Saving Capitalism: For The Many, Not The Few
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Stagnant or declining wages for most, coupled with declining job security and widening inequality. Corporations, giant banks, and billionaires in control of a growing share of the economy * . In this book I examine the connections between these phenomena, what they portend, and the critical choice they pose.
In particular, they overlook the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.
The real question is not whether Britain and the United States will move toward a capitalism * that works for the many rather than the few. Both of our nations will have to. The question is whether this change will occur through democratic reforms or by means of authoritarian mandates.
Do you recall a time when the income of a single schoolteacher or baker or salesman or mechanic was enough to buy a home, have two cars, and raise a family? I do.
For three decades after World War II, America created the largest middle class the world had ever seen. During those years the earnings of the typical American worker doubled, just as the size of the American economy doubled. Over the last thirty years, by contrast, the size of the economy doubled again but the earnings of the typical American went nowhere.
The living standards of most people improved throughout their working lives, our children would enjoy better lives than we had, and the rules of the game were basically fair.
To many, the economic and political systems seem rigged, the deck stacked in favor of those at the top.
When most people stop believing they and their children have a fair chance to make it, the tacit social contract societies rely on for voluntary cooperation begins to unravel.
We have the power to change all this, re-creating an economy that works for the many rather than the few.
The basic rules of capitalism are not written in stone. They are written and implemented by human beings.
These rules have been altered over the past few decades as large corporations, Wall Street, and wealthy individuals have gained increasing influence over the political institutions responsible for them.
In truth, income and wealth increasingly depend on who has the power to set the rules of the game.
The problem is not the size of government but whom the government is for. The remedy is for the vast majority to regain influence over how the market is organized.
My conclusion is that the only way to reverse course is for the vast majority who now lack influence over the rules of the game to become organized and unified, in order to re-establish the countervailing power that was the key to widespread prosperity five decades ago.
The challenge is not just economic but political. The two realms cannot be separated.
Time and again we have saved capitalism from its own excesses. I am confident we will do so again.
Few ideas have more profoundly poisoned the minds of more people than the notion of a “free market” existing somewhere in the universe, into which government “intrudes.”
According to this view, whatever we might do to reduce inequality or economic insecurity—to make the economy work for most of us—runs the risk of distorting the market and causing it to be less efficient, or of producing unintended consequences that may end up harming us.
The prevailing view is so dominant that it is now almost taken for granted. It is taught in almost every course on introductory economics.
But the prevailing view, as well as the debate it has spawned, is utterly false. There can be no “free market” without government. The “free market” does not exist in the wilds beyond the reach of civilization.
Civilization is defined by rules; rules create markets, and governments generate the rules.
A market—any market—requires that government make and enforce the rules of the game.
Government doesn’t “intrude” on the “free market.” It creates the market.
The rules reflect who in society has the most power to make or influence them.
It is impossible to have a market system without such rules and without the choices that lie behind them.
It is first necessary to address basic questions about how government has organized and reorganized the market, what interests have had the most influence on this process, and who has gained and who has lost as a result.
Power and influence are hidden inside the processes through which market rules are made, and the resulting economic gains and losses are disguised as the “natural” outcomes of “impersonal market forces.” Yet as long as we remain obsessed by the debate over the relative merits of the “free market” and “government,” we have little hope of seeing through the camouflage.
The invisible hand of the marketplace is connected to a wealthy and muscular arm.
Now, as economic and political power have once again moved into the hands of a relative few large corporations and wealthy individuals, “freedom” is again being used to justify the multitude of ways they entrench and enlarge that power by influencing the rules of the game.
Under these circumstances, arguments based on the alleged superiority of the “free market,” “free enterprise,” “freedom of contract,” “free trade,” or even “free speech” warrant a degree of skepticism. The pertinent question is: Whose freedom?
Those who view the global economy as presenting a choice between “free trade” and “protectionism” overlook the centrality of power in determining what is to be traded and how.
In such negotiations the interests of big American-based corporations and Wall Street banks have consistently trumped the interests of average working Americans, whose wages are considered less worthy of protection than, say, an American company’s intellectual capital or a Wall Street bank’s financial assets.
Those who claim to be on the side of freedom while ignoring the growing imbalance of economic and political power are not in fact on the side of freedom. They are on the side of those with the power.
Private property is the most basic building block of free-market capitalism. In the conventional debate it’s contrasted with government ownership, or socialism. What is left out of that debate are the myriad ways government organizes and enforces property rights and who has the most influence over those decisions.
Three centuries ago, it was common for people to own other people. As historian Adam Hochschild has noted, by the end of the eighteenth century well over three-quarters of all people alive in the world were in bondage of one kind or another, as slaves or serfs.
Property rights require that government determines how they are to be allocated initially, by what criteria, and how they are to be traded.
If necessities such as clean air and water simply go to the highest bidders, income and wealth disparities can result in wildly unfair outcomes.
Strong and enduring property rights provide incentives to invest and innovate, but they also raise consumer prices. Importantly, the economic power of those who possess these rights often translates into political and legal power to make them even stronger and more enduring.
The biggest technology companies are spending billions accumulating patent portfolios and then suing and countersuing one another.
As White House intellectual property advisor Colleen Chien noted in 2012, Google and Apple have been spending more money acquiring and litigating over patents than on doing research and development.
Again, the underlying issue here has nothing to do with whether one prefers the “free market” or government. The question is how government defines property rights, what that process entails, and who has the most power to determine its outcomes.
Big Pharma spends heavily on political campaigns.In 2012 it shelled out more than $36 million, making it one of the biggest political contributors of all American industries.
The critical question is not whether government should play a role. Without government, patents would not exist, and pharmaceutical companies would have no incentive to produce new drugs. The issue is how government organizes the market. So long as big drugmakers have a disproportionate say in those decisions, the rest of us pay through the nose.
The story with copyrights—applied to works of art and music—is similar. Copyrights now cover almost all creative works, including computer programs, and give owners (now, usually large corporations) rights over all derivative work that might be generated by the original.
Here again, the result is higher corporate profits, higher costs to consumers, and less access for everyone.
In sum, property—the most basic building block of the market economy—turns on political decisions about what can be owned and under what circumstances.
As we bicker over whether we prefer the “free market” to government, the game continues and the winnings accumulate.
The second building block of a market economy follows directly from the first. Businessmen and -women need some degree of market power in order to be induced to take the risks of starting new businesses.
The question of how much market power is desirable therefore poses a trade-off similar to that presented by rules about property, including intellectual property.
Decisions must be made about whether a particular company or group of companies has “excessive” market power. The important question is how such decisions are made and influenced.
Monsanto, the giant biotech corporation, owns the key genetic traits in more than 90 percent of the soybeans planted by farmers in the United States and 80 percent of the corn. Its monopoly grew out of a carefully crafted strategy.
To ensure its dominance, Monsanto has prohibited seed dealers from stocking its competitors’ seeds and has bought up most of the small remaining seed companies.
At every stage, Monsanto’s growing economic power has enhanced its political power to shift the rules to its advantage, thereby adding to its economic power.
You might think Monsanto’s overwhelming market power would make it a target of antitrust enforcement. Think again. In 2012, it succeeded in putting an end to a two-year investigation by the antitrust division of the Justice Department into Monsanto’s dominance of the seed industry.
Monsanto, like any new monopoly, has strategically used its economic power to gain political power and used its political power to entrench its market power.
Amazon may end up limiting the marketplace of ideas, just as Google and Facebook have chokeholds on the news—analogous to the way Monsanto’s seeds have reduced biodiversity in our food supply.
Unlike the old monopolists, who controlled production, the new monopolists control networks. Antitrust laws often busted up the old monopolists. But the new monopolists have enough influence to keep antitrust at bay.
By 2014, Wall Street’s five largest banks held about 45 percent of America’s banking assets, up from about 25 percent in 2000.
Wall Street’s biggest banks effectively controlled the fastest-growing sector of the entire U.S. Economy.
Between 1980 and 2014, the financial sector grew six times as fast as the economy overall.
As the big banks have gained dominance over the financial sector, they’ve become more politically potent.
The employees of Goldman Sachs were Obama’s leading source of campaign donations from a single corporate workforce.
Wall Street’s new monopolists rig financial markets for their own benefit. And again, the rest of us pick up the tab.
Why isn’t antitrust law as effective at curbing the new monopolists as it was the older forms of monopoly? Partly because antitrust enforcement has lost sight of one of its original goals: preventing large aggregations of economic power from gaining too much political influence.
We are now in a new gilded age of wealth and power similar to the first Gilded Age, when the nation’s antitrust laws were enacted. The political effects of concentrated economic power are no less important now than they were then, and the failure of modern antitrust to address them is surely related to the exercise of that power itself.
Contracts are a third building block of capitalism. But as with property and market power, contracts do not just happen. Any system of exchange requires rules about what can be bought and sold.
In a democracy, these rules emerge from legislatures, agencies, and courts. Here again, the debate over the “free market” versus government disguises how these rules are made and who has the most influence over making them.
This has opened the way for political influence over all aspects of the new contracts.
Buried within the rules about what can be traded and what cannot are also assumptions reflecting the status and power of different groups in society. *
Increasingly, political power is determining what can be traded and how.
State and federal lawmakers once sought to protect vulnerable consumers, employees, and borrowers by setting limits on certain contractual terms large corporations and finance companies can demand. But in recent years, those limits have been whittled back under political pressure from corporations and banks.
When large corporations have disproportionate power—not only over what’s sold, but also over the rules for deciding what contracts are permissible and enforceable by law—those who are relatively powerless have no choice. The “free market” is not, in this sense, free. It offers no practical alternative.
Bankruptcy was designed so people could start over. But these days, the only ones starting over with ease are big corporations, wealthy moguls, and Wall Street, who have had enough political clout to shape bankruptcy law to their needs.
Bankruptcy is the fourth basic building block of the market.
Bankruptcy is the system used in most capitalist economies for finding the right balance—allowing debtors to reduce their IOUs to a manageable level while spreading the losses equitably among all creditors, under the watchful eye of a bankruptcy judge.
Who gets to use bankruptcy, and for what types of debts? The “free market” itself doesn’t offer solutions. Most often, powerful interests do.
Over the last two decades, every major U.S. airline has been through bankruptcy at least once, usually in order to renege on previously agreed-upon labor union contracts.
Another group of debtors who cannot use bankruptcy to renegotiate their loans are former students laden with student debt. The bankruptcy code does not allow student loan debts to be worked out under its protection. If debtors cannot meet their payments, therefore, lenders can garnish their paychecks.
Buried within the staid laws of bankruptcy are fundamental political and moral questions. Who are “we” and what are our obligations to one another? Is American Airlines just its shareholders and executives, or its employees as well? When graduates cannot repay their student debts, do lenders have any responsibilities?
Bankruptcy and contracts conveniently mask such questions.
The fifth building block of the market is enforcement. Property must be protected. Contractual agreements must be enforced. Losses from bankruptcy must be allocated. All are essential if there is to be a market.
Entire industries with notable political clout have gained * immunity from prosecution.
Congress enacted the Protection of Lawful Commerce in Arms Act, which sharply limited the liability of gun manufacturers, distributors, and dealers for any harm caused by the guns they sold.
Defanging laws by hollowing out the agencies charged with implementing them works because the public doesn’t know it’s happening. The enactment of a law attracts attention.
But the defunding of the agencies supposed to put the law into effect draws no attention, even though it’s the practical equivalent of repealing it.
An even quieter means of rescinding laws is to riddle them with so many loopholes and exceptions that they become almost impossible to enforce.
Wall Street’s shenanigans have convinced a large portion of America that the economic game is rigged and blanketed America in a miasma of cynicism.
The costs of such cynicism have leached deep into America, contributing to the suspicion and anger that have subsequently consumed American politics.mask
Six years after Wall Street’s near meltdown, not a single executive on the Street had been convicted or even indicted for crimes that wiped out the savings of countless Americans.
Lehman Brothers’ Repo 105 program—which temporarily moved billions of dollars of liability off the bank’s books at the end of each quarter and replaced them a few days later at the start of the next quarter was a carefully crafted fraud.
But no former Lehman executive ever faced criminal prosecution for it. Contrast this with the fact that a teenager who sells an ounce of marijuana can be put away for years.
Mention should also be made of the large number of state judges and attorneys general who are elected to their positions, providing another channel for big money to influence how market rules are interpreted and enforced. *
A summary is in order. Markets are made by human beings—just as nations, governments, laws, and corporations are.
However organized, the rules of a market create incentives for people. The rules will also reflect their moral values and judgments about what is good and worthy and what is fair.
Private property, constraints on monopoly, contract, bankruptcy or other means for coping with default, and enforcement of such rules are essential building blocks of any market. But each of them can be tilted to the benefit of a few rather than the many.
To an ever-growing extent, large corporations and the wealthy influence the political institutions whose decisions organize the market, and they benefit most from those decisions.
The idea of a “free market” separate and distinct from government has functioned as a useful cover for those who do not want the market mechanism fully exposed. They have had the most influence over it and would rather keep it that way.
Are those on Wall Street “worth” the vast amounts of money they receive? *
The specific mechanism by which they earn their incomes—including the hidden too-big-to-fail subsidy as well as the utilization of insider information—suggests that much of what they receive is involuntarily transferred to them from taxpayers and small investors. They have enough wealth to influence the rules of the game, but they are not “worth” their pay in any meaningful sense of the term. *
For three decades after World War II, the average hourly compensation of workers rose in lockstep with productivity gains. It was a virtuous cycle. But then, beginning in the late 1970s, the virtuous cycle came to a halt.
By 2013, the median household was earning less than it did in 1989, nearly a quarter of a century before.
The standard explanation attributes this U-turn to “market forces,” especially globalization and technological improvements.
It is commonly argued that workers who had once earned good paychecks priced themselves out of the labor market. If they want jobs, they have to settle for lower wages and less security. If they want better jobs, they need better skills. So hath the market decreed.
The standard explanation cannot account for much of what has happened. It does not explain why the transformation occurred so suddenly and the standard explanation doesn’t tell us why the average incomes of the bottom 90 percent actually dropped during the first six years of recovery from the Great Recession.
The government did not tax the middle class and poor and transfer a portion of their incomes to the rich. The government—and those with the most influence over it—undertook the upward redistribution less directly, by altering the rules of the game.
Aradically different vision of corporate ownership erupted in the late 1970s and early 1980s. It came with corporate raiders who mounted hostile takeovers.
The raiders assumed that shareholders were the only legitimate owners of the corporation and that the only valid purpose of the corporation was to maximize shareholder returns.
This transformation did not happen by accident. It was a product of changes in the legal and institutional organization of corporations and of financial markets—changes that were promoted by corporate interests and Wall Street.
The human costs of this transformation have been substantial. Ordinary workers have lost jobs and wages, and many communities have been abandoned.
As corporations have steadily weakened their workers’ bargaining power, the link between productivity and workers’ income has been severed.
High levels of unemployment have also contributed to the willingness of workers to settle for lower wages. And here, too, government policies play a significant role.
Even full-time workers who have put in decades with a company can now find themselves without a job overnight—with no severance pay, no help finding another job, and no health insurance.
The risk of getting old with no pension is also rising. This is another central reality of American capitalism as organized by those with the political power to make it so.
A third driving force behind the declining power of the middle class has been the demise of unions. The result has been a race to the bottom.
By the mid-1950s, almost a third of all employees in the private sector of the economy belonged to a union, and why the median wage increased in tandem with productivity growth. Starting in the late 1970s, the process went into reverse.
The strategic use of bankruptcy to eliminate union contracts was another practice begun in the 1980s.
The result has been a steady decline in the percentage of private-sector workers who are unionized. Not incidentally, that decline parallels the decline in the share of total income going to the middle class.
To attribute this to the impersonal workings of the “free market” is to ignore how the market has been reorganized since the 1980s, and by whom.
And it is to overlook the marked decline of countervailing power in our political-economic system. *
Until quite recently, poverty was largely confined to those who did not work. It was rare for a full-time worker to be in poverty. This is no longer the case.
The mythology that a minimum-wage increase would cause employers to reduce employment is a common trope. A corollary is that getting rid of the minimum wage altogether will reduce or even eliminate unemployment.
Slavery, after all, was a full-employment system.
Another reason for the rise in the number of working poor is a basic shift in the criteria used by the government to determine eligibility for government assistance.
Those at the bottom are the first to be fired, last to be hired, and most likely to bear the brunt of declining wages and benefits.
Some continue to believe that the poor remain poor because they lack ambition. But what they really lack is opportunity and the political power to get the resources needed to realize that opportunity.
In all these ways, poverty among those who work and their political powerlessness are intimately connected.
As the ranks of the working poor have swelled, so too have those of the non-working rich. They do not need to work because they have ample earnings from income-producing assets.When these assets increase in value, though, their current owners are rarely responsible.
A growing portion of the non-working rich have never worked, however. They have inherited their wealth.
The Walmart heirs have more wealth than the bottom 40 percent of Americans combined. And this is just the beginning.
The specter of an entire generation that does nothing for its money other than speed-dial its wealth management advisors is not particularly attractive.
It is also increasingly dangerous to our democracy, as dynastic wealth inevitably and invariably accumulates even more political influence and power. *
Meanwhile, the poor who cannot find their way out of poverty are not losers or failures, either, although that is how many of them view themselves. The far more significant fact is they are utterly powerless in society.
The underlying reality is that capitalism is not working as it should or as it can. The mythology that one is paid what one is worth must be seen for what it is.
The meritocratic ideal with which our form of capitalism has been justified does not match the reality in which most of us live and work.
Reversing this state of affairs is our own responsibility, the topic to which I now turn.
The “free market” serves as a smoke screen * . Because of it, the system for distributing economic gains appears to be the natural and inevitable result of neutral forces.
There is no longer any significant countervailing power, no force to constrain or balance the growing political strength of large corporations, Wall Street, and the very wealthy.
We are then left with three questions. First, how will this trend threaten capitalism if countervailing power is not re-established? Second, how can the middle class and the poor regain sufficient countervailing power to reorganize the market in ways that generate broader-based prosperity? And third, what might that reorganization look like?
If history is any guide, reform is likely to begin in America and inspire reform elsewhere. That’s because Americans have always tended to choose pragmatism over ideology.
Again and again we have saved capitalism from its own excesses by making necessary corrections. It is time for us to do so again.
The essential challenge is political rather than economic. It is impossible to reform an economic system whose b asic rules are under the control of an economic elite without altering the allocation of political power that lies behind that control.
The only way back toward a democracy and economy that work for the majority is for the majority to become politically active once again, establishing a new countervailing power. The moneyed interests will continue to do what they do best—make money.
The rest of us must do what we do best—use our voice, our vigor, and our votes to wrest back economic and political control.
If we are able to rid ourselves of the notions that the “free market” exists separately from government, and that people earn what they are worth to society, it will be possible to move beyond the ideological brawls that have consumed so much of the political right and left and attend instead to the central challenge of our time—restoring countervailing power to our political-economic system.
The bottom 90 percent have far more in common, economically, than they do with the top executives of large corporations.
This will require eschewing the tired and increasingly irrelevant choice between the “free market” and “government,” and focusing instead on how to make it work instead for the vast majority.
The moneyed interests have too much at stake in the prevailing distribution of income, wealth, and political power to passively allow countervailing power to re-emerge.
The status quo is too comfortable, and the prospect of countervailing power too risky and unpredictable. Yet its re-emergence is inevitable. We cannot continue in the direction we are now headed.
Reinventing the corporation would move us only part of the way toward a more balanced economy.
The coming challenge will be to develop new market rules that spread the economic gains when robots take over.
The economic model that predominated through most of the twentieth century was mass production by many for mass consumption by many. That no longer holds. The model of the future seems likely to be unlimited production by a handful for consumption by whoever can afford it.
The underlying problem is not the number of jobs but the allocation of income and wealth.
One of the young founders of WhatsApp had a 45 percent equity stake in the company when Facebook purchased it, which yielded him $6.8 billion. Each of the early employees reportedly had a 1 percent stake, which would have netted them $160 million each.
If present trends continue, the fortunate creators of blockbuster ideas will earn even more. The corollary, as I have emphasized, is that they will also gain unparalleled political power. But most people will not share in the monetary gains, and their political power will disappear.
Reversing the upward pre-distributions baked into the rules of the market, getting big money out of politics, reinventing the corporation, and improving the quality of and access to education will all be helpful. Countervailing power should aim for no less. But these changes will not themselves alter the direction in which technological advances are taking us.
What will be needed? And how could the market be reorganised to acomplish this?
New market rules that cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it, and be used instead to finance a minimum guaranteed income for all citizens, is one way.
However it is accomplished, the rules must be adapted toward creating a more inclusive economy. Absent some means for sharing the increasingly large rewards that will otherwise go to few people and their heirs fortunate enough to possess ownership rights to these robots and related technologies, the middle class will disappear, and capitalism as we know it will not survive.
We need not be victims of impersonal “market forces” over which we have no control. The market is a human creation. It is based on rules that human beings devise. The central question is who shapes those rules and for what purpose.
The coming challenge is not to technology or to economics. It is a challenge to democracy. The critical debate for the future is not about the size of government; it is about whom government is for.
The pertinent issue is not how much is to be taxed away from the wealthy and redistributed to those who are not; it is how to design the rules of the market so that the economy generates what most people would consider a fair distribution.
The vast majority of the nation’s citizens do have the power to alter the rules of the market to meet their needs.
We have done so before. If history is any guide and common sense has any sway, we will do so again.