Wall Street.

• Author: Buell, John

Today the mainstream media are awash with stories of permanent prosperity. In the spring, the stock market flirted with new records almost daily and job growth was steady for months. Everything from the ability of computers to track inventories to the supposed benefits of globalization was seen as solving the problem of the business cycle.

Doug Henwood, the editor of Left Business Observer, has written a powerful challenge to these conventional assessments. His new book begins with a detailed examination of market players and their financial instruments. After a respectful summary of the best classical defenses of the markets, he moves to a careful critique of the effects of market mania. He then offers some important suggestions for possible reforms.

Henwood shows that increasingly deregulated financial markets -- stocks, derivatives, currency, and investment banking -- have created immense riches for the property-holding classes. But, he points out, these markets assure neither stable productivity gains nor minimal levels of economic justice.

Conventional economic theory says that the stock market brings together cash-rich savers and cash-short investors. It is supposed to allocate capital to its most needed outlets and thereby advance everyone's prosperity. But this view bears little relationship to actual stock-market behavior. Since 1952, corporations have funded 95 percent of the cost of their expansions internally -- primarily through retained earnings. Even initial public offerings, which compose a tiny fraction of the market, are often used to pay off loans from founding owners.

If the stock market isn't the major source of new investment capital, why should we concern ourselves with it? Some Marxist scholars have long argued that markets are merely a distraction from underlying power relations within the firm. Henwood dissents from this theory. He believes we can't fully understand the modern firm without studying the dynamics of markets.

Though corporate profits fund new investments, most of these profits go to stockholders in the form of dividends, Henwood notes. American firms are controlled primarily by stockholders and managers rather than by consortia of investment bankers, suppliers, and even public capital, as in Germany and Japan. For this reason, U.S. firms must keep dividends high in order to retain stockholder loyalty.

Though stock-price fluctuation doesn't directly affect real investment in plants and equipment, it...