How investment bankers destroyed industry

I am fan of Michael Lewis, author of such masterpieces as Liar’s Poker and Moneyball. I make it a point to read his writings when I come across them and have read most of what he has written for Vanity Fair and Bloomberg. Other day I came across a review of John Lanchester’s Capital done by Lewis in New York Review of Books. He wrote admiringly about Lanchester’s ability to keep the reader hooked to his writing and his ability to explain novel concepts. Lewis noted Lanchester’s book “I.O.U.” for being very readable and stating that it has very good explanations for layman about exotic financial concepts and instruments. May be Lewis was repaying the favor to Lanchester who had reviewed the former’s book Boomerang earlier in the same pages. I am a finance guy and have a relatively very clear idea of what went wrong before, during and after the financial crisis. However, I was intrigued by Lewis’s recommendation of I.O.U. John Lanchester isn’t a financial guy. He is a writer, a novelist. He was researching the material for his novel set in the backdrop of financial crisis and he realized that he has such extensive idea of what went wrong that he ended up writing I.O.U. So I bought the book and it was such a pleasure to read, despite the fact I already knew most of the stuff, that I ended up finishing the book in two sittings late into the night. Its not a page turner but the prose is so beautiful that you want to keep on reading it. Here is an excerpt from the book where author explains how when the financial sector (we are talking about City of London here to which the author refers to simply as “the City”) took over industries, they became businesses.

“What was new was the extent to which financial interests were not just important but uncontestedly paramount. A lot of British economic history concerns the struggle between the financial and industrial interests—between the City and men from the Midlands—and a good deal of that history boils down to a sense of grievance and misunderstoodness on the part of Britain’s manufacturers. From the point of view of people who make things, the City always wants to make its money too quickly and too irresponsibly; it wants to take too big a share of the business in return for its capital, is impatient with slow growth, doesn’t understand the importance of investment and of relationships, and wants only to achieve a spectacular casino-like payout in the shortest possible amount of time.

The reciprocal view, from the City, has been that manufacturers whine all the time, that they lost the ability to control their workforces and allowed themselves to be held hostage by unions, that they had a farmer-like tendency to complain about trading conditions in all weathers (“The pound’s too high! No one can afford our stuff!”; “The pound’s too low! We can’t afford raw materials!”), and that they were obtuse about the fact that the final point of all business is to make money and that everything else is a means to that end. That was the most important cultural difference.

There is a profound anthropological and cultural difference between an industry and a business. An industry is an entity which as its primary purpose makes or does something and makes money as a by-product. The car industry makes cars, the television industry makes TV programs, the publishing industry makes books, and with a bit of luck they all make money too, but for the most part the people engaged in them don’t regard money as the ultimate purpose and justification of what they do. Money is a by-product of the business, rather than its fundamental raison d’être. Who goes to work in the morning thinking that the most important thing he’s going to do that day is to maximize shareholder value? Ideologists of capital sometimes seem to think that that’s what we should be doing—which only goes to show how out of touch they are. Most human enterprises, especially the most worthwhile and meaningful ones, are in that sense industries, focused primarily on doing what they do; health care and education are both, from this anthropological perspective, industries. At least that’s what they are from the point of view of the people who work in them.

But many of these enterprises are increasingly owned by people who view them not as industries but as businesses: and the purpose of a business is, purely and simply, to make money. The attitudes of a business owner are different from those of people who work in an industry, and from the point of view of business, an industry’s ways of doing things are often the unexamined inheritance of the past, willfully inefficient, willfully indifferent to fundamental realities of how the world works. Money doesn’t care what industry it is involved in, it just wants to make more money, and the specifics of how it does are, if not exactly a source of unconcern, very much a means to an end: the return on capital is the most important fact, and the human or cultural details involved are just that, no more than details.

To workers in an industry, the attitudes and thinking of business are often summed up by the shorthand term “accountants,” as in, we want to do such-and-such but the accountants won’t let us, or such-and-such used to work well but then the accountants got hold of it. Hollywood, for instance, used to be an industry, involved primarily in making films, in the days when it made many more of them; now it is a business, whose primary preoccupation is to make money. The films are bigger and stupider and there are fewer of them, but when they do succeed, they make so much money that, in the words of the late Julia Phillips, the producer of Jaws, “there is no bottom line.”

Excerpt From: John, Lanchester. “I.O.U.”

Buy the book and read it even if you are a finance grad from an top business school like me.


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