Money manager capitalism: still here, but not quite as expected.

Author:Whalen, Charles J.

Hyman Minsky is well known for books and essays on the cyclical instability of capitalism. In the last dozen or so years of his life, however, Minsky often looked beyond business cycles and focused instead on the structural evolution of economic systems over long periods of time. He believed that the US economy of the 1980s and 1990s was profoundly different from the economy of the 1950s and 1960s--and that an appreciation of the key differences was essential to understanding and managing economic activity at the end of the twentieth century.

Minsky explained the post--World War II changes in the US economy by presenting a theory of capitalist development. That theory, influenced by his association with Joseph Schumpeter, emphasizes financial-market innovations and their impact on the broader economy. In particular, Minsky argued that the US economy evolved through three stages prior to the 1980s--commercial capitalism, finance capitalism, and managerial capitalism--and that it entered a new stage, money manager capitalism, in the 1980s (Minsky 1990; 1993; Whalen 1997; 2001).

If imitation is the highest form of praise, then the notion of money manager capitalism (MMC) has received considerable acclaim. Michal Useem, of the Wharton School, published a book in 1996 entitled Investor Capitalism (1996). In 2000, James Hawley and Andrew Williams, of Saint Mary's College of California, published The Rise of Fiduciary Capitalism (2000). Like Minsky's writings, both works stress how money managers--institutional investors, especially those who oversee pension and mutual funds--can have a profound effect on business and the economy.

The core insights that Minsky offered in the 1980s and 1990s remain relevant today. Institutional investors wield great power in the US economy and have forced corporations to intensify their attention to the growth of stockholder value. Yet much has happened since Minsky first wrote about the growing importance of pension and mutual fund managers in 1983. (1) MMC is still here, but its effects on the economy have not always been what he anticipated.

What Minsky Had Right

Minsky was correct when he proposed that money managers had become major players in the economy. Between 1950 and 1990, money managers saw the fraction of US corporate equities under their control grow from 8 percent to 60 percent (Porter 1992, 69). (2) Over the same period, pension funds increased their share of total business equities from less than 1 percent to almost 39 percent--while their fraction of corporate debt rose from 13 percent to 50 percent (Ghilarducci 1992, 117). Institutional investor assets tripled in the 1990s (Conference Board 2000). (3)

Mutual funds have seen especially explosive growth. From the start of 1998 to the end of 2001, total mutual fund assets rose from $4.8 trillion to $6.9 trillion. And 2001 was the first year in which the majority of US households (52 percent) owned such funds (Investment Company Institute 1998-2001; 2001).

Minsky was also right when he wrote that money managers, obliged to maximize the value of their assets over each short period, would pressure corporate managers to take steps that raise stock prices. Business executives enjoyed considerable independence from bankers and stockholders in the early postwar years--a period that Minsky called "managerial capitalism." The situation has been very different since the early 1980s.

One source of institutional pressure on an enterprise is obvious: Fund managers can sell company stock. Minsky explained how "block trading" developed to accommodate purchases and sales by billion dollar funds. The stock market crash of October 1987 showed that uneasy block traders can have a profound impact not only on individual companies but also on the entire market...

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