Makers and Takers

1. Finance Dominates, Business Suffers: The Rise of Takers

Finance has become a headwind to economic growth, not a catalyst for it.

Finance's Outsized Influence. The financial sector, though representing a small fraction of jobs, now commands a disproportionate share of corporate profits, indicating a shift where finance serves itself rather than the real economy. This dominance has led to a system where "takers" (those who extract wealth) often prevail over "makers" (those who create it), hindering overall economic progress.

• Finance represents about 7% of the economy but takes around 25% of all corporate profits, while creating only 4% of all jobs.
• This imbalance has resulted in a "cognitive capture" of government officials, regulators, and CEOs, making it difficult to craft policies that benefit everyone.

The Shift from Service to Self-Interest. Finance, once intended to support business and facilitate investment, has become an end in itself, prioritizing short-term gains and risky speculation over long-term, sustainable growth. This shift has led to a system where wealth creation within financial markets has become an end in itself, rather than a means to the end of shared economic prosperity.

• The financial crisis of 2008 was followed by the longest and weakest economic recovery of the post–World War II era.
• 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. But that critical link has been lost.

The Need for Rebalancing. To ensure better and more sustainable growth, a dramatic shift in the balance of power between finance and the real economy is needed. This requires a fundamental rethinking of how our market system operates, moving away from a system that prioritizes financial engineering over real innovation and job creation.

• The view from Wall Street has become the conventional view of how our market system and our economy should operate. And yet, it’s a view that is highly biased and distorted.
• We need a dramatically different balance of power between finance and the real economy—between the takers and the makers—to ensure better and more sustainable growth.

2. The Perils of Financialized Thinking: GM's Fall from Grace

It wasn’t the way Steve Jobs would have done it.

Financial Metrics Over Product Quality. The story of General Motors (GM) illustrates how a focus on financial metrics and cost-cutting, driven by Wall Street pressures, can lead to a decline in product quality and innovation. The company's ignition switch crisis, which resulted in numerous injuries and deaths, was a direct consequence of a culture that prioritized short-term financial gains over long-term safety and customer satisfaction.

• GM's culture was a culture of unaccountability in which “no single person owned any decision.”
• The company was selling the cars in bulk, with steep discounts, to big fleet buyers like car rental companies—never a good sign.

The Rise of the "Bean Counters." The ascendancy of "bean counters" (financially oriented managers) over "car guys" (engineers and product developers) within GM led to a culture where financial metrics mattered more than the quality of the products themselves. This shift resulted in a corporate structure characterized by silos, where information wasn't shared and people were afraid to pass bad news up the ladder.

• The company had a culture in which, as Barra herself acknowledged to me in an interview, you have employees who “were expert in this or that without recognizing people don’t buy this or that—they buy a car, and we’ve got to pull it together, and people have to talk.”
• The number of new initial public offerings (IPOs) is about a third of what it was twenty years ago.

The Legacy of McNamara and the Whiz Kids. The influence of Robert McNamara and the "Whiz Kids," who brought a data-driven, financially oriented approach to management, further solidified the dominance of financial thinking in corporate America. This approach, while initially successful in cutting costs, ultimately undermined innovation and long-term growth.

• McNamara’s obsession with systems analysis—in which data about every aspect of the war effort, from bombs to defoliants to fatalities to the number of enemy vehicles disabled per air strike megaton, was collected in order to maximize efficiency—blinded Washington to the overall flaws in its conduct of the war.
• The Whiz Kids were the forerunner of the new class in American business. Their knowledge was not concrete, about a product, but abstract, about systems—systems that could, if used properly, govern any company.

3. MBA Education: Training for Finance, Not Business

The culture of finance looks for growth now, starting this morning, in time to show results for the next quarterly profit filings.

The Focus on Financial Engineering. Business schools, particularly in the United States, have increasingly focused on teaching financial engineering and balance sheet manipulation, often at the expense of real managerial skills and innovation. This has led to a situation where many of the best minds are drawn into finance, rather than more productive sectors of the economy.

• The changes in the financial system have gone hand in hand with changes in business culture.
• Because Wall Street salaries are 70 percent higher on average than in any other industry, many of the best minds are drawn into its ranks and away from anything more useful to society.

The "Markets Know Best" Ideology. MBA programs often perpetuate the idea that markets are efficient and that shareholder value is the primary goal of a corporation. This ideology, while seemingly logical, often leads to short-term decision-making and a neglect of long-term investments in research, development, and worker training.

• The very type of short-term, risky thinking that nearly toppled the global economy in 2008 is today widening the gap between rich and poor, hampering economic progress, and threatening the future of the American Dream itself.
• The changes in the financial system have gone hand in hand with changes in business culture.

The Need for a Broader Perspective. To address the problems of financialization, business education needs to shift its focus from financial metrics to a more holistic approach that emphasizes innovation, long-term value creation, and social responsibility. This requires a curriculum that incorporates insights from other disciplines, such as psychology, sociology, and ethics.

• The culture of finance looks for growth now, starting this morning, in time to show results for the next quarterly profit filings.
• Moreover, financialization has bred a business culture built around MBAs rather than engineers and entrepreneurs.

4. Activist Investors: Short-Term Gains, Long-Term Pain

To him, and to many others in corporate America today, one kind of creativity is just as good as another.

The Rise of Shareholder Activism. Activist investors, often hedge fund managers, have gained significant power in corporate America, pushing companies to prioritize short-term gains and shareholder value over long-term investments and innovation. This has led to a culture of financial engineering, where companies focus on stock buybacks and dividend payments rather than research and development.

• From “activist investors” to investment banks, from management consultants to asset managers, from high-frequency traders to insurance companies, today, financiers dictate terms to American business, rather than the other way around.
• The S&P 500 companies as a whole have spent more than $6 trillion on such payments between 2005 and 2014, bolstering share prices and the markets even as they were cutting jobs and investment.

The Perils of Short-Termism. The pressure from activist investors to deliver quick results has led to a decline in long-term investment and a focus on short-term financial manipulations. This has had a negative impact on innovation, job creation, and the overall competitiveness of American businesses.

• In lobbying for short-term share-boosting management, finance is also largely responsible for the drastic cutback in research and development outlays in corporate America, investments that are the seed corn for the future.
• Indeed, if you chart the rise in money spent on share buybacks and the fall in corporate spending on productive investments like R&D, the two lines make a perfect X.

The Need for a Broader View of Value. To counter the influence of activist investors, companies need to adopt a broader view of value that considers the interests of all stakeholders, including employees, customers, and the community. This requires a shift in corporate culture and a rejection of the idea that shareholder value is the sole purpose of a corporation.

• Wealth creation within the financial markets has become an end in itself, rather than a means to the end of shared economic prosperity. The tail is wagging the dog.
• Sometimes our pension funds even invest with the “activists” who are buying up the companies we might be working for—and then firing us. All of it erodes growth, not to mention our own livelihoods.

5. Corporations as Banks: The Blurring of Lines

It seems that we are all bankers now.

The Emulation of Finance. Many nonfinancial companies, including tech giants like Apple and industrial firms like GE, have begun to emulate the practices of banks, engaging in complex financial transactions and prioritizing financial engineering over their core businesses. This has led to a blurring of the lines between the financial sector and the real economy.

• Apple, for example, has begun using a good chunk of its spare cash to buy corporate bonds the same way financial institutions do, prompting a 2015 Bloomberg headline to declare, “Apple Is the New Pimco, and Tim Cook Is the New King of Bonds.”
• Airlines often make more money from hedging on oil prices than on selling seats—while bad bets can leave them with millions of dollars in losses.

The Risks of Unregulated Financial Activity. The growth of financial activity within nonfinancial firms has created new risks in the economy, as these companies are often not subject to the same regulations as banks. This has led to a situation where large corporations can engage in risky financial transactions without adequate oversight.

• They are, in essence, acting like banks, but they aren’t regulated like banks.
• If Big Tech decided at any point to dump those bonds, it could become a market-moving event, an issue that is already raising concern among experts at the Office of Financial Research, the Treasury Department body founded after the 2008 financial crisis to monitor stability in financial markets.

The Need for Re-Mooring. To address this issue, companies need to refocus on their core businesses and prioritize long-term value creation over short-term financial gains. This requires a shift in corporate culture and a rejection of the idea that financial engineering is a substitute for real innovation and productivity.

• In fact, American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimizing, and selling financial services, than they did in the immediate post–World War II period.
• Eight years on from the financial crisis of 2008, we are finally in a recovery, but it has been the longest and weakest recovery of the postwar era. The reason? Our financial system has stopped serving the real economy and now serves mainly itself.

6. Derivatives: Financial Weapons of Mass Destruction

The entire value of the New York Stock Exchange now turns over about once every nineteen months, a rate that has tripled since the 1970s.

The Dangers of Derivatives. Derivatives, complex financial instruments that derive their value from other assets, have become a major source of risk in the financial system. These instruments, often traded off exchanges and with little transparency, can amplify market volatility and contribute to financial crises.

• Less than half of all derivatives, those financial weapons of mass destruction that poured gasoline on the crisis, are regulated, even after the passing of the Dodd-Frank financial reform legislation in 2010.
• The entire value of the New York Stock Exchange now turns over about once every nineteen months, a rate that has tripled since the 1970s.

The Manipulation of Commodities Markets. The story of Goldman Sachs and its manipulation of the aluminum market illustrates how banks can use their control over derivatives and physical commodities to extract profits at the expense of consumers and businesses. This type of market manipulation, while often legal, undermines the integrity of the financial system and creates instability in the real economy.

• The rule effectively rolled back one of the most important bits of post-crisis regulation: the ban on trading taxpayer-insured derivatives, those “financial weapons of mass destruction,” as Warren Buffett famously called them, that sparked the 2008 crisis to begin with.
• With the rise of the securities and trading portion of the industry came a rise in debt of all kinds, public and private. Debt is the lifeblood of finance; it is where the financial industry makes its money.

The Need for Transparency and Regulation. To address the risks associated with derivatives, regulators need to increase transparency in these markets and impose stricter rules on trading practices. This requires a global effort to ensure that financial institutions are not able to exploit loopholes and engage in risky behavior that could destabilize the entire system.

• The entire value of the New York Stock Exchange now turns over about once every nineteen months, a rate that has tripled since the 1970s.
• No wonder the size of the securities industry grew fivefold as a share of gross domestic product (GDP) between 1980 and mid-2000s while ordinary bank deposits shrunk from 70 to 50 percent of GDP.

7. Private Equity: Profiting from the Housing Crisis

The fact that Apple, probably the best-known company in the world and surely one of the most admired, now spends a large amount of its time and effort thinking about how to make more money via financial engineering rather than by the old-fashioned kind, tells us how upside down our biggest corporation’s priorities have become, not to mention the politics behind a tax system that encourages it all.

The Rise of Investor Landlords. Private equity firms have become major players in the housing market, purchasing large numbers of foreclosed homes and turning them into rental properties. While this has helped stabilize prices in some areas, it has also led to a situation where many Americans are priced out of homeownership and forced to rent from large, often absentee, landlords.

• The Kafkaesque story of Apple described above is just one of the many perverse outcomes associated with financialization, a wonky but apt moniker picked up by academics to describe our upside-down economy, one in which Makers—the term I use in this book to describe the people, companies, and ideas that create real economic growth—have come to be servants to Takers, those that use our dysfunctional market system mainly to enrich themselves rather than society at large.
• These takers include many (though certainly not all) financiers and financial institutions, as well as misguided leaders in both the private and the public sector, including numerous CEOs, politicians, and regulators who don’t seem to understand how financialization is undermining our economic growth, our social stability, and even our democracy.

The Exploitation of Distressed Properties. Private equity firms often purchase distressed properties at steep discounts, make minimal improvements, and then rent them out at higher-than-average rates, extracting profits from communities that are already struggling. This has led to a situation where many renters are forced to pay exorbitant prices for substandard housing.

• The first step to tackling financialization is, of course, understanding it. This immensely complex and broad-based phenomenon starts with, but is by no means limited to, the banking sector.
• 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. But that critical link has been lost.

The Need for Community Control. To address the problems created by private equity in the housing market, communities need to have more control over their own housing stock. This requires policies that prioritize local ownership, affordable housing, and tenant protections.

• Today finance engages mostly in alchemy, issuing massive amounts of debt and funneling money to different parts of the financial system itself, rather than investing in Main Street.
• “The trend varies slightly country by country, but the broad direction is clear: 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 investment is decreasing. Most of the money in the system is being used for lending against existing assets,” says Adair Turner.

8. Retirement: A System Rigged for the Few

What’s more, though many of us don’t know it, we ourselves are part of a dysfunctional ecosystem that fuels all this short-term thinking.

The Privatization of Retirement. The shift from defined-benefit pension plans to defined-contribution plans like 401(k)s has placed the burden of retirement savings on individuals, many of whom lack the financial literacy and resources to make sound investment decisions. This has led to a situation where many Americans are not saving enough for retirement and are increasingly reliant on the financial markets for their future security.

• The people who manage our retirement money—fund managers working for firms like Fidelity and BlackRock—are typically compensated for delivering returns over a year or less.
• That means they use their financial clout (which is really ours) to push companies to produce quick-hit results, rather than to execute longer-term strategies.

The High Cost of Asset Management. The asset management industry, which manages trillions of dollars in retirement savings, has become a major source of fees and profits, often at the expense of individual investors. These fees, combined with the poor performance of many actively managed funds, have eroded the value of retirement savings and made it more difficult for people to achieve financial security in their old age.

• Sometimes our pension funds even invest with the “activists” who are buying up the companies we might be working for—and then firing us. All of it erodes growth, not to mention our own livelihoods.
• And yet, so many Americans now rely on the financial markets for safety in their old age that we fear anything that might have a chilling effect on them, a fear that the financial industry expertly exploits.

The Need for a More Secure System. To address the retirement crisis, we need to create a more secure and equitable system that provides all Americans with access to affordable and reliable retirement savings options. This requires a shift away from the current system of privatized retirement and a greater emphasis on public programs like Social Security.

• After all, who would want to puncture the bubble that pays for our retirement? We have made a Faustian bargain, in which we depend on the markets for wealth and thus don’t look too closely at how the sausage gets made.
• The number of new initial public offerings (IPOs) is about a third of what it was twenty years ago.

9. Tax Code: Rewarding Debt, Punishing Equity

It seems that we are all bankers now.

The Bias Toward Debt. The US tax code is structured in a way that favors debt over equity, both for corporations and individuals. This has led to a situation where companies are incentivized to borrow money rather than invest in their own businesses, and individuals are encouraged to take on debt rather than save.

• Debt is the lifeblood of finance; it is where the financial industry makes its money.
• At the same time, a broad range of academic research shows that rising debt and credit levels stoke financial instability.

The Tax Advantages of Financial Engineering. The tax code also provides numerous loopholes that allow corporations to avoid paying their fair share of taxes, often by shifting profits to overseas tax havens. This has led to a situation where many of the largest and most profitable companies in the world pay little or no taxes in the United States.

• But tax avoidance and even “tax inversions” of the sort firms like the drug giant Pfizer have done—maneuvers that allow companies to skirt paying their fair share of the national burden despite taking advantage of all sorts of government supports (federally funded research and technology, intellectual property protection)—are only the tip of the iceberg.
• In fact, American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimizing, and selling financial services, than they did in the immediate post–World War II period.

The Need for Tax Reform. To address these issues, we need to reform the tax code to eliminate the bias toward debt and close the loopholes that allow corporations to avoid paying their fair share. This requires a shift in political priorities and a commitment to creating a tax system that is both fair and efficient.

• It’s a truth that is at the heart of the way our economy works—and doesn’t work—today.
• Eight years on from the financial crisis of 2008, we are finally in a recovery, but it has been the longest and weakest recovery of the postwar era. The reason? Our financial system has stopped serving the real economy and now serves mainly itself.

10. The Revolving Door: Wall Street's Grip on Washington

The problems are so blatant, in fact, that even a number of Too Big to Fail bankers themselves, including former Citigroup chairman Sandy Weill, have admitted that the system is unsafe, that finance needs much stricter reregulation, and that big banks should be broken up.

The Revolving Door. The close relationship between Wall Street and Washington, often characterized by a "revolving door" between government and the financial industry, has created a situation where regulators are often beholden to the very institutions they are supposed to oversee. This has led to a weakening of regulatory oversight and a failure to address the systemic risks in the financial system.

• Individuals from J.P. Morgan and Goldman Sachs may (or, more often, may not) go to jail for reckless trading, but the system that permitted their malfeasance remains in place.
• Even now, finance continues to grow as a percentage of our economy. Leverage ratios are barely down from where they were in 2007—it’s still status quo for big banks to conduct daily business with 95 percent borrowed money.

The Influence of Lobbying. The financial industry spends vast sums of money lobbying Congress and other government agencies, often successfully pushing for policies that benefit the industry at the expense of the public good. This has led to a situation where the financial sector has an outsized influence on the political process.

• Finance regularly outspends every other industry on lobbying efforts in Washington, D.C., which has enabled it to turn back key areas of regulation (remember the trading loopholes pushed into the federal spending bill by the banking industry in 2014?) and change our tax and legal codes at will.
• Increasingly, the power of these large, oligopolistic interests is remaking our unique brand of American capitalism into a crony capitalism more suited to a third-world autocracy than a supposedly free-market democracy.

The Need for Independent Oversight. To address the problems of regulatory capture, we need to create a more independent and transparent system of financial oversight. This requires a shift in the culture of Washington and a commitment to putting the public interest ahead of the interests of the financial industry.

• It won’t happen anytime soon. Even now, finance continues to grow as a percentage of our economy.
• We may have gotten past the crisis of 2008, but we have not fixed our financial system.

11. Re-Mooring Finance: A Path to Shared Prosperity

This book is about connecting those dots and the complex phenomenon that connects them: financialization.

The Need for Systemic Change. To address the problems of financialization, we need to move beyond piecemeal reforms and focus on creating a more sustainable and equitable economic system. This requires a fundamental rethinking of the role of finance in our society and a commitment to putting the real economy first.

• Re-mooring finance in the real economy isn’t as simple as splitting up the biggest banks, although that would be a good start.
• It’s about dismantling the hold of financial-oriented thinking on every corner of corporate America.

Policy Solutions. There are a number of policy solutions that could help re-moor finance in the real economy, including:

• Breaking up the largest banks
• Reforming business education
• Changing the tax code to favor equity over debt
• Rethinking retirement
• Crafting smarter housing policy
• Restraining the money culture

The Importance of Public Understanding. The key to reforming our current system is making the American public understand just how deeply and profoundly things aren’t working for the majority of people in this country and, just as important, why they aren’t working. This requires a more open and honest conversation about the role of finance in our society and a commitment to creating a more just and equitable economy.

• It’s a topic that has traditionally been the sole domain of “experts”—those academics, financiers, and policy makers who often have a self-interested perspective to promote, and who do so with complicated language that keeps outsiders from the debate.
• But when it comes to finance, as in so many things, complexity is the enemy. The right question here is in fact the simplest one: Are financial institutions doing things that provide a clear, measurable benefit to the real economy? Sadly, the answer is mostly no.

Last updated: January 15, 2025