in real danger from another kind of slavery…that would result from aggregations of capital in the hands of a few individuals and corporations controlling, for their own profit and advantage exclusively, the entire business of the country, including the production and sale of the necessities of life.
When Harlan wrote this decision, Berle was 16 and in his second year at Harvard. By the age of 23, he’d served as an Army staff officer at the Paris Peace Conference, received his master’s and law degrees, and worked in the Boston office of future Supreme Court justice Louis Brandeis. Then Berle became a Wall Street lawyer, living next door to a settlement house whose founder, the progressive reformer and nurse Lillian Wald, became a mentor.
These identities were not as contradictory as they might seem. Wall Street was a useful crucible for Berle’s vision of social reform, in which the commanding heights of the economy would be organized to serve human needs first. He was learning something new and important from his work writing up stock and bond offerings: that with the passing of a generation of oligarchs like Cornelius Vanderbilt and John D. Rockefeller, the ownership of corporations was becoming increasingly separated from their control—a fact that, as he studied it, Berle increasingly came to believe could be exploited to make the world a much better place.
What did the separation of ownership from control mean? In his book The Modern Corporation and Private Property (1932), cowritten with the economist Gardiner Means, Berle answered this question in an unforgettable way. Imagine a person who owns a horse: “If the horse lives, he must feed it. If the horse dies, he must bury it. No such responsibility attaches to a share of stock. The owner is practically powerless through his own efforts to affect the underlying property.” This is what happened at US Steel. At its founding in 1901, it was but the lengthened shadow of two men, Andrew Carnegie and J.P. Morgan. By 1932, its shareholders numbered almost 175,000, with each individual “owner” controlling nothing. Many companies in the United States followed this pattern as robber barons died off and their corporations became bigger and more complex. Seeking outside investment, they took on thousands of stockholders, and ownership and management began to go their separate ways. The result, as Berle pointed out, was that “the power, the responsibility and the substance which [had] been an integral part of ownership in the past are being transferred to a separate group in whose hands lies control.”
Berle believed that this development could be used to benefit society as a whole. His very influential acquaintance Franklin D. Roosevelt, the 1932 Democratic presidential nominee, agreed: Since corporate managers’ compensation came in the form of salaries, they could be persuaded to act in socially responsible ways that oligarchs would not. In one of modern liberalism’s most famous speeches, given before the Commonwealth Club of San Francisco, Roosevelt proposed a new “economic constitutional order” to restrain business and protect workers that came to include old-age pensions, bank deposit insurance, health and unemployment insurance, and regulations holding financial speculation in check. In short, a New Deal.
The paradigmatic moment of the new, more humane economy that Berle envisioned came in 1950, when the United Auto Workers and General Motors inked a remarkable settlement giving factory workers automatic quarterly cost-of-living increases, and company-provided health insurance and pensions. The Treaty of Detroit, as it became known, soon served as a national model. Within 15 years (as one learns in Matt Stoller’s Goliath, another excellent new book on the history of corporations), the percentage of Americans with surgical coverage went from 36 to 72 percent, and the reasons for it were Berle’s reasons. As he put it in a 1954 book, “Mid-twentieth-century capitalism has been given the power and the means of more or less planned economy, in which decisions are or at least can be taken in the light of their probable effect on the whole community.”
And why not? Blue-chip, market-defining firms were stable, perennially profitable, and practically impervious to economic downturns and so could afford to spread the wealth around. Without imperious oligarchs watching their every move or imperious shareholders threatening to pull out if eye-popping returns weren’t posted every quarter, managers could afford to think of the long-term well-being of everyone. It wasn’t their money, after all, and the agency of shareholders was so limited as to make opposition nearly inconceivable.
Examining this period, Lemann shows that the situation described above did not exist only because owners were so numerous and dispersed. Another product of Berle’s influence had made Wall Street finance decorous and staid: the passage of the Glass-Steagall Act in 1933, which barred commercial banks from underwriting or dealing in securities and so greatly reined in the sort of dangerous, hyperleveraged speculation that caused the financial system to crash in 1929. Now a small set of regulated investment firms handled the nation’s stock and bond offerings (Morgan Stanley, which broke off from J.P. Morgan for this very purpose, handled 25 percent alone by 1936), and American finance became a far more stable part of the US economy, almost more feudal than capitalist. This was partly for purely cultural reasons. It was the sole preserve of starchy old WASPs.
When a firm like General Motors required a chunk of outside capital (which was rare), a GM executive or two—relatively low-level ones—would meet with a Morgan Stanley partner, who would then convene the other partners and decide how to raise it: stocks or bonds? How many shares? How much per share? There was no competition; “no other banking firm,” Lemann explains, “could try to become the underwriter of that issue because the SEC could review only one firm’s request at a time.” Then they would decide, also unilaterally, which of the lesser firms would get to sell it and how much of the profit would trickle down to these syndicate partners, and the availability of the new stock or bond would be announced in a stark, simple display ad in The Wall Street Journal called a tombstone, which was often enclosed and put on one’s desk as a souvenir.
What might these days take place in seconds took weeks. The lower-level firms would then approach their clients, say a trust officer in Kansas City, who might buy a chunk “to hold on to it for a wealthy widow.” The widow might shake her fist, reading in the morning paper about how the execs at GM were surrendering their corporate liberty to that damned socialist Walter Reuther, but what could she do? “Owners” had no power—and the system wasn’t about to change to accommodate competitors who might devise faster and more flexible ways to move cash around and keep its recipients accountable. In 1947 the US government tried to sue Morgan Stanley as a trust, the judge in the case, after seven years of deliberations, declined to label it thus, ruling that the system worked perfectly well for all concerned and noting the “absolute integrity” of Harold Stanley, one of the firm’s founders.
Corporate finance is rather different now. Turn on your TV, and one fictional corporation’s struggle not to be devoured by investors fuels enough cliffhanging melodrama to plot a soap opera. In one episode of HBO’s Succession, an executive addresses the employees of a hot website that his conglomerate purchased to signal to stockholders its hipness; he fires the entire staff to prove its ruthlessness. Not exactly the sort of capitalism in which decisions are taken in light of their probable effect on the whole community. In another episode, a young executive proudly announces a management efficiency he’s been able to realize. (He has stock options to worry about, after all.) “How many skulls?” his supervisor asks lustily.
How did the one regime transform into the other? As a quibbling historian, I sometimes find Lemann’s approach to the answer unsatisfying. In the manner of too many intellectuals, he privileges the role of intellectuals. He also gets the periodization wrong, granting great motive force to an academic paper published in 1976, even though the new phase of financialization was well underway in the previous decade. (Just read Stoller’s account of the financial chicanery that brought down Penn Central railroad in 1970.) And Lemann also prefers to focus on the personalities implementing these changes instead of the structural forces behind them. These include the decline of American corporate profitability, the way formerly colonized nations began withholding access to their resources until their demands for political consideration were met, and the rising industrial strength of Europe and Japan as they rebuilt from the ruins of World War II.
But the story Lemann does tell in this part of the book is so revelatory that I’m glad to put such pedantic concerns aside. He introduces us to the anti-Berle: Michael Jensen, the kind of University of Chicago–trained economist who insists that markets are the only fair way to apportion value in a society because they are the only institutions that are rational. Lemann illustrates the peculiar lunacy of this doctrine by relating how the psychologist Amos Tversky once asked Jensen to “assess the decision-making capabilities of his wife.” Jensen responded by contemptuously citing a series of economically irrational absurdities she indulged in. Then Tversky asked Jensen about his students,
and Mike rattled off silly mistakes they made…. As more wine was consumed, [Jensen’s] stories got better, [and] Amos went in for the kill. “Mike,” he said, “you seem to think that virtually everyone you know is incapable of correctly making even the simplest of economic decisions, but then you assume that all the agents in your models are geniuses. What gives?” Jensen was unfazed. “Amos, you just don’t understand.”
Behavior like this is why Jensen has had two wives and became estranged from his father and daughters. It also illustrates the sort of errant confidence that he and a generation of financial economists brought to arguments about funding corporations that eventually proved instrumental in so destabilizing the economy.
One of Jensen’s major influences was the free-market economist Henry Manne, whose most famous book, Insider Trading and the Stock Market (1966), contended that trading on nonpublic information—a crime—was economically efficient and so should not be illegal. The argument by Manne that Jensen seized on and pushed to its furthest extreme was that stockholders should be granted power to enforce on corporate managers the understanding that their very existence depended only on maximizing profits for stockholders. To encourage them to behave as full-time profit maximizers and nothing but, companies should take on much more debt. They should, in other words, be much, much more unstable, for well-funded corporate treasuries “permitted chief executives to relax,” Lemann writes, “rather than being incessantly, almost desperately worried, as they should be, about making the company more profitable.”
Jensen’s most influential statement of this idea was a 1976 paper, “Theory of the Firm.” Lemann describes it as “long, detailed, [and] formula-filled,” which gave it the appropriately cool aura of science, even if it was also a work of moral dementia. CEOs, the paper argued, were wasting far too many corporate resources on things like “the physical appointments of the office,” “the attractiveness of the secretarial staff,” and “personal relations (‘love,’ ‘respect,’ etc.) with employees,” all mere distractions from the only value that mattered. “Love,” “respect”—no wonder, you imagine Jensen tut-tutting, these irresponsible fools thought twice about decimating entire towns rather than just doing their jobs maximizing shareholder value.
But Lemann overstates the responsibility of Jensen and his colleagues in the changes that took place in the 1970s and ’80s. When corporate managers increased the number of workers illegally fired for union activity, from 3,779 in 1970 to 8,529 in 1980, their attention to articles in the Journal of Financial Economics likely had nothing do with it. But Lemann isn’t wrong in asserting that the “new financial economics” that Jensen and his peers helped launch undeniably contributed to it. They not only provided the intellectual justification for things like paying corporate officials in stock but also invented the sophisticated mathematics behind index funds that tracked the entire stock market, making it much easier to create a mass market for stocks and bonds, and greatly increased the number of people who had a stake in bigger corporate profits. And they innovated fancy computer-driven financial instruments that left the somnolent olden days in the dust. Just as Jensen wished, corporations learned to abjure stability and love exotic forms of debt, and the companies that sold debt—like Morgan Stanley, whose staff ballooned from 2,600 to over 60,000 between 1983 and 2018—rose to the occasion, providing ever more innovative ways to supply it (even as a skeptic of these developments, then–Federal Reserve chair Paul Volcker, huffed in 2009 that there hadn’t been a useful financial innovation since the automated teller machine).
Lemann does a very nice job explaining many of these baffling innovations, taking us again inside Morgan Stanley’s offices to meet the men and now, mirabile dictu, the women at the controls. But he best illustrates the cult of instability behind these changes with a story. A top Morgan executive (an enlightened one, as it were: “he demonstrated his commitment to the advent of diversity at Morgan Stanley by offering free golf lessons to women and minority employees”) was rewarded, after a particularly lucrative transaction, with “a smashed telephone headset, of the kind an amped-up trader might create in the heat of a big trade, encased in Lucite as a parody of the old tombstone-ad souvenirs.”
This could not have happened without the dismantling of the regulatory regime that Berle and other New Dealers put in place in the 1930s—laws like Glass-Steagall, which Clinton signed out of existence with the announcement that “this is a very good day for the United States.” Its repeal opened a Pandora’s box, returning America to the pre–New Deal days when corporate finance was characterized, as one of Berle’s mentors put it, by “prestidigitation, double shuffling, honey-fugling, hornswoggling, and skullduggery.” The difference is that our new age of prestidigitation and honey-fugling was intellectually underwritten by a set of doctors of economic philosophy who managed to convince a generation of Democrats that all of this was not just lucrative but also progressive. The flow of dollars, they explained, was really the most democratic way to judge what was worthwhile in society. If dollars kept flowing toward something, that something must be worthwhile in and of itself, and if that something was an exotic financial instrument, its riskiness need not be of much concern because the risk was already priced into it—making it that much harder for them to anticipate the sort of cascading, system-destroying failure that happens when, as history shows they eventually always do, highly leveraged financial instruments fail.
Nowhere is Lemann more enraging than in his description of what he found deep in the bowels of the William Clinton Presidential Library. One example: an eye-opening memo from junior staffers at the Council of Economic Advisers, who were astonished by an Office of Management and Budget report that concluded banking regulation had “cost” the United States roughly $5 billion. “No attempt is made in the report or in the studies it cites to estimate the benefits of regulation of financial markets,” the memo states. Another memo recorded what happened after Brooksley Born, then the head of the Commodity Futures Trading Commission, exercised her jurisdiction to regulate the new $28 trillion market in derivatives (another invention of Jensen’s colleagues in the field of financial economics). She pointed out that if the assets these derivatives were built on were not accurately priced (for example, dodgy home mortgages), the whole financial system could be destabilized. But she simply didn’t understand, then–Federal Reserve chairman Alan Greenspan explained: “Economics should inform these decisions.” Treasury Secretary Rubin was recorded complaining that the “financial community” was “petrified” and that he would simply proceed as if she didn’t have the jurisdiction she claimed. His colleague Larry Summers followed up with a phone call to Born threatening that “if she moved forward…she would be precipitating the worst financial crisis since the end of the Second World War.”
Lemann grounds the consequences of all these high-flying transformations in the experience of a single Chicago neighborhood known as Chicago Lawn. This was where Martin Luther King Jr. was struck by a rock when he led marches for open housing in 1966. Subsequently, in Lemann’s telling, Chicago Lawn settled into a humble but stable existence as a mixed-ethnicity neighborhood that one of his guides, the former owner of a Buick dealership, remembers as being an “Eden”—but one that, in the wake of all this new financial prestidigitation, suffered decades of deindustrialization.
Was Chicago Lawn ever an Eden? Surely not; nostalgia is a kindness we overlay on a complicated past. But it’s hard not to be impressed by the scene that Lemann paints of one of its institutions, Talman S&L, a “grand block-long building at Fifty-Fifth and Kedzie that was the largest savings and loan office in the country,” on Friday nights. Payday was almost a party, a hive of convivial conversations carried out on couches that the owner provided for the occasion. Sometimes he even hired a band. Institutions like Talman filled out a virtuous cycle: Wages earned at the Chicago Lawn outposts of the great blue-chip corporations became savings; savings deposited at Talman were invested in mortgages, not dodgy financial instruments; and mortgages made for safe and stable neighborhoods that prospered and thrived. The reason this worked was government regulation—including one in Illinois that barred financial institutions from operating in more than one location in the state. This meant that banks served their communities, not transnational circuits of hot money.
Then what became of Chicago Lawn? Imagine Berle’s horse, boiled for glue. “The market for corporate control that Michael Jensen had promoted so enthusiastically affected all the major private employers in the neighborhood, always in the same way: fewer jobs.” An American Can Company factory, a Kool-Aid plant, one that manufactured water heaters, a Sears branch, a Nabisco cookie plant “whose towering factory on South Kedzie was a neighborhood landmark and the largest private employer”—all were victims of the age of transaction.
The Buick dealership, which boasted “an overwhelmingly black clientele, a black manager, and a union shop with lots of black employees,” survived for a time; the owner adjusted to the neighborhood’s straitened circumstances by selling more used cars and by putting up a basketball hoop for kids in the neighborhood. Then GM nearly went under, a victim of the credit crunch after the 2008 crash—and the fact that it had turned itself into one more company that relied for its health on selling debt. The Obama administration’s auto bailout was devised by financier Steve Rattner, who demanded the shuttering, without warning, of hundreds of dealerships around the country. Yet the owners of those dealerships successfully petitioned their congressional representatives for a reprieve, much to Rattner’s astonishment. Figures on a balance sheet aren’t supposed to talk back, and to see Congress pay so much attention to their pleas left him, as he noted in his autobiography, “mystified.” But the Chicago Lawn Buick dealership went under anyway, largely, it seems, because GM loaded it down with so many financial obligations (for example, demanding a redesign and renovation of the dealership by a GM-approved architect). So that was that. The neighborhood institution is now a Wendy’s, after years as a vacant lot.
The most moving parts of Transaction Man take us inside the struggles of Chicago Lawn’s priests, community organizers, and ordinary neighbors to manage the wreckage. Many of them not infrequently become wrecks themselves. Earl Johnson, the “unofficial mayor of the 6300 block of South Rockwell,” was almost arrested by cops demanding to know why he was sitting in his car. “Before it all died down, the police had beaten up Earl’s brother.” In another case, he was sitting in his backyard with neighbors when they were set upon by an armed young marauder, whom Earl attempted to subdue. In the midst of that, “one of the boy’s friends came up, plucked out the gun, and shot Earl in the back. “Between the gangs and the police,” he had finally had enough. He moved to a small town in Indiana and got a job at a plant that happened to produce police cars.
Jensen also undergoes a transition in the period covered by the book, although it’s almost too absurd to believe. After the economy collapsed in 2008 for many of the same reasons it did in 1929 (unregulated, hyperleveraged hornswoggling), he revisited his earlier academic work and decided that the only reason his theories didn’t work was that economic actors had not yet learned to act rationally. To remedy this, they must study, as Jensen now does with frantic devotion, the ideas of Werner Erhard, the founder of a 1970s self-help cult. If enough people internalized Erhard’s ideas—taught in seminars with titles like Being a Leader and the Effective Exercise of Leadership: An Ontological/Phenomenological Model—then, as Lemann paraphrases his subject, there would be “a benign revolution in human affairs” and “soon people would prove, with rigorous, quantitative research, that companies adhering to [Jensen’s] idea of integrity performed far better economically than companies that did not. That this had not happened yet did not affect his certitude.”
Reading about Jensen moving around the globe preaching New Age babble in order to redeem the failings of another set of fraudsters his ideas helped enable in the first place, it’s hard to discern what is goofier: that or the ideas that made him one of the most influential economists on planet Earth.
Transaction Man has a final profile, of Reid Hoffman, the founder of the job seeker’s social network LinkedIn. This profile is incredibly illuminating. Better than I ever did before, I now understand how closely the Silicon Valley business model, whose architects somehow believe themselves to be leading us to a New Jerusalem, resembles what is politely referred to as multilevel marketing or, to put it more bluntly, a pyramid scheme. In this new iteration of corporate finance, investors shovel money to disrupters in fantastical amounts, even though the vast majority of them will fail. One study Lemann cites found that among venture capital recipients (who constitute the cream of the crop, since the vast majority of supplicants receive no funding), three-quarters will fail.
The only possible way such investing could make sense is if the venture capitalists are placing bets that they will someday buy into a monopoly; indeed, it is only at a monopoly-like scale of market domination that a social network company can hope to make money at all. So we’re back where we started: aggregations of capital in the hands of a few individuals and corporations controlling, for their profit and exclusive advantage, the sale of certain necessities of life—in this case, our social relationships, the ties that bind, the very stuff of psychic life itself.
Meanwhile, the material world grinds on. In destitute Chicago neighborhoods, social media has become one more factor in the world Polanyi warned we might get if society failed to restrain the destructive forces of the market and profit maximization. Two sample headlines: “Fatal Chicago Shooting Captured on Facebook Live” and “Chicago ‘Gang Member’ Streams His Own Shooting Death.” But after telling Hoffman’s story, the book does not take us back to Chicago Lawn. Instead, Transaction Man peters out with one of those short How to Solve It All chapters that publishers love to insist must be tacked onto books about social problems.
Perhaps the reason for this is that Lemann ran out of pages or, possibly, time. If so, it’s a bad break, because this summer, as his book went to press, history provided him the material for another, more interesting conclusion. The Business Roundtable, an organization founded in 1972 whose membership consists solely of the chief executive officers of some 200 of America’s biggest corporations (including Citigroup, where Robert Rubin went to work after his government service), announced that it was “modernizing its principles on the role of a corporation.” A press release noted that since 1997, each of the Roundtable’s periodic statements on the principles of corporate governance had insisted “that corporations exist principally to serve shareholders.” That, the Roundtable now claims, “does not accurately describe the ways in which we and our fellow CEOs endeavor every day to create value for all our stakeholders, whose long-term interests are inseparable.”
This new manifesto pledged the group to work toward an “economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity.” The bullet points enumerate the many goals that the signatories are committed to, such as “delivering value to our customers,” “investing in our employees,” “dealing fairly and ethically with our suppliers,” “supporting the communities in which we work,” and—last and (we are very much meant to assume) least—”generating long-term value for our shareholders.”
Somewhere, Milton Friedman must be weeping. The Wall Street Journal certainly is: “These CEOs are fooling themselves if they think this new rhetoric will buy off [Elizabeth] Warren and the socialist left,” its editorialists replied. “It may even embolden them by implying that corporate rules that require a focus on achieving value for shareholders are somehow morally insufficient.” Whether the Business Roundtable can be trusted in these representations is, of course, the most open of questions. But in the meantime, I can’t imagine a better way to grasp the immense difficulties that will be involved in any thoroughgoing revision of the purpose of corporations than by reading this book.