Illustration by TYLER COMRIE THE ATLANTIC SEPTEMBER 2019 33the international monetary order, deeming their BOOKS
advice useless. William McChesney Martin, who
presided over the Federal Reserve in the 1950s and
’60s, confi ned economists to the basement.
Starting in the 1970s, however, economists
began to wield extraordinary infl uence. They per-
suaded Richard Nixon to abolish the military draft.
They brought economics into the courtroom. They
took over many of the top posts at regulatory agen-
cies, and they devised cost-benefi t tests to ensure
that regulations were warranted. To facilitate this
testing, economists presumed to set a number on
the value of life itself; some of the best passages of
Appelbaum’s fi ne book describe this subtle revo-
lution. Meanwhile, Fed chairmen were expected
to have economic credentials. Soon the nonecono-
mists on the Fed staff were languishing in the met-
aphorical basement.
The rise of economics, Appelbaum writes,
“transformed the business of government, the
conduct of business, and, as a result, the patterns
of everyday life.” It was bound to have a marked
eff ect on Berle’s pro-corporate liberalism. Lemann
hangs this part of his story on Michael C. Jensen,
an entertainingly impassioned fi nancial economist
who reframed attitudes toward the corporation in
the mid-’70s.
Jensen agreed with Berle’s starting point: Cor-
porate managers were unaccountable because
shareholders could not restrain them. But rather
than seeing a remedy in checks exerted by regula-
tors and organized labor, Jensen proposed to over-
haul the fi rm so that ownership and control were
reunited. Executives should be rewarded more
with stock and less with salary, so that they would
think like shareholders and focus on the profits
that shareholders wanted. Managers who failed
to generate a good return would see their stock
prices languish, which would create tempting take-
over targets. A market for corporate control would
redouble the pressure on bosses to behave like
owners. Successful takeovers, in turn, would shift
corporations into the hands of single, all-powerful
proprietors, capable of overseeing management
more eff ectively than scattered stockholders could.
In sum, Jensen’s prescriptions inverted Berle’s. The
market could be made to solve the problem of the
fi rm. Government could pull back from regulation.
For ideas to have infl uence, Lemann observes,
“there has to be a confluence between the ideas
themselves, the spirit of the times, and the interests
of powerful players who fi nd the ideas congenial.”
Berle had been lucky that his treatise on the cor-
poration appeared when Roosevelt was launching
his run for the presidency. Jensen was equally for-
tunate in his own way. Shortly after the publication
of his research, the invention of junk bonds made
hostile takeovers the rage. During the ’80s, more
than a quarter of the companies on the For tu ne
500 list were targeted. Jensen became the scholar
who explained why this unprecedented boardroom
bloodbath was good news for America.
And to a considerable extent, the news was good.
Shielded from market discipline, the old corporate
heads had deployed capital carelessly. They had
expanded into new markets for reasons of vanity,
squandered money on fancy management dining
rooms, and signed labor contracts like the Treaty
of Detroit, which—however statesmanlike— stored
up liabilities to retirees that would ultimately hobble
their companies. From 1977 to 1988, Jensen calcu-
lated, American corporations had increased in value
by $500 billion as a result of the new market for
corporate control. Reengineered and re invigorated,
American business staved off what might have been
an existential threat from Japanese competition.
Yet a large cost eluded Jensen’s calculations.
The social contract of the Berle era was gone: the
unstated assumption of lifetime employment,
the promise of retirement benefi ts, the sense of