An experienced practitioner of the genre is Nicholas Lemann, a former dean of the Columbia School of Journalism and longtime writer for the New Yorker. In “The Big Test,” Lemann used the history of the SAT, the Scholastic Aptitude Test, to explain the rise of a rigid meritocratic hierarchy that dominates American society. In “The Promised Land,” he recounted the migration of African Americans from the rural South to the urban North to explain the emergence of dysfunctional black ghettos. Now, in “Transaction Man,” he chronicles the changing role of Big Business to explain the rise of inequality and the decline of social and political institutions that together now threaten the American Dream.
On one level, “Transaction Man” is the story of the social and economic deterioration of Chicago Lawn, once a thriving white, ethnic, working-class neighborhood on Chicago’s South Side. Its economy revolved around factories owned by Nabisco and American Can, a big Sears outlet, and locally owned banks and car dealerships. Martin Luther King Jr. came to Chicago Lawn in 1966 to protest housing segregation, but it was 20 more years before blacks began to move into its small brick houses with tidy lawns. By the time the financial crisis of 2008 had sorted itself out, however, Chicago Lawn had become a crime-ridden black ghetto with its factories abandoned, its retail strips given over to liquor stores and payday lenders, and many of its houses boarded up and foreclosed.
On another level, Lemann chronicles the rise and fall of two business empires. There is General Motors, the model American corporation of the mid-20th century, offering steady, lifetime jobs with generous benefits to hundreds of thousands of its own employees, along with those of its suppliers and dealers. And there is Morgan Stanley, once the exemplar of the white-shoe Wall Street investment bank, that, with the junk-bond and hostile-takeover craze of the 1980s and the misguided financial deregulation of the 1990s, discarded a relationship-based business model based on integrity and caution in favor of a transaction-based model of debt-fueled dealmaking, ruthless trading and irresponsible consumer lending. For both firms, it all came crashing down in 2008, followed by a government rescue that bailed out executives, shareholders and creditors but not always the employees, suppliers and communities that relied on them.
Finally, Lemann’s is a story of three men and their big ideas — “master organizing principles,” as he calls them, for various phases of American capitalism.
There is Adolf Berle, a Harvard-educated lawyer who rubbed elbows with John Maynard Keynes at the Versailles peace talks in 1919, and became a protege of progressive reformer Louis Brandeis and a member of Franklin Roosevelt’s brain trust. In Lemann’s telling, Berle was the intellectual champion of the large modern corporation, which, when closely regulated by an equally powerful federal government, was the best vehicle for producing a prosperity shared broadly among workers, consumers, suppliers and shareholders who owned the corporation but did not control it. Berle saw in the public corporation the American proxy for the European welfare state. This “mixed system” was not an example of “creeping socialism,” he wrote, but rather a form of “galloping capitalism.”
By the 1970s, however, the corporatist model was under attack from a new generation of free-market-oriented economists who — for reasons Lemann never bothers to explain — rejected Berle’s model of the paternalistic corporation in which ownership was separate from control. Instead, wrote the University of Chicago’s Michael Jensen, shareholders who had long been neglected by corporate managers intent on building empires and bloated bureaucracies should use their power to select directors to see that their interests are put ahead of workers or communities. With the publication of Jensen’s article, “Theory of the Firm” — one of the most-cited and influential academic articles ever — the era of “maximizing shareholder value” was born. In the ensuing decades, executives who embraced that credo, ruthlessly cutting costs, outsourcing jobs and buying back shares, were showered with riches, while those who didn’t were sent packing. And through that process, 6 percent of the nation’s annual income shifted from workers to lenders and investors.
With the tech bubble and the accounting scandals of 2001, however, Jensen realized that the relentless pressure from Wall Street for ever-increasing earnings was now doing more harm than good. Lemann spent many hours interviewing Jensen and his former colleagues, and the story of Jensen’s recantation makes for the most fascinating portions of the book. It is worth noting, however, that it took until August of this year — after Lemann’s manuscript went to the printer — for the chief executives of America’s largest companies, speaking through the Business Roundtable, to finally join Jensen in officially repudiating their embrace of the credo of shareholder primacy.
Lemann rounds out his trilogy of big thinkers with Reid Hoffman, a Silicon Valley entrepreneur and investor. Just as managerial capitalism had given way to the shareholder variety, now shareholder capitalism was giving way to a thoroughly atomized and democratized economy in which corporations, unions and governments were no longer required to create opportunity and apportion wealth. To Hoffman, who was founder of one of the first dating sites, chief operating officer of PayPal and creator of LinkedIn, the only institution that mattered now was the Internet-enabled network.
Unfortunately, even Lemann’s abbreviated portrait of Hoffman as visionary thinker and mover-and-shaker reveals him to be just another of Silicon Valley’s insular, arrogant, faux-populist twits. And having identified networks as the next big organizing principle, Lemann almost as quickly is forced to dismiss it — and with it the conceit that there can be a single “master concept for a good society.”
The book then ends strangely, with a muddled paean to pluralism, “a messy, contentious system that can’t be subordinated to one conception of the common good.”
In “Transaction Man,” Lemann does a fine job of identifying and reporting the various strands of a narrative that he hoped would explain why “the economy we have now is not doing a good job of generating . . . social trust, political calm, or widely shared prosperity.” But he never succeeds in weaving them together in a convincing, coherent story. The evolution of America from a broadly prosperous, institution-trusting, socially cohesive society to one that is distrustful and polarized does not easily lend itself to a single, thematic explanation. The problem is not, as the author suggests, that Berle, Jensen, Hoffman and their contemporaries succumbed to “conceptual grandeur.” They were merely part of the dynamic process by which every generation responds with ideas and policies to events and challenges, and even successful economic models atrophy and are replaced by something better. Rather, if anyone is guilty of conceptual overreach, it is Lemann himself.
The Rise of the Deal and the Decline of the American Dream
Farrar, Straus and Giroux.
306 pp. $28