The Rise of Wall Street Thievery

How corporations and their apologists blew up the New Deal order and pillaged the middle class.

America has long had a suspicious streak toward business, from the Populists and trustbusters to Bernie Sanders and Elizabeth Warren. It’s a tendency that has increased over the last few decades. In 1973, 36 percent of respondents told Gallup they had only “some” confidence in big business, while 20 percent had “very little.” But in 2019, those numbers were 41 and 32 percent—near the highs registered during the financial crisis.

Clearly, something has happened to make us sour on the American corporation. What was once a stable source of long-term employment and at least a modicum of paternalistic benefits has become an unstable, predatory engine of inequality. Exactly what went wrong is well documented in Nicholas Lemann’s excellent new book, Transaction Man. The title is a reference to The Organization Man, an influential 1956 book on the corporate culture and management of that era. Lemann, a New Yorker staff writer and Columbia journalism professor (as well as a Washington Monthly contributing editor), details the development of the “Organization” style through the career of Adolf Berle, a member of Franklin D. Roosevelt’s brain trust. Berle argued convincingly that despite most of the nation’s capital being represented by the biggest 200 or so corporations, the ostensible owners of these firms—that is, their shareholders—had little to no influence on their daily operations. Control resided instead with corporate managers and executives.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Farrar, Straus and Giroux, 320 pp.

Berle was alarmed by the wealth of these mega-corporations and the political power it generated, but also believed that bigness was a necessary concomitant of economic progress. He thus argued that corporations should be tamed, not broken up. The key was to harness the corporate monstrosities, putting them to work on behalf of the citizenry.

Berle exerted major influence on the New Deal political economy, but he did not get his way every time. He was a fervent supporter of the National Industrial Recovery Act, an effort to directly control corporate prices and production, which mostly flopped before it was declared unconstitutional. Felix Frankfurter, an FDR adviser and a disciple of the great anti-monopolist Louis Brandeis, used that opportunity to build significant Brandeisian elements into New Deal structures. The New Deal social contract thus ended up being a somewhat incoherent mash-up of Brandeis’s and Berle’s ideas. On the one hand, antitrust did get a major focus; on the other, corporations were expected to play a major role delivering basic public goods like health insurance and pensions. 

Lemann then turns to his major subject, the rise and fall of the Transaction Man. The New Deal order inspired furious resistance from the start. Conservative businessmen and ideologues argued for a return to 1920s policies and provided major funding for a new ideological project spearheaded by economists like Milton Friedman, who famously wrote an article titled “The Social Responsibility of Business Is to Increase Its Profits.” Lemann focuses on a lesser-known economist named Michael Jensen, whose 1976 article “Theory of the Firm,” he writes, “prepared the ground for blowing up that [New Deal] social order.”

Jensen and his colleagues embodied that particular brand of jaw-droppingly stupid that only intelligent people can achieve. Only a few decades removed from a crisis of unregulated capitalism that had sparked the worst war in history and nearly destroyed the United States, they argued that all the careful New Deal regulations that had prevented financial crises for decades and underpinned the greatest economic boom in U.S. history should be burned to the ground. They were outraged by the lack of control shareholders had over the firms they supposedly owned, and argued for greater market discipline to remove this “principal-agent problem”—econ-speak for businesses spending too much on irrelevant luxuries like worker pay and investment instead of dividends and share buybacks. When that argument unleashed hell, they doubled down: “To Jensen the answer was clear: make the market for corporate control even more active, powerful, and all-encompassing,” Lemann writes.

The best part of the book is the connection Lemann draws between Washington policymaking and the on-the-ground effects of those decisions. There was much to criticize about the New Deal social contract—especially its relative blindness to racism—but it underpinned a functioning society that delivered a tolerable level of inequality and a decent standard of living to a critical mass of citizens. Lemann tells this story through the lens of a thriving close-knit neighborhood called Chicago Lawn. Despite how much of its culture “was intensely provincial and based on personal, family, and ethnic ties,” he writes, Chicago Lawn “worked because it was connected to the big organizations that dominated American culture.” In other words, it was a functioning democratic political economy.

Then came the 1980s. Lemann paints a visceral picture of what it was like at street level as Wall Street buccaneers were freed from the chains of regulation and proceeded to tear up the New Deal social contract. Cities hemorrhaged population and tax revenue as their factories were shipped overseas. Whole businesses were eviscerated or even destroyed by huge debt loads from hostile takeovers. Jobs vanished by the hundreds of thousands. 

And it all got much, much worse after 2008, when the schemes collapsed and, as Lemann points out, Barack Obama did not aggressively rein in Wall Street as Roosevelt had done, instead restoring the status quo ante even when it meant ignoring a staggering white-collar crime spree. Neighborhoods drowned under waves of foreclosures and crime as far-off financial derivatives imploded. Car dealerships that had sheltered under the General Motors umbrella for decades were abruptly cut loose. Bewildered Chicago Lawn residents desperately mobilized to defend themselves, but with little success. “What they were struggling against was a set of conditions that had been made by faraway government officials—not one that had sprung up naturally,” Lemann writes.

Toward the end of the book, however, Lemann starts to run out of steam. He investigates a possible rising “Network Man” in the form of top Silicon Valley executives, who have largely maintained control over their companies instead of serving as a sort of esophagus for disgorging their companies’ bank accounts into the Wall Street maw. But they turn out to be, at bottom, the same combination of blinkered and predatory as the Transaction Men. Google and Facebook, for instance, have grown over the last few years by devouring virtually the entire online ad market, strangling the journalism industry as a result. And they directly employ far too few people to serve as the kind of broad social anchor that the car industry once did.

In his final chapter, Lemann argues for a return to “pluralism,” a “messy, contentious system that can’t be subordinated to one conception of the common good. It refuses to designate good guys and bad guys. It distributes, rather than concentrates, economic and political power.”

This is a peculiar conclusion for someone who has just finished Lemann’s book, which is full to bursting with profoundly bad people—men and women who knowingly harmed their fellow citizens by the millions for their own private profit. In his day, Roosevelt was not shy about lambasting rich people who “had begun to consider the government of the United States as a mere appendage to their own affairs,” as he put it in a 1936 speech in which he also declared, “We know now that government by organized money is just as dangerous as government by organized mob.”

If concentrated economic power is a bad thing, then the corporate form is simply a poor basis for a truly strong and equal society. Placing it as one of the social foundation stones makes its workers dependent on the unreliable goodwill and business acumen of management on the one hand and the broader marketplace on the other. All it takes is a few ruthless Transaction Men to undermine the entire corporate social model by outcompeting the more generous businesses. And even at the high tide of the New Deal, far too many people were left out, especially African Americans.

Lemann writes that in the 1940s the United States “chose not to become a full-dress welfare state on the European model.” But there is actually great variation among the European welfare states. States like Germany and Switzerland went much farther on the corporatist road than the U.S. ever did, but they do considerably worse on metrics like inequality, poverty, and political polarization than the Nordic social democracies, the real welfare kings. 

Conversely, for how threadbare it is, the U.S. welfare state still delivers a great deal of vital income to the American people. The analyst Matt Bruenig recently calculated that American welfare eliminates two-thirds of the “poverty gap,” which is how far families are below the poverty line before government transfers are factored in. (This happens mainly through Social Security.) Imagine how much worse this country would be without those programs! And though it proved rather easy for Wall Street pirates to torch the New Deal corporatist social model without many people noticing, attempts to cut welfare are typically very obvious, and hence unpopular.

Still, Lemann’s book is more than worth the price of admission for the perceptive history and excellent writing. It’s a splendid and beautifully written illustration of the tremendous importance public policy has for the daily lives of ordinary people.

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Ryan Cooper

Ryan Cooper is a national correspondent at the Week. His work has appeared in the Washington Post, the New Republic, and the Nation. He was an editor at the Washington Monthly from 2012 to 2014.