The growing awareness of financialization of developed economies has brought to the forefront of economic debate the issue of financing long-term investment. Many heterodox economists have used the dichotomy between enterprise and speculation found in the works of Keynes and Minsky to demonstrate how the modern financial system falls short of supporting the capital development of the economy (see e.g. Tymoigne and Wray 2013 and Wray 2009).

Minsky’s theory, while an extension of Keynes, can also be productively synthesized with the work of Thorstein Veblen. In the Theory of Business Enterprise, Veblen argues that in a developed capitalist economy the interests of the community are separated from the interests of those who control the production process by two degrees. First, producers are interested in the vendibility of goods while the community needs them to be “serviceable”, i.e. to enhance its “life-process”. Second, with the rise of absentee ownership, the interests of the business enterprise as a going concern are distinct from the interests of the managers. The latter care about the vendibility of capital above all else.

In this paper, I argue that there is yet another layer of separation between the interests of the community and the business enterprise under Money Manager Capitalism. While mainstream economists predicted that “investor capitalism” would solve the problem of separation of ownership and control, the reality has been a “third-degree” of separation. Shareholders are the absentee owners of corporations, but stocks are no longer held directly. Rather, they are controlled through organizations where ownership and control are separate too – professional money managers represent the absentee owners of the corporations. At the very least, money managers’ interests are more in line with those of corporate managers, rather than their shareholders. More often, however, they simply try to increase their fee income, which leads to high turnover of stocks and increased reliance on capital gains, encouraging speculation rather than enterprise. The short-term outlook of these funds leads to separation between the needs of the community and what the business enterprise is actually doing by altering the priorities of the corporation and enhancing systemic instability.

References:

Tymoigne, E. and L. Randall Wray. 2013. The Rise and Fall of Money Manager Capitalism: Minsky's half century from world war two to the great recession. Routledge Critical Studies in Finance and Stability.

Veblen, Thorstein. 1904. The theory of business enterprise. C. Scribner's Sons.

Wray, L. R. 2009. The Rise and Fall of Money Manager Capitalism: A Minskian Analysis. Cambridge Journal of Economics 33 (4): 807-828.