American Capitalism – Toward a New History: Industrial Capitalism to Finance Capitalism

“Industrial Capitalism to Finance Capitalism” is part 2 of a 3-part series on “American Capitalism—toward a new history.”

In history departments, inquiry into topics such as business, finance, entrepreneurship, and capitalism has become fashionable. Vibrant scholarship in the history of U.S. capitalism is important so that today’s business leaders and entrepreneurs can more fully evaluate the evolving environment within which they maneuver. Additionally, this history is crucial for constructing the country’s broader narrative, not only in the fields of economics and politics, but also to fully understand our national culture – the issues that have sowed societal divisions as well as the features that have created a distinctive American commercial spirit.

In recognition of these facts, the Kauffman Foundation is sponsoring “American Capitalism,” a research project launched by Louis Galambos, Angus Burgin, and me. Lou Galambos is a giant in the fields of history and political economy. His current work on the entrepreneurial multiplier – that is, the increase in investment, production, and consumption generated by entrepreneurs and their activities – promises to shape the questions and research projects of scholars for generations to come. Angus Burgin, celebrated for his work examining the twentieth-century history of free market advocacy (The Great Persuasion, 2012), has now turned his attention to understanding how the generation following World War II – including politicians, entrepreneurs, social commentators, and economists – grappled with technology and the issues it posed for societal development.

My project focuses on how the U.S. economy has transitioned from industrial capitalism to finance capitalism since World War II. Rather than deriving most earnings from the manufacture of tangible goods, the economy now realizes more profit through financial activities. Within that broader subject, the theme of entrepreneurs in finance has garnered attention from journalists and industry insiders eager to divulge their tale, but has received less notice from scholars and historians.                         

The topic of financial entrepreneurship is thus compelling.

Consider Georges Doriot, known as the “father of venture capitalism.” A professor at Harvard Business School for many years, Doriot then served as a brigadier general during WWII. Upon his return to civilian life, he founded the American Research and Development Corporation (ARD). Often referred to as the first venture capital firm, ARD was novel because investors were not bound by kinship or close social connections and because the company’s managers controlled investment decisions without input from those bankrolling the enterprise.

Doriot’s financial innovations helped launch many other entrepreneurs. For example, in 1957, Ken Olsen and Harlan Anderson were having difficulty finding the capital to start their computer company. Olsen and Anderson planned to develop computers that would be much smaller than the prevailing refrigerator-sized mainframes. The computer engineers ended up exchanging 70 percent of their nascent company for $70,000 in ARD funding. By the late 1960s, Digital Equipment Corporation was a major player in the industry and Doriot’s investment was worth hundreds of millions of dollars. 

The role of venture capitalist quickly advanced beyond simply supplying financial resources to also include business advice, strategy discussions, and consultations on firm structure.  

Private equity firms sought a more active role, usually investing in existing firms to acquire management authority or outright ownership. In 1985, Steven Schwarzman cofounded the Blackstone Group with $400,000 in capital. In 2014, the company earned $7.5 billion and had risen to become a dominant player in the global equity sector. The industry’s leveraged buyouts often attract negative publicity as slash-and-burn, pink-slip laden operations; however, they can also serve to direct significant asset pools toward more productive purposes. For example, for several years after the Blackstone Group’s 2007 purchase of Hilton Hotels Corporation, the company’s prospects appeared bleak. But the new infusion of capital combined with debt restructuring, smart management techniques, and a commitment to employee retention helped turn the chain around.

Journalists have begun telling the story of financial innovators. It is time that academics do so as well, in order to map out the complex institutional mechanisms that have made America’s political economy ripe for such activities. Understanding how government regulations, federal tax rules, monetary policy, and changing corporate structures have interacted will help us further understand the societal position of entrepreneurs and their part in creating economic wealth.

Christy Ford Chapin, Assistant Professor, University of Maryland, Baltimore County

Sources consulted

Spencer E. Ante, Creative Capital: George Doriot and the Birth of Venture Capital (Cambridge, Mass., 2008).

Christina Pazzanese, “The Talented Georges Doriot,” Harvard Gazette, February 24, 2015, accessed at http://news.harvard.edu/gazette/story/2015/02/the-talented-georges-doriot/.

Davidy Carey and John E. Morris, King of Capital: The Remakable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone (New York, 2012).

“The World’s Billionaires,” Forbes, June 2015, accessed at http://www.forbes.com/profile/stephen-schwarzman/.

William D. Cohan, “Blackstone’s $26 Billion Hilton Deal: The Best Leveraged Buyout Ever,” Bloomberg Business, September 11, 2014, accessed at http://www.bloomberg.com/bw/articles/2014-09-11/blackstones-hilton-deal-best-leveraged-buyout-ever.