Nick Lemann on Shooting Sacred Cows (in Economics)

Published Dec 23, 2019, 8:05 AM

It's easy to take the economic mores of the time in which you live for granted. It's so easy, in fact, that it doesn't occur to most of us to question them. But question them we should. In his new book, TRANSACTION MAN, longtime journalist and Dean Emeritus of the Columbia Journalism School Nick Lemann shows that the beliefs that have shaped our modern world are not inviolable truths, but rather temporary and fragile constructs. In this episode, Bethany and Nick range from the 1950's-era belief that big corporations were the keepers of the social good, to the modern era of profit maximization, and agree that we need to keep questioning economic models and trends...because you never know when you’ll realize, all of a sudden, that they’re wrong.

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I'm Bethany McLean. This is making a killing in this show. I cut through the hype and handwringing to reframe the stories you thought you understood and uncover the ones you didn't know were important. I started work on Wall Street in nineteen ninety two, in the mergers and acquisitions department at Goldman Sex. In nineteen ninety five I went to Fortune Magazine. By this time we were firmly in the age of shareholder primacy, by which I mean the purpose of a company was to make money for shareholders. If they didn't make enough, it was a bad company. And then a god of finance aka biotfirm, a private equity firm, would come along and fix things. This was the natural order of things, or so it seemed my guest today. Long time journalist Nick Lehman describes this period of acceptance of the status quo and his brilliant new book Transaction Man, The Rise of the Deal in the Decline of the American Dream. He writes, there moments in history when everything seems calm, when there isn't some obvious bitter contention about big problems. That, of course, was the late nineteen nineties, even the subsequent dot com crash, and then, of course the implosion of Enron didn't seem to me at the time so much an example of a deep systemic problem as it was a story of good ideas taken to bad extremes at a market peak. The men, and they are mostly men, who order our economic world, must be right in their thinking, because well, because they order our economic world. It's a perfect example of the fallacy of the consequent high Aristotle. I think the financial crisis in two thousand and eight made us question all of that. What Nick does in his book is outline the beliefs that have shaped our economic world and show them not as inviolable truth, but as temporary and fairly fragile constructs. Here's one take the mid century idea that big corporations, their power kept in check by smart government regulation, would always dominate. It was the polar opposite of today's startup loving culture. As Nick writes, it's worth recalling how little the founding of new companies was part of the prevailing narrative of how business worked. How obviously wrong did that turn up to be. Then it became an article of faith from the eighties until oh about now that financiers, We're going to make companies stronger and more efficient, and somehow never mind exactly how that was going to work for the rest of us too. Now that idea is under fire as well. In late August, the Business Round Table, which as it sounds, essentially represents big business, said it it's changing its statement of the purpose of a corporation. No longer should decisions be based solely on the Milton friedmanesque view that the only purpose is to produce higher profits for shareholders. Rather, corporate leaders should take into account all stakeholders, that is, employees, customers, and society writ large. Today I get to discuss all of this and more with my friend Nick Lehman, who, in addition to his many other roles New Yorker writer din Emeritus of the Columbia Journalism School, is also the editor in chief of Columbia Global Reports, which published my last too mini books. So I'm thrilled that now I get to talk to Nick about his new book. So Nick, tell me what was the genesis of this book. First of all, you mentioned that I was dean of Columbia Journalism School, and in that role, fundraising was a big part of my life. So that was the first time I had encountered the current generation of very rich people, and I was fascinated to learn kind of how they thought, which was if I said, will you give money to Columbia Journalism School, they'd always say no. If I said, we're going to disrupt journalism and create an entirely new institution that will be very loosely related to the Journalism School, but it'll be sort of entrepreneurial and dismantling everything that existed before, they'd say, great, I love it. So there was this kind of prejudice that you'd encounter over and over again toward taking a part institutions that existed, even once I believed in, and then creating new ones that would supposedly be better, or just not having institutions. And there's also a part about journalism. And I won't name the person, but one of my fundraising meetings when I was dean was with a former journalist who had become very wealthy venture capital investor. So I thought, great, you know somebody who loves journalism. And I went to see him with my colleague who was the fundraiser, and he just I don't know why he took the meeting, but he spent an hour just giving us a big lecture on how everything in journalism was going down and he was proud to be part of that, and how he was going to fund all these startups that were going to replace all the familiar journalism institutions and do a better job. And my development officer and I went back to a hotel and met for breakfast. I said to him, did you look at all the sites he's funding? And he said, yeah, did you? I said, did you do you want to kill yourself? Or is it just me? Because they were just you know, pop culture basically, So it just it just was striking to me to encounter this mindset delivered with total sureness and a kind of religious fervor, and to try to sort of pinpoint and identify that as William White did many years ago in his great book The Organization Man, which was kind of about the opposite phenomenon back in the nineteen fifties. Right, So asking these questions, is it fair to say that by looking at an institution or a business that you knew well, mainly journalism, and thinking about how the mindsets regarding journalism were changing, made you start thinking about these larger mindsets that have ordered our economic world, and how they've changed over really the course of American history. Yeah, exactly, I was. I was using as nonfiction writers often do you know in fiction class which I've never taken, supposedly they tell you right about what you know and you know in nonfiction, I think what you do is, or at least for book writers, you take something that, probably for a personal reason, you're intensely interested in and curious about, but you don't know, and try to find out about it. So with all my books, there's been this dynamic of how did this happen? You know, something that I had experienced in a deep way but hadn't understood, And then I would go try to unravel the mystery. Now that the Business Roundtable has come out with a statement about corporations having a broader responsibility, do you think people recognize that this is, essentially, as you lay out in your book, a return to an old way of thinking rather than something that's completely fresh. I mean, it strikes us all as revolutionary now to say that the purpose of a company should be something other than generating shareholder value, and yet that's actually how most people thought about corporations up until oh, the nineteen eighties or so. Right, Yeah, But I mean before I get there, there's a tension between the financial world and the corporate world, and that's just built into the fabric of everything. I live on the fabled Upper West Side of New York, home of liberals. If I say that to people, the initial reaction is what huh, Because I think we think of them as the same thing. Business and finance are both part of the same big evil scheme. So it takes a little work to introduce the uninitiated to the fact that this tension exists. But once you get there, Yes, the story I tell in the book is one where when we start in the early twentieth century, there is no notion of corporate social responsibility, and then it's created with government playing a very large role in its creation. We can get more into the pause there and tell us about the character about Off Burley, who you tell this story through. Burley was a crucial advisor to Franklin Roosevelt in the early days of the New Deal. Burley and a co author wrote a book that was published in nineteen thirty two called The Modern Corporation and Private Property. In that book, They said Burley had a flair for the dramatic. For the first time in human history, ownership and control have been separated. Because the modern publicly held corporation, then quite a new institution that people found strange and unfamiliar, has shareholders who are so widely dispersed that they can't have any influence over the management of the company. So the management is completely unaccountable, and there needs to be some way to call them to account. Early in his career, Burley was read as an advocate of what we'd now call shareholder activism. In other words, he was noting this, and people thought he was noting it to say, well, let's put the shareholders in charge. That's not what he thought. What he thought was, let's bulk up government so it can be as powerful as the corporations, and there can be a sort of fair fight, like what I call in the book a clash of the titans between them, and only then, in his view, would you get the socially responsible corporation. Many years later, he was quite typical of sort of Eastern liberal establishment types in saying things like, we have these big industrial corporations, no one will ever be able to compete with them. They will last forever. They will only get bigger and bigger and more dominant. There are no entrepreneurs in America anymore. Only large corporations can innovate. Wall Street has become irrelevant in the American economy and will disappear eventually. Because he thought these corporations would be so rich they would just invent their own financial products to fund production and things like that. And you know, in a certain way, I hate to say he died just in time, because is this world that he went to his deathbed thinking was forever and many people like him did exploded not long after. The three things that really stood out to me that you noted about Burley were that you wrote he believed the corporation had become the conscience carrier of twentieth century American society. And that's a quote from him. Either way, that's not no, it's but it's fascinating because it shows how this idea was so ingrained for a while, that corporations had this larger responsibility. And then I also thought his idea that a near clash of the Titans analogy government was the one thing that could restrain big business. And then the way in which he believed, back to the point you were making about corporations and finance being two different things, the way he believed that capital had come out of capitalism, that this really was just about big corporations and Wall Street was quiescent. Really, yeah, he did, he said one of his He loved to make these dramatic pronouncements, and one of them was, we now have, for the first time in the world capitalism without capitalists. Was that right? A fantastic lyde tell us. Before we move on to how the world changed and how this world because construct Burley had created seemed to be wrong, because it's so relevant today, talk a little bit about the difference in views between Burley and Brandeis. Lewis Brandeis was Supreme Court justice and before that a crusading liberal lawyer. He was appointed to the Supreme Court by Woodrow Wilson, and he's kind of the father intellectually of aggressive anti trust. His favorite phrase was the curse of bigness, and he was a crucial advisor to Woodrow Wilson in his first successful presidential campaign in nineteen twelve. We now forget that. Number one. The big issue in that campaign was anti trust policy, believe it or not. And number two Theodore Roosevelt, one of the three candidates who's seen today as a trustbuster, was the anti anti trust candidate. Woodrow Wilson was the one for breaking up big companies, not Roosevelt, because Roosevelt had embraced Burley's view that big corporations could be restrained by Yeah, I have this idea in the book Clash of the Titans. Liberals who tend to be people from New York, and they believe, you know, supersize government, supersized business, and then you can have a kind of fair fight between them. Brandeis believed in dispersing power and not coincidentally, maybe came from the provinces Louisville, Kentucky. So really interesting relationship. Burley's very first job he was a lawyer after law school, was working for Brandeis and Brandeis's law firm and they had a long tortured relationship. Burley claimed that he kept a picture of Brandise on his office wall until his death, but he thought Brandeis was completely wrong on anti trus Burley was fiercely opposed to anti trust his whole life. Every time he got a chance to testify in Congress against breaking up a company. He would do it, and he just thought this was a kind of backward looking, nostalgic attempt to revive nineteenth century America. So he would one of the many things he'd be shocked by if he were alive today. What is the revival of anti trust that we're now seeing out on the campaign trail and in Europe the revival, right at least, the revival of the idea. I was thinking when you mentioned Brandeis and the curse of bigness, how much that resonates today, not only when you think about technology, but the big banks after the financial crisis. Right, Yeah, And as I said, Burley had a flair for the dramatic. One of his many dramatic pronouncements after World War Two, and after Brandeis was dead, he said, this is such a settled matter that these big corporations are a good idea for America, that I believe that justice Brandis, my friend, if he were alive, would have supported my view. So he sort of converted Brandis to his position post mortem. So before we get to how a settled matter became incredibly unsettled, I want to pause for a minute on Roosevelt, just because he also is an interesting character in light of what's happening today, and a complicated one. In other words, he strikes me as a bit Clintonian, perhaps in his embrace of multiple ideas that would seem to be in conflict with each other. Franklin Roosevelt is a fascinating character, and you know, very attractive in many ways, but he's beyond Clintonian in his sort of affable elusiveness. One advantage we have is in those days, everybody wrote everything down, so there's wonderful archives on all of the endless internal battles. Remember that FDR changed vice presidents three times, and he was just always moving and shifting his position instinctively. Well, or I would say he never really sat down and stated what his views were. In fact, what people often cite as the best statement of his views was written by Burley during the nineteen thirty two campaign. What was that. It was called the Commonwealth Club speech, and it's often taught in history classes and so on. And the timing of presidential campaigns was a lot more slow than it is now. So around August nineteen thirty two, Burley wrote Roosevelt a letter he was by then a key advisor, and he said, look, you know, you might win or you might lose the election. We don't know. But even if you lose, you don't want to be remembered as somebody who had no vision. And right now no one knows what you stand for, so you need to make a speech showing what your vision is. So Roosevelt wrote back and said, okay, write me a speech that contains my vision and I will deliver it. So Burley and his wife, who was an amazing and very accomplished medical doctor named Beatrice Burley, sat down in their kitchen table in the Berkshires and wrote this speech that they telegraphed to FDR who was riding on a train across the country. Supposedly he saw it only minutes before he delivered it, but he delivered it. And it was this grand, sweeping vision of very Burly esque, of how America was being strangled by these giant corporations and government had to push back against them. And it actually cited Burly's book. Of course, you can't write a speech without signing your own book. Ye. So anyway, everybody was always fighting in the Roosevelt administration, and no one could quite figure out where Roosevelt stood as he zigged and zag between various warring liberal camps. And one dimension of this was government regulation. And you know how much did he believe in markets or not? Was he trying to save the market or was he trying to get the United States onto another system? And then another was did he believe in Brandeis or did he believe in Burley? And he kind of believed in both, right, yeah, or no? One could tell that there's a fascinating moment where Brandeis. In those days, people in Washington, maybe like today, maybe even more so, didn't color inside the lines as they say. So Brandeis calls Burley and says, I don't like FDR's new economic policies and essentially implies if he doesn't change, I'm going to strike down one of his key new government agencies, the National Recovery Administration, which is being challenged in the Supreme Court. So Burley tells Roosevelt this, Roosevelt writes back in his usual sort of affable, mysterios way and says, I'll just have to call in the Justice and have a little talk with him. And whatever happened in the talk, the Supreme Court did strike down the National Industrial Recovery Act, with Brandis voting in a unanimous majority. Can you imagine today if it became public that a Supreme Court justice was effectively blackmailing the president at the United States. I mean, that's a pretty extraordinary story, right, And also it later emerged. I mean, I'm a big admirer of Brandis, I think he was a great man. But it later emerged, not from my work, but from another historian's work that Brandeis was paying a stipend to his later colleague on the Supreme Court, Felix Frankfurter, who was an arch enemy of Burley, to sort of promote ideas that were friendly to Brandis, but that Brandeis couldn't promote personally because he was a Supreme Court justice. So how did this world that appeared to be so settled began to unravel? And at the risk of asking to why didn't people see it at the time that what seemed to be so permanent was actually just a fragile, impermanent construct. You've got this great phrase in the book, masterless money, and yet that supposedly masterless money suddenly became a master, a master at the universe. As a matter of fact, masterless money, I think is another of Burley's great phrase it's not mine, but just to set the table for this, any time you were born into a social system and a group of arrangements, you always kind of automatically think, well, this is the way the world is, so this is the way the world will always be. So I would say what happened is number one, inflation, which had been quiescent for a number of years, really took off in the nineteen seventies, and that destabilized the system a lot, particularly because banks could no longer at act depositors because they didn't want to have their money lose its value while it was sitting in a bank at a regulated interest rate. So it led to all this listening of the rules at the behest of the banking line, right. So the banking industry, which had never really wanted to be regulated in the first place, started pushing, pushing, pushing to be able to invest more daringly, have fewer safety and soundness restrictions, etc. So that was That's totally fascinating and worth pausing on that point for a moment, because for all the discussion about what led to the collapse of Glassdagle. Obviously Roosevelt's law. I'd never thought of inflation as being as being a part of that story, but it is. Yeah. I think it is a really important the story. Another part of the story is just general mood of the times. When I was starting out in journalism, I was working in Washington in the mid to late nineteen seventies, and at that point you could actually see New Deal figures walking down the street elderly men, and it was just an article of faith with us. I mean, looking back, you think, well, you know, the New Deal economic regime, and the whole regime worked pretty damn well, getting us from a horrible financial crisis in the late twenties and early thirties to no real financial crisis for many years. But by we, I mean liberal journalist types believed that anything with New Deal attached to it was outmoded and didn't work anymore. So there was a kind of excitement not just on the right but also on the left about dismantling things and innovating and deregulating and starting over. That strikes me as really important. How people who you would have expected to push back against the dismantling of some of these systems instead became coopted. Perhaps that's not the right word, but how does that happen? I think a lot of how it happened is I mean, I hate to say, I'm going to say we we liberal elite types. We're in on the deal our kids, and we go to schools that are the sort of bastion of liberalism in America, but where most people, most parents, and most of the students are going to go into finance, and finance sort of pays for the whole thing, so we're sort of beneficiaries of it. Finance gives copiously to liberal politicians. Barack Obama got more money from Wall Street by far when he ran in two thousand and eight than John McCain did. So. In Roosevelt's day, business and finance were one Republican and now they're very split, and that means that that world is located part of both. So tell us about Michael Jensen, because he's this fascinating character, because he embodies this drive toward the idea that markets are the answer to everything, and I think a craving for a simplistic worldview that we all have in a somewhere, but then he becomes a skeptic of this idea he did so much to implement. Jensen came from a blue collar background, from several generations of printers and newspaper line of type operators in Minneapolis. He was the first person in his family to go to college, and he wound up through a few twists and turns in the famous University of Chicago economics department in the sixties, which is when Milton Friedman was kind of the guiding spirit there, and when all these financial techniques that underlie the derivatives markets were invented by economists, So he was part of that group that was kind of quantifying the financial performance of portfolios, and that was the first phase of his work. Then in the seventies, inspired in part by Freedman. In those days, as we were noting earlier, the reigning belief was a socially responsible corporation. So Milton Friedman began questioning that and saying the only purpose of a corporation should be to make money for its shareholders. And then Jensen really took hold of that idea and wrote a famous academic article, one of the most cited academic articles of all time, detailing with formulas and specific techniques how a corporation could reorient itself toward its shareholders. So he became kind of the intellectual godfather or patron saint of all those old corporate raiders of the early eighties like Boone Pickens and Ron Perlman and all those people, because what he wanted to do was create what he called a market for corporate control. That is, the control of the corporation would itself be up for grabs at all times, available to the person who could produce the best return for shareholders. So this was kind of the set of ideas around all the stuff that you were dealing with when you started at Goldman. Sachs. Oh, it's fascinating. As I read your book, I thought, here's the intellectual godfather of the construct of the world that I just took for granted. I thought that's the way the world was, you know, mergers and acquisitions and paying CEOs in stock options so that they would be personally enriched by the performance of the stock. But the core idea of it is there's one owner. There's not dispersed ownership. I mean, he was consciously saying, and he says briefly in that first article, I'm blowing up Adolf Burley's construct here, you know, So there's a sort of connection there. So what he loves about, or used to love about private equity was that you'd have one person like black Stone or KKR owning a company, so the shareholder in the management were indistinguishable, and so that you'd get rid of all these social arrangements that had been embedded into the corporation union contracts and fancy offices and all that, and then spin it off and release value. So all through the eighties into the nineties, Jensen was always sort of writing and testifying in Congress and so on in favor of this big revolution that was going on in the American corporation. Something like a third of the fortune five hundred disappeared in the nineteen eighties alone. So it was done by that nig big, big change, and unpopular with a lot of people, including a lot of politicians. But Jensen's view was that his techniques used by others, had saved the American economy from failure and created hundreds of billions of dollars of value. But yet he becomes a skeptic, threw he's a real genius, and he's sort of an ideologue, and like many ideologues, he tends to have one simple idea that solves everything, but it's capable of switching. So he's rejected the idea pretty much of shareholder primacy and instead gone to this idea that he calls integrity. You have to wonder what both Jensen and what Early would think of the current system where you have private equity firms taking over companies only to cut jobs and destroy pensions. And then supposedly the mechanism that enables the private equity firms to do this is indeed workers pensions, which are invested in private equity firms, as the only possible It's this, it's this odd, it's this odd, weird circle, right that proves I think, how corrupted this idea became. But before it we're done, I want to interestingly chart this move from organization man to transaction man, but then to network man, which is where we are now, back to how you began this story with the primacy of words like disruption and entrepreneurialism. And do you see this as we finally arrived at the right system by which to order our world? Or do you think we should all look at this this world too and say, wait, this is just another construct that may not last either or maybe shouldn't last. I'm picking option be there. It is clear to me that, especially after the financial crisis, but to somewhat before there, the idea of a business world that's run for shareholder value as not just as a market making principle, but as a society making principle was really losing altitude fast, you know. And you see that in this presidential campaign, where there's more talk about these basic economic arrangements than I can remember in my lifetime by candidates. You know, we're back to the early twentieth century days in that regard. For suddenly people care about this again, right, the way the world is ordered economically. If the book is a procession of these sort of big sweeping ideas that claim to be able to solve everything, I would say, if you were looking for one end of the twentieth century early twenty first, it would be this idea of a network based society and a network based economy. The bloom on that rose is already really off. Because when I started the book, no one in the press ever said an unkind word about Facebook ever and now and now every single day it's gone from white hat to black hat, and we're back to brandeis right and the course of bigness. Right before I let you go, I wanted to close on one last question. Why is it what is it about human nature that makes us long for these big, conceptual, simple ideas that seem to clarify everything and provide an easy worldview. Well, I'll have to tackle that one in my next book on human nature. But it's appealing, and it's especially appealing to sort of very smart elite types who live a fairly insulated life from the harsh realities of life, and the transaction man phenomenon that I write about removes you from seeing people who aren't like yourself because you're maybe not sitting all the time in these large institutions, so it seems to kind of make sense, and you're always being told how smart you are. But I would say what I'd like the book to do is reopen a conversation about power sharing, power limiting, not having big concentrations of money and power, and having a restored balance between politics and markets is a conversation we need to be had. Having a get yep, and paying attention to the way things are structured and seeing it not as inevitable but as the product of choices, and the product of choices that that may not last. Right. I thought that that's an incredibly valuable addition to the conversation, So thank you so much for joining me. It's really fun. The US economy hit a historic high in twenty eighteen, and today unemployment is at its lowest rate in five decades. Yet wage growth for the vast majority of Americans has stalled, and more people are struggling to afford housing, healthcare, education, and other basics. Clearly, the economic model that is in place now does not work for everyone, and so it is that that economic model is now a campaign issue. Big tech, which such a short time ago was so celebrated, is in the crosshairs. That's true of big finance. Also, gone are the days where we unquestioningly accepted the idea that the gods of Wall Street knew what they were doing. We are in uncertain times, and my main takeaway from next book is that maybe we should be in uncertain times. We should keep questioning economic models and trends and the economic constructs that rule our world. Because you'll never know when you'll realize all of a sudden that they're wrong, or when the world will change and you'll be forced to realize that they are wrong. Making a Killing is a co production of Pushkin Industries and Chalk and Blade. It's produced by Ruth Barnes and Rosie Stofford. My executive producers are Alison McClain no relation in Making Casey. The executive producer at Pushkin is Mia Loebell. Engineering by Jason Gambrel and Jason Rastkowski. Our music is by Jed Flood. Special thanks to Jacob Weisberg at Pushkin and everyone on the show. I'm Bethany McClain. Thank you so much for listening. You can find me on Twitter at Bethany mac twelve and let me know which episodes you've most enjoyed.

Making a Killing with Bethany McLean

Big Business is shaping the world in unprecedented ways. Through a series of conversations with toda 
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