There is no shortage of criticism for the financial sector, particularly in the incessant wake of the 2008 economic crisis. Yet, Wall Street’s size and profit continues to swell, and so does its pressure and influence on public companies. Harvard Business School Professor Gautam Mukunda says the American economy is suffering from an “enlarged heart.” But it can recover.
As Mukunda emphasizes in his just-published Harvard Business Review article (June issue), the problem is power. In the past few decades, since the deregulation of the 1980s, Wall Street has amassed an enormous and disproportionate share of power – swaying the government to spend billions on lobbyists and forcing corporate executives to make risky decisions in the best interest of shareholder returns, not business value.
Examples abound. In the pursuit of higher stock returns, many companies – Boeing, Sara Lee and Dell, among numerous others – outsourced manufacturing despite proof that tightly integrated R&D and manufacturing operations are crucial to innovation. As Harvard Business School’s Clayton Christensen argues in a complementing feature article, “The Capitalist’s Dilemma,” management’s adoption of Wall Street’s preferred metrics has hindered innovation.
“Power shapes the way we think about the world in profound ways, in ways we’re often unaware of,” says Mukunda. “Everything is viewed through a financial lens… but the financial system only works if it is in balance.” And clearly, the scales are tipped toward Wall Street.
This “financialization” of the economy – its roots deeply sowed by Milton Friedman’s infamous claim that executives’ only responsibility is to maximize profits – has serious implications: it increases volatility, inhibits growth, misallocates resources and distorts thinking. Restoring the balance of power is critical to the competitiveness and health of the rest of the economy, Mukunda emphasizes. It sounds like an impossible problem, but it’s one we’ve solved before, and he believes it can be done again by:
- Limiting the size and leverage of banks;
- Putting debt and equity on a level playing field;
- Taxing financial transactions; and
- Treating investment income like ordinary income.
He cautions, however, that courage is needed to put such reforms into place. “American business needs to get involved.” And for that, leadership is critical.