It is an interesting argument, though not in my view a very convincing one. You can pick any of the other books mentioned here for instances of outright individual irrationality — ninja loans, for one; debt valuation models that returned “cannot compute” when asked to contemplate a fall in house prices, for another; the list is long. A Failure of Capitalism is indispensable nonetheless, for Posner’s trademark intellectual vitality and his tireless instinct to start a quarrel. And it is a pleasure to find that a public intellectual of Posner’s amazing productivity — he seems to publish a book every six months — is still capable of surprising his readers. Despite his free-market instincts, his book confronts the limits of the market system.
The most scholarly book of the bunch, with due respect to Posner, is Gerald F. Davis’s Managed by the Markets: How Finance Re-Shaped America. Davis is a professor of management at the University of Michigan, with particular interest in sociology and finance. He steps back farthest of all, and asks whether the crisis is a sign that finance has vastly outgrown its proper place in the U.S. social and economic system.
This is an excellent question, and Davis deserves great credit for trying to answer it in a serious way. His basic argument is that “twentieth century American society was organized around large corporations, particularly manufacturers, and their way of doing things. It is now increasingly organized around finance — not just particular Wall Street banks, but finance as a model of how things are done.… The consequences of tying the well-being of society to financial markets have become starkly evident.” Even aside from the immediate crisis, in Davis’s view, those consequences are mostly grim.
This is a valuable and novel perspective. Seen from high altitude, things look different. You see features of the economic and social landscape that escape your attention at ground level. Davis explains how many aspects of U.S. society shaped themselves around the traditional large corporation, and especially around manufacturing: a settled career pattern; lifetime employment with a company pension to follow; the phenomenon of the company town; the company as welfare state, almost. Then, thanks partly to information technology, financial services gradually gained the societal upper hand. The sector made the most money, offered the highest salaries, and attracted the best talent — and prospered in part by breaking down the traditional structures.
Today, Davis argues, an individual’s prospects in work and in retirement are tied less to the fate of one long-lived company than to the vagaries of financial markets. This is a shift as profound as the transition from farming to manufacturing, though as yet much less well understood. One consequence is economic insecurity, a problem writ large in the current crisis (which is itself a product of the hegemony of finance).
The book is too gloomy for my taste, although in this it conforms to the current mood. And Davis expresses a faith in good government that strikes me as naive. But Managed by the Markets gave me more food for thought than any of the other books mentioned in this review. In the past 20 years, finance did indeed triumph over other modes of enterprise in the U.S. and elsewhere. This was, as Davis says, a momentous shift. To the victor went the spoils, with far-reaching social and economic consequences. In contemplating the wreckage of the crisis, one should follow Davis’s example, and ask whether this was either inevitable or desirable, and what, if anything, we might learn from it.
Because the crisis is not yet over, many of the lessons must be tentative. But one certain casualty of the meltdown — as nearly all of these books, in their different ways, confirm — is credulous faith in self-regulation. This has been the principle underlying financial regulation in recent years. Financial institutions need to be supervised, went this credo, but what they do is so complicated, and the regulator’s powers necessarily so circumscribed, that firms must be trusted not to do things reckless or stupid enough to put themselves in jeopardy. What we have learned is that, as a group, financial institutions cannot be trusted even that far — and when they put themselves in harm’s way, the rest of us share in the consequences.