Finance: The modern-day business of business

01 September 2017 -

The imperative of finance is to find low-cost ways to appropriate existing value, rather than create new

Simon Caulkin

For the first time in nearly half a century, the US is flirting with industrial policy. President Trump is, of course, a law unto himself. But, taken with Theresa May’s similar conversion, this is perhaps the most striking sign yet that, even in the Anglosphere, the long run of the neo- liberal, leave-it-to-the-market financial order has hit the political buffers.

It’s impossible to know how far, or in what direction, Trump and May might take economic intervention. But there’s plenty to go for in economies that over the past 40 years have been so corrupted that, in slavish pursuit of abstract numbers (GDP, profits, share prices

and league tables), both the business and political classes have forgotten the realities those numbers represent in Pittsburgh and Sheffield, as opposed to Davos.

Trump and Brexit (and Le Pen and Wilders) remind us that an economy that doesn’t provide jobs, wages and basic welfare for local, as opposed to global, citizens will blow up in the latter’s face.

The irony is that Trump and May’s remedies are unlikely to do much for angry voters, attacking symptoms, rather than causes.

It’s not just industry that’s sick – the economy as a whole is eating itself from within.

As Rana Foroohar puts it in Makers and Takers, the business of business, especially but not exclusively in the US and UK, is no longer business – it’s finance.

That’s true not just of banks: non-financials make five times more money from financial operations than 50 years ago, according to Foroohar.

Beginning in the 1980s, this shift in economic priorities – demand side to supply side, managed economy to laissez-faire, retain and reinvest to downsize and distribute in corporate capital allocation – has had consequences for our economies that only now are becoming clear.

Foroohar subtitles her book The Rise of Finance and the Fall of American Business. The two are indeed linked. Where once the function of finance was to grease the wheels of the real economy, now the positions are reversed.

The economy is no longer an exercise in cooperation but a tug of war – a “zero-sum game between financial wealth-holders and the rest of the American economy”, as one ex- Goldman Sachs executive told the author.

The same is true at the level of the firm. It used to be that, when companies prospered, ordinary citizens did too.

That link is broken. The terrible truth is that companies driven by shareholder value are as much ‘takers’ as banks, prospering at the expense of ordinary citizens. They create jobs only as a last resort, and mostly at the lowest wage rates.

Their innovation takes the form of finding low-cost ways to appropriate existing value, rather than creating new. The emblematic company of the age is Uber, a firm that chews up well-paid, regular jobs and spits them out as gigs.

It’s worth emphasising that Foroohar, an ex-editor at Time and now columnist with the Financial Times, is no wild-haired Marxist, but part of the mainstream media.

Her book is the best account yet of how finance has infiltrated every cranny of economic life, correlating closely with “the growth of inequality, the fall in new businesses, wage stagnation and political dysfunction”, not to mention financial failures that have become far more frequent and damaging than ever.

The last one wiped out $16tn in household assets.

So, yes, there’s quite a lot on Trump and May’s industrial policy ‘to-do’ list. A non-exhaustive agenda would include deleveraging finance and breaking up the banks, striking down shareholder primacy and building a growth model that really does empower the makers.

Above all, to avert much worse political shocks, we need to restate clearly who and what companies and the economy are for.

“Free enterprise can’t be justified because it is good for business,” Peter Drucker said once. “It can only be justified as being good for society.” He was right.