Must the Stock
Market Rule?

A review of
The Speculation Economy: How Finance Triumphed Over Industry
By Lawrence Mitchell. Berrett-Koehler Publishers, Inc., 395 pp.

February 11, 2008

Build a better mouse-trap, Ralph Waldo Emerson is supposed to have said, and the world will beat a path to your door. This hoary aphorism still captures — for the vast majority of Americans — the essence of how our economy operates.

This economy, we believe, revolves around making and selling goods and services. Bring a better product to market, and the world will indeed come running your way, or so our folklore assures us.

In reality, our U.S. economy doesn’t revolve around buying and selling products. Our economy revolves around the buying and selling of companies, or pieces of them, through the stock market.

Companies today dance to the stock market’s tune. To keep the music playing — and the market happy — the CEOs of these companies will do almost anything. They’ll downsize. They’ll outsource. They’ll slash research and development. They’ll rush into mergers that leave their enterprises ludicrously dysfunctional.

And if none of that does enough to jolt their share price upward, corporate execs simply shift to Plan B. They cook the books.

Why do executives dance so doggedly — and dangerously? Why do they engage in behaviors that so obviously undermine the capacity of their companies to build better mouse-traps? They do so, of course, for the money. Dancing to the market’s tune is stuffing executive pockets with paychecks of ungodly magnitude.

But why do we, as a society, let stocks call our economy’s tune? We seldom ask this question. We assume the economic dominance of stock market speculation as simply the way things are — and the way things must be.

Lawrence Mitchell does not make that assumption. His absorbing new book, The Speculation Economy, vividly explains why.

Mitchell, a former corporate lawyer who now teaches at George Washington University, takes us back to the early years of the 20th century, to the merger wave that created the modern giant American corporation — and the modern stock market.

That wave began in 1897, the year after the first great American popular upsurge against plutocracy climaxed and collapsed in the landmark 1896 election. By 1903, Corporate America had been transformed. U.S. industrial corporations had “become the raw materials of a new kind of business, a business created for finance rather than for production.”

Andrew Carnegie typified the old business order. He made his fortune manufacturing steel. The modern new corporation, Mitchell relates, would be “created for a new purpose, to sell stock, stock that would make its promoters and financiers rich.”

The dancing for short-term profits that CEOs do today, Mitchell's history goes on to help us see, simply exaggerates “a quality that was embedded in the American economy a hundred years ago.”

In today’s global economy, notes Mitchell, a founder of the progressive corporate law movement, that quality only dominates in the United States and the UK, the developed world’s two most unequal nations. Our current “stock market capitalism,” in other words, stands as neither “necessary nor inevitable.”

The U.S. economy, Mitchell adds, could have gone down different roads — to a capitalism, for instance, where “publicly held investments like bonds characterize the principal source of corporate finance, even a heavily regulated state-guided capitalism.” Other roads like these, he stresses, remain open to us.

“The history of American corporate capitalism is living history,” Mitchell sums up, “and the course of living history can be changed.”

— Sam Pizzigati

Sam Pizzigati edits Too Much, the weekly online newsletter on excess and inequality.