Author: Rana Foroohar

Publisher: Crown Business

Date: 2016 (first edition); republished 2017

Comments:*This book was voted one of the top business books of the year both by the Financial Times and by Bloomberg. The author has now joined the Financial Times and writes a regular column.

Rana Foroohar’s central argument is that finance should be a utility. Unlike an electric company, which allocates energy to businesses and people to power the economy, banks allocate capital. Theoretically, in an efficient financial system all an entrepreneur needs to do is have a great idea and a solid business plan. The bank evaluates the plan, loans the money, and makes a profit on the interest. It’s an easy, boring business. If things work out the entrepreneur becomes wealthy, people are employed, and the community receives long term investment. Foroohar presents the case that a revolution has taken place that moved finance from a supporter of the economy to the centre piece. It no longer allocates capital and gets out of the way; today finance manages nearly all aspects of business. It no longer helps make society; it takes from society.

One of her most telling statistics is that only 15% of all capital flowing out of financial institutions today is being invested in businesses. The rest remains in a closed financial loop, part of the “financialisation” of the economy.

She traces the shift back to the post-war management of Ford which “shifted power from engineers to MBAs … Accountants were replacing tradesmen,” Foroohar writes. “Making money was slowly but surely replacing the goal of making great products.”*

*The most damaging legacy of this development may have been its impact on labour relations. Labour became a commodified input. It was now something to be managed and squeezed; just a cost of doing business. Never mind that one of the major drivers of innovation is the collaboration of the factory floor and the engineering team. There’s a reason, for Foroohar, why Bell Labs designed their buildings to house both engineering and manufacturing—a strategy Tesla uses today. While Japanese and German firms were becoming more productive and agile by engraining labour into the strategic decisions of the company—America was building walls and eroding key competencies by outsourcing production.

Thus, the modern financial system has destroyed America’s ability to innovate. The entire system rewards short-term gain, over long-term investment. The good thing, she notes is that none of this is permanent. “We can remake [the economy] as we see fit to better serve our shared prosperity and economic growth.”*

See video interview of Rana Foroohar

See Article by the author: Why management by numbers doesn’t add up