The Moral Life of Corporations   /   Summer 2009   /    Books

Review of Lawrence E. Mitchell’s The Speculation Economy: How Finance Triumphed over Industry

Daniel Holt

In The Speculation Economy, Lawrence E. Mitchell argues that the American financial  system  under went  a  radi- cal change at the start of the twentieth century as finance went from being a servant of industry to dominating it. “The speculation economy,” he writes, “is one in which business management focused on production is replaced with business management focused on stock price” (x). In his earlier book Corporate Irresponsibility, Mitchell—a law profes- sor at George Washington University— analyzed how a concern with maximizing shareholder returns in the short term eroded corporate management’s com- mitment to the long-term health of their businesses and society at large. Here he examines the historical roots of twen- tieth-century corporate capitalism and its dysfunctional relationship with the “modern stock market.”

Mitchell weaves together strands of business, political, legal, and cultural his- tory to explain the rise of the stock mar- ket to its central position in the American economy and society. The industrial economy had gradually evolved over the course of the nineteenth century, but the “speculation economy” emerged sudden- ly during the merger wave of 1897–1903, when large corporations took over much of American manufacturing. In the last decade of the nineteenth century, large industrial businesses sought new ways to cooperate and suppress competition, state laws loosened controls over corpo- rate finance, and prosperity returned after years of depression to produce a growing pool of capital seeking new investments. Most importantly though, according to Mitchell, a cadre of promoters and finan- ciers took advantage of these conditions to create the “giant modern corporation,” an institution primarily intended to enrich its creators. Businesses organized to produce goods were replaced with new corporations designed only to produce shares of stock—shares that were foisted upon a growing population of middle class investors.

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