Book Review: Managed by the Markets

Gerald F. Davis. Managed by the Markets: How Finance Re-Shaped America. Oxford: Oxford University Press, 2009. 304.

We live in a world where finance has outstripped production, where it is more important to make money than to build cars or refrigerators. In Managed by the Markets, Gerald Davis tries to make sense of this transition. He raises some interesting points, but ultimately the book is short-sold by needless repetition. It would make an intriguing 30-page article, but there’s not nearly enough material here for a 300-page book.

Case in point: an 8-page preface introduces the arguments of the book: “finance had become the new American state religion,” and citizens had been transformed into investors, as “the expansive use of financial markets has shaped the transition from industrial to post-industrial society in the United States over the past three decades.” This is followed by a chapter-by-chapter outline of the book’s structure. Fair enough. But then, the 30-page first chapter does the same thing, in expanded form, including an even longer summary of the chapters to come.

The author has a tendency to, as Gorilla Monsoon might have put it, “go to the well once too often.” For example, on page five he describes the change to a financial-market based capitalism as a “Copernican revolution.” It’s a fine analogy for the world-shifting rise of markets as the arbiters of capital. But he then re-uses the metaphor three more times in the next 50 pages. It’s overkill. He also has a tendency to find amusing instances of finance run amok–David Bowie issuing $55 million in bonds against future royalties, or a Norwegian town investing in American mortgages–and use them repeatedly, suggesting that there’s not much depth to his research outside the small circle of factoids that are rotated in and out of the text. There is some really interesting material here, but it’s run into the ground over the course of the book.

The book’s highlights are Davis’s analyses of the rise and fall of corporate “social responsibility,” the profound impact of the shift from bank financing (loans) to market financing (stocks and bonds) on the world’s business, and the rise of the vendor state. Each of these developments has serious implications for public policy, and Davis advances thoughtful ideas, though they are rooted in the concept that bigger is better (there’s a great deal of nostalgia for the big corporations of the mid-20th century) and it is difficult to see how any amount of regulation or planning could put the genie of finance back into the bottle at this point.

In short, the ideas are of interest, but the presentation leaves something to be desired.

The book is interesting to me because it informs recent developments in the gaming industry. Massive over-leveraging and what now seems a foolish optimism in the real estate market aren’t unique to the Las Vegas Strip–these trends have shaped American (even global) business for the past decade. Is there anyway that this mess could have been avoided? With shareholders demanding value, and executives having few options to create value but mergers and expansion, probably not–companies that didn’t try to grow quickly were, for the most part, acquired by others or threatened with shareholder revolt. Nor is there much to suggest that the future will be any different, though as I’ve suggested before managers could learn a thing or two from the players at their tables: they need to understand that, no matter how hot the dice have been, it’s just as possible to seven out five times in a row, so it’s best to take some chips off the table during a lucky run. Letting it ride–whether on the pass line or on condo-hotels–can be rewarding, but it’s a risk that often ends badly.

Another interesting point was Davis’s discussion of OEMs, or “Original Equipment Manufacturers.” With the market demanding companies that have few assets and high profits, many manufacturers have outsourced the actual production of the goods that they sell, allowing a second party to own the factory and build the equipment to their specs before slapping their label on it. The original manufacturer, then, is primarily concerned with advertising and brand management, not the headaches of production. This sounds a great deal like what MGM Mirage is doing with its brand name overseas. You can see that the company is positioning itself not as a hotel builder, but as a hotel brander–which is smart, given the vicissitudes of the real estate market and construction. Seeing what the company is doing against the context of what other companies are doing, you can see the logic in the process, though it remains to be seen whether a company that has no physical control over the products bearing its name will, in the long run, have a recognizable brand.