freaking Ben and Jerry’s to build union ice cream shops in Palestine!” The quality of the public discussion, I’m afraid, tends to be low. But there are, I assure you, plenty of people inside of the union world who think about these things for a living, although any honest analysis must admit that we have barely even scratched the surface of the task of wielding the latent power of trillions of dollars of working people’s money.
Likewise, the post you are now reading has only scratched the surface of this topic. (I fucking love to talk about the theoretical political power of union pension funds, but I have not found this to be a subject that tends to attract large crowds of casual readers. Odd.) Mostly, this is a reminder that we can never do an accurate calculus of how far we’ve come on the road to salvation without reckoning with all of the interconnected pieces of where our own capital flows. It’s easy to think, “Workers unionized. Workers got a contract. Workers got a pension. Workers are winning.” But if all that pension got funded by, you know, throwing 30,000 Toys R Us employees out of work with no severance, it’s not really a win for the workers of the world. We gotta think holistically, people. Our money is part of our power. We have trillions of fucking dollars. Trillions. Wall Street will do the bidding of the working class for that kind of money. We just have to get it together to ask.
Also
“The Rise of the Working Class Shareholder” by David Webber is a good primer on this topic. I aim to write more on this very exciting topic down the road. Stay tuned!!! In the meantime, I have been writing dust jacket copy for my book about the labor movement, which you can preorder here.
If you are a 1) union member who is a 2) socialist and 3) has infinite patience, I highly recommend that you look into becoming a pension trustee at your own union. Behold the fiduciary beast from within! This red army of pension trustees will constitute a sleeper cell that will awake and usher our pension money into a bold and radical new future, as soon as we figure it all out.
Thank you, sincerely, to everyone who has subscribed to How Things Work. My writing here is funded not by advertisers, nor by private equity firms, but by paid subscribers. If you like what you read here, please think about becoming a paid subscriber yourself. The How Things Work collective is powered by people like you.
This is a huge issue. I once spoke to a man who was an executive at a large company about the huge pressure on them from pension funds to report profits. He said that workers pension fund managers were often the harshest critics of anything that was done to the benefit of his company’s workers. They were often in his mind short sighted. They questioned the amount of money spent on health insurance, education etc.
Maybe it's just my ego, but I always enjoy it when one of your newsletters crystallizes thoughts that I've had for a while. (And always aticulated better than I could muster.) This system makes so many of us complicit in keeping others of us down. I think that this is something that applies to many 401k plans*, too, and it's what makes me boil a bit whenever someone wants to sink Social Security money into the stock market. That's just a snake pit of an idea.
*Although I think some plans do allow ethical investment options
All of this relates to everyday consumption, as well. Those low, low prices are typically contingent on low, low wages. Another nasty cycle.
As always, thanks, Hamilton. I appreciate that you are able to write about these issues - saddening when one thinks about them - in a manner that isn't itself saddening.