These days, it’s not hard to find people who question the role that financial markets play in our economy, who argue that shareholder value is a flawed metric of corporate success, who say that linking pay to financial markets is a big mistake.
In 1997, though, such arguments were pretty close to unheard of. Which is what makes Doug Henwood’s book Wall Street, published that year, such an amazing document. Along with explaining in clear if caustic terms how financial markets work, the book prefigures almost every criticism of the financial system that’s been levied since the crisis of 2008. An overleveraged housing market?Check. A link between financial sector growth and income inequality? Check. A natural tendency toward instability in financial markets? Check.
I don’t want to paint Henwood, who edits a newsletter called the Left Business Observer, hosts aweekly radio show, and knows more about economic indicators than anyone has a right to, as some kind of Nostradamus. In Wall Street he doesn’t so much make predictions as expose, in his crotchety, almost absurdly erudite way, the inconsistencies and contradictions in conventional views of how the financial world is supposed to work.
I’ve just read the book from cover-to-cover for the first time, prompted by Henwood’s complaint that the article Jay Lorsch and I wrote for the July/August HBR, “What Good Are Shareholders?,” bears an “uncanny resemblance” to his work. I had read about half of Wall Street five or six years ago as research for a book, and hadn’t looked at it since. Jay has never read it. So I thought it was pretty unlikely that we had directly pilfered from it, but figured I ought to read the book to be sure.
The most important things I learned from this exercise were that
1) I wish I had read Wall Street from cover to cover years ago. It’s brilliant.
2) I wish I had remembered the book and consulted it while working on the article with Lorsch, because that would have made the article better.
1) I wish I had read Wall Street from cover to cover years ago. It’s brilliant.
2) I wish I had remembered the book and consulted it while working on the article with Lorsch, because that would have made the article better.
I also started thinking that, with a little updating, Wall Street would make for a great introductory finance textbook. It covers all the basic concepts with wonderful clarity, then adds layers of observation and critical thinking usually absent from textbooks. Yeah, all those quotes from Marx might scare some people away. But the fact that Henwood approaches his topic from a distinct perspective shouldn’t keep anyone, whatever their political bent, from appreciating and learning from his work. Any account of how the financial system or the economy works is going to be informed by some sort of ideology; it’s to Henwood’s credit that he acknowledges his own leanings and — for the most part — takes others’ arguments seriously even as he attempts to tear them apart.
As for the “uncanny resemblance” between the article Lorsch and I wrote and Henwood’s book, you can go read Wall Street (it’s out of print, but you can still buy it on Amazon or download it directly from Henwood) and decide for yourself. I think it was probably from Henwood that I first learned that shareholders, on aggregate, take much more money out of U.S. corporations (in dividends and buybacks) than they put in, a point Lorsch and I make in the article using recent statistics from the Federal Reserve. Beyond that our article builds on a plethora of recent writing on markets and corporate governance by professors and policy makers, and uses a terminology and framework that’s quite different from Henwood’s. Its recommendations are also different: Henwood wants corporations to be handed over to their workers; Lorsch and I bank mainly on shifting the balance of power from short-term shareholders to long-termers. But it is undeniable that Henwood was asking, 15 years before we did, what shareholders were good for — and came up with an answer that was at least directionally similar to ours. He deserves credit for that — and for a lot of other prescient things he wrote in Wall Street.
There’s a saying in investing that “being early is the same as being wrong.” It’s not quite like that in intellectual endeavors, but Henwood clearly hasn’t gotten his due. That’s partly because he was early, partly because he operates in an ill-defined border zone between journalism and academia, partly because, well, he’s a crotchety leftist. But he was describing a lot of important problems with the workings of our capitalist system at a time when practically everyone else was proclaiming the brilliance of the shareholder-dominated Wall Street way. We should have been listening to him then, and we should be rereading him (or reading him for the first time) now.
JUSTIN FOX
Justin Fox is Executive Editor, New York, of the Harvard Business Review Group and author of The Myth of the Rational Market. Follow him on Twitter @foxjust.
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