"Legitimising the Index Fund: The US Neoliberalism and the Re-making of the U.S. Asset Management Industry in the 1970s"

The launch of index fund by Jack Bogle at the Vanguard Group in 1975 revolutionized the modus operandi at Wall Street. Its strategy to construct the portfolio by tracking the stock market substantiated the characterization of the ‘market’ by financial economists at Chicago. The assumption of ‘you can’t beat the market’ challenged the traditional notion of superior performance in the US asset management industry. The debate between active and passive professional money managers still wages on Wall Street as Warren Buffett often disapproves of the efficient market hypothesis (EMH).
This paper problematizes the ‘victory of social sciences’ over the rules of thumb in the Chandlerian account by analyzing the cultural and legal legitimisation of the index fund in the 1970s. First, it examines the generational confrontations between the two sides in Wall Street. The depiction of Jerry Tsai, a Shanghai-born American superstar stock-trader, the irrational and superstitious figure, indicates the strategy of disenchantment by proponents of the EMH. Second, it argues the role of US neoliberalism, the Law and Economics, in the legalization of the index fund. It claims that the new legal movement re-defined the ‘prudent man rule’, which had stipulated duties of fiduciary by distinguishing speculation and investment. Until the 1960s, the court had rejected the whole portfolio approach, the central premise of the index fund. However, in response to the pension crisis and the legislation of the Employee Retirement Income and Security Act of 1974, US neoliberals led by Richard Posner challenged the meaning of prudence to legitimise the index fund which adopted the whole portfolio approach. And the campaign succeeded when the Labour Department introduced the new approach in its regulation for pension funds in 1979, which paved the way for the integration of labour’s capital into the logic of free-market ideology.