[A-List] How the Rise of the Speculation Economy Shaped US Corporate Culture
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Fri Jan 2 15:31:10 MST 2009
American capitalism is such that a speculative stock market dominates
the policies of businesses.
by Lawrence E Mitchell
AlterNet (December 22 2008)
Editor's Note: The following is an edited excerpt from The Speculation
Economy: How Finance Triumphed Over Industry (2007), Lawrence
Mitchell's definitive history of the rise of American finance and
analysis of how it shaped corporate behavior in the modern era.
During the rise of the "speculation economy" in the early years of the
20th century, business' focus on production was replaced with business
management's focus on stock prices.
That goal might be consistent with healthy, sustainable and responsible
business practices, but it also might not be. Understanding the complex
development of American corporate capitalism can help us better improve
and sustain the strength of the American economy.
While our current economic crisis is frequently compared to that of the
Great Depression, its roots and causes go further back in history - to
the development of the modern American stock market at the turn of the
Contrary to popular belief, the public market for industrial securities
didn't finance industrialization - industrialization had already taken
place. Instead, it exploded into existence as a result of trust
promoters and investment bankers trying to restrain competition through
the creation of giant combinations of corporations and at the same time
getting rich quick by dumping the overvalued securities of these giant
corporate behemoths onto an emerging middle class eager to share the wealth.
The first major industrial stock market crash followed fast on the heels
of its birth.
The formative era of American corporate capitalism took place between
1897 and 1919. The American business landscape of the late 19th century
had been characterized by independent factories. No matter what their
size, they typically were owned by entrepreneur industrialists, their
families and perhaps a few business associates.
But in the first decades of the 20th century, American business
transformed into a vista of giant combinations of industrial plants
owned directly and indirectly by widely dispersed shareholders.
Business reasons sometimes justified these combinations. But they might
never have come into being if financiers and promoters had not
discovered that they could be used to create and sell massive amounts of
stock for their own gain.
The result is a form of capitalism in which a speculative stock market
dominated the policies of American business. The result is the
Historians have studied virtually every aspect of the Progressive Era,
including the social and philosophical changes that took place in
Americans' ways of living and thinking about their world, the dramatic
technological and economic developments that occurred, the rise of big
business, the growth in importance of the federal government, the fitful
creation of American industrial policy, the establishment of the bargain
between labor and capital, the changes in political relations between
government and big business, the development of new styles of regulation
and America's assumption of its turn as the world's dominant economic
power. Many have provided rich pictures of different aspects of the
dramatic and related economic, social and political transformations that
occurred during that period.
The story I tell in The Speculation Economy: How Finance Triumphed Over
Industry (2007) is the economic equivalent of the political creation of
the republic. It is a story that needs to be told for many reasons, not
least of which is that the corporate economy that emerged during this
era has been beset with problems ranging from short-term management
horizons that can damage the long-term health of business to the
increasing willingness of corporate managers to "externalize" the costs
of production for the benefit of their stockholders.
A recent survey of CEOs running major American corporations revealed
that almost eighty percent would have at least moderately mutilated
their businesses in order to meet financial analysts' quarterly profit
Cutting the budgets for research and development, advertising and
maintenance, and delaying hiring and new projects are some of the
long-term harms they would readily inflict on their corporations. Why?
Because in modern American corporate capitalism, the failure to meet
quarterly numbers almost always guarantees a punishing hit to the
corporation's stock price.
One lesson of the formative period is that meaningful reform can be
achieved only by reforming the market, by reforming finance itself to
create the incentives for stockholders, and through them the market, to
re-learn the lesson that profits come from industrial production, not
from the breeze that blows toward tomorrow. It is a lesson that was
often forgotten during these early years, and many times since.
Finally, the story of the creation of American corporate capitalism
illustrates the possibilities of capitalism and the variety of forms it
can take. Some of these were present in the American corporate economy
of the late 19th century.
Closely held industrial capitalism, bank-finance capitalism, capitalism
in which publicly held permanent investments like bonds characterized
the principal source of corporate finance, even a heavily regulated
state-guided capitalism, all were possibilities before the election of
Warren Harding. Many of these different forms of capitalism have
appeared successfully in different regions, cultures and countries
during the 20th century. American corporate capitalism - stock market
capitalism - was neither the necessary nor inevitable form of the
The story of the formative period is a story of problems misperceived,
transformations not yet understood and misguided regulation. One lesson
of this story is that modern American corporate capitalism is the result
of human choices. It is a system we maintain out of choice. It is a
system that has ramifications beyond the economic that have helped to
embed the kind of "hyper-individualism" that interferes with the
cooperation necessary for a successful economy and a thriving society.
It is within our power either to change it, to modify its rough edges or
to accept it as it is. But these choices can only be made with
Several years into my research on the rise of the speculation economy, I
began to see in the formation of American corporate capitalism the
reasons for a number of contemporary economic and social problems,
problems which so many are trying to solve today without grasping some
of the important causes that this history helps to identify. Perhaps as
important, I started to see the way our speculation economy affects the
norms of American society, how it has pushed American social norms from
a vision of collective life that achieved some currency during the
Progressive Era to a more atomistic form of individualism that has both
recalled an earlier American ideal and driven the future. Nowhere in
American society is violent, competitive individualism more rampant than
in the modern stock market.
Finally, the story holds important lessons for citizens of other
nations, even as the American form of corporate capitalism has affected
the different ways many other countries do business. For somewhat over a
decade now, many countries have been at a decision point as to whether
they will adopt the American way or pursue their own, or even whether
they have much choice in the matter.
Lawrence E Mitchell is Theodore Rinehart Professor of Business Law at
George Washington University.
(c) 2009 Independent Media Institute. All rights reserved.
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