Book Review by the Dean of The Harvard Business School

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johnkarls
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Book Review by the Dean of The Harvard Business School

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Wall Street Journal – 6/1/2016


Imagine An Economy Without Wall Street
Absent Finance, Most People Can’t Buy A Home Or Start A Business. Look At My Family’s Experience.
By Nitin Nohria – Dean of The Harvard Business School


When I was 13 years old, my father sat our family down for a meeting—a conversation that, more than 40 years later, I still remember vividly. My father was a successful businessman who eventually became the chief executive of Crompton Greaves, one of India’s largest companies that helped build the country’s electricity-distribution system. But he was thinking about quitting his job to start a firm of his own. He wanted our family to talk about the risks of entrepreneurship and why he felt they were worth taking. After some discussion, we assured him of our support and urged him to take the leap.

It wasn’t to be. In the United States, it would have been possible for someone like him—with a sound business plan and a proven record—to get funding to start a business. But in India, where I grew up, the financial system lacked a mechanism to lend money to someone without collateral. Because those who could put up collateral were already from wealthy families, this system thwarted the dreams of people who came from humble backgrounds and hoped to become self-made entrepreneurs.

My father continued his career and our family lived comfortably. But he remained disappointed he had never been able to launch his own firm. And despite his decent income, he couldn’t buy his own home until he was nearly 60 years old, because India didn’t have a robust mortgage-finance industry and buyers had to pay the entire price of the home upfront.

In the lingering aftermath of the Great Recession, many commentators have demonized Wall Street and the financial system as parasitic forces making life worse for the average American. In the new movie “Money Monster,” a desperate stockholder takes a popular business personality hostage inside a TV studio after his stock tip proves disastrous. The movie’s tagline: “Not every conspiracy is a theory.”

In the new book “Makers and Takers: The Rise of Finance and the Fall of American Business,” Time magazine columnist Rana Foroohar argues that the U.S. economy has become too focused on financial engineering, which has led to decreases in research and development, manufacturing and innovation. “Finance has become a headwind to economic growth, not a catalyst,” Ms. Foroohar writes. “As it has grown, business—as well as the American economy and society at large—has suffered.”

I disagree. The global financial system has certainly shown excesses in the past decade, and without a doubt some players have behaved irresponsibly. Nonetheless, Wall Street remains a fundamentally value-creating enterprise. The finance industry is essential to the nation’s economic health and an integral part of what makes the U.S. economy the envy of the world. Many of the alleged consequences of “financialization”—such as the decline of manufacturing—are the result of dozens of forces, many having little to do with finance.

Wall Street’s attackers should stop and imagine life in a world without a well-developed financial system. I’ve seen such a world firsthand. The India of my youth, lacking a modern financial infrastructure, was sclerotic and inefficient. Economic growth was severely constrained by lack of capital, and that had a direct impact on the lives of millions of people at all levels of the economic ladder.

There is no question that we’ve lived through a period in which too many people were lent money unadvisedly, financial models proved fallible and incentives for risk-taking were flawed. Some of these excesses continue. It is also evident that the recovery from the Great Recession has been slow and uneven.

As we seek to understand these issues, however, we should be careful about diagnoses that rely on a false divide between Wall Street and Main Street. There are “takers” on Wall Street, just as there are people who put self-interest above other considerations in law, medicine, politics, academics and every other profession. But without Wall Street, there would also be dramatically fewer “makers.”

It is also shortsighted to criticize business schools, as Ms. Foroohar does, for producing too many graduates who aspire to work in finance. Business-school graduates have always flocked toward industries offering the most opportunities. In the 1910s and 1920s, it was the railroads; in the 1930s, consumer packaged-goods companies; in the 1950s and 1960s, manufacturing.

As this year’s M.B.A. candidates graduate and begin new careers, they have chosen jobs after assessing not just compensation, but the opportunities for career growth, training, development, geographic considerations and, most important, the chance to do interesting and meaningful work.

For the past 20 years, many of those opportunities have been in finance, particularly as innovative business-builders have created hundreds of new firms in private equity, venture capital and fintech startups. Despite populist criticisms, finance remains an honorable profession, and graduates who enter this field should be applauded, not derided.

In election years in particular, there is often a desire to find scapegoats and boogeymen, and to reduce complicated economic phenomena into simplistic sound bites. But ultimately, solutions to problems like inequality and the lack of employment opportunities or wage growth aren’t going to come from government alone. They’re also going to require imaginative businesses that find new ways to employ people and create real value. These businesses won’t exist without financing.

UtahOwl
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Re: Book Review by the Dean of The Harvard Business School

Post by UtahOwl »

I find the Dean's argument to fall prey to the Fallacy of the False Alternative. I did not read Ms. Foroohar's position as condemning the enterprise of finance wholesale, as the Dean's review appears to assume from its title:
Imagine An Economy Without Wall Street. Absent Finance, Most People Can’t Buy A Home Or Start A Business
. IMO, She understands the function of finance
The traditional role of finance within an economy - the one our growth depends on - is to take the savings of households and turn it into investment.
p. 6, Makers and Takers. Her criticism is that
across all advanced economies, and the United States and the UK in particular, the role of the capital markets and the banking sector in funding new investments is decreasing....Turner* estimates that a mere 15% of all financial flows now go into projects in the real economy.
p6-7. *Adair Turner, Between Debt and the Devil:Money, Credit and Fixing Global Finance, Princeton Univ Press 2015.

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