The Free Market 7, no. 6 (June 1989)
Quick: what do the following world-famous men have in common: John Kenneth Galbraith, Donald J. Trump, and David Rockefeller? What values could possibly be shared by the socialist economist who got rich by writing best-selling volumes denouncing affluence; the billionaire wheeler-dealer; and the fabulous head of the financially and politically powerful Rockefeller World Empire?
Would you believe: hatred of making money and of “capitalist greed”? Yes, at least when it comes to making money by one particular man, the Wall Street bond specialist Michael R. Milken. In an article in which the august New York Times was moved to drop its cherished veil of objectivity, and shout in its headline, “Wages Even Wall St. Can’t Stomach” (April 3), these three gentlemen each weighed in against the $550 million earned by Mr. Milken in 1987. Galbraith, of course, was Galbraith, denouncing the “process of financial aberration” under modern American capitalism.
More interesting were billionaires Trump and Rockefeller. Speaking from his own lofty financial perch, Donald Trump unctuously declared, of Milken’s salary, “you can be happy on a lot less money,” going on to express his “amazement” that his former employers, the Wall Street firm of Drexel Burnham Lambert “would allow someone to benefit that greatly.” Well, it should be easy enough to clear up Mr. Trump’s alleged befuddlement. We could use economic jargon and say that the payment was justified by Mr. Milken’s “marginal value product” to the firm, or simply say that Milken was clearly worth it, otherwise Drexel Burnham would not have happily continued the arrangement from 1975 until this year.
In fact, Mr. Milken was worth it because he has been an extraordinarily creative financial innovator. During the 1960s, the existing corporate power elite, often running their corporations inefficiently—an elite virtually headed by David Rockefeller—saw their positions threatened by takeover bids, in which outside financial interests bid for stockholder support against their own inept managerial elites. The exiting corporate elites turned—as usual—for aid and bailout from the federal government, which obligingly passed the Williams Act [named for the New Jersey Senator who was later sent to jail in the Abscam affair] in 1967. Before the Williams Act, takeover bids could occur quickly and silently, with little hassle. The 1967 Act, however, gravely crippled takeover bids by decreeing that if a financial group amassed more than 5% of the stock of a corporation, it would have to stop, publicly announce its intent to arrange a takeover bid, and then wait for a certain time period before it could proceed on its plans. What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high,yield bonds (the “leveraged buyout”).
The new takeover process enraged the Rockefeller,type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process Drexel Burnham grew from a small, third,tier investment firm to one of the giants of Wall Street.
The establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the establishment media to sneeringly refer to their high-yield competition as “junk” bonds, which is equivalent to the makers of Porsches persuading the press to refer to Volvos as “junk” cars.
People like Michael Milken perform a vitally important economic function for the economy and for consumers, in addition to profiting themselves. One would think that economists and writers allegedly in favor of the free market would readily grasp this fact. In this case, they aid the process of shifting the ownership and control of capital from inefficient to more efficient and productive hands—a process which is great for everyone, except, of course, for the inefficient Old Guard elites whose proclaimed devotion to the free markets does not stop them from using the coercion of the federal government to try to restrict or crush their efficient competitors.
We should also examine the evident hypocrisy of left-liberals like Galbraith, who, ever since the 1932 book by Adolf Berle and Gardiner Means, The Modern Corporation and Private Property, have been weeping crocodile tears over the plight of the poor stockholders, who have been deprived of control of their corporation by a powerful managerial elite, responsible neither to consumers nor stockholders. These liberals have long maintained that if only this stockholder-controlled capitalism could be restored, they would no longer favor socialism or stringent government control of business or the economy.
The Berle-Means thesis was always absurdly overwrought, but to the extent it was correct, one would think that left-liberals would have welcomed takeover bids, leveraged buyouts, and Michael Milken with cheers and huzzahs. For here, at last, was an easy way for stockholders to take the. control of their corporations into their own hands, and kick out inefficient or corrupt management that reduced their profits. Did liberals in fact welcome the new financial system ushered in by Milken and others? As we all know, quite the contrary; they were furiously denounced as exemplars of terrible “capitalist greed.”
David Rockefeller’s quote about Milken is remarkably revealing: “Such an extraordinary income inevitably raises questions as to whether there isn’t something unbalanced in the way our financial system is working.” How does Rockefeller have the brass to denounce high incomes? Ludwig von Mises solved the question years ago by pointing out that men of great inherited wealth, men who get their income from capital or capital gains, have favored the progressive income tax, because they don’t want new competitors rising up who make their money on personal wage or salary incomes. People like Rockefeller or Trump are not appalled, quite obviously, at high incomes per se; what appalls them is making money the old-fashioned way, i.e., by high personal wages or salaries. In other words, through labor income.
And yes, Mr. Rockefeller, this whole Milken affair, in fact, the entire reign of terror that the Department of Justice and the Securities and Exchange Commission have .been conducting for the last several years in Wall Street, raises a lot questions about the workings of our political as well as our’ financial system. It raises grave questions about the imbalance of political power enjoyed by our existing financial and corporate elites, power that can persuade the coercive arm of the federal government to repress, cripple, and even jail people whose only “crime” is to make money by facilitating the transfer of capital from less to more efficient hands. When creative and productive businessmen are harassed and jailed while rapists, muggers, and murderers go free, there is something very wrong indeed.