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The Speculation Economy:
In light of the recent news on Wall Street, I've been reading my colleague Larry Mitchell's new book, The Speculation Economy: How Finance Triumphed Over Industry (also available soon in paperback). It's about the creation of the modern corporation and the rise of the stock market in the late 19th and early 20th century. Mitchell argues that changes at the time made stock prices and finance a higher priority than the health of companies, creating the seeds of a speculation-based economy. Mitchell is more more inclined toward market intervention than most VC readers will be, but it's still an interesting read and certainly a timely one.
wm13:
I've noticed it's been all downhill since the early 20th century. No more new products, no more new companies or businesses, no real increase in national wealth or income, etc.
10.10.2008 2:02pm
J. Aldridge:
Mitchell must be unaware it is federal "intervention" that is the root of the problem (Hint: expansive, idiotic reading of "to regulate" commerce while ignoring the direct prohibitions of commerce interference).
10.10.2008 2:02pm
OrinKerr:
wm13, J Aldridge,

Too bad my colleague didn't consult you first: I didn't know you were experts in the history of U.S. corporate law.
10.10.2008 2:09pm
J. Aldridge:
Orin: I wasn't aware corporate law was a vested interest of Congress.
10.10.2008 2:15pm
OrinKerr:
J. Aldridge,

I'm confused: The book is entirely about state law. Maybe I misunderstand your comment?
10.10.2008 2:19pm
Gregory Conen (mail):
I can only imagine that wm13 is being sarcastic. It just seems beyond belief that someone would use a personal computer to claim, via the internet, that there have been "no more new products" since the early 20th century.
10.10.2008 2:47pm
wm13:
Actually, I know quite a lot about corporate law, since it is what I do all day, here in the financial capital of the world. I haven't read the book, to be sure, but I've certainly written and read a lot more corporate charters and prospectuses than any law professor.
10.10.2008 3:04pm
Harry Eagar (mail):
Sloan famously said, we are not here to make cars, we are here to make money.

GM was able to do both until it put a finance man instead of an engineer at the top. All downhill since then.

Draw your own conclusions.
10.10.2008 3:34pm
Splunge:
GM was able to do both until it put a finance man instead of an engineer at the top.

Yes, well, IBM has famously put salesmen in the top spots, while former competitors like Digital put engineers. The results speak for themselves. IBM always remembers it's job is to make things the market actually wants, not to make brilliant products that the market will, when it comes to its senses someday, want.

Sloan was quite right, as you can see by substituing the phrase "gasoline-powered vehicle" for "car" in that sentence, which would lead -- which has led -- to an inability to adapt to changing circumstances, e.g. realize that perhaps a vehicle powered some other way might be a better idea.

As for the broader point, I find it dubious. Well could observers of the medieval traffic in indulgences, the 18th century London speculation in South Sea shares, the 18th century American speculation in Western land, and so on, make the same comment. Jefferson and Madison condemned the rise of "financiers" in New York, and compared them unfavorably with the yeoman farmer quietly producing tobacco and wheat, things of real value...upholding those solid Puritan virtues of thrift, industry, yadda yadda...

The plain fact is that finance has tremendously leveraged the power of industry, by greatly easing the flow of capital to its point of greatest utility, even making it possible for capital to flow backwards in time, so to speak, through lending and investment. That the system is subject to parasitic insanity is no more indicative of systematic corruption than is the sad fact that if you invent glue some people will become glue sniffers. All bloodstreams attract mosquitos. Sad fact o' life.
10.10.2008 5:04pm
Carl W. (mail):
Hi Orin, I know you are a McCain supporter. I as someone who was undecided, would love to see a post from you with your thoughts as to the change of tone and direction of the McCain campaign over the last week or so. I know DB has mentioned it in passing, but I think it would incite some meaningful conversation.
10.10.2008 7:02pm
Steve2:
Splunge, thing with finance is that it breaks the rule of "money can be exchanged for goods or services" by making money exchangeable for that which is neither a good nor a service, and thus has no connection to the real world. That's something that makes me think Jefferson and Madison were right to condemn it. Right now, there's a good little matrix on Wikipedia's Financial instrument entry. The whole right hand side of that matrix - the derivative instruments - is unstuck from reality. Just as friction in an engine consumes energy without producing useful work, they allow the flow of capital to places where, while some individual thinks (rightly or wrongly) it's of "greatest utility" to them, but enables no-one to do useful work. The system isn't "subject to parasitic insanity", the insanity of the commodities futures market, with people who have no business trading materials as they have no use for them are nonetheless allowed to trade them and distort their prices, and of the other derivatives markets, where items (say, credit default swaps) of no inherent reality, let alone inherent value, are allowed to exist is fundamental to the financial system. That makes the financial system a detriment to the economy. Look at what just happened to GE with their 3Q profits. Most of the company's producing useful goods and services: light bulbs, washing machines, locomotives, jet engines, SNL, circuit breakers, etc. But they have a financial division, and the fact that the financial "industry" doesn't create a useful good or service finally caught up to it as the past few weeks have revealed the naked emperor at the heart of the financial markets, and so instead of posting a great profit by virtue of making a plethora of useful things, GE's been put up against the ropes by virtue of getting involved in finance.
10.11.2008 8:42pm