Saving Capitalism E-Book

Robert Reich

• Herausgeber: Icon Books
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 457

Veröffentlichungsjahr: 2016

Beschreibung

'A very good guide to the state we're in' Paul Krugman, New York Review of Books 'A well-written, thought-provoking book by one of America's leading economic thinkers and progressive champions.' Huffington Post 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? Robert Reich does – in the 1950s his father sold clothes to factory workers and the family earnt enough to live comfortably. Today, this middle class is rapidly shrinking: American income inequality and wealth disparity is the greatest it's been in eighty years. As Reich, who served in three US administrations, shows, the threat to capitalism is no longer communism or fascism but a steady undermining of the trust modern societies need for growth and stability. With an exclusive chapter for Icon's edition, Saving Capitalism is passionate yet practical, sweeping yet exactingly argued, a revelatory indictment of the economic status quo and an empowering call to action.

Leseprobe

Praise for Saving Capitalism

‘A riveting guide to how our economic and political system has become so badly flawed.’

Joseph Stiglitz

‘Reich makes a very good case that widening inequality largely reflects political decisions that could have gone in very different directions … Saving Capitalism is a very good guide to the state we’re in.’

Paul Krugman, New York Review of Books

‘One of Reich’s finest works, and is required reading for anyone who has hope that a capitalist system can indeed work for the many, and not just the few.’

Salon

‘Arresting, thought-provoking … Readily understandable language … Powerful.’

Publishers Weekly

‘Like any good teacher, Robert Reich knows that making a simple yet crucial idea stick often takes much time and many presentations of the concept … In Saving Capitalism, Reich drives home a basic fact that, if widely understood, could lift America from today’s destructive political standoff.’

Chicago Tribune

‘Reich has both the stature and eloquence to make a compelling case … Highly recommended to all readers … Insightful.’

Library Journal, starred review

Praise for Supercapitalism (Icon Books, 2008)

‘Supercapitalism is a grand debunking of the conventional wisdom in the style of John Kenneth Galbraith … Reich documents in lurid detail the explosive growth of corporate lobbying expenditures and campaign contributions since the 1970s. Today’s presidential candidates should study his message carefully.’

New York Times

‘A much-needed call for a reassessment of capitalism and recommendations for how to fix the mess we’re in. An important book that needs to be read.’

Joseph Stiglitz

‘Robert Reich’s timely book should act as a wake-up call to the body politic.’

Tribune

‘One of the most interesting books on political economy to appear in a long time.’

Financial Times

‘Supercapitalism is a rounded and explicit discussion of how capitalist structures have stretched into the realm of democracy and eroded it.’

New Statesman

‘Reich’s book is fluently written, highly informative and a thoroughly absorbing read.’

Sunday Business Post

‘The most original and honest criticism of the status quo that I have read for a long time.’

Literary Review

‘Mr Reich argues that firms and financiers, from Wal-Mart to Wall Street, have caused such a dizzying gulf between rich and poor that the “common good” has disappeared and Americans have lost control of their democracy.’

Daily Telegraph

‘There are many good reasons to read this book, not least the genuine importance of the issues under consideration.’

Spectator

‘Robert Reich has done it again, offering a powerful new perspective on the predicaments in which we as Americans find ourselves. Supercapitalism highlights a new kind of social conflict – between ourselves as consumers and investors and ourselves as democratic citizens.’

Robert D. Putnam, author of Bowling Alone

SAVING CAPITALISM

SAVING CAPITALISM

For the Many, Not the Few

Robert REICH

Published in the UK in 2016 by Icon Books Ltd, Omnibus Business Centre, 39–41 North Road, London N7 9DP email: [email protected]

First published in the USA in 2015 by Alfred A. Knopf, a Division of Penguin Random House LLC

Sold in the UK, Europe and Asia by Faber & Faber Ltd, Bloomsbury House, 74–77 Great Russell Street, London WC1B 3DA or their agents

Distributed in the UK, Europe and Asia by Grantham Book Services, Trent Road, Grantham NG31 7XQ

Distributed in Australia and New Zealand by Allen & Unwin Pty Ltd, PO Box 8500, 83 Alexander Street, Crows Nest, NSW 2065

Distributed in South Africa by Jonathan Ball, Office B4, The District, 41 Sir Lowry Road, Woodstock 7925

Distributed in India by Penguin Books India, 7th Floor, Infinity Tower – C, DLF Cyber City, Gurgaon 122002, Haryana

ISBN: 978-178578-067-7

Text copyright © 2015 Robert B. Reich

The author has asserted his moral rights.

No part of this book may be reproduced in any form, or by any means, without prior permission in writing from the publisher.

Typeset by North Market Street Graphics, Lancaster, PA Designed by Maggie Hinders Printed and bound in the UK by Clays Ltd, St Ives plc

In fond memory of John Kenneth Galbraith

There are two modes of invading private property; the first, by which the poor plunder the rich … sudden and violent; the second, by which the rich plunder the poor, slow and legal.

—JOHN TAYLOR,An Inquiry into the Principles and Policy of the Government of the United States (1814)

Contents

PREFACE TO THE BRITISH EDITION

INTRODUCTION

PART I THE FREE MARKET

1The Prevailing View

2The Five Building Blocks of Capitalism

3Freedom and Power

4The New Property

5The New Monopoly

6The New Contracts

7The New Bankruptcy

8The Enforcement Mechanism

9Summary: The Market Mechanism as a Whole

PART II WORK AND WORTH

10The Meritocratic Myth

11The Hidden Mechanism of CEO Pay

12The Subterfuge of Wall Street Pay

13The Declining Bargaining Power of the Middle

14The Rise of the Working Poor

15The Rise of the Non-working Rich

PART III COUNTERVAILING POWER

16Reprise

17The Threat to Capitalism

18The Decline of Countervailing Power

19Restoring Countervailing Power

20Ending Upward Pre-distributions

21Reinventing the Corporation

22When Robots Take Over

23The Citizen’s Bequest

24New Rules

ACKNOWLEDGMENTS

NOTES

INDEX

Preface to the British edition

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 and government. Rising populist agitation in the form of fierce xenophobia and anti-immigrant fervor.

Sound familiar? It’s becoming the new political-economic normal in the United States, Britain, and elsewhere around the world. In this book I examine the connections between these phenomena, what they portend, and the critical choice they pose.

The standard explanation for the economic stresses that workers in Britain and the United States have endured over the last several decades focuses on globalization and technological displacement. While it’s true that lower-paid workers abroad or computer-driven machines can now do many jobs more cheaply, these two factors by no means explain all that has happened.

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 ongoing debate between the political Left and Right over the merits of the so-called “free market” has diverted attention from the fact that the market in both our nations is organized differently from the way it was a half-century ago, and that its current organization is failing to deliver the widely shared prosperity and security it delivered then.

Such power is the main reason the compensation packages of the top executives of big companies have soared, that the wages and job prospects of recent college graduates have declined, and that the middle classes in both Britain and the United States have less employment security than they had decades ago.

To take but one example, our corporate and financial elites have enlarged and extended intellectual property rights—patents, trademarks, and copyrights—thereby increasing the profits of corporations engaged in the production of pharmaceuticals, high technology, biotechnology, and entertainment. Those profits have come at the expense of higher prices for average consumers—a portion of whose incomes have thereby been redistributed upwards to top executives and major shareholders.

Many corporations have also gained sufficient market power to set their prices higher than they would be under normal competitive circumstances. In the United States, such corporations include giant food processors, airlines, Internet service providers, health insurers, and high-tech companies owning software platforms now de facto industry standards (Amazon, Facebook, and Google). Such market power translates into higher profits, propelled by a redistribution from average consumers to top executives and major shareholders.

Laws governing bankruptcy have been altered to the further advantage of large corporations and financial institutions. In the United States, a wealthy individual can use bankruptcy to shield his fortune from investments that have gone badly, and a corporation can use bankruptcy to abrogate labor contracts. But former students who have borrowed for their education and are having difficulty repaying what they owe, or homeowners who are caught in the downdraft of a major recession and cannot meet their mortgage payments, are not allowed to reorganize their debts under bankruptcy. Here again, the consequence is a hidden redistribution upward.

At the same time, major corporations and financial institutions in both our nations have used their political influence to prevent the wages of most workers from rising in tandem with productivity gains. Trade agreements have encouraged companies to outsource jobs abroad, even while enlarging the protections accorded these corporations’ intellectual property and financial assets abroad. Government budgets in Britain and the United States have emphasized debt reduction over job creation, thereby further undermining the bargaining power of average workers. Diminished safety nets and labor protections in both nations have added to the job insecurities of average workers, and therefore their willingness to accept lower wages.

Corporate and financial power is also reflected in the decline of labor unions in Britain and the United States. Fifty years ago, when General Motors was the largest employer in America, the typical GM worker earned $35 an hour in today’s dollars. By 2014, America’s largest employer was Walmart, and the typical entry-level Walmart worker earned about $9 an hour. That’s largely because GM workers a half-century ago had a powerful union behind them, while Walmart workers have no union at all. Walmart has blocked all attempts at unionization. The pattern is much the same across the U.S. economy: In the 1950s, a third of all private-sector workers in America belonged to a union; now, fewer than 7 percent do.

It should not be surprising that corporate profits have increased as a portion of the total U.S. economy while the share going to wages has declined. In both the U.S. and in Britain, people whose incomes derive directly or indirectly from profits—corporate executives, Wall Street traders, and shareholders—have done exceedingly well. People dependent primarily on wages have not.

Britain has not moved as far toward American-style oligarchic capitalism, to be sure, but Britain is following America’s dubious lead. Markets do not exist without rules. When large corporations, major banks, and the very rich gain the most influence over those rules, market outcomes begin to favor them—further adding to their wealth and their political influence. Unaddressed and unstopped, this vicious cycle accelerates.

Britain, beware. This trend is not sustainable, economically or politically. No economy can maintain positive momentum without the purchasing power of a large and growing middle class—one reason why, six full years into an economic recovery, the U.S. economy is barely back to where it was before succumbing to the Great Recession. Meanwhile, a large portion of the American electorate, having worked hard but seen no wage gains for many years, has grown angry and frustrated—fueling a nationalist revolt against the prevailing establishment and against convenient scapegoats such as immigrants. Political economies that bestow most gains on small groups at the top are inherently unstable.

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. Such, I believe, is the choice our two nations—the leading forces of capitalism in the nineteenth and twentieth centuries, respectively—will face in coming years.

Robert Reich Berkeley, California December 2015

Introduction

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. In the 1950s, my father, Ed Reich, had a shop on the main street of a nearby town, in which he sold women’s clothing to the wives of factory workers. He earned enough for the rest of us to live comfortably. We weren’t rich but never felt poor, and our standard of living rose steadily through the 1950s and 1960s.

That used to be the norm. 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.

Then, the CEOs of large corporations earned an average of about twenty times the pay of their typical worker. Now they get substantially over two hundred times. In those years, the richest 1 percent of Americans took home 9 to 10 percent of total income; today the top 1 percent gets more than 20 percent.

Then, the economy generated hope. Hard work paid off, education was the means toward upward mobility, those who contributed most reaped the largest rewards, economic growth created more and better jobs, 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.

But today all these assumptions ring hollow. Confidence in the economic system has declined sharply. The apparent arbitrariness and unfairness of the economy have undermined the public’s faith in its basic tenets. Cynicism abounds. To many, the economic and political systems seem rigged, the deck stacked in favor of those at the top.

The threat to capitalism is no longer communism or fascism but a steady undermining of the trust modern societies need for growth and stability. 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. In its place comes subversion, small and large—petty theft, cheating, fraud, kickbacks, corruption. Economic resources gradually shift from production to protection.

We have the power to change all this, re-creating an economy that works for the many rather than the few. Contrary to Karl Marx, there is nothing about capitalism that leads inexorably to mounting economic insecurity and widening inequality. The basic rules of capitalism are not written in stone. They are written and implemented by human beings. But to determine what must be changed, and to accomplish it, we must first understand what has happened and why.

For a quarter century, I’ve offered in books and lectures an explanation for why average working people in advanced nations like the United States have failed to gain ground and are under increasing economic stress: Put simply, globalization and technological change have made most of us less competitive. The tasks we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

My solution—and I’m hardly alone in suggesting this—has been an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to get ahead, and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function better for everyone if government is smaller and if taxes and redistributions are curtailed.

While the explanation I have offered for what has happened is still relevant, I’ve come to believe it overlooks a critically important phenomenon: 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. And the governmental solutions I have propounded, while I think still useful, are in some ways beside the point, because they take insufficient account of the government’s more basic role in setting the rules of the economic game. Worse yet, the ensuing debate over the merits of the “free market” versus an activist government has diverted attention from several critical issues: how the market has come to be organized differently from the way it was a half century ago, why its current organization is failing to deliver the widely shared prosperity it delivered then, and what the basic rules of the market should be.

I have come to think that the diversion of attention away from these issues is not entirely accidental. Many of the most vocal proponents of the “free market”—including executives of large corporations and their ubiquitous lawyers and lobbyists, denizens of Wall Street and their political lackeys, and numerous multimillionaires and billionaires—have for many years been actively reorganizing the market for their own benefit and would prefer these issues not be examined.

It is my intention in this book to put these issues front and center. My argument is straightforward. As I will elaborate in Part I, markets depend for their very existence on rules governing property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what terms), bankruptcy (what happens when purchasers can’t pay up), and how all of this is enforced.

Such rules do not exist in nature. They must be decided upon, one way or another, 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.

Simultaneously, centers of countervailing power that between the 1930s and late 1970s enabled America’s middle and lower-middle classes to exert their own influence—labor unions, small businesses, small investors, and political parties anchored at the local and state levels—have withered. The consequence has been a market organized by those with great wealth for the purpose of further enhancing their wealth. This has resulted in ever-larger upward pre-distributions inside the market, from the middle class and poor to a minority at the top. Because these pre-distributions occur inside the market, they have largely escaped notice.

In Part II, I show what this has meant for the resulting distribution of income and wealth in society. The meritocratic claim that people are paid what they are worth in the market is a tautology that begs the questions of how the market is organized and whether that organization is morally and economically defensible. In truth, income and wealth increasingly depend on who has the power to set the rules of the game.

As I will show, CEOs of large corporations and Wall Street’s top traders and portfolio managers effectively set their own pay, advancing market rules that enlarge corporate profits while also using inside information to boost their fortunes. Meanwhile, the pay of average workers has gone nowhere because they have lost their aforementioned countervailing economic power and political influence. The simultaneous rise of both the working poor and non-working rich offers further evidence that earnings no longer correlate with effort. The resulting skewed pre-distribution of income to the top inside the market has generated demands for larger downward redistributions outside the market through taxes and transfer payments to the poor and lower-middle class, but such demands have simply added fuel to the incendiary debate over government’s size.

As I elaborate in Part III, the solution is not to create more or less government. 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. This will require a new countervailing power, allying the economic interests of the majority who have not shared the economy’s gains. The current left-right battle pitting the “free market” against government is needlessly and perversely preventing such an alliance from forming.

As I will explain, the biggest political divide in America in years to come will not be between the Republican and Democratic parties. It will be between the complex of large corporations, Wall Street banks, and the very rich that has fixed the economic and political game to their liking, and the vast majority who, as a result, find themselves in a fix. 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.

While this book focuses on the United States, the center of global capitalism, the phenomena I describe are increasingly common to capitalism as practiced elsewhere around the world, and I believe the lessons drawn from what has occurred here are as relevant to other nations. Although global businesses are required to play by the rules of the countries where they do business, the largest global corporations and financial institutions are exerting growing influence over the makeup of those rules wherever devised. And the growing insecurities and cumulative frustrations of average people who feel powerless in the face of economies (and market rules) that are not working for them are generating virulent nationalist movements, sometimes harboring racist and anti-immigrant sentiments, as well as political instability in even advanced nations around the globe.

…

I believe that if we dispense with mythologies that have distracted us from the reality we find ourselves in, we can make capitalism work for most of us rather than for only a relative handful. History provides some direction as well as some comfort, especially in America, which has periodically readapted the rules of the political economy to create a more inclusive society while restraining the political power of wealthy minorities at the top. In the 1830s, the Jacksonians targeted the special privileges of elites so that the market system would better serve ordinary citizens. In the late nineteenth and early twentieth centuries, progressives enacted antitrust laws to break up the giant trusts, created independent commissions to regulate monopolies, and banned corporate political contributions. In the 1930s, New Dealers limited the political power of large corporations and Wall Street while enlarging the countervailing power of labor unions, small businesses, and small investors.

The challenge is not just economic but political. The two realms cannot be separated. Indeed, the field on which I draw in this book used to be called “political economy”—the study of how a society’s laws and political institutions relate to a set of moral ideals, of which a fair distribution of income and wealth was a central topic. After World War II, under the powerful influence of Keynesian economics, the focus shifted away from these concerns and toward government taxes and transfers as means of both stabilizing the business cycle and helping the poor.1 For many decades this formula worked. Rapid economic growth generated widespread prosperity, which in turn created a buoyant middle class. Countervailing power fulfilled its mission. We did not have to attend to the organization of the political economy or be concerned about excessive economic and political power at its highest rungs. Now, we do.

In a sense, then, this book harkens back to an earlier tradition of inquiry and a longer-lived concern. The book’s optimism is founded precisely in that history. Time and again we have saved capitalism from its own excesses. I am confident we will do so again.

Footnote

1 The emergence of economics as a discipline distinct from political economy began in 1890 with the publication of Alfred Marshall’s Principles of Economics. The new discipline sought to identify abstract variables applicable to all systems of production and exchange and paid little or no attention to the distribution of those resources or to a specific society’s legal and political institutions. The study both of economics and of many other aspects of society thereafter began shifting from historically specific political, moral, and institutional relationships to more universal and scientific “laws.” John Maynard Keynes’s General Theory of Employment, Interest, and Money (1936) dominated American economic policy from the end of World War II until the late 1970s.

PART I

The Free Market

1

The Prevailing View

It usually occurs in a small theater or a lecture hall. Someone introduces me and then introduces a person who is there to debate me. My debate opponent and I then spend five or ten minutes sparring over the chosen topic—education, poverty, income inequality, taxes, executive pay, middle-class wages, climate change, drug trafficking, whatever. It doesn’t matter. Because, with astounding regularity, the debate soon turns to whether the “free market” is better at doing something than government.

I do not invite this. In fact, as I’ve already said and will soon explain, I view it as a meaningless debate. Worse, it’s a distraction from what we should be debating. Intentional or not, it deflects the public’s attention from what’s really at issue.

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.” In this view, whatever inequality or insecurity the market generates is assumed to be the natural and inevitable consequence of impersonal “market forces.” What you’re paid is simply a measure of what you’re worth in the market. If you aren’t paid enough to live on, so be it. If others rake in billions, they must be worth it. If millions of people are unemployed or their paychecks are shrinking or they have to work two or three jobs and have no idea what they’ll be earning next month or even next week, that’s unfortunate but it’s the outcome of “market forces.”

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. Although market imperfections such as pollution or unsafe workplaces, or the need for public goods such as basic research or even aid to the poor, may require the government to intervene on occasion, these instances are exceptions to the general rule that the market knows best.

The prevailing view is so dominant that it is now almost taken for granted. It is taught in almost every course on introductory economics. It has found its way into everyday public discourse. One hears it expressed by politicians on both sides of the aisle.

The question typically left to debate is how much intervention is warranted. Conservatives want a smaller government and less intervention; liberals want a larger and more activist government. This has become the interminable debate, the bone of contention that splits left from right in America and in much of the rest of the capitalist world. One’s response to it typically depends on which you trust most (or the least): the government or the “free market.”

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. Competition in the wild is a contest for survival in which the largest and strongest typically win. Civilization, by contrast, is defined by rules; rules create markets, and governments generate the rules. As the seventeenth-century political philosopher Thomas Hobbes put it in his book Leviathan:

[in nature] there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.

A market—any market—requires that government make and enforce the rules of the game. In most modern democracies, such rules emanate from legislatures, administrative agencies, and courts. Government doesn’t “intrude” on the “free market.” It creates the market.

The rules are neither neutral nor universal, and they are not permanent. Different societies at different times have adopted different versions. The rules partly mirror a society’s evolving norms and values but also reflect who in society has the most power to make or influence them. Yet the interminable debate over whether the “free market” is better than “government” makes it impossible for us to examine who exercises this power, how they benefit from doing so, and whether such rules need to be altered so that more people benefit from them.

The size of government is not unimportant, but the rules for how the free market functions have far greater impact on an economy and a society. Surely it is useful to debate how much government should tax and spend, regulate and subsidize. Yet these issues are at the margin of the economy, while the rules are the economy. It is impossible to have a market system without such rules and without the choices that lie behind them. As the economic historian Karl Polanyi recognized, those who argue for “less government” are really arguing for a different government—often one that favors them or their patrons.1 “Deregulation” of the financial sector in the United States in the 1980s and 1990s, for example, could more appropriately be described as “reregulation.” It did not mean less government. It meant a different set of rules, initially allowing Wall Street to speculate on a wide assortment of risky but lucrative bets and permitting banks to push mortgages onto people who couldn’t afford them. When the bubble burst in 2008, the government issued rules to protect the assets of the largest banks, subsidize them so they would not go under, and induce them to acquire weaker banks. At the same time, the government enforced other rules that caused millions of people to lose their homes. These were followed by additional rules intended to prevent the banks from engaging in new rounds of risky behavior (although in the view of many experts, these new rules are inadequate).

The critical things to watch out for aren’t the rare big events, such as the 2008 bailout of the Street itself, but the ongoing multitude of small rule changes that continuously alter the economic game. Even a big event’s most important effects are on how the game is played differently thereafter. The bailout of Wall Street created an implicit guarantee that the government would subsidize the biggest banks if they ever got into trouble. This, as I will show, gave the biggest banks a financial advantage over smaller banks and fueled their subsequent growth and dominance over the entire financial sector, which enhanced their subsequent political power to get rules they wanted and avoid those they did not.

The “free market” is a myth that prevents us from examining these rule changes and asking whom they serve. The myth is therefore highly useful to those who do not wish such an examination to be undertaken. It is no accident that those with disproportionate influence over these rules, who are the largest beneficiaries of how the rules have been designed and adapted, are also among the most vehement supporters of the “free market” and the most ardent advocates of the relative superiority of the market over government. But the debate itself also serves their goal of distracting the public from the underlying realities of how the rules are generated and changed, their own power over this process, and the extent to which they gain from the results. In other words, not only do these “free market” advocates want the public to agree with them about the superiority of the market but also about the central importance of this interminable debate.

They are helped by the fact that the underlying rules are well hidden in an economy where so much of what is owned and traded is becoming intangible and complex. Rules governing intellectual property, for example, are harder to see than the rules of an older economy in which property took the tangible forms of land, factories, and machinery. Likewise, monopolies and market power were clearer in the days of giant railroads and oil trusts than they are now, when a Google, Apple, Facebook, or Comcast can gain dominance over a network, platform, or communications system. At the same time, contracts were simpler to parse when buyers and sellers were on more or less equal footing and could easily know or discover what the other party was promising. That was before the advent of complex mortgages, consumer agreements, franchise systems, and employment contracts, all of whose terms are now largely dictated by one party. Similarly, financial obligations were clearer when banking was simpler and the savings of some were loaned to others who wanted to buy homes or start businesses. In today’s world of elaborate financial instruments, by contrast, it is sometimes difficult to tell who owes what to whom, or when, or why.

Before we can understand the consequences of all of this for modern capitalism, 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. To do so, we must examine the market mechanism in some detail.

Footnote

1 In his book The Great Transformation (1944) Polanyi argued that the market economy and the nation-state should be viewed as a single man-made system he called the “Market Society.” In his view, the coming of the modern nation-state and the modern capitalist economies it fostered altered human consciousness, from one based on reciprocity and redistribution to one based on utility and self-interest.

2

The Five Building Blocks of Capitalism

In order to have a “free market,” decisions must be made about

PROPERTY: what can be ownedMONOPOLY: what degree of market power is permissibleCONTRACT: what can be bought and sold, and on what termsBANKRUPTCY: what happens when purchasers can’t pay upENFORCEMENT: how to make sure no one cheats on any of these rules

You might think such decisions obvious. Ownership, for example, is simply a matter of what you’ve created or bought or invented, what’s yours.

Think again. What about slaves? The human genome? A nuclear bomb? A recipe? Most contemporary societies have decided you can’t own these things. You can own land, a car, mobile devices, a home, and all the things that go into a home. But the most important form of property is now intellectual property—new designs, ideas, and inventions. What exactly counts as intellectual property, and how long can you own it?

Decisions also underlie what degree of market power is permissible—how large and economically potent a company or small group of firms can become, or to what extent dominance over a standard platform or search engine unduly constrains competition.

Similarly, you may think buying and selling is simply a matter of agreeing on a price—just supply and demand. But most societies have decided against buying and selling sex, babies, and votes. Most don’t allow the sale of dangerous drugs, unsafe foods, or deceptive Ponzi schemes. Similarly, most civilized societies do not allow or enforce contracts that are coerced or that are based on fraud. But what exactly does “coercion” mean? Or even “fraud”?

Other decisions govern unpaid debts: Big corporations can use bankruptcy to rid themselves of burdensome pension obligations to their employees, for example, while homeowners cannot use bankruptcy to reduce burdensome mortgages, and former students cannot use it to reduce burdensome debts for higher education.

And we rely on decisions about how all these rules are enforced—the priorities of police, inspectors, and prosecutors; who can participate in government rule making; who has standing to sue; and the outcomes of judicial proceedings.

Many of these decisions are far from obvious and some of them change over time, either because social values change (think of slavery), technologies change (patents on novel arrangements of molecules), or the people with power to influence these decisions change (not just public officials, but the people who got them into their positions).

These decisions don’t “intrude” on the free market. They constitute the free market. Without them there is no market.

What guides these decisions? What do the people who make the rules seek to achieve? The rules can be designed to maximize efficiency (given the current distribution of income and wealth in society), or growth (depending on who benefits from that growth and what a society is willing to sacrifice to achieve it, such as fouling the environment), or fairness (depending on prevailing norms about what constitutes a fair and decent society); or they can be designed to maximize the profits of large corporations and big banks, and the wealth of those already very wealthy.

If a democracy is working as it should, elected officials, agency heads, and judges will be making the rules roughly in accordance with the values of most citizens. As philosopher John Rawls has suggested, a fair choice of rule would reflect the views of the typical citizen who did not know how he or she would be affected by its application. Accordingly, the “free market” would generate outcomes that improved the well-being of the vast majority.

But if a democracy is failing (or never functioned to begin with), the rules might instead enhance the wealth of a comparative few at the top while keeping almost everyone else relatively poor and economically insecure. Those with sufficient power and resources would have enough influence over politicians, regulatory heads, and judges to ensure that the “free market” worked mostly on their behalf.

This is not corruption as commonly understood. In the United States, those with power and resources rarely directly bribe public officials in order to receive specific and visible favors, such as advantageous government contracts. Instead, they make campaign contributions and occasionally hold out the promise of lucrative jobs at the end of government careers. And the most valuable things they get in exchange are market rules that seem to apply to everyone and appear to be neutral, but that systematically and disproportionately benefit them. To state the matter another way, it is not the unique and perceptible government “intrusions” into the market that have the greatest effect on who wins and who loses; it is the way government organizes the market.

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.

Before examining each of the five building blocks of capitalism separately, it is useful to see how political power shapes all of them and why market freedom cannot be understood apart from how such power is exercised, and by whom.

3

Freedom and Power

As income and wealth have concentrated at the top, political power has moved there as well. Money and power are inextricably linked. And with power has come influence over the market mechanism. The invisible hand of the marketplace is connected to a wealthy and muscular arm.

It is perhaps no accident that those who argue most vehemently on behalf of an immutable and rational “free market” and against government “intrusion” are often the same people who exert disproportionate influence over the market mechanism. They champion “free enterprise” and equate the “free market” with liberty while quietly altering the rules of the game to their own advantage. They extol freedom without acknowledging the growing imbalance of power in our society that’s eroding the freedoms of most people.

In 2010, a majority of the Supreme Court of the United States decided in Citizens United v. Federal Election Commission that corporations are people under the First Amendment, entitled to freedom of speech. Therefore, said the court, the Bipartisan Campaign Reform Act of 2002 (commonly referred to as the McCain-Feingold Act), which had limited spending by corporations on political advertisements, violated the Constitution and was no longer the law of the land.

Yet as a practical matter, freedom of speech is the freedom to be heard, and most citizens’ freedom to be heard is reduced when those who have the deepest pockets get the loudest voice. Nowhere did the five members in the majority acknowledge the imbalance of power between big corporations increasingly willing to finance vast political advertising campaigns and ordinary citizens. In practice, therefore, the freedom of speech granted by the court to corporations would drown out the speech of regular people without those resources.

In the first decades of the twentieth century, the court was similarly blind to the realities of power. Conservatives on the court struck down laws enacted to protect the freedom of workers to organize and bargain collectively. In Carter v. Carter Coal Company (1936), the court’s majority ruled that collective bargaining was “an intolerable and unconstitutional interference with personal liberty and private property … a denial of rights safeguarded by the due process clause of the Fifth Amendment.” Yet without collective bargaining, workers weren’t free to negotiate their terms of employment; if they wanted a job, they had to accept whatever terms were dictated by the big businesses that dominated the economy. By elevating “personal liberty and private property” over the freedom of workers to band together to achieve better terms, the court tipped the Constitution in the direction of the powerful. Carter was subsequently overruled, but the ideology behind it lives on.

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. These include escalating campaign contributions, as well as burgeoning “independent” campaign expenditures, often in the form of negative advertising targeting candidates whom they oppose; growing lobbying prowess, both in Washington and in state capitals; platoons of lawyers and paid experts to defend against or mount lawsuits, so that courts interpret the laws in ways that favor them; additional lawyers and experts to push their agendas in agency rule-making proceedings; the prospect of (or outright offers of) lucrative private-sector jobs for public officials who define or enforce the rules in ways that benefit them; public relations campaigns designed to convince the public of the truth and wisdom of policies they support and the falsity and deficiency of policies they don’t; think tanks and sponsored research that confirm their positions; and ownership of, or economic influence over, media outlets that further promote their goals.

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?

The expanding freedom of corporations to do what they want may theoretically enlarge the economic pie for everyone. But in recent years the major consequence of such freedom has been to give bigger slices to the top executives of large corporations and Wall Street banks, and their shareholders, and smaller slices to almost everyone else. Another consequence has been to reduce the freedoms of ordinary working people in the workplace. The supposed freedom of contract is a cruel joke to workers who have no alternatives but to agree to terms mandating arbitration of all grievances before an arbiter chosen by the company, thereby forcing employees to give up their constitutional right to a trial. A corporation that monitors its employees’ every motion from the minute they check in to the minute they check out, even limiting bathroom breaks to six minutes a day, may be a model of free enterprise, but it does not contribute to the liberty of the people working for it.

“Free enterprises” designed to maximize shareholder returns have been known to harm the environment, endanger the health and safety of consumers and others, and defraud investors. Even when such actions are illegal, some corporations have chosen to defy the law when the risks and costs of getting caught are less than the profits to be made. The list of enterprises that in recent years have made such a calculation, wittingly or unwittingly—including BP, Halliburton, Citigroup, and General Motors—makes clear that corporate power will infringe on individual liberties if the potential financial returns are sufficiently high.

The freedom of enterprises to monopolize a market likewise reduces the freedom of consumers to choose. Allowing Internet service providers to reduce or eliminate competition, for example, has made Internet service in the United States more expensive than in any other rich country. Permitting drug companies to prolong their patents by paying generic producers to delay lower-cost versions has kept drug prices higher in the United States than in Canada or Europe. Most of us remain “free” in the limited sense of not being coerced into purchasing Internet services or drugs. We can choose to do without them. But this is a narrow view of freedom.

Similarly, 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. Since all nations’ markets depend on political decisions about how their markets are organized, as a practical matter “free trade” agreements entail complex negotiations about how different market systems will be integrated. “Free trade” with China, for example, doesn’t simply mean more trade, because China’s market is organized quite differently from that of the United States. The real issues involve such things as the degree of protection China will give the intellectual property of American-based corporations, how China will treat the assets of U.S.-based investment banks, and the access of China’s state-run enterprises to the American market. 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. The United States has never sought to require, for example, that trading partners establish minimum wages equal to half their median wages.

In all these respects, freedom has little meaning without reference to power. Those who claim to be on the side of freedom while ignoring the growing imbalance of economic and political power in America and other advanced economies are not in fact on the side of freedom. They are on the side of those with the power.

A close examination of each building block of the market will make this apparent.

4

The New Property

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.

Private property has obvious advantages over common ownership. A half century ago the American environmentalist Garrett Hardin warned of the “tragedy of the commons,” by which individuals, acting rationally but selfishly, deplete a common resource—allowing their cattle to overgraze the town common, for example. When property is privately held, on the other hand, rational owners take care to avoid depletion, investing in fertilizer and irrigation. There are many other examples. To my knowledge, no customer has ever washed a rental car.

But the debate over private versus public ownership obscures basic decisions about the rules governing private property: What can be owned, on what condition, and for how long? Some of these are profoundly moral issues. They are also, inevitably, political, because their answer depends on the distribution of power in society.

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. In parts of the Americas and Africa, slaves far outnumbered free persons.

Slavery rested on the political power of slave owners and traders to maintain slavery as a form of property. The Republican Party in the United States was founded in the 1850s in direct opposition to wealthy slaveholders and those Democrats who asserted that ownership of slaves was a property right protected by the Constitution. Yet within fifteen years, politics and power shifted. Slavery was banned in America in 1865 with the passage of the Thirteenth Amendment to the Constitution. By the end of the nineteenth century slavery was outlawed almost everywhere in the world. But not entirely. It was not officially banned in Mauritania until 1981. And it still continues, illegally, in many places around the world. Even in twenty-first-century America, an estimated 100,000 children are enslaved in the sex trade.

Other than slaves, the most valuable form of property in the nineteenth century was land. Yet even landownership was based on social norms as well as political power. In England, vast tracts were locked away in an aristocracy that handed them down from generation to generation, allowing tenants to farm them. In America, by contrast, a series of laws, beginning with the Land Ordinance of 1785 through the Homestead Act of 1862, made frontier land available to potential settlers rather than to political elites. (In most Latin American countries, frontier lands went to the politically powerful.) But America’s white settlers had political power behind them, too. The United States gave them right to the land, and the U.S. military fought native Americans to secure it.

As land prices escalated through the nineteenth century, those who owned large tracts saw their wealth increase dramatically even if they did nothing but rent the land. Land values were increasing simply because land was becoming scarce. Henry George, in his book Progress and Poverty (1879), described progress that pushed up land prices as “an immense wedge being forced, not underneath society, but through society. Those who are above the point of separation are elevated, but those who are below are crushed down.” The book sold two million copies, but George’s proposal for a steep tax on land that would recapture for society most of a landowner’s capital gains went nowhere.

Then came another economic and political shift, as factories and machines transformed America and other advanced economies from agriculture to industry. Within a few decades, most Americans no longer owned or even rented the property that supplied their livelihoods. They were employees. And the critical question about property then moved to the freedom of workers to organize in order to gain a larger share of the income resulting from the combination of their labors with the factories and machines, versus the owners’ “liberty of contract.”

Even the modern corporation, and its ownership, is part of the property mechanism—a consequence of particular decisions by legislatures, agencies, and courts that people who invest in the corporation are entitled to a share of its profits and that their personal property beyond those investments is protected if the corporation can’t pay its debts. The “free market” doesn’t dictate this. Property and contract rules do. Yet the idea that shareholders are a corporation’s only owners, and therefore that the sole purpose of the corporation is to maximize the value of their investments, appears nowhere in the law. In fact, in the first three decades following World War II, corporate managers saw their job as balancing the claims of investors, employees, consumers, and the public at large. The large corporation was in effect “owned” by everyone with a stake in how it performed. The notion that only shareholders count emerged from a period in the 1980s when corporate raiders demanded managers sell off “underperforming” assets, close factories, take on more debt, and fire employees in order to maximize shareholder returns.

The rules governing private property are constantly being contested and adapted, sometimes in big ways (banning slavery) but often in small ways barely noticeable to anyone not directly involved. What looks like government regulation is sometimes better understood as the creation of a property right. For example, before 1978, airlines with overbooked flights simply bumped their excess passengers arbitrarily. After many complaints, the Civil Aeronautics Board (which then regulated airlines) began requiring airlines to treat each seat as the property of the passenger who booked it. That way, airlines with overbooked flights would have to “buy” the excess seats back by offering whatever inducement was necessary to get the right number of passengers to give up their “property” voluntarily.

Scarce resources often depend on property rights to encourage conservation and investment in technologies that could reduce future scarcity and help ensure that those who need them can get them. By 2015, several water districts in California, facing acute shortages because of drought conditions, turned water into a form of property whose cost depended on usage—starting low for a basic allocation covering families’ essential needs and rising rapidly with volume so that people do not mindlessly refill their swimming pools. The same approach could be taken with the environment as a whole—a scarce resource on a global scale. Ideally, the right to emit carbon dioxide into the atmosphere would be treated as a form of property whose price continued to rise over time. Polluters could buy and trade it, so it would be used where most needed. This would also give them a strong incentive to minimize their emissions immediately and devise innovative ways of reducing them further. Such 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. Government must also monitor and enforce any such system.

…

The underlying mechanisms that define property become even more complicated when property takes the form of strands of genetic material, or combinations of molecules, or gigabits of software code, or, more generally, information and ideas. This sort of property doesn’t exist in one unique place and time. It can’t be weighed or measured concretely. And most of the cost of producing it goes into discovering it or making the first copy. After that, the additional production cost is often zero. Yet such intellectual property is the key building block of the new economy, and without government decisions over who can own what aspects of it, and on what terms, the new economy could not exist.