Makers and Takers

Makers and Takers Plot Summary

Introduction

The transformation of the American economy over the past four decades represents one of the most profound shifts in modern capitalism. What began as a financial sector designed to serve business and economic growth has evolved into a dominant force that increasingly extracts value rather than creates it. This inversion of the traditional relationship between finance and business has fundamentally altered how companies operate, how resources are allocated, and ultimately who benefits from economic activity. The consequences extend far beyond Wall Street, affecting everything from innovation and job creation to inequality and political power. Understanding this transformation requires examining how financial thinking has colonized business practices, corporate governance, and even business education. The financialization of the economy has created a system where short-term financial metrics trump long-term value creation, where financial engineering is rewarded more richly than product innovation, and where the extraction of wealth takes precedence over its creation. By tracing this evolution and its consequences, we gain crucial insights into why our economy increasingly works well for investors and financial professionals while delivering diminishing returns for workers, communities, and even the long-term health of businesses themselves.

Chapter 1: The Rise of Finance and Decline of Productive Enterprise

The American economy has undergone a profound transformation over the past four decades, with finance growing from a modest portion of economic activity to a dominant force. This shift has fundamentally altered the relationship between Wall Street and Main Street, creating a system where financial markets no longer serve the real economy but instead extract wealth from it. Finance now represents about 7 percent of the economy while taking around 25 percent of all corporate profits and creating only 4 percent of jobs. This imbalance reflects a deeper dysfunction in our market system. The consequences of this transformation extend far beyond Wall Street. As finance has grown in power and influence, American businesses have increasingly adopted financial thinking and priorities. Companies now focus on boosting short-term share prices rather than making long-term investments in innovation, worker training, and productive capacity. This financialization has contributed to slower economic growth, rising inequality, stagnant wages, and greater market fragility. The statistics tell a compelling story. In 1980, the financial sector accounted for just 4.9% of GDP. Today, that figure has more than doubled. Meanwhile, as the financial sector has grown, productive investment has declined. American corporations now invest a smaller percentage of their profits in research and development, new equipment, and employee training than they did a generation ago. This decline in productive investment coincides with stagnant wages for most Americans. Since the 1970s, productivity has increased by 74%, yet median hourly compensation has grown by just 9%. The gap between productivity and compensation represents value that has been extracted from workers and redirected primarily to corporate executives and shareholders. This extraction happens through various financial mechanisms—stock buybacks, excessive executive compensation, tax avoidance strategies, and financial engineering—that prioritize short-term profits over long-term growth. Perhaps most troublingly, the rise of finance has transformed a basic human need into yet another arena for speculation and extraction. When homes become primarily financial assets rather than places to live, housing policy inevitably shifts toward protecting asset values rather than ensuring affordable shelter for all. This shift explains why, despite the lessons of 2008, policymakers continue to support policies that inflate housing prices while doing little to address the affordability crisis facing millions of Americans.

Chapter 2: From Making to Taking: The Financialization of Corporate America

The story of American business over the past several decades is one of profound transformation from companies focused on making things to enterprises increasingly preoccupied with financial engineering. This shift began in earnest during the 1980s, when corporate raiders and Wall Street financiers pressured companies to maximize "shareholder value" above all other considerations. The result was a fundamental reorientation of corporate priorities away from stakeholders like workers, customers, and communities toward the narrow interests of shareholders and executives. This transformation is evident in how companies allocate their resources. Since the 1980s, American corporations have dramatically reduced investments in research and development, worker training, and new equipment. Instead, they've diverted cash to financial activities like stock buybacks, which artificially boost share prices without creating real value. Between 2005 and 2014, S&P 500 companies spent more than $6 trillion on such buybacks and dividends—money that could have been invested in innovation and job creation. The consequences have been severe. New business formation has declined significantly, with startups comprising a smaller share of American businesses than in previous decades. Productivity growth has slowed, wages have stagnated for most workers, and economic mobility has decreased. Meanwhile, corporate executives, whose compensation is increasingly tied to stock performance, have seen their pay skyrocket to unprecedented levels. This shift from making to taking has also changed corporate culture. Short-term thinking dominates decision-making, with quarterly earnings targets taking precedence over long-term strategic planning. Companies now spend more time and energy on financial engineering than on product engineering. The result is a business environment that rewards extraction over creation, financial manipulation over genuine innovation, and short-term gains over sustainable growth. General Electric exemplifies this transformation. Under Jack Welch's leadership from 1981 to 2001, GE evolved from an industrial manufacturer into a financial conglomerate. By 2007, GE Capital accounted for nearly half of the company's profits. Rather than investing primarily in new products or manufacturing capabilities, GE devoted increasing resources to financial services, trading, and complex derivatives. When the financial crisis hit, GE required an $88 billion government bailout to keep its financial arm afloat. The company that once symbolized American industrial might had become dependent on financial speculation for its profits.

Chapter 3: MBA Education's Role in Prioritizing Financial Engineering

The transformation of American business education mirrors the broader financialization of the economy. Over the past four decades, business schools have increasingly focused on teaching financial engineering rather than leadership, innovation, or operational excellence. Finance has become the dominant discipline, with other aspects of business education subordinated to financial metrics and models. This shift began in the 1970s and accelerated in the 1980s, as business schools embraced the efficient market hypothesis and shareholder value theory. These theories, which originated at the University of Chicago, posited that maximizing shareholder returns should be the primary goal of corporate management. Business schools began teaching students that the stock price was the ultimate measure of corporate success, and that anything that didn't contribute directly to higher share prices was secondary or irrelevant. The curriculum changed accordingly. Finance courses became mandatory, while subjects like ethics, sustainability, and stakeholder management were marginalized. Students learned complex financial models but received little training in leadership, innovation, or long-term strategic thinking. They were taught to view businesses as collections of assets to be optimized rather than as organizations of people working toward common goals. The focus shifted from creating value through products and services to extracting value through financial manipulation. The results have been predictable. MBA graduates now flock to finance and consulting rather than to manufacturing or entrepreneurship. When they do enter traditional businesses, they bring with them a financially oriented mindset that prioritizes cost-cutting, outsourcing, and financial engineering over innovation and growth. They are trained to see workers as costs to be minimized rather than as assets to be developed. This educational approach has created generations of business leaders who excel at boosting short-term financial metrics but struggle with the challenges of building sustainable, innovative companies. They know how to read a balance sheet but not how to inspire a workforce or develop groundbreaking products. The financialization of business education has produced financial engineers rather than business leaders, with profound consequences for American economic competitiveness. Perhaps most troubling is how this educational model has corrupted the very purpose of business. Rather than seeing business as a means of creating value through products and services that meet human needs, MBA programs increasingly portray it as simply a mechanism for generating financial returns. This narrow conception of business purpose has helped legitimize practices that extract value from companies, workers, and communities rather than creating shared prosperity.

Chapter 4: Shareholder Value Theory: Triumph of Short-Term Thinking

The doctrine of shareholder value has become the dominant ideology in American business, fundamentally reshaping corporate priorities and behaviors. This theory, which holds that maximizing returns to shareholders should be the primary goal of corporate management, has given Wall Street unprecedented influence over corporate decision-making. The result has been a profound shift in how companies operate and who benefits from their activities. Under the shareholder value regime, corporate executives face relentless pressure to meet quarterly earnings targets and boost stock prices. This pressure comes not only from activist investors but also from institutional shareholders like pension funds and mutual funds, which demand consistent short-term returns. Companies that fail to meet these expectations face punishment in the form of falling stock prices, executive turnover, and potential takeover attempts. To satisfy Wall Street's demands, companies have adopted strategies that boost short-term financial metrics at the expense of long-term health. They cut costs by laying off workers, reducing research and development, and postponing investments in new facilities and equipment. They engage in financial engineering through stock buybacks, which artificially inflate share prices without creating real value. They pursue mergers and acquisitions that look good on paper but often destroy value in practice. The consequences of this approach extend far beyond corporate boardrooms. Workers face stagnant wages, reduced benefits, and greater job insecurity as companies prioritize shareholder returns over employee welfare. Communities suffer when companies close plants or move operations offshore in search of lower costs. Innovation slows as research and development budgets are cut to meet quarterly earnings targets. Perhaps most troubling, the shareholder value model has created a system in which the benefits of economic growth flow primarily to shareholders and executives rather than being broadly shared. This has contributed significantly to rising inequality, as the gains from productivity improvements and technological advances accrue to capital rather than labor. The result is an economy that works well for investors but leaves many workers and communities behind. The triumph of shareholder value theory represents a dramatic departure from earlier conceptions of corporate purpose. For much of the 20th century, large American corporations operated with a broader sense of social responsibility, balancing the interests of multiple stakeholders. This stakeholder model recognized that long-term corporate success depended on satisfied customers, motivated employees, supportive communities, and stable supplier relationships—not just happy shareholders.

Chapter 5: Financial Extraction: How Wall Street Drains Main Street

The financial transformation of Corporate America represents one of the most significant economic shifts of the past four decades. Companies across virtually every sector have moved away from their core business activities to embrace financial operations, often becoming more focused on making money from money than from making products or providing services. This trend has fundamentally altered the nature of American business and its relationship to the broader economy. Financial engineering—the complex manipulation of corporate structures, assets, and liabilities to maximize short-term profits—has become the dominant strategy for many American corporations. Rather than creating value through innovation or improved productivity, companies increasingly rely on accounting tricks, tax avoidance schemes, and financial maneuvers to boost their bottom lines and stock prices. Stock buybacks represent perhaps the most pervasive form of financial engineering. Since the SEC loosened restrictions on buybacks in 1982, corporations have spent trillions repurchasing their own shares. Between 2004 and 2014 alone, S&P 500 companies devoted 54% of their earnings—$3.7 trillion—to buybacks. These transactions artificially inflate stock prices and earnings per share without creating any real economic value. They primarily benefit executives whose compensation packages include stock options and wealthy shareholders, while diverting resources from productive investments that could generate jobs and growth. Debt-fueled acquisitions constitute another common form of financial extraction. Private equity firms typically purchase companies using minimal equity and maximum debt, then load the acquired companies with the cost of their own acquisition. The acquired companies must generate sufficient cash flow to service this debt, often leading to layoffs, reduced investment, and even bankruptcy. Meanwhile, the private equity firms extract value through special dividends, management fees, and other mechanisms that ensure they profit regardless of whether the acquired companies succeed or fail. Tax avoidance strategies have also become increasingly sophisticated. Corporations shift profits to low-tax jurisdictions through transfer pricing, intellectual property licensing, and other complex arrangements. Apple, for example, has accumulated over $200 billion in offshore cash, much of it technically "held" in Ireland despite being generated through U.S. innovation and American consumers. Rather than repatriating this money and paying U.S. taxes, Apple borrows money domestically to fund dividends and buybacks—a strategy that maximizes shareholder returns while minimizing tax obligations.

Chapter 6: The Real Cost: Innovation, Jobs, and Economic Growth

The dominance of finance in our economy has imposed substantial costs that extend far beyond Wall Street. These costs manifest in slower economic growth, increased inequality, reduced innovation, and greater systemic fragility. Understanding these costs is essential to grasping why financialization represents such a fundamental challenge to American prosperity. Perhaps the most significant cost has been the diversion of talent and resources away from productive activities. Finance now attracts a disproportionate share of top graduates from elite universities, drawing them away from fields like engineering, medicine, and entrepreneurship. These talented individuals spend their careers developing complex financial instruments rather than solving real-world problems or creating new technologies. Similarly, corporate resources that could fund research and development instead flow to financial activities like stock buybacks and acquisitions. This misallocation of resources has contributed to slower productivity growth, which has declined markedly since financialization accelerated in the 1980s. Without productivity improvements, sustainable wage growth becomes impossible. The result has been stagnant incomes for most Americans even as the economy continues to grow. Meanwhile, those at the top of the income distribution—particularly in finance—have seen their compensation soar to unprecedented levels, widening inequality. Financial dominance has also increased economic fragility. The financial sector's growing size and complexity have made the economy more vulnerable to crises, as demonstrated in 2008. Each crisis destroys enormous amounts of wealth and leaves lasting economic scars. Even between crises, the volatility associated with financial markets creates uncertainty that discourages long-term business investment. Perhaps most troubling is how financialization has corrupted the political process. The financial industry's enormous resources allow it to exercise outsized influence over policy decisions, from tax reform to financial regulation. This influence ensures that the rules of the economic game continue to favor finance over other sectors, creating a self-reinforcing cycle of financial dominance. Research shows that publicly traded companies invest significantly less in research and development than comparable privately held firms. They also respond more slowly to competitive threats and technological changes. The pressure to maintain quarterly earnings and stock prices forces many companies to sacrifice long-term investments that might strengthen their competitive position but reduce short-term profits. As a result, America's industrial base has weakened, and technological leadership in many sectors has eroded.

Chapter 7: Reclaiming Business for the Real Economy

Reclaiming business for the real economy requires fundamental changes in how we think about and organize economic activity. It demands a shift away from the financialized model that has dominated in recent decades toward one that prioritizes productive investment, innovation, and broadly shared prosperity. This transformation will not be easy, but several promising paths forward exist. First, we must reform corporate governance to encourage long-term thinking and broader accountability. This means moving beyond the shareholder value model to one that considers the interests of all stakeholders—employees, customers, communities, and the environment, as well as shareholders. It requires changing executive compensation to reward long-term performance rather than short-term stock price movements. And it means giving workers greater voice in corporate decision-making, following models that have proven successful in countries like Germany. Second, we need to realign the financial system with its proper role in the economy. Financial regulation should distinguish between activities that support the real economy and those that merely extract value from it. Tax policies should discourage financial speculation while encouraging productive investment. And we should explore new models of finance, such as state investment banks and community development financial institutions, that can channel capital to underserved sectors and regions. Third, we must revitalize public investment in the foundations of economic growth. This includes not only physical infrastructure but also research and development, education, and worker training. These investments create the conditions for private sector innovation and growth, generating returns that benefit society as a whole rather than just financial investors. Fourth, we need to rebuild the cultural and ethical foundations of business. This means restoring the idea that business exists not merely to generate profits but to create value for society. It requires business education that emphasizes leadership, innovation, and social responsibility alongside financial analysis. And it demands a new generation of business leaders committed to building companies that thrive by solving real problems rather than through financial engineering. Banking reform represents an essential starting point. The current banking system combines traditional deposit-taking and lending activities with speculative trading and complex securitization within the same institutions. This integration creates inherent conflicts of interest and allows banks to use government-insured deposits to subsidize risky activities. A modern version of the Glass-Steagall separation between commercial and investment banking would reduce these conflicts while limiting the implicit government backstop to essential financial services rather than speculative trading.

Summary

The financialization of the American economy represents a fundamental shift in how value is created and distributed. What began as a process of deregulation intended to increase efficiency has instead produced an economic system increasingly oriented around extraction rather than production. Financial institutions and mechanisms that once served the real economy now increasingly dominate it, capturing an ever-larger share of profits while contributing less to genuine economic growth and prosperity. This transformation has profound implications for democracy and social cohesion. As economic power concentrates within the financial sector, political power inevitably follows. The resulting policies further entrench financialization, creating a self-reinforcing cycle that proves remarkably resistant to reform. Breaking this cycle requires more than technical regulatory changes—it demands a fundamental reconsideration of how we structure economic incentives and measure economic success. Only by reorienting our economy toward genuine value creation can we build a system that works for everyone, not just financial elites.

About Author

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Rana Foroohar

Rana Foroohar is the author of Don’t Be Evil, which won a Porchlight Business Book Award, and Makers and Takers. Currently the global business columnist and associate editor for the Financial Times and the global economic analyst for CNN, she has served as the assistant managing editor and economic columnist at Time and an economic and foreign affairs editor and foreign correspondent at Newsweek. She is a life member of the Council on Foreign Relations and sits on the board of the Open Markets Institute.

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