Managed by the Markets: How Finance Re-Shaped America

by Gerald F. Davis

In recent years, we've been rocked by a series of economic jolts, and all of them seemed to revolve around finance. And the most recent, the American mortgage meltdown, has sent shock waves around the world. Managed by the Markets , which won the 2010 George R. Terry Book Award, offers an illuminating account of how finance has replaced manufacturing at the center of the American economy over the past three decades, explaining how the new finance-centered system works, how we got here, and what challenges lay ahead.

Since the early 1980s, Gerald F. Davis shows, finance and financial considerations have increasingly taken center stage, dramatically reshaping American society. Corporations now have an overriding focus on creating shareholder value, while their personnel practices no longer provide secure employment, economic mobility, health insurance, or retirement benefits. Instead, employees must become shareholding free-agents, left to their own fate. Banking has shifted from the traditional role of taking in deposits and making loans to the widespread use of "securitization," turning loans (such as mortgages or corporate debt) into bonds owned by institutional investors. The financial services industry is both more concentrated among large banks and mutual funds, yet more spread out among under-regulated specialists such as mortgage finance companies and hedge funds. And states increasingly act as "vendors" in a global marketplace of law, emulating firms such as Nike, hiring contractors to do
much of the work of government.

As a result, individuals and households find their welfare tied to the stock market and the mortgage market as never before. And the turbulence of recent years starkly underscores the dangers of depending too much on financial markets. Written in the spirit of C. Wright Mills' penetrating The Power Elite and White Collar , this brilliant study provides an invaluable map of the finance-driven American society.

Genres: Economics, Finance, Social Science

324 pages, Hardcover

First published May 15, 2009

About the author

Gerald F. Davis is the Wilbur K. Pierpont Collegiate Professor of Management at the University of Michigan's Ross School of Business. He has published widely in management, sociology, and finance. Recent books include Social Movements and Organization Theory (with Doug McAdam, W. Richard Scott, and Mayer N. Zald) and Organizations and Organizing: Rational, Natural, and Open System Perspectives (with W. Richard Scott). He is currently Associate Editor of Administrative Science Quarterly and Co-Director of the Interdisciplinary Committee on Organization Studies (ICOS) at the University of Michigan.

Reviews

[Nick · Rating 5 out of 5]

In the book, Davis outlines how markets came to be worshiped—through the gospel told by Chicago school economists, advocates of deregulation and efficiency, and, later, supporters of Bush 43’s ‘ownership society’—and how this allowed for the rise of finance. Information and communication technology made it possible for anyone to participate in the stock market and innovations like securitization opened up unprecedented investment opportunities—yet aside from the potential here that excited many, there is an obvious danger in everyday necessities becoming commodities that you depend on markets for, or, say, your ability to retire relying on a volatile stock market or unchecked macroeconomy.

What I appreciated most about this book, though, was that it isn’t simply a story of how the rise of finance timed the political climate perfectly or how financial tools reinforced market dependence.

In the postwar years, corporations were social institutions accountable to their communities, provided healthcare and retirement plans to their employees, and shaped life outcomes. But now, local banks and companies no longer have the community influence they once did—because businesses can charter anywhere (creating the race to the bottom the author discusses) and participate in however many industries they want—and long-term employment cannot be expected like it once was. Shareholder value takes precedence over everything else and Davis discusses the implications this has. Any kind of obligation to the public that large businesses may have felt in prior eras has now been replaced by these justifications: of markets disciplining behavior or how dispersed ownership of publicly owned companies serves some kind of democratic purpose. But obviously the wealth inequality we have today means ownership is not very dispersed after all and decision-making isn’t democratic regardless. And there is no invisible hand, or any Market with a capital M for that matter—there’s just oligarchy.

In a reality where everyone is seen as an investor and every aspect of life is seen as some kind of capital, ‘ownership’ and ‘community’ don’t have the same kind of meaning anymore. The book finishes by presenting a postmodernist perspective: “It is hard to sketch out a life narrative in one’s career in a world of temporary employment, when this year’s hot skills (say, mortgage brokerage) are obsolete next year. And if a house is a fungible financial investment rather than a tie to a neighborhood, what becomes of community?…Frederic Jameson describes the spectacle and contrived depthlessness of postmodern art and architecture and how they reflect a particular structure of feeling abroad in the culture. The idea that surface is all there is...seems perfectly suited to a world of OEM [original equipment manufacturers] corporations, where a primary source of the value of something is its brand, its ‘story’, rather than the thing itself, and thus the production of the thing itself—cars, computers, blood thinner, dog food—can be contracted out.”

Corporations at one point in time performed many welfare state functions instead of the American state. Now, instead we are guaranteed no healthcare, no pension, etc., but rather these things are supplied by the market, just like everything else is—causing us to be first and foremost investors, or economic actors, rather than more ‘meaningful’ members of society, or something like that. The author argues that the void we find ourselves in can only be addressed by new, government-formed institutions and I, of course, agree.

[Paul Cloutier · Rating 4 out of 5]

I've enjoyed this book though it is a little slow sometimes, the premise is very thought provoking right now. Basically that we have given too much power to shareholders and corporations have lost any sense of moral and social responsibility leading to a culture of giant largely unaccountable organizations that care only about the relentless pursuit of shareholder value. He then goes on to lay out how this came to be and where we might head next and what some companies are starting to do to combat this. Very compelling read for anyone working in strategy or building new kinds of companies.

[Otto Laakso · Rating 5 out of 5]

There have been many books written about this subject (financialization, neoliberalism, etc.), but if you're only going to read one, this is it. It explains the transition from an industrial manufacturing economy to a financialized service economy in a clear, concise way. Best of all, the writer has a knack for the most fascinating (and sometimes jaw-dropping) examples and anecdotes which makes the book for an entertaining read.

[Nick · Rating 3 out of 5]

Informative but extremely repetitive, including many passages that were repeated verbatim among the chapters.

[db · Rating 3 out of 5]

Made me think about how society has moved from industrialization to financialization.

[Paul Peterson · Rating 4 out of 5]

This book is interesting and was helpful!

[Sarah Rosenthal · Rating 3 out of 5]

every purchase is an investment and every investment can be financed with a little bit if debt bc there must be a return, right? right??

[Sylvia Barmack · Rating 4 out of 5]

Really interesting depiction of how policy around finance has shaped wealth inequality and company structures in America. Gets a star off because I found many of the points to be a little repetitive.

[Jonathan · Rating 4 out of 5]

A well-written/organized and informative book about how financialization has reshaped the US economy in the late twentieth and early twenty-first centuries. Davis traces the evolution of the finance industry (especially the demise of local banks as anchor institutions), the evolution of the corporate capitalism (from the finance capitalism of the early twentieth century to mid-century managerial capitalism to the shareholder capitalism of today), and the corresponding evolution of the state. The parallels drawn between changes in the corporation and the rise of the "vendor state" were particularly sharp and reminded me of points that Colin Crouch made in Post-Democracy. As Davis explains, "finance as a worldview has much the same status in the US today that mass production did in the twentieth century," and this extends even to the reconceptualization of a vast array of social relations (including seeing citizens as investors). The book focuses more on analyzing a problem than offering solutions, but the musings on the latter in the conclusion (e.g., the need to stop contracting out services and build institutional knowledge, the need for a stronger regulatory framework for finance, the need to invest in education and strengthen the public safety net, etc.) are on point.

[Jack · Rating 5 out of 5]

This was, hands-down, one of the more thought-provoking books I have read in some time. Most generally, Davis asks: what happens to our lives when we let capital become a metaphor for everything? What if we read not for pleasure or knowledge, but human capital? What if we hang out on goodreads to acquire social capital? How does that metaphor, in one sense so powerful, also commoditize and devalue our relationships?

Davis makes his case most forcefully that this is true for our homes and neighbors. As we came to see our houses as investments, and ATMs, did we lose some of things that make home ownership such a socially valuable thing? Perhaps.

Along the way, though, Davis has a lot of other things to teach us. He is a damn fine sociologist, and has done much excellent work on how to think about organizations. And the core nature of those organizations has changed. How corporations see themselves has changed from being a social institution, responsible to their community to being nexus of contracts, responsible solely to shareholders. This widespread change in a core part of our society, Davis shows, has widely rippling effects.

This could all sound dreadfully dense, but Davis has a light touch and a pleasant wit. He has an eye for the poignant detail, and has collected dozens of stories along the way. Thus one learns that large numbers of people in China survive by playing World of Warcraft all day, earning gold, and selling that WoW gold online to westerners who want to jump start their characters. This stuff boggles the mind, but helps tell an important story about how the U.S. has changed, and how we need to be thinking about ourselves now.

[Aniabania · Rating 3 out of 5]

I do appreciate this book for taking broader (less popular) approach to the problems of finance and economy. The author moves beyond efficient market hypothesis and contemplates economy as a social process, which implicates far reaching consequences that tend to be overlooked by current main stream finance theories. However, I guess I had larger expectations towards this book, that it will move further from just compiling data supporting certain thesis to more thorough analysis.

[Walker*Management*Library · Rating 5 out of 5]

Recommended by Timothy Vogus