Makers and Takers – The Rise of Finance and The Fall of American Business – Book Review

Way back in college, there was a perennial debate that raged on in classes. Whether people pursuing Finance as an MBA specialization are actually doing anything to contribute to the real economy or not. One side of the debate argued that Finance MBAs do not contribute anything real to society. It is entrepreneurs and manufacturers who are the real heroes of the economy. They’re the ones who create physical assets. All Finance MBAs do is conjure  assets up out of thin air (that are likely to disappear into thin air as well), a house of cards, so to speak. The other side fought for the view that Finance is very much a rock solid constituent of the world economy. It lubricates the wheels of business, by moving capital from where it is available to where it is needed most.

No points in guessing which side of the debate this book would take. But what we would have never discussed in our debates is how the financial economy would not only contribute to the world economy in such measure, but also control the functioning of the real economy. Makers and Takers explains this phenomena in the book in detail.

The book starts with the author quoting what seems to be her favourite statistic, [Finance] represents about 7 percent of our economy but takes around 25 percent of all corporate profits, while creating only 4 percent of all jobs.

The book goes on to describe how Finance has risen in the economy in the recent few decades. The author has even coined a term for this phenomenon – calling it financialization. The author explains that a majority of this was due to the incessant lobbying by the heads of the financial sector to make the authorities go easy, and in some cases, even reverse certain laws, for their convenience. What is even more shocking is that many such lobbyists and heads of too-big-to-fail institutions later get plum government positions after they retire.

There is an interesting bit of history about Corporate America’s obsession with numbers and the gradual shift towards cost-cutting and optimization. This the author argues is partly due to the way management education (read MBA) has changed over the years. The focus, according to the author, has shifted from managerial skills to balance sheet manipulation. And that leads to questionable decisions and a lot of short-term fixes.

There is an entire chapter (and rightly so) that is devoted to the bad boys of Finance. No, I’m not talking about the investment banks (although they’re there too). I’m talking about the creations of these investment banks – derivatives. The notorious financial weapons of mass destruction. The author explains the danger inherent in giving derivatives a centre-stage in the financial market through an infamous example. In around 2011, Goldman Sachs had cornered the aluminium market and had caused its price to shoot up, much to the detriment of major aluminium consumers such as Coca Cola. This story alone is a must read for those wanting to understand how derivatives can cause an uncontrollable change in commodity prices suddenly.

The author closes the book by discussing the impact of the growing financialization on the retirement and taxation benefits of individuals, and what are the possible solutions on how “finance might be put back into the service of the real economy.”

The basic question that resonates throughout the book is – why does a sector that was meant to facilitate business now have such a stranglehold over the very businesses that it was meant to support?

What makes the book engrossing is the author’s use of real life examples to explain how the financial sector has crept slowly into the realms of the real sector. Old and reputed institutions such as Citibank, GE, Enron (reputed until it no longer was), Goldman Sachs, had a major part to contribute to this growing financialization in the American corporate economy.

There were some concepts that I did not agree with, though. The author seems to be very much against buybacks, arguing that companies should utilize this money into more meaningful endeavours such as research or investment in factories and other infrastructure. This expectation goes against the very fundamental goal of a business. According to the economist Milton Friedman, the main purpose of a business should be to maximize profits for its owners, and in the case of a publicly-traded company, the stockholders are its owners. If investments in real assets would be the most profitable investment, then a business should do so. Else, if there is no future growth in doing so, the company would do well to distribute its earnings through dividends or share buybacks. In fact, Warren Buffett was one of the strongest proponents of buybacks, and has mentioned it in his letters many a times. According to Buffett, when used correctly, buybacks are one of the most shareholder friendly ways to improve the ROE of the company.

Also, the author seems to repeat many points to a point of infatuation. I feel the editor could have done a snappier job in identifying and reducing these. However, for someone interested in the learning about how Finance has today become the biggest cog in the global economy, this book will be a very good place to start. Get this book on Amazon.

Makers and Takers - The Rise of Finance and The Fall of American Business
Rana Foroohar
Finance

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