Posted by: Doug Henwood | July 20, 2012

Credit default

Back in 2009, Justin Fox, then of Time magazine, published a book called The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. I interviewed him about it on my radio show in June of that year. It’s a pretty good book, but at the time, I thought it bore an uncanny resemblance to some of the arguments I made in my book Wall Street, published by Verso in 1997. (Verso let it go out of print, so it’s now available for free download at that link.) With the publication of the book, Fox went on to become editorial director of the Harvard Business Review (HBR).

My feeling of uncanny resemblance has just gotten a strong booster dose with the publication of an article that Fox co-wrote with Harvard business prof Jay Lorsch, “What Good Are Shareholders?” In Wall Street, I argued (among other things)

  • shareholders provide little or no money to the companies whose stock they own, and rarely have
  • in fact, since the early 1980s, the flow of cash has mostly gone in the reverse direction, from companies to shareholders
  • stock prices are often noisy and even systematically wrong, so therefore provide no good evidence on how well managers are running firms
  • shareholders’ interests are very narrowly selfish, usually at odds with workers, communities, and the broader society
  • so, basically, who needs them?

Curiously, the Fox/Lorsch article makes a very similar argument—one, I might add, that I haven’t really seen anywhere else. My version was explicitly radical; though it engaged deeply with the mainstream financial literature, it was also larded with quotes from Marx. Theirs is not. It makes a more modest case for bringing other “stakeholders” into the corporate governance game: “boards, customers, employees, lenders, regulators, nonprofit groups.” My conclusion was somewhat different:

In other words, the modern corporation shows that production can be organized on a large scale over time and space, bringing together thousands of workers in pheonomenally productive cooperation. But these institutions are nonetheless run by and for a small group of owners and managers whose social role is peripheral or even harmful to the institution’s proper running. This contradiction, in Marx’s words, constitutes “the latent abolition of capital ownership contained within it….”

But these days, even asking the question, “What good are shareholders?” is pretty subversive stuff.

In any case, I was paid a pittance for writing Wall Street. I enjoy neither the fame nor the compensation of Harvard swells. It would be nice even to get a prominent credit for having developed an original argument, even if its full form is too radical for an august establishment organ like the HBR. To his credit, Fox acknowledges the pedigree:

But a midnight tweet isn’t enough, really.

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Responses

  1. I haven’t had a chance to read it yet, but they mention Lynn Stout’s The Myth of Shareholder Value, which seems to cover much of the same material. Do you know if you get any credit in that book? I do fear that Wall Street will end up being like, say, Mission of Burma, in being well-loved by a small number of fans in its time, but too far ahead of the mainstream to be much of a commercial success. Or even widely known among the masses who would listen to remarkably similar, if watered down, music years later. Maybe we can cultivate some sort of hipster snob appeal to being a Doug Henwood fan.

  2. It’s been a while since I read WS. I’d say you own the first two points, but the other three are objects of pretty widespread commentary.

  3. Point 3 was pretty unusual when I wrote the book – EM theory was still rather sacrosanct. Point 4 is not unusual, of course. But point 5 is rather rare. And the whole sequence of points leading to that conclusion is not something you read every day.

  4. Ha, well I love MoB, as you may know. Haven’t read the Stout book. It’s been a while since I read any of that corp gov lit.

  5. You should check if the S.H.A.M.E. Project is interested in him. They do a lot of digging on their subjects.

  6. Proof once again, that – like Marx’s Capital – Henwood’s Wall Street is truer today than when it was written. (But I’d still like a new edition.) = = That said, I do agree with Max that the corporate wars between management and shareholder/raiders led to “mainstream” people wondering, perhaps muttering under their breath, what the point of shareholders was.

  7. I am either mis-informed or You have added some support I hadn’t been aware of. Profit increases to the upper management and C-F’s-CE’s-has Sky-Rocketed since the ’70’s–so the Higher Share Value has not shown up on The Gross…Has the Company found a way to turn the attention away from Outsourcing- Union Contract Elimination- Bankruptcies- the now proven way to get at the Higher Cost of Labor and at the same time sever the U.S. Work Force from their now greatly lowered or eliminated Benefits they are told in some cases to find for themselves or wait for Gov’t. Coverage in the Great Bye-and Bye…? I, as a Shareholder Myself, received practically No Dividends (and I had Fidelity Funds) after 2000– It was as if The Companies had found a way to Thrive on Small Portions of Meat-Potato-Veg on their Plate because The Hors d’ Euv’s and Wine Before the Main Course-and the Dessert after was More Than Enough to add Bulk to their Portfolios…I Speak from a point of Ignorance on the Then-Burgeoning E-Trading Sector which mounted The Market with a Bang–but I knew of People who stayed with it for a while until they discovered it was not unlike finding out your “Black-Jack Hot-Streak” was coming to a quick end (the post-dot-com-boom)….

  8. Given that shareholders don’t do any good, why have them? You answered that well in Wall Street and should include it here. I’d summarize: the shareholder system serves the wealthy by allowing them to own the economy broadly and not be tied to the fortunes of a few individual firms.

  9. Doug — I think Wall Street was as important and under-appreciated as you say – and far more persuasive than Robin Blackburn’s take, which ignored the book and its arguments systematically (as you pointed out in your review).
    But I agree that an updated edition is needed, partly to more fulsomely take on the role of private equity and hedge funds, which themselves appear to have arisen and expanded in the form they have specifically to overcome the irritating role of shareholders that WS underlined. My own interest here is the profoundly co-opting role played by these securities and ownership markets on unions and worker trustees who take up investment policy responsibilities via pension funds – and then want to claim that they are managing “workers’ capital” (as though the exploitation and harm that results is somehow blessed by the sanctity of the ostensible “worker” owners or beneficiaries). For this co-opted set, it sounds like the Lorsch/Fox article will be very soothing.

  10. Doug, the sour grapes attitude makes you sound like a petulant teenager.

  11. Compared to mainsteam finance journals, HBR is a breath of fresh air. No doubt they’ll rip off Doug (or any other thoughtful analysis) because they don’t have to pass muster with academic editors looking for a lot of math. But c’mon, the purpose of academic finance and economics is largely to formally justify the existing order or obscure patently obvious inequities. You read the AER, JPE, Journal of Finance and Jornal of Financial Economics from the bib and conclusion backwards – you already know the policy implications from the paper’s title, you just have to see how clever the authors were in posing the questions! From what I read in the heterodox lit, nobody has done as clear and cogent a job of critiquing neoclassical finance theory as Doug (Steve Keen has also done good critiques of micro and macroeconomic theory). Doug’s WS has these great gems like “Jensenism” that I incorporate into my lectures that makes teaching this stuff somewhat tolerable. Many a disaffected student – who have pretty low attention spans for arcane ideas – find the EMH stuff pretty hard to swallow. Ironically, while young people understand where Fox News is coming from, they’re very uneasy about the strong ideological asumptions embedded in economics and finance (e.g., Black-Sholes, CAPM, EMH, perfect capital markets, asymmetric info, real business cycle theory). Even econometrics is filled with ideological dimensions (e.g., ARCH, VARs, dynamic panel estimation). Folks like Justin Fox just can’t contemplate the logical conclusion of what Doug (and Marx for that matter) are getting at: no matter how you try to prettify capitalist relations, ultimately, economcis and finance is about power and facilitating the extraction of value from somebody’s labor. After all, this is business, ain’t it – nothing personal.

  12. Doug- you should regard it as a blessing in disguise. After all, those whom the Gods of Wall Street wish to destroy, they invite to academia (and HBR).
    That is cold comfort, I am sure, especially when the rent collector is banging on the door, and baby needs a new pair of shoes.
    WS, New Economy, LBO, and the rest *should* be more widely read than they are. Those who style themselves “the left” or “the Left” are astonishingly ignorant of what used to be called “political economy”. How one can claim to be political without having a modicum of understanding of how the economy works is beyond me. That is, sadly, the state of affairs in the workers movement and “the left” at the moment.
    It’s what leads the nonsense that things like income inequality and poverty, or tax rates, or CEO compensation are moral questions. All we need is a little bit of enlightened self-interest.
    Hogwash (and I mean that in an Animal Farm sense).
    The capitalist class is a bunch a SOBs because they HAVE to be, not because they want to be.
    But I digress.
    They are lovely and sing beautifully, but do not be swayed, and driven on the rocks by the syrens of academe and their promises of recognition and fame. Stick to the charts, and steer by the red star.

  13. while it wasn’t necessarily intended, this counts as plagiarism under typical university standards – but not at Harvard, which protected dershowitz after finkelstein demonstrated his [much worse] plagiarism incontestably.

    and taking offense at plagiarism is not petulance – though you now have the right to be petulant over that charge itself.

  14. [...] just read the book from cover-to-cover for the first time, prompted by Henwood’s complaint that the article Jay Lorsch and I wrote for the July/August HBR, “What Good Are [...]

  15. [...] just read the book from cover-to-cover for the first time, prompted by Henwood’s complaint that the article Jay Lorsch and I wrote for the July/August HBR, “What Good Are [...]


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