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Mitchell’s The Speculation Economy

The mail recently brought a review copy of ”The Speculation Economy: How Finance Triumphed Over Industry” by Lawrence Mitchell, law professor at George Washington. Larry’s posted a TOC and introduction to SSRN:

ABSTRACT: The Speculation Economy identifies the moment in American history when finance triumphed over industry. It shows how the birth of the giant modern corporation spurred the rise of the stock market and how, by the dawn of the 1920s, the stock market left behind its business origins to become the very reason for the creation of business itself. The consequent widespread distribution of intrinsically speculative common stock embedded speculation into the capital structures of most large American corporations.

The stock market become the driving force of the American economy in the first decade of the 20th century as a result of the birth of the giant modern corporation. The Speculation Economy tells the story of the legal, financial, economic and social transformations that allowed financiers to collect companies and combine them together into huge new corporations for the main purpose of manufacturing stock and dumping it on the market. Businessmen started to make more money from legal and financial manipulation than from practical business improvements like innovations in technology, management, distribution, and marketing.

The Speculation Economy explains how and why, at the turn of the 20th century, the stock created by the giant modern corporation became dispersed throughout the market. It shows the shift in attitudes of ordinary Americans from cautious bond buyers into eager stock speculators. At the same time, it shows how a federal government wedded to an outdated economic model and struggling to expand its own power failed to regulate finance and thus missed the chance to control corporations. While politicians argued, finance came to dominate industry, and as stock ownership spread widely throughout society, the stock market came to dominate finance.

The Speculation Economy examines this history in detail from the perspectives of the economic history of the growth of the market, the social history of early stockholding, the intellectual history of financial analysis of the era, the federal regulatory attempts to control the giant combinations, and the roots of modern securities regulation that emerged from the antitrust debate of the first decade of the 20th century.

I read most of this text while it was in draft and although I didn’t agree with all of Larry’s conclusions, I found it to be a provocative and thoughtful analysis. I’m looking forward to reading the finished project, but am already confident that it will find the wide audience it deserves.