Jack Welch and the Rent-Seeking Century

He was crowned Manager of the Century for turning an engineering company into a finance company. Look closer, the story is not about management at all. It is about what happens when rent goes untaxed

I watched a documentary on Jack Welch last night. Good detail on the man, the rise, the fall, all of it. But like almost everything written about him, it missed the actual mechanism of why now he is seen as a failure and not as the hero he was portrayed at the time. Most people file Welch under culture. They blame Reagan and Thatcher, the deregulated eighties, the yuppie mindset, greed is good and all that. It’s not wrong exactly, but it’s not the engine; it’s not the causality, and so many will not understand why it happened. The real story is fundamental, while the culture wars then and now are just a smoke screen to turn us away from finding the real solution to the fall of Western civilisation. It’s about tax. Specifically, what gets taxed and what doesn’t, and what that does to a man sitting in a boardroom deciding whether to build a factory or buy back some shares, fire 100,000 of his most skilled, dedicated employees and turn his company into a producer of crap that is now worse than what the global competition is now supplying.

Jack Welch died in 2020 as close to a business saint as America produces. Fortune had already named him Manager of the Century. Every MBA programme in the country still teaches some diluted version of his method. Twenty of his former lieutenants went on to run other Fortune 500 companies and took the playbook with them, to Boeing, to Home Depot, to Albertsons.

I remember doing my own MBA back in the late nineties. I look back on it now, and I recognise it for what it was: the most useless garbage dressed up as rigour. The economics we were taught was not just functionally useless; it was wrong. The business strategy modules were built on the same flawed assumptions: shareholder value as the only god worth serving, and nobody in the room ever asked where that value was actually supposed to come from. Was it earned through genuine production, or was it simply extracted from somewhere else and relabelled as genius? Nobody asked because nobody was trained to ask. My whole cohort of young MBAs, myself included, were sent out into the world armed with this stuff, convinced we understood how an economy worked when in truth we understood nothing of the kind. We went forth, and we wrecked things. Not out of malice; most of us were not bad people, but because we had been taught the wrong model and given the confidence to apply it everywhere we went. That generation of graduates helped hasten the hollowing out of British industry and British prosperity, and we are living through the consequences of it now, watching it play out in real time, and most of us still do not understand what we actually did.

Strip away the reverence and look at what actually happened at General Electric between 1981 and 2001, and the story stops being about management style. Welch inherited a company with 411,000 employees that made turbines, lightbulbs, jet engines, plastics and locomotives. He left it with dozens of factories closed, and a lending arm called GE Capital that by the end of his tenure produced nearly half the group’s revenue. GE had stopped being an industrial company that dabbled in finance. It had become a finance company that still made a few jet engines.

What Welch actually did

GE under Welch made close to a thousand acquisitions, worth around one hundred and thirty billion dollars, while selling off some four hundred businesses. Beth Comstock, a longtime GE marketing executive, later described the approach as a kind of Pac-Man strategy: acquire growth, acquire growth, acquire growth, rather than build it from scratch.

The bigger shift was internal. GE had been an industrial company, making turbines, jet engines, light bulbs and appliances. Under Welch it became, in large part, a financial one. GE Capital grew into what was effectively an unregulated bank, lending, insuring, and trading its way to a point where financial services accounted for something like sixty per cent of GE’s profits at their peak. Welch himself reportedly called it “the blob”: an amorphous pool of financial assets flexible enough to be adjusted whenever the quarterly numbers needed smoothing.

Meanwhile, the workforce was treated with contempt. Welch cut roughly a quarter of a million jobs over two decades, ranking staff every year and firing the bottom ten per cent regardless of whether the company as a whole was thriving. He earned the nickname Neutron Jack: the buildings stayed standing, the people vanished. Offshoring accelerated in parallel, as production shifted to wherever labour was cheapest and workforces at home were told this was simply the discipline of global competition.

None of the money freed up by this discipline went where you might expect. According to the business writer David Gelles, GE under Welch spent more on share buybacks than on research and development. Cash that could have gone into new turbine technology, new materials, new engineering capability, went instead into inflating the share price by reducing the number of shares in existence. Wall Street loved it. The company’s own long-term productive capacity was left to wither on the vine.

Rent, not risk

This is where the Georgist lens earns its keep. Classical economics, from Ricardo onward, drew a sharp line between the returns to labour, the returns to capital genuinely invested in production, and rent: income that flows to whoever controls a scarce resource or a privileged position, regardless of what they actually produce. Land rent is the purest case. But rent, in this technical sense, is not confined to land. It is any income captured through ownership, control or manipulation of position rather than through creating something new.

Share buybacks are rent extraction dressed as capital allocation. They create no new turbine, no new drug, no new productive asset. They simply concentrate the existing claim on a company’s earnings among fewer shareholders, and the executives whose pay is tied to earnings-per-share benefit directly. Financial engineering of the GE Capital kind is rent extraction too: profit generated not by making anything better but by exploiting a lighter regulatory perimeter than an ordinary bank would face, and by the accounting flexibility that comes with being simultaneously an industrial conglomerate and a shadow lender.

William Lazonick, the economist who has tracked this most carefully, calls the pattern downsize-and-distribute. Between 2003 and 2012, he found, S&P 500 companies paid out ninety-one per cent of their net income in buybacks and dividends. Money that once flowed back into the productive capabilities of a workforce, the retain-and-reinvest model that built the postwar American middle class, now flows almost entirely to whoever already owns the shares.

For thirty years after the war, pay tracked productivity almost exactly: workers who produced more were paid more, because the gains were reinvested in their skills and their wages. From around 1979, precisely as the Welch generation of managers took charge, the lines pull apart. Workers kept getting more productive. They stopped being paid for it. The International Labour Organization has found that financialisation of this kind accounts for close to half the global decline in labour’s share of income.

Boeing: crash and burn

Welch was not unique. He was simply the most celebrated practitioner of a doctrine that spread through corporate America and eventually crossed the Atlantic. Boeing is the clearest tragedy of it. Before 1997 Boeing was an engineering company that happened to sell aeroplanes. The merger with McDonnell Douglas that year brought in a leadership culture built around financial metrics rather than airframes, and the headquarters moved from Seattle, where the engineers were, to Chicago, where they were not.

Harry Stonecipher, the former McDonnell Douglas boss who became Boeing’s president, was candid about the intent. The aim, he said later, was that Boeing would be run “like a business rather than a great engineering firm”. Development of the 787 was outsourced extensively to cut capital costs. The 737 Max programme was rushed to compete with Airbus on the cheap rather than redesigned properly. Three hundred and forty-six people died in the two crashes that followed. The company had not become less capable of building good aircraft. It had simply stopped prioritising that over the share price.

The English water experiment

Britain has run its own version of the same experiment, once mighty companies have fallen, and the blame goes on the workers for demanding too much, be that wages, health and safety, or environmental protection; the real culprit was economic rent. The results are now visible to every household with a water bill and a nearby river full of sewage. To every industry, drive through any industrial estate in the UK not one company that actually makes things, just endless retail outlets.

Since privatisation in 1989, England’s water and sewage companies have paid out roughly fifty billion pounds in dividends. Over the same period they have piled up net debts of a similar order. Thames Water alone has paid out more than seven billion pounds in dividends while its debts climbed past eighteen billion.

Dr Kate Bayliss of SOAS has described what happened plainly: water companies used financial engineering to create returns for shareholders, restructuring their finances to carry high debt while still paying dividends. Macquarie, the Australian infrastructure group that owned Thames Water for a decade, borrowed against the company’s own assets to fund the payouts, then sold up before the consequences became public. The debt does not vanish. It sits on the balance sheet of a regulated monopoly, and it is recovered, pound for pound, from customers who have no choice of supplier and no say in the matter.

This is rent-seeking in its cleanest form: a legally protected monopoly position over an essential resource, converted into a cash extraction machine, with the extraction financed by debt that the public ultimately underwrites, whether through higher bills or, as now looks likely with Thames Water, through the state itself absorbing the wreckage.

Why this is a tax problem, not a management problem

It is tempting to read all this as a story about bad executives and weak regulators, and they certainly play their part. But the deeper cause is fiscal. Britain and America both tax earned income, productive enterprise and genuine capital investment heavily, through income tax, national insurance, payroll taxes and corporation tax on real trading profits. Meanwhile the returns to rent, land value uplift, monopoly position, debt-financed extraction, capital gains on assets that were simply repriced rather than improved, are taxed lightly or not at all.

Faced with that structure, any rational board will conclude that extraction is the safer, cheaper, faster route to a rising share price than the slow, risky, heavily taxed business of investing in people, machinery and research. Welch understood this instinctively even if he never framed it in Ricardian terms. Every buyback, every piece of financial engineering, every debt-funded dividend is, at root, a decision made easier by a tax system that punishes the making of things and barely touches the taking of them.

Fred Harrison has spent decades documenting the mechanism by which this kind of extraction compounds across an eighteen-year property and credit cycle, each turn leaving the real economy a little thinner and the rentier class a little richer. Cheating, to use the word Harrison chose for his own account of it, is not a moral flourish. It describes, precisely, an economy in which the rules reward taking over making.

The rent is due

The consequences are now visible in the aggregate numbers. American manufacturing has fallen from around a quarter of GDP in the 1950s to roughly ten per cent today. British manufacturing has fallen even further, from about thirty per cent of GDP in 1970 to under nine per cent now, a steeper collapse than almost any comparable economy. Manufacturing employment in the United States has dropped from a wartime peak of thirty-eight per cent of the non-farm workforce to under eight per cent. These are not the natural, comfortable transitions to a services economy that were promised. They are the visible scar tissue of thirty years spent taxing production and subsidising extraction.

A country that stops investing in the productive capabilities of its people and its industry does not simply become poorer in some abstract sense. It loses the capacity to build the things a modern state actually needs: ships, munitions, aircraft, the industrial base behind any credible defence policy, at precisely the moment global instability is rising and both Britain and America are being asked to rearm. It loses the wage growth that once made family formation affordable, which is one of the less discussed but entirely real contributors to falling birth rates on both sides of the Atlantic. It produces a cost of living crisis that is not, at root, about the price of eggs, but about decades of income being funnelled toward rent rather than wages.

And it produces political turmoil. When a working population correctly senses that the game is rigged, that hard work no longer buys a stable life while asset owners get richer simply by owning assets, it does not respond with patience. It responds, eventually, with anger, and that anger is currently being channelled in two directions. One is toward a genuine reckoning with rent, taxing land values, capping the kind of debt-financed extraction that broke Thames Water, closing the loopholes that let capital gains escape the tax burden borne by wages. The other, more dangerous direction, is toward strongman politics, in which the same rentier interests that caused the damage now offer themselves, or sponsor others, as the only force capable of controlling the anger they created. Authoritarian politics rarely emerges from nowhere. It emerges from precisely this kind of long, grinding, engineered unfairness, when no mainstream party has been willing to name the actual mechanism at work.

The alternative was always available

None of this was inevitable. An economy that taxed land and monopoly rent properly, and left wages, genuine enterprise and productive investment lightly taxed by comparison, would have made Welch’s playbook far less attractive to the boards that copied it. A GE that could not shelter GE Capital’s arbitrage profits behind favourable tax treatment, competing instead on a level field with a corporation tax bill eliminated but hit economic rent like a hammer, then imagine what wonders of efficiency it could have created with well-paid employers in safe jobs. A water industry required to hold enough equity, rather than leveraged debt, to fund its own investment would never have been able to strip thirty-five years of dividends out of a monopoly asset while its pipes rotted.

The instrument for fixing this already exists, and it is the one this Substack keeps returning to for a reason: shift taxation off labour and genuine enterprise and onto the value of land and the returns to monopoly and financial rent. It will not resurrect Boeing’s lost engineers or fix Thames Water’s crumbling mains overnight. But it would finally remove the incentive that made Jack Welch a hero rather than a cautionary tale, and it is difficult to see how either Britain or America rebuilds real productive capacity, or defuses the anger now curdling into support for authoritarian politics, without doing it.

Sources referenced: David Gelles, The Man Who Broke Capitalism; William Lazonick, Profits Without Prosperity (Institute for New Economic Thinking) and Brookings; House of Lords Industry and Regulators Committee report on water sector debt and dividends; Dr Kate Bayliss, SOAS; Wikipedia and contemporaneous reporting on Thames Water; reporting on the Boeing–McDonnell Douglas merger; ONS, BLS and Economics Help data on manufacturing’s share of GDP.