How McKinsey Destroyed the Middle Class - The Atlantic
The rise of management consulting firms like McKinsey played a pivotal role in disempowering the American middle class by promoting corporate restructuring that concentrated power and wealth in the hands of elite managers while stripping middle managers and workers of their decision-making roles, job security, and opportunities for career advancement.
Key topics:
- Management consulting's role in reshaping corporate America
- The decline of the middle class and the rise of corporate elitism
- McKinsey's influence on corporate restructuring and inequality
- The shift from lifetime employment to precarious jobs
- The erosion of corporate social responsibility
- The role of management consulting in perpetuating economic inequality
what consequences has the rise of management consulting had for the organization of American business and the lives of American workers?
The answers to these questions put management consultants at the epicenter of economic inequality and the destruction of the American middle class.
Managers do not produce goods or deliver services. Instead, they plan what goods and services a company will provide, and they coordinate the production workers who make the output. Because complex goods and services require much planning and coordination, management (even though it is only indirectly productive) adds a great deal of value. And managers as a class capture much of this value as pay. This makes the question of who gets to be a manager extremely consequential.
In the middle of the last century, management saturated American corporations. Every worker, from the CEO down to production personnel, served partly as a manager, participating in planning and coordination along an unbroken continuum in which each job closely resembled its nearest neighbor.
Even production workers became, on account of lifetime employment and workplace training, functionally the lowest-level managers. They were charged with planning and coordinating the development of their own skills to serve the long-run interests of their employers.
At McDonald’s, Ed Rensi worked his way up from flipping burgers in the 1960s to become CEO. More broadly, a 1952 report by Fortune magazine found that two-thirds of senior executives had more than 20 years’ service at their current companies.
Top executives enjoyed commensurately less control and captured lower incomes. This democratic approach to management compressed the distribution of income and status. In fact, a mid-century study of General Motors published in the Harvard Business Review—completed, in a portent of what was to come, by McKinsey’s Arch Patton—found that from 1939 to 1950, hourly workers’ wages rose roughly three times faster than elite executives’ pay. The management function’s wide diffusion throughout the workforce substantially built the mid-century middle class.
The earliest consultants were engineers who advised factory owners on measuring and improving efficiency at the complex factories required for industrial production. The then-leading firm, Booz Allen, did not achieve annual revenues of $2 million until after the Second World War. McKinsey, which didn’t hire its first Harvard M.B.A. until 1953, retained a diffident and traditional ethos
A new ideal of shareholder primacy, powerfully championed by Milton Friedman in a 1970 New York Times Magazine article entitled “The Social Responsibility of Business is to Increase its Profits,” gave the newly ambitious management consultants a guiding purpose. According to this ideal, in language eventually adopted by the Business Roundtable, “the paramount duty of management and of boards of directors is to the corporation’s stockholders.” During the 1970s, and accelerating into the ’80s and ’90s, the upgraded management consultants pursued this duty by expressly and relentlessly taking aim at the middle managers who had dominated mid-century firms, and whose wages weighed down the bottom line.
Management consultants thus implemented and rationalized a transformation in the American corporation. Companies that had long affirmed express “no layoff” policies now took aim at what the corporate raider Carl Icahn, writing in the The New York Times in the late 1980s, called “corporate bureaucracies” run by “incompetent” and “inbred” middle managers. They downsized in response not to particular business problems but rather to a new managerial ethos and methods; they downsized when profitable as well as when struggling, and during booms as well as busts.
Downsizing was indeed wrenching. When IBM abandoned lifetime employment in the 1990s, local officials asked gun-shop owners around its headquarters to close their stores while employees absorbed the shock.
In some cases, downsized employees have been hired back as subcontractors, with no long-term claim on the companies and no role in running them. When IBM laid off masses of workers in the 1990s, for example, it hired back one in five as consultants. Other corporations were built from scratch on a subcontracting model. The clothing brand United Colors of Benetton has only 1,500 employees but uses 25,000 workers through subcontractors.
Shift from lifetime employment to reliance on outsourced labor; decline in unions
The shift from permanent to precarious jobs continues apace. Buttigieg’s work at McKinsey included an engagement for Blue Cross Blue Shield of Michigan, during a period when it considered cutting up to 1,000 jobs (or 10 percent of its workforce). And the gig economy is just a high-tech generalization of the sub-contractor model. Uber is a more extreme Benetton; it deprives drivers of any role in planning and coordination, and it has literally no corporate hierarchy through which drivers can rise up to join management.
In effect, management consulting is a tool that allows corporations to replace lifetime employees with short-term, part-time, and even subcontracted workers, hired under ever more tightly controlled arrangements, who sell particular skills and even specified outputs, and who manage nothing at all.
the managerial control stripped from middle managers and production workers has been concentrated in a narrow cadre of executives who monopolize planning and coordination. Mid-century, democratic management empowered ordinary workers and disempowered elite executives, so that a bad CEO could do little to harm a company and a good one little to help it.
Whereas at mid-century a typical large-company CEO made 20 times a production worker’s income, today’s CEOs make nearly 300 times as much. In a recent year, the five highest-paid employees of the S&P 1500 (7,500 elite executives overall), obtained income equal to about 10 percent of the total profits of the entire S&P 1500.
as Kiechel put it dryly, “we are not all in this together; some pigs are smarter than other pigs and deserve more money.” Consultants seek, in this way, to legitimate both the job cuts and the explosion of elite pay. Properly understood, the corporate reorganizations were, then, not merely technocratic but ideological.
corporate reorganizations have deprived companies of an internal supply of managerial workers. When restructurings eradicated workplace training and purged the middle rungs of the corporate ladder, they also forced companies to look beyond their walls for managerial talent—to elite colleges, business schools, and (of course) to management-consulting firms. That is to say: The administrative techniques that management consultants invented created a huge demand for precisely the services that the consultants supply.
Consulting, like law school, is an all-purpose status giver—“low in risk and high in reward,” according to the Harvard Crimson. McKinsey also hopes that its meritocratic excellence will legitimate its activities in the eyes of the broader world. Management consulting, Kiechel observed, acquired its power and authority not from “silver-haired industry experience but rather from the brilliance of its ideas and the obvious candlepower of the people explaining them, even if those people were twenty-eight years old.”
A deeper objection to Buttigieg’s association with McKinsey concerns not whom the firm represents but the central role the consulting revolution has played in fueling the enormous economic inequalities that now threaten to turn the United States into a caste society.
Meritocrats like Buttigieg changed not just corporate strategies but also corporate values.
GM may aspire to build good cars; IBM, to make typewriters, computers, and other business machines; and AT&T, to improve communications. Executives who rose up through these companies, on the mid-century model, were embedded in their firms and embraced these values, so that they might even have come to view profits as a salutary side effect of running their businesses well.
When management consulting untethered executives from particular industries or firms and tied them instead to management in general, it also led them to embrace the one thing common to all corporations: making money for shareholders. Executives raised on the new, untethered model of management aim exclusively and directly at profit: their education, their career arc, and their professional role conspire to isolate them from other workers and train them single-mindedly on the bottom line.
American democracy, the left believes, cannot be rejuvenated by persuading elites to deploy their excessive power somehow more benevolently. Instead, it requires breaking the stranglehold that elites have on our economics and politics, and reempowering everyone else.