Commentary on ' Financial Factors in Business Fluctuations ' '

This paper reflects one of the important trends in macro thinking about corporate finance: There is an internal economic life of the firm where the most important decisions-employment, investment, production-are made. The players within the firm are the salaried managers of the firm and the workers. Quite separately, there are wealthy individuals and institutions who provide finance for these activities. These wealthy individuals trade with each other claims on the operations run by managers in organized securities .markets. It's a fact of life that in an economy like that of the U.S., there are relatively few wealthy managers. So there always needs to be a bridge between managers and wealth which is held either in the form of institutions or by a relatively small number of very wealthy individuals who haven't the managerial skills or time to "run their own show." This bridge-the interaction between the managers and the wealthholders-involves some difficult problems of incentives and moral hazard, which are very well developed in this paper. I endorse both the example given here in the paper, and the general principle it illustrates: that although the managers are playing with the wealthholders' wealth, wealthholders would like managers to make decisions as if they were deploying the managers' own wealth. That bridge and its implications for macroeconomics-in particular, for the transmission of gyrations of financial markets into the real economy-is what this paper is about. What has emerged from thinking about this situation is what I call the "back-to-the-wall" school of finance theory. Contributions in