Monday, January 30, 2012

Doug Henwood on Our Current Disorders

Blogging's been light here lately. Sorry. In the meantime, you should read this:
if you combine net equity offerings—which, given the heavy schedule of buybacks over the last quarter century, have been negative most of the time since 1982—takeovers (which involve the distribution of corporate cash to shareholders of the target firm), and traditional dividends into a concept I call transfers to shareholders, you see that corporations have been shoveling cash into Wall Street’s pockets at a furious pace. Back in the 1950s and 1960s, nonfinancial corporations distributed about 20% of their profits to shareholders.... After 1982, though, the shareholders’ share rose steadily. It came close to 100% in 1998, fell back to a mere 25% in 2002, and then soared to 126% in 2007. That means that corporations were actually borrowing to fund these transfers. ...

So what exactly does Wall Street do? Let’s be generous and concede that it does provide some financing for investment. But an enormous apparatus of trading has grown up around it—not merely trading in certificates, but in control over entire corporations. I think it’s less fruitful to think of Wall Street as a financial intermediary than it is to think of it as an instrument for the establishment and exercise of class power. It’s the means by which an owning class forms itself, particularly the stock market. It allows the rich to own pieces of the productive assets of an entire economy. So, while at first glance, the tangential relation of Wall Street, especially the stock market, to financing real investment might make the sector seem ripe for tight regulation and heavy taxation, its centrality to the formation of ruling class power makes it a very difficult target.
For a long while [after 1929], shareholder ownership was more notional than active. ... But when the Golden Age was replaced by Bronze Age of rising inflation and falling profits, Wall Street ... unleashed what has been dubbed the shareholder revolution, demanding not only higher profits but a larger share of them. The first means by which they exercised this control was through the takeover and leveraged buyout movements of the 1980s. By loading up companies with debt, they forced managers to cut costs radically, and ship larger shares of the corporate surplus to outside investors rather than investing in the business or hiring workers. ... [In the 1990s,] the shareholder revolution recast itself as a movement of activist pension funds... the idea was to get managers to think and act like shareholders, since they were materially that under the new regime.
But pension fund activism sort of petered out as the decade wore on. Managers still ran companies with the stock price in mind, but the limits to shareholder influence have come very clear since the financial crisis began. Managers have been paying themselves enormously while stock prices languished. ... The problem was especially acute in the financial sector: Bank of America, for example, bought Merrill Lynch because its former CEO, Ken Lewis, coveted the firm, and if the shareholders had any objections, he could just lie to them... It was as if the shareholder revolution hardly happened, at least in this sense. But all that money flowing from corporate treasuries into money managers’ pockets has quieted any discontent.
I do have some doubts about that last paragraph, tho -- I suspect that "especially acute" should really be "limited to." I don't think it's as if the shareholder revolution never happened -- there still is, you know, all that money flowing into money managers' pockets -- but more a matter of quis custodiet ipsos custodes. If the function of finance is as overseers for the capitalist class -- and I think Doug is absolutely right about this -- then, well, who's going to oversee them. Intrinsic motivation, norms and conventions, is really the only viable solution to this sort of principal-agent problem, and the culture of finance doesn't do it.

Jim Crotty is also very worth reading on this. And I think he's clearer that this kind of predatory management is mostly specific to Wall Street.


  1. That Crotty link is U Mass only.

  2. An anti-managerial counterrevolution which the managers themselves ended up leading?

  3. Why not? Would hardly be the first time that the targets of a (counter)revolution ended up co-opted by it.

    Personally, I think there is a very convincing story in which the emergence of the modern corporation in the early decades of the 20th century, and then the vast expansion of the federal administrative apparatus in the New Deal and (especially) World War II, crated a class of professional managers with substantial autonomy from the notional owners of capital. (Not as cohesive as the enarques in France, but the same kind of stratum.) As managers of firms they pursued a variety of objectives, of which providing a satisfactory (not maximal) flow of payments to shareholders was just one among others.

    At some point (in the late 1970s, let's say) this arrangement broke down, with conflicts both between managers and owners over the fraction of surplus flowing to the latter, and between owners and workers, over the size of the surplus. The second of these conflicts was, in some sense, more fundamental, but the first one was also real and important.

    You then had a series of institutional changes that were intended to force managers to realign the interests of managers with owners, in terms of both conflicts. During the period of realignment, these changes took the form -- at least at times -- of a conflict, with recalcitrant managers forcibly removed by LBOs, etc. But over time, top management was effectively absorbed into the capitalist class proper. So the site of conflict moved to rentiers vs. other stakeholders in the firm, or the firm as a social organism, or society as a whole. At the same time, there does have to be continuous policing to ensure that management doesn't deviate from the goal of maximizing payments to shareholders. That is finance's other function, along with intermediation, and it's this second function that has been responsible for finance's growth over the past decades. (Along with the rents that financial institutions and asset-owners claim in the course of doing their enforcement work.)

    So in terms of overt conflict between owners and managers, the shareholder revolution is over; the shareholders won. The fly in the ointment is that no one is policing the police, and unlike other institutional supports of the capitalist system (the actual police, say, or the legal profession or the academia) they don't have the right internal norms to make them reliable servants.

    That's how it looks to me, anyway. I realize that here this is just a set of assertions, which would need to be backed up with evidence/examples to convince anyone who's not already convinced. As usual, I recommend Doug H.'s Wall Street (especially chapter 6, which I'm having my students read this semester) and Dumenil & Levy's Crisis of Neoliberalism to see the argument developed properly. One of these days, ojala, I'll write something substantive on this myself.