Wall Street.

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 does often lead to changes in corporate structure, Henwood says. "The stock market isn't just about prices; it's about the control of whole corporations, which are bought and sold, combined and liquidated, often on purely financial considerations through the mechanism of the stock exchange," he writes. "So the judgments of an ignorant, greedy, and excitable mob do have considerable real-world effects."

Corporate management is an increasingly marketable commodity. Managements that don't deliver steadily increasing quarterly profits are subject to hostile takeovers, leveraged buyouts, and other forms of reorganization. "Big corporations, with easy access to the public (non-bank) credit markets, have more money than they know what to do with," Henwood writes. Between 1981 and 1995, these corporations spent $1.9 trillion buying each other out, about a third of what they spent on productive investment. Such companies incurred high levels of debt, making them vulnerable to subsequent downturns.

Most of this process of merger and acquisition did not foster long-term economic efficiency or even steady increases in profits. Downsizing became the order of the day. Cuts in research and development that couldn't be justified in immediate terms were also mandated.

"Throughout the late 1980s and early 1990s the stock market rewarded firms announcing write-offs and mass firings -- a bulimic strategy of management -- since the cost cutting was seen as contributing rather quickly to profits." Henwood writes. "Firms and economies can't get richer by starving themselves, but stockmarket investors can get richer when the companies they own go hungry -- at least in the short term. As for the long term, well that's someone else's problem for the week after next."

Wage stagnation during the 1990s led to profit growth and high upper-management salaries, writes Henwood. Neither unions nor government tax policy did much to blunt growing prosperity among the already rich. In the early nineties, much of that money went to investors, then back into the market, driving market prices and investor wealth steadily upward. Late that spring, the rise in the market drew further infusions of new money, especially from middle-class investors, chasing growth opportunities through mutual funds.

Nonetheless, there is little doubt that the wealthiest Americans still hold by far the largest percentage of stock assets. In 1992, the most recent year for which complete statistics are available, 1 percent of U.S. families owned 39 percent of corporate stocks. Even pension funds, supposedly a democratizing element in the market, are controlled disproportionately by the rich. Among U.S. workers, 60 percent have no pensions at all, and the richest 10 percent of U.S. workers control 62 percent of pension assets.

As stock-market concentration grows, American workers are becoming more heavily indebted to banks and credit-card companies. Credit markets create one more opportunity for the rich to make money off the poor. And they engender their own addictive pathologies. "Debt," says Henwood, "reduces the pressure for higher wages by allowing people to buy goods they otherwise couldn't afford. It helps to nourish both the appearance and the reality of a middle-class standard of living in a time of polarization." But eventually, high levels of consumer debt become unsustainable, with destructive social consequences.

What would Henwood have us do? For starters, we must resist privatizing Social Security. That would throw even more money into the stock market. Money managers would rip off a large segment of the gain, and the whole U.S. retirement system would be subject to stock-market volatility. Henwood warns. Ultimately, depriving seniors of some minimal income supports would make the whole U.S. economy more volatile. And none of the infusions of capital into the markets are likely to enhance new investment in the production of goods and services.

I would add that much the same kind of argument can be made against capital-gains tax "relief." Not only will the rich benefit disproportionately, but any increased saving will be channeled into mostly unproductive market speculation.

Part of getting the economy back on track requires curbing the casino economy. For starters, Henwood advocates a tax on both securities and currency trades, curbing some of the speculative activities and social waste associated with these. More ambitiously, he would have us impose a wealth tax, as do Switzerland and Sweden. Such a policy would fund needed public capital investment and job creation by taxation rather than borrowing from the rich, which only increases the government's dependence on the wealthy.

Henwood makes a persuasive case. Nonetheless, there are limits to the benefits of a wealth tax. Though conservatives exaggerate the risks of taxation, overly heavy reliance on stiffly progressive taxes would invite tax evasion and undermine incentives. Tax and securities reforms work best in conjunction with reform of corporate governance.

A rejuvenated labor movement might play a vital role in preventing the most extreme inequalities. A stronger labor movement could demand wages that reflect ongoing gains in workplace productivity, something workers have been unable to achieve in the last quarter-century. Stronger and more democratic unions could also insist that workers be given an opportunity to gain broad-based skills and a larger voice in corporate financial planning. Educated workers with a stake in their companies could yield faster productivity growth, and this could give them a better claim to the fruits of that growth.

Henwood knows that any reform of our market pathologies is unlikely without a political movement to recapture power. He realizes we are currently a long way from such a politics. Nonetheless, the unvarnished picture he presents of markets and their excesses sheds needed light on the destructive role financial markets play in our daily lives. Such enlightenment is a necessary first step in our political reconstruction.