Transaction Man: The Rise of the Deal and the Decline of the American Dream

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann, Farrar, Straus and Giroux

What is the American Dream? The term “American Dream” was coined in the early 1930s in James Truslow Adams’ The Epic of America, a book published as the Great Depression set in across the country. One might argue that the first part of Nicholas Lemann’s new book, Transaction Man, details what became the most widely accepted version of the “American Dream,” a system of industrial capitalism that provided jobs, stability, and upward mobility for large swaths of the population. An alternate to the book’s subtitle “The Rise of the New Deal and the Promise of the American Dream,” would be apt. Lemann describes the arrangement of industrial capitalism that existed for nearly a half-century after World War II and provided prosperity to so many (though certainly not all) as an “intricately constructed and balanced social, economic, and political ecosystem that was created in the early days of the New Deal.” Lemann explores the genesis of that ecosystem by telling the story of Adolf Berle, whose book The Modern Corporation and Private Property and a memorandum on “The Nature of the Difficulty” helped form the intellectual foundation for the New Deal.

But to many, on both the left and the right, that dream was a nightmare. In the liberal critique, the industrial corporation that dominated American work and life was seen as breeding conformity and giving birth to the “Organization Man”—a term popularized by Fortune magazine reporter William H. White’s book of the same name. The conservative criticism was—or, rather, eventually became—that the industrial corporation had become too concerned with social forces rather than market forces. As the social revolutions of the 1960s and 1970s played out—largely in response to the liberal critique of the system—it was that second criticism, largely emanating from the University of Chicago, that would change the fundamental structure of our economy.

Lemann’s task in the book is to “lay out the history of our move from an institution-oriented to a transaction-oriented society.” He does so through the stories of two men: the aforementioned Berle, who witnessed and warned against the rise of the modern industrial corporation while working on Wall Street in the 1920s, and who became an economic advisor to FDR and one of the architects of the New Deal, and Michael C. Jensen, a graduate of the University of Chicago’s economics department who was a prominent early booster of the idea of market efficiency and helped provide the intellectual basis for the shift in the balance of power from state regulation and control of the economy to unfettered financial markets. (A third shift, toward a network-oriented society, is examined through the person of Reid Hoffman at the end of the book.) 

It is important to remember where the regulations that formed the basis of the postwar economy emanated from, which is perhaps best summed up by putting one of our nation’s greatest presidential quotes in context:

The best remembered line from Roosevelt’s inaugural address—“We have nothing to fear but fear itself”—was specifically meant to give people the confidence not to take their savings out of banks, and hence out of the economy, from sheer panic.

The only way to do that was to guarantee their deposits, which was achieved through the FDIC, just one of the many alphabet soup government agencies spawned to oversee the workings of the American economy during the New Deal to reign in the power of corporations and banks. “The financial system created at the outset of the New Deal was rather sleepy,” writes Lemann, “but quite stable … There was no financial crisis for fifty years, and this period was one of rising, and widely shared, prosperity in the United States.” Whether it could remain so despite the rise of financial economics championed by Jensen and others is questionable, but also moot. What we know is that is provided safety, stability, and general prosperity in the economy for nearly a half-century. And industrial corporations, regulated by the federal government, were at the heart of it. 

Adolph Berle was never of a mind with his friend Supreme Court Justice Louis Brandeis, who wanted to break up big corporations to reign in their power. He not only didn’t believe the economy could be decentralized, he thought it would be easier for the government to control the economy if it were centralized. He was instead a proponent of industrial planning, which he felt was easier for government if big corporations remained big. He favored controlled capitalism and a planned economy. Berle’s was a “dream world of capitalism without capitalists.”

The direness of his warnings about corporate power could obscure the fact that he actually had no quarrel with centralized power, as long as it was used for good, by the state. The drama of his career was the harnessing of the corporation, not its destruction; indeed, in order to work, his vision of a good society actually required that corporations be as big and powerful as possible.

That was, after all, how the second world war was won. He was, in the end, a believer in “pro-corporate liberalism.” John Kenneth Galbraith was a protege of his, and a “leading champion of the liberal idea that the corporation, properly handled, could provide the economic foundation for a benign social order.” That said, Berle did want the regulations to go even further, which may have provided an extra layer of protection as they were dissolved: 

He had hoped, for example, that when the new agency regulating stocks, the Securities and Exchange Commission, was created, it would not only require public information but also regulate financial behavior—for example, banning margin trading, short selling, and the practice of banks trading stocks for their own accounts rather than those of their customers. 

Explaining how President Harry Truman’s proposal for a new wave of economic measures—including “national health insurance, federal funding of public education, new laws that would strengthen the hand of organized labor”—which he called the Fair Deal, never materialized after the war, Lemann writes:

The United States declined to create the kind of comprehensive welfare state most European countries had. This meant that the corporation, when it could be successfully pushed into behaving like a social institution, was the American welfare state, at least for its many millions of employees, their families, and to some extent the much wider circle of its small-scale suppliers, service providers, and retail outlets for its products. … All the grumbling about corporations make it easy to miss that they were now bearing a heavy noneconomic load, and if that changed, there wasn’t a real plan for what would take their place.

The separation of ownership and control of corporations at that time was a central facet and feature of the arrangement. Professional managers, not owners or stockholders, controlled the workings of most companies and, therefore, most of American economic life. Most liberals, like Berle, generally accepted big business as a fact of economic life, and worked to either extend its benefits to marginalized populations that had been excluded from it, or to address its ill-effects—in Lemann’s words, “moving on to other concerns: the environment, civil rights, feminism.” Another focus became consumer rights. New Deal economics had created newly entrenched interests that would eventually come under fire from both the left and the right. Consumer rights activists, in particular, believed many regulations were harmful to their cause, so deregulation became uncontroversial and bipartisan.

Berle was focused on the balance of power, which he felt had been solved through government regulation and the separation of ownership and control in corporate america. But a new wave of conservative academic economists like Jensen were focused on the “science” of market efficiency. The separation of ownership and control, in their estimation, was exactly what was wrong with the system. That corporations had a social role to play was anathema to their vision of how the economy should function. Not only was shareholder value not a primary concern at the time, the term itself didn’t even exist. 

The rise of pension funds, mutual funds, and other institutional investors changed the balance of power between capital and the corporation, and “the providers of capital were going to begin acting like textbook capitalists, as they hadn’t for decades.” With that development, the attacks on the corporate social order from the right were coming. Jensen and William Meckling’s paper “Theory of the Firm” provided an intellectual framework for a new order. Investors, no longer pacified by corporate power, became activists, engaging in buyouts, hostile takeovers, and mergers and acquisitions on a historic scale in the 1980s. Industrial managers and government oversight were wrong; the markets were right. Intrinsic value to them was only a firm’s financial value, and the only aim should be to increase that value. Social value had no worth, general prosperity not a thought. Profits, rather than general prosperity, were the goal. The dream was to work on Wall Street rather than in big corporations. And it fundamentally remade American society. Speaking of Jensen, Lemann writes:

All through the 1980s and 1990s he had been steadfast in insisting that much of what the public understood as financial greed and manipulation was actually a healthy and necessary remaking of the American economy. 

It was the rise of financial economics. It was soon challenged in academia by the idea of information asymmetry (“markets could not price everything perfectly if all participants did not have equal access to accurate information”) and behavioral economics, but it took hold on Wall Street and fundamentally changed the arrangement of American institutions and life, to the point that today: 

The transactional society has become one where wealth and power are increasingly concentrated, and where public life, rather than being contained inside a narrow band of acceptable thought, is much more fraught with anger and contention. That is because, paradoxically, our suspicion of institutions has brought us a new set of institutions (because institutions are an inescapable part of human life, and the real question is what form they will take) that are fewer, but larger and more dominant, than the set of institutions that preceded them.

To Jensen, the idea of corporations as social institutions was crap. They were economic entities that should be focused on maximizing their own value. As he saw the focus on quarterly earnings that arose in large part because of his own ideas—“forming mergers, taking on a heavy load of debt, and tying executives’ compensation to stock prices”—begin to destroy what he now felt the long-term value of companies, he changed his tune somewhat. But it was too late. “The corporation-dependent American version of the social welfare state was eroding.” Corporations were once so well entrenched that their managers were largely free of market pressure. Now it was their obsession, and meeting quarterly earnings expectations was their primary preoccupation.

Financial economics had gone from being a paradigm shift that threatened the Establishment to being the establishment itself, the foundational idea powering the immense expansion of Wall Street.

Record profits masked the risk it reintroduced into the system for a time, but soon the risk would become apparent as financial crises once again become common, and the taxpayer would act as lender of last resort to a financial system that no longer shared its benefits with them. And, “In the 1980s it was becoming clear that the steady upward economic progress of the American middle class … was ending.” The very idea of an “economically dominant, eternally stable corporation” was over.

Transaction Man begins with the story of Nick D’Andrea, an automobile dealer on the south side of Chicago who lost his dealership when GM went bankrupt after the financial collapse of 2008, and the government official overseeing the process demanded the company reduce its number of dealerships. The arrangement between GM and its dealers is complicated, as was the entire arrangement of the industrial economy, but the corporation was dominant. Dealers across the country organized and fought for the right to remain open—or compensation for closing—and won. D’Andrea closed, found employment for as many of his employees as he could elsewhere, and moved on. But it was just one more hit to the Chicago Lawn neighborhood that had seen so many jobs and businesses depart as the industrial economy gave way to financial capitalism.

The market for corporate control that Michael Jensen had promoted so enthusiastically affected all the major private employers in the neighborhood, always in the same way: fewer jobs.

But that was only the first wave of problems. The bank that had anchored the neighborhood, Talman Savings, had already been forced into a merger that eventually ended up being bought by Bank of America. With the neighborhood institution and gathering spot gone, new mortgage brokers popped up offering loans they knew the new residents moving into the neighborhood could never afford, but since they were not the ultimate holders of the loan—as they were sold and packaged into derivatives—they didn’t care. It led to a wave of foreclosures and abandoned homes. That only increased when the subprime market collapsed and the recession set in. When neighborhood parishioner, Father Tony Pizzo, inquired into who owned an abandoned, deteriorating home across the street from his St. Rita’s church where a teenage girl had been raped, the answer was Deutsche Bank, located in Germany. If you’ve heard of them today, it is most likely as the only bank willing to do business with Donald Trump after his many bankruptcies or the many suits for money laundering they’ve been subject to, not for their investment in communities like Chicago Lawn, which they only had through the complicated financial instruments that deregulation spawned and eventually crashed the world economy.   

But the fight of the auto dealers, and the community organizers that have come in to fill the void left by the institutions that fled Chicago Lawn offer some hope. And that hope, in Lemann’s view, is the power of interest groups—widely derided in our politics but essential in enacting change. 

Abolitionists helped end slavery, suffragists got women the vote, labor unions won better conditions for workers, the civil rights movement took down the Jim Crow system, environmental groups engendered antipollution policies. Conversely, a long parade of supposedly modernizing, interest-neutral, morally superior ideas have failed to attract a broad political constituency, or their proponents didn’t see that they were ignoring a crucial element of society … Organizing and advocating for the interests of one’s group is the only effective way to get protection against the inevitable lacunae in somebody else’s big idea.

Yes, Transaction Man is a history of the big ideas that have shaped the last century of the American economy, but it is also about their effect on the individual communities that comprise American society. It is about the structural racism of one era that excluded African Americans from moving into Chicago Lawn, and how it was potentially worse when that era ended and subprime mortgages offered the illusion of that chance only to cheat them out of it. It is about the decline of a New Deal that worked for many, but not all. And it is about a largely forgotten idea that has helped create social progress within the communities that comprise an ever shifting society as so many big thinkers like Berle and Jensen (and now Hoffman) thought they had the answers for everything and everyone, and an end to history:

It’s called pluralism, and it deserves a revival. 

Pluralism treats democratic processes, not particular outcomes, as moral absolutes. The right to vote, the right to organize, and the right to speak need constant, vigilant protection. The never-ending attempts of interests with money to give themselves more than their fair share of power should be resolutely resisted.

What is the American Dream? For some, it has been to get rich, usually to get rich quick, whether it was in the gold mines that brought San Francisco to life, or in nearby Silicon Valley that has remade the region—indeed, the entire American economy—today. For many, it is simply the ability to make an honest living, to earn enough to own a home and support a family, and to give one’s children a shot at pursuing their dreams, to provide a better life than they’ve had. But, of course, not everyone has or wants children, and the country and its institutions have a shameful history of removing children from their parents, whether through slavery or American Indian boarding schools, or today at our southern border. The term “American Dream” was coined in the early 1930s, but it was extended back to include the folks extending the frontier and settling the continent. But, of course, the continent wasn’t unsettled when immigrants from other continents arrived, and not all those who arrived came willingly. For all of us, I think the dream is to be free, and that word has many different meanings for many different communities. Freedom from slavery, freedom from Europeans usurping land and ending a way of life, freedom to vote, freedom to control one’s own body. Whatever freedom means to you, whatever your American Dream, it is likely not monolithic. But it is probably worth fighting for. America’s promise has always been a better life, and a better way of life. The messiness of all our interests and the struggle to achieve that better way is what makes America great.