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20200412 – Transaction Man

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MAIN IDEA:

The main idea of this book is to review the last 100 years of economic thought and actions and demonstrate how they all, after quite a bit of hype, proved to be deficient and failed to produce what is badly needed: reliable, workable, and implementable economic and political organization of society that would meet requirement of the people for good system. Probably the most important point author makes is idea of revival of Arthur Bentley’s ideas about group interest in pluralistic societies.

 

DETAILS:

Prologue

This starts with the note that our world is very fragile and something that seemingly rock solid could be dissolved by the event in the blink of an eye. As illustration author retells the story of typical auto dealership that was created and ran by quite typical American middle-class family for decades and then was destroyed by financial crises of 2008-9. Author presents it as a example of process that he investigates in this book: “the history of our move from an institution-oriented to a transaction-oriented society.” Author also looks at raise and fall of transactional society and discuss future that he believes will be based on networking

  1. Institution Man

Here author starts at the beginning of XX century when Institutional Man came into existence and then dominance. Author uses story of Adolf Berle to present ideas of institutions and institutional man that Berle developed. These ideas were pretty much in synch with New Deal and Berle presented them in a book:” The Modern Corporation and Private Property, which had two central arguments: first, that a relatively small number of corporations had rapidly come to dominate the American economy, and second, that because these corporations had so many shareholders (the biggest one, American Telephone and Telegraph, had more than half a million), they represented a historically new kind of economic institution that was not under the control of its owners. “. Consequently, these institutions in conjunction with institutions of government that would maintain leading role, should substitute private property and free market as economic foundation of society. Berle become one of the closest advisors of FDR and author describes this relationship and how it impacted American development in details. Berle died in 1971 just before all powerful corporations led by all-knowing government brought in near destruction of American economy via stagflation.

  1. The Time of Institutions
    This chapter moves to the next two important thinkers on economy and society: Drucker and Polanyi. Author describes Drucker’s work with GM and its struggle with Unions, Dealers, and Customers. Here author links this with initial story of auto dealership in Chicago Lawn and how it started moving from prosperous suburb of Middle America of 1950 down the hill. Author also includes into discussion financial institution – Morgan Stanley, which become key player in investment market of public offerings with shares ownership distributed to such extent that Drucker in 1976 published book” called The Unseen Revolution, in which he announced, with typical flair, that the United States was the first truly socialist country in world history. That was because the workers now owned the means of production through their union and company pension funds’ new role in the stock and bond markets.”
  2. Transaction Man
    Here author presents the next thinker – transaction man Mike Jensen, economist who in 1976 in his book ”The Theory of the Firm” started promoting idea of efficient markets, heavy computerization and mathematization of trading, combined with multitude of new financial tools: “ the derivatives markets—options, futures, index funds, swaps, mortgage-backed securities; anything that could be assembled out of existing financial instruments and then priced, packaged, and traded—had gone from being insignificantly small to producing billions of dollars in activity every year, far more than the traditional stock and bond markets.” One of the most important key ideas was recognition of agent – principal problem and corresponding attempt to remove it by getting management wellbeing directly linked to the Firm’s performance. One of effects of these ideas was boom in leveraged buyouts in 1980s. Author also describes debates between this approach and newly developed behavioral economics of 1990s. The chapter also closely traces personal and professional live of Jensen.
  3. The Time of Transactions: Rising
    Here author moves away from theory and personalities of theorist to practical history of Morgan Stanley and raise of financial industry.
  4. The Time of Transactions: Falling
    Here author moves to the fall of Morgan Stanley, starting with the story of dramatic expansion of mortgages, especially substandard, and linking it back to Chicago lawns, auto dealership, and Obama’s bailout.
  5. Network Man
    In this final chapter author moves beyond financial crises to the new network and Social media environment. He briefly retells the story of Silicon Valley and present his final hero – founder and CEO of LinkedIn Reid Hoffman. Author uses this ultimate networking company as example of emerging new economy and Hoffman’s attitudes and actions as representative for the new economic relations. Author also discusses Hoffman political views and hate of Trump and everything Trump represents.

Afterword: An Attempt to Use a Tool

Here author concisely repeat his review of century of economic thought and action development and bring another personage: Arthur Bentley and his work on “role of business in politics and of politics in the economy.” The main point in his work was to switch analysis from broad classes to much more local and limited interest groups and seek reorganization on the basis of some process of reconciliation of interests, while maintaining pluralistic character of society.

 

At the end author summarizes the book this way: “What all the major thinkers in this book had in common was an intolerance for organizing the country, in particular the economy, around a never-ending political struggle among non-gigantic interest groups. This meant that in each case, they upheld a pure and alluring idea that was supposed to transcend the inherent contention and untidiness of life in a democracy. Adolf Berle wanted to put the corporation under government’s dominion. He had in mind a two-player game that would begin in conflict but mature into tranquility. Michael Jensen dreamed of a society built around the discipline imposed by markets. The corporation-based American welfare state that Berle helped create was a casualty of the rise of transactions as our governing economic principle. A transaction-based society is anti-pluralist by definition because it lets decisions rest entirely with markets that move instantaneously, and it disempowers groups that aim to attain their goals through political means. Reid Hoffman’s idea of a technologically enabled, network-based society has brought with it a pluralist-sounding rhetoric about distributing power, giving voice to the voiceless, and enabling political organizing. This stands in contrast to the new economic and political world that the Internet-based networks have created thus far, which looks awfully similar to the world made by the railroads and oil companies and electric utilities in their early days of bigness. Pluralism requires institutions that will enact and maintain democratic ideals. A network society promotes a form of pluralism that is virtual and institution-free. That is impossible. Our notional turn away from institutions doesn’t mean that institutions no longer exist. People are social; they naturally form themselves into groups. The more established groups become institutions, and the less established try to influence institutions; and institutions constantly struggle for advantage against one another. To remove institutions from the tableau of how society is supposed to work is, inevitably, merely to allow the powerful institutions to become more powerful and the more vulnerable ones to weaken. This has happened in almost every area of American life. Deregulation produced the greatest concentration of financial power in American history, in six big companies. The advent of the supposedly power-distributing Internet produced the five big companies that now dominate technology. Understanding institutions as necessary is the only real protection against a few institutions becoming too powerful. The great project of organizing economic life so as to give most people a sense of security, belonging, and hope is still an urgent one. The economy we have now is not doing a good job of generating social trust, political calm, or widely shared prosperity. Instead, it has produced a series of terrifying economic shocks that have given rise to equally terrifying political upheavals fueled by voters who feel so ignored and angry that they are willing to blow up the system just to see what happens. The solution to this problem surely will not entail returning to some fondly remembered arrangement from the past. History moves in only one direction, forward. But the tool that Arthur Bentley attempted to fashion, with its insistence on understanding the world in terms of a ceaseless but often productive contention between groups, where the best outcomes are complicated and inclusive bargains, provides useful guidance. Using it properly entails understanding that most people, even people who think of themselves as cosmopolitan, even in the age of globalization and the Internet, live parochial lives. They are neither atomized individuals nor part of a great undifferentiated mass of the public. What’s in front of them are the groups they belong to and the institutions they can see and touch: the schools that educate their children, their local governments, the places where they pray, their trade associations, their ethnic organizations, their political movements. Those are their means of protecting themselves, of improving their condition, of addressing their needs as they define them. Reaching people, doing right by people, building the next good society means using these institutions. Not transactions. Not big ideas.”

MY TAKE ON IT:

I think that it is generally good interpretation of history and economic thought. I would agree that so far none of attempts was successful in providing theoretical guidance for building better system. I also support ideas of pluralism, but I would not limit it to the group level, even small groups. I think all analysis should eventually go to the level of individuals. The group level would probably be sufficient a while ago when groups to high extent were defined by locality and commonality of personal features and therefore remained relatively stable. It is not the case now when social media and Internet made everybody connectable to everybody else in the world providing for complete instability of the groups and possibly of instant group formation on the huge scale. In my opinion the pluralism should be accepted at individual level, the one and only way to avoid tensions and conflict.

 

 

 


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