"THE FINANCIALIZATION OF THE AMERICAN ELITE." This valuable 'American Affairs' article from last year by Harvard Business School graduate Sam Long helps explain tectonic changes in the financial sector over recent decades which has had the nasty impact of increasing American wealth and income inequality.
If we're going to fix the problem we have to understand it first. Jim
"…a closer look at Klarman’s remarks, as well as the origins and trajectory of his career, suggests a deeply flawed messenger. Indeed, Klarman’s story provides an interesting window through which to understand much of what afflicts our economy and society today.
"A considerable amount has been written about the financialization of the American economy. Less understood is the financialization of America’s business talent. Klarman, his alma mater, and its peer institutions are all part of this story. What we confront today—a business elite dominated by financiers and their squires, presiding over a disordered economy gutted of both its productive energy and the ability to generate mass prosperity—is a direct result of this economic and cultural evolution…
"…the shareholder primacy movement proved lucrative to a wave of CEOs in the early 1990s whose compensation was tied to stock price. In 1990, Jensen published another landmark article, this time in the Harvard Business Review. Jensen asserted that corporate performance could be improved by using stock options to compensate CEOs and further align their interests with those of shareholders. The result, coupled with a 1993 tax law that increased the cost-effectiveness of compensating management with equity, has been twenty-five years of skyrocketing executive pay…
"The new elite also applied their ample talent and superior education to devising financial mechanisms and 'business strategies' that captured increasing percentages of their companies’ revenues. They discovered financial engineering techniques to boost stock values without growing earnings or investing in productive assets. Bankers and consultants helped shareholders and boards value, measure, and optimize their equity, which often led to decisions to offshore jobs or purposefully reallocate capital away from asset-intensive industries that employed millions of middle-class Americans…
"…Within the economy, the financial sector’s contribution to GDP now approaches 10 percent, more than triple what it was in 1950.
"The consequences have damaged the long-term health of the American economy and hindered its ability to create prosperity and offer opportunities for social mobility…
"Related to this shift in sectoral balances is both a shameful level of inequality and historically weak economic performance and productivity growth…We live in the richest society in the history of mankind, but as the Federal Reserve reported earlier this year, 40 percent of Americans would be unable to fund the costs of a $400 emergency from their savings…
"…Given that 50 percent of Americans own no stocks, the wealthiest 10 percent own 80 percent of the country’s stocks, and the top 1 percent own almost 40 percent of the country’s equities, the benefits of this financially engineered asset price inflation have flowed almost entirely to the largest capital holders…
"The impact is not merely economic. The cultural and political consequences of shareholder primacy have undermined our social cohesion…
"It was not always this way. If the class of ’82 represents the wealth and success achieved by the shareholder primacy generation, another HBS class tells the story of a different era.
"In 1974, Fortune published a profile of the HBS class of 1949 on the twenty-fifth anniversary of its graduation. As a cohort, its members had achieved fantastic financial success: one in five were millionaires in 1974 dollars. Fortune’s editors titled their profile “The Class the Dollars Fell Upon,” and the nickname stuck.28
"By 1974 approximately 45 percent of the class held the position of CEO or COO…
"While their wealth, professional success, and acclaim drive the comparison to the 82ers, it is the difference in how the two classes made their money that is striking. The young Americans who matriculated at HBS in the years after the war found an institution that sought to instill in its graduates a sense of noblesse oblige, despite the fact that few of them had any blue blood to speak of. They had been given an unprecedented opportunity, and much was expected of them…
"At bottom, when many of our country’s wealthy citizens say 'democracy,' what they really mean is 'our class’s way of life.' If they respected democracy as fervently as they worship the 'invisible hand,' they would see that the popular discontent simmering across the world today is the direct result of decades of elite hypocrisy and greed, hidden behind a façade of neoliberal economics…
"These are the same people who have left us with an upside-down economy and a weakened social fabric. Income inequality, financialization, and a socially inefficient distribution of both capital and talent are the legacies of shareholder capitalism. Although these elites now mourn the erosion of the political 'center,' they actively participated in the erosion of the American middle class. To add insult to injury, they insist on telling us elaborate stories about their entrepreneurial spirit and good intentions, and invite us to celebrate their virtue when they give back a tiny share of their captured wealth.
"Encouraged by academics like Porter and Jensen, and the universities at which they preach, this elite now purports to know how to fix our politics. Given their track record, we would be foolish to listen."
The Financialization of the American Elite – American Affairs Journal
On October 1, 2018, the newly christened Klarman Hall opened to much acclaim on the campus of Harvard Business School. The stunning $120 million building houses a conference center as well as a gleaming auditorium built around a 32-million-pixel, 1,250-square-foot video wall and a state-of-the-art,….
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