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Genre = Economics, Finance
Foroohar shows how incentives in the U.S. have shifted, away from profit derived via making things and initiating new products, to profits derived from financial ventures. Targeting the supporting structure of the problem of too much financialization, going from various industries such as car manufacturers to the way finance is taught, and from banks competing with non-financial firms to the legal issues. Growth may be the aim of firms, but due to financialization, the current incentive structure reduces both firm and economic growth.
With the rise of quantitative analysis, quality has declined. Costs become the enemy a good evaluation for the firm, rather than a gateway to a quality product. To show a steadily rising profit, many firms are forced to show growth on a quarterly basis which usually means reducing costs. Costs such as research and development, or quality component inputs to a product must be sacrificed to show higher profits. The reduction of these types of costs leads to degraded products and less innovation in the future.
Part of the problem is the education received for a business. Business education has become numbers game, rather than a product one. Those becoming managers and leaders of the firms and industry do not understand the products that they are meant to provide, but place all their focus on the firm evaluation. As product managers are replaced with financial experts, firms lose their creative edge as the creative edge is too expense.
Public offerings to a company are becoming a danger to economic growth. Foroohar shows that firm stock price goes down when a firm comes up with a new product, but increases when the firm uses money for share buybacks. Short term gains are expected, with the cost of the future of the firm. When financial firms apply pressure on the firm to raise its stock, the firm usually outsources many departments that used to be integral to it. By outsourcing the departments such as manufacturing, the firm loses tacit knowledge of the product, which leads to miscommunications of the product design ending up with a major problem for consumer and the firm.
Many firms have started their own finance departments which earn more revenue than their production departments. As finance becomes the dominant route for firm growth, many risks are added such as volatility of prices. Not only are firms providing financial tools to their client, but banks who finance the clients also own much of the resources that their clients need. With legal loopholes, banks can purchase resources that an industry needs, thereby creating a shortage of the resource, and then the bank can sell the resources at a higher price. Banks are starting to compete with the very firms that they fund.
Legislature plays a dual role in the rise of finance. Due to the revolving door between those who create the legislate and those who are supposed to abide by it, firms can easily navigate the legislature to obtain the desired needs. The author expresses that firms have become more interested in navigating legislature than the products they produce. The problem with this view, is that at times the legislature creates a problem for the firms’ production ability. Alternately, the author expresses a need for more legislature and simplified legislature at the same time. Foroohar makes the points that firms have an incentive to hoard money abroad and finance their new ventures through debt as it is cheaper than actually using their own money. Too much and to little legislation have their set of problems and incentives.
Although the author does not seem to bridge the notions together, it seems that it is not legislation that is required for a healthy system, it is the creating a process to obtain the right legislature with the ability to rectify it should it be misused. Legislature which would allow for proper distinction between what is allowed and what is not, at the same time providing for an internationally competitive legal framework which does not bypass the interests of the nation or the firm. Those incentives may be opposed, for which the process of creating the right legislature should aim at reconciling.
An eloquently written book about the structure of incentives within the firm and financial system that seeks to reward short term gain over the opportunities that take more than a fiscal quarter to manifest. Desensitizing economic growth while purporting to support it. With an analysis from the various actors including education, firm, finance, and law, Foroohar does a wonderful job at presenting the complexity of the system without losing depth of each piece.
Pages to read: 329
1st Edition: 2016
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