Saving Capitalism: For the Many, Not the Few, by Robert Reich

Ron Berger —

2015-12-28-1451282454-6015540-savingcapitalismIn his most recent book Saving Capitalism: For the Many, Not the Few (2015), Robert Reich aims to explain how “the increasing concentration of political power in a corporate and financial elite…has been able to influence the rules by which the economy runs.” He lays the groundwork for this case by introducing readers to the field that was once called political economy—“the study of how a society’s laws and political institutions relate to…a fair distribution of income and wealth.”

An understanding of political economy begins with the recognition that the existence of a so-called “free market” independent of government is a myth, because it is government that sets the rules of the market. In other words, according to Reich, government does not “intrude” on the market but rather “creates the market.” This view stands in marked contrast to the one espoused by contemporary conservatives and libertarians who believe that the market exists as a natural force by which economic actors compete to advance their self-interest and in doing so produce beneficial outcomes not only for individual competitors but for society as a whole.

Whereas conservative and libertarians believe that an unfettered market is essential to human freedom, Reich thinks this view ignores the “imbalance of power” that enables a minority of powerful people to erode the freedoms of the majority. Unsurprisingly, he is critical of the U.S. Supreme Court decision in Citizens United v. Federal Election Commission (2010), which equated spending money on political campaigns to freedom of speech. As a practical matter, Reich argues, “freedom of speech is the freedom to be heard,” and therefore granting unlimited freedom of speech to those who can afford it results in drowning out the speech of those who don’t have the resources to be heard.

Reich argues that “the interminable debate” between conservatives and liberals about the size of government misses the point. It is not a matter of more or less government, but of how the government makes decisions in five main areas of the economy: property (what can be owned), monopoly (what degree of market power is permitted), contract (what can be bought and sold and under what conditions), bankruptcy (what happens when purchasers or borrowers can’t meet their financial obligations), and enforcement (how to ensure compliance to the rules). Reich notes that decisions in these areas can be designed to accomplish different goals or values, including efficiency, growth, and/or fairness. They can be designed to maximize or minimize economic equality and determine who benefits from economic growth and what is sacrificed to achieve it.

The Five Pillars of Capitalism

Property and Monopoly.  Private property, Reich observes, is the “basic building block of free-market capitalism.” This is to be contrasted with government ownership, the traditional notion of socialism. But private property does not exist in a vacuum. Rather, government sets the rule for what can be owned, under what conditions, and for how long. Centuries ago, for example, “it was common for people to own other people….Slavery rested on the political power of slave owners and traders to maintain slavery as a form of property.”

In addition to slaves, the most valuable form of property in the past was land. In the United States, laws such as the Land Ordinance of 1785 and the Homestead Act of 1862 made frontier land that was inhabited by Native Americans available to white settlers, who had the political power of the U.S. government behind them.

Reich adds that even the modern corporation and its form of ownership is a mechanism established by government. For one, it is because of government that the personal property of shareholders is protected if a corporation cannot pay its debts. Additionally, it is laws regarding patents that establish the period of time in which an inventor is allowed a temporary monopoly, that is, “a property right that disappears after a certain length of time.” As an example, Reich notes the market for pharmaceuticals, where drug prices in the U.S. are higher than in Canada because the U.S. government allows for extended patents that prevent the selling of generics. U.S. law also prohibits the government from negotiating with drug companies to lower costs for Medicare and Medicaid patients (it is worth noting that U.S. law does permit the Veterans Administration to negotiate for lower drug prices).

In 1890 the Sherman Antitrust Act granted the U.S. government power to regulate business combinations that resulted in a restraint of trade or the monopolization of an industry. But over the years this law has been practiced more in its breach. For one, the definitions of “restraint of trade” and “monopolization” are ambiguous. For instance, some sectors of the contemporary U.S. economy can best be described as “oligopolies,” dominated by a few companies, rather than “monopolies,” dominated by one.

Reich develops his argument by considering the market for cable and broadband services. In 2014, for example, “more than 80 percent of Americans had no choice but to rely on one single cable company for high-capacity wired data connections to the Internet.” This situation, he explains, is the product of cable operators’ “deep pockets” that have persuaded politicians to grant them these monopolies.

Another example of a monopoly is the biotech corporation Monsanto, “which owns the key genetic traits in more than 90 percent of the soybeans…and 80 percent of the corn” planted in the U.S. It has “patented its own genetically modified seeds, along with an herbicide that would kill weeds but not soy and corn grown from its seeds….To ensure its dominance, Monsanto has prohibited seed dealers from stocking its competitors’ seeds and has bought up most of the remaining seed companies.” This monopolist control, which has been permitted by the government, has kept farmers dependent on one company and forced them to pay higher seed prices. It has also dramatically reduced “the genetic diversity of the seeds we depend on.” In addition, Monsanto has successfully lobbied against laws that would “require labeling of genetically engineered foods” and “protect biodiversity.”

Amazon, which “has become the first stop for almost a third of all American consumers looking to buy anything,” is yet another example of monopolistic-type power. Book readers in particular are now embedded in a market where Amazon accounts for half of all book sales in the U.S. Small booksellers are rapidly becoming an extinct species, and even one-time book-selling giant Barnes & Noble is “perilously weak.” To be sure, this state of affairs is in large part the result of book readers’ own choices to save money. But Reich notes that Amazon now has so much market power that it can dictate its own terms regarding prices to the book publishing industry, and asks, how long will “it be before Amazon puts publishers out of business, too”? It worth noting that Walmart employs a similar business model, putting pressure on its suppliers to lower prices or risk going out of business.

Contracts.  Reich defines a contract as an agreement between a buyer and seller “to do or provide something in exchange for something else.” He is particularly interested in the ways in which distortions in market power—including outright fraud—may favor or disfavor the different parties. Take the case of insider trading in the stock market, which has presumably been banned since the Securities and Exchange Act of 1934 but which occurs with regularity. Insider trading occurs when some purchasers of stock are privy to inside information not available to other purchasers, giving them an unfair advantage. The logic behind the prohibition is that the legitimacy of capitalism depends upon the expectation of a positive association between the economic risk taken by an investor and the potential return. In insider trading, however, the advantaged investor collects a higher rate of return with little risk at all, while the disadvantaged investor assumes most of the risk. Reich adds that employees who invest part of their paychecks in “corporate-sponsored pension funds are also harmed when…the funds charge them higher than normal fees and then rebate the excess to the corporation in form of discounts on other financial services.” He thinks that the information the corporation does not share with its employees is “a conflict of interest…tantamount to fraud.”

Another example of a distorted contractual relationship stems from the ability of some parties to an agreement to demand acceptance of certain conditions from other parties. For instance, users of popular Internet sites and software products may be required to “voluntarily” accept conditions of use that relinquish their privacy rights and ability to hold a company liable for unauthorized use of personal data. Similarly, small-business franchises may be required to sign agreements that set “forth their obligations in such detail that parent corporations can close them down for minor violations in order to resell the franchises at high prices to new owners.”

Bankruptcy.  Turning to the issue of bankruptcy, Reich notes that this element of capitalism is designed to give people who fall on hard times the ability to start over. The challenge is to find the right balance between locking people into a lifetime of debt they can never pay and letting them off the hook for careless or irresponsible behavior. According to Reich, the central idea behind bankruptcy is shared sacrifice. It allows debtors to reduce their obligations “to a manageable level while spreading the losses equitably among all creditors.”

One problem with current bankruptcy laws, Reich thinks, is that more powerful business entities are able to use these laws more advantageously than others. Reich does not mention Donald Trump, who has become America’s most well-known businessman who has repeatedly used bankruptcy laws to avoid paying his creditors, including small businesses that have done contract work for his companies. On the other hand, Reich does mention the airline industry, noting that over the last two decades every major U.S. airline has used bankruptcy at least once, typically “to renege on previously agreed-upon labor union contracts.” In this way, the threat of bankruptcy has become “a potent weapon for getting union members to sacrifice wages already agreed to.” In one case, American Airlines CEO Don Carty “preached the necessity of ‘shared sacrifice’” while secretly locking away a $12 million retirement plan into a trust that “couldn’t be touched in the event of bankruptcy.”

Similarly, while the U.S. government used billions of dollars in taxpayer money to bail out the big banks that went under during the 2008 financial crash, ordinary homeowners were not allowed to declare bankruptcy due to their inability to pay mortgage loans on their primary residences. And former students who are suffering under the burden of debt from student loans are unable to use bankruptcy to renegotiate their debt.

Enforcement.  The fifth pillar of capitalism that Reich considers is enforcement of the rules of economic life. “In many respects,” he argues, “the enforcement mechanism is the most hidden from view because decisions about what not to enforce are not publicized; priority for how to use limited enforcement resources are hard to gauge; and the sufficiency of penalties imposed are difficult to assess. Moreover, wealthy individuals and corporations that can afford vast numbers of experienced litigators have a permanent, systemic advantage over average individuals and small businesses that cannot.”

Having said this, Reich notes that some industries have been more successful than others in shielding themselves from liability. After decades of immunity, for example, the automobile and tobacco industries have been forced to pay millions of dollars in damages and comply with more regulatory oversight. On the other hand, the gun, nuclear-reactor, and oil-drilling industries have escaped meaningful regulatory oversight and/or been shielded from liability that would be commensurate with the damage they’ve caused. Even the Wall Street Reform and Consumer Protection Act of 2010, also known as the Dodd-Frank Act, which was passed in the aftermath of the 2008 crash to regulate the financial industry, is riddled with loopholes and exceptions, some of which are due to the absence of rules that define what the law actually means or prohibits.

Work and Worth

In the middle section of Saving Capitalism, Reich focuses on the relationship between merit and pay. He describes the “meritocratic myth” of capitalism as defining an individual’s “worth” by how much he or she is paid in the marketplace. “But a moment’s thought reveals many factors other than individual merit that play a role  in determining earnings,” including “financial inheritance, personal connections, and discrimination in favor or against someone” because of particular traits or circumstances. If our system of compensation “took full account of the benefits to society of various roles and occupations,” social workers, teachers, nurses, and those who care for the elderly or children would be paid much more. On the other hand, many corporate CEOs, hedge-fund managers, investment bankers, corporate lawyers and the like would be paid less because they do not really create value but take money out of one set of pockets and put it into another, that is, they find “new ways to squeeze money out of a given set of assets, including employees, or to expropriate the assets and incomes of others.”

Speaking specifically of corporate CEOs, Reich notes that the “share of corporate income devoted to compensating the five highest-paid executives of a large public firm went from an average of 5 percent in 1993 to more than 15 percent in 2013. Not incidentally, this was money corporations could have invested in research and development, additional jobs, or higher wages for average workers. In addition, almost all of it was deducted from corporate income taxes, which means the rest of us paid more taxes proportionally in order to make up the shortfall.”

One explanation some give for this rising CEO pay is that some CEOs merit higher earnings because they increase shareholders’ earnings beyond what they could have made through other investments. But this is not always the case, and there is little justification for escalating pay if the company did not do better than the stock market as a whole. One study of 1,500 large companies between 1994 and 2011 even found that “the 150 companies with the highest-paid CEOs returned about 10 percent less to their shareholders than did their industry peers. In fact, the more CEOs were paid, the worse their companies did.” Moreover, an increasing portion of CEO earnings are allocated through stock options, which gives them an incentive to “pump up” short-term earnings, often at the expense of long-term gain. Similarly, cronyism on corporate board of directors is rampant, and many individuals earn six-figure salaries for simply meeting three or four times a year.

There was a time in America, Reich argues, when the ideal corporate executive was expected to be an “industrial statesmen” or steward of the public good, a dispassionate administrator who “weighed the claims of investors, employees, consumers, and citizens and allocated benefits accordingly.” But in the late 1970s and early 1980s “a radically different vision of corporate ownership” emerged as corporate raiders marshaled hostile takeovers vis-à-vis their statesman counterparts and advanced the view that “shareholders were the only legitimate owners of the corporation and the only valid purpose of the corporation was to maximize shareholder returns.” Government regulations were loosened, jobs outsourced to lower wage markets, unions undermined, and the real earning power of workers reduced.

In the course of this transformation, we witnessed the rise of the “working poor.” In the past, “poverty was largely confined to those who did not work—widows and children, the disabled and seriously ill, and those who had lost their jobs.” Now more than half of fast-food workers are “dependent on some form of public assistance,” and more than half of the 46 million “users of food pantries and other charitable food programs” have jobs or are members of working families. The real value of the current minimum wage of $7.25 an hour has declined; if it had even retained the value it had in 1968, it would be $10.86 an hour. All this has occurred while the productivity of the American worker—the amount of output per hour—has increased.

Turning to education, Reich notes that public schools’ reliance on property taxes means that the richest districts are able to spend about twice as much per student as the poorest districts. In effect, he argues, so-called public schools in wealthy communities are more like private schools “whose tuition is hidden away in the purchase price of upscale homes.”

Lastly, Reich concludes his discussion of work and worth by considering the “non-working rich,” who have inherited their wealth and have “become the major source of a new American aristocracy.” This group enjoys far lower taxes on capital gains from their investments than ordinary workers do for their wages, and they receive tax deductions for donations to charitable foundations or endowments that are in effect “tax-free earnings that are the equivalent of government subsidies.” Although they are called “charitable deductions,” only a third of this money ends up helping the most needy, with the rest “allocated to operas, art museums, symphonies, and theaters….Another portion goes to the elite prep schools and universities that benefactors once attended or want their children to attend.”

Countervailing Power

The third and final section of Saving Capitalism is devoted to the question of countervailing power. Reich begins by noting the absence of an effective source of power that might “constrain or balance the growing political strength of large corporations, Wall Street, and the very wealthy.” As the eminent U.S. Supreme Court Justice Louis Brandeis said, “We can have a democracy or we can have great wealth in the hands of a few, but we cannot have both.” President Theodore Roosevelt recognized this dilemma, too, which is why he favored legislation that prohibited corporations from donating money to political candidates who would be beholden to their interests. But now we have Citizens United, which allowed unlimited contributions by corporations, and McCutcheon v. Federal Election Commission (2014), which eliminated the former $123,000 cap on individual contributions to federal candidates and political parties.

Historically, of course, labor unions were a source of countervailing power. But union membership in the U.S. has been steadily declining, now comprising just 11 percent of the workforce. Reich also bemoans the declining participation in local organizations, citing sociologist Robert Putnam’s Bowling Alone: The Collapse and Revival of American Community (2000), which documented how Americans have become more alienated from each other and are no longer a nation of “joiners.” In its place we now have a proliferation of national advocacy organizations that are typically headquartered in Washington, DC, with “membership” no longer meaning “active engagement at the local and state levels, with affiliates and chapters communicating their members’ preferences upward to national leaders,” but rather meaning “little more than an individual’s willingness to send money in response to mass solicitations flowing downward.”

Reich cites the American public’s dissatisfaction with the current state of affairs, and thinks that “in the coming years the major fault line in American politics will shift from Democrat versus Republican to anti-establishment versus establishment—that is, to the middle class, working class, and poor who see the game is rigged versus the executives of larger corporations, the inhabitants of Wall Street, and the billionaires who do the rigging.” But beyond offering a number of important policy proscriptions (that I will not review here) for what the “new rules” of a fair economy that works for everyone should be, Reich has little to say about how a “new countervailing power could emerge.” He considers the possibility of a new third party, but thinks that when third parties have historically appeared “they usually have done little more than siphon off votes from the dominant party closest to them in ideology or voter preference.” In the last analysis, Reich is a better economist than political strategist, and we will have to look elsewhere for guidance on this question.

Thanks to Charles Cottle for his suggestions on this article.

5 thoughts on “Saving Capitalism: For the Many, Not the Few, by Robert Reich

  1. I have been wanting to respond to Ron’s review of Saving Capitalism for some time. One thing or another always seemed to get in the way.

    In the second paragraph of the review, Ron writes:

    “In other words, according to Reich, government does not ‘intrude’ on the market but rather ‘creates the market.’ This view stands in marked contrast to the one espoused by contemporary conservatives and libertarians who believe that the market exists as a natural force by which economic actors compete to advance their self-interest and in doing so produce beneficial outcomes not only for individual competitors but for society as a whole.”

    Taking Milton Friedman’s views as expressed in his work, Capitalism and Freedom (1962), it appears that Ron is quite correct to point out the contrast between Reich’s views on the nature of the market and that of other economists. In the second chapter of Capitalism and Freedom, “Government in a Free Society,” one can infer from Friedman’s discussion that the market and government stand independently of each other. He writes, “The role of government just considered is to do something that the market cannot do for itself, namely, to determine, arbitrate, and enforce the rules of the game” (Friedman, p. 27). We can think of several tasks the market cannot do by itself; for example, currency regulation and the enforcement of contracts. Each of these activities falls within the realm of determining, arbitrating, and enforcing the rules of the game.

    Friedman goes on to identify two more areas in the market that require government participation. These are the establishment of monopolies where appropriate, and the administration of activities involving “neighborhood effects.” Friedman’s preference is that all economic activity be handled by voluntary exchange, but in these two areas it is extremely difficult and impractical for voluntary exchange to manage the situation. He cites the example of the need for technical monopolies in certain cases, and the example of the need to deal with polluters in the case of neighborhood effects. In both of these examples government intervention is warranted because the market cannot easily handle the economic transactions involved through voluntary exchange.

    Ron continues in his fourth paragraph to summarize Reich’s point of view.

    “It is not a matter of more or less government, but of how the government makes decisions in five main areas of the economy: property (what can be owned), monopoly (what degree of market power is permitted), contract (what can be bought and sold and under what conditions), bankruptcy (what happens when purchasers or borrowers can’t meet their financial obligations), and enforcement (how to ensure compliance to the rules). Reich notes that decisions in these areas can be designed to accomplish different goals or values, including efficiency, growth, and/or fairness.”

    Interestingly, Friedman’s conclusion to his chapter, “Government in a Free Society,” is remarkably similar to Reich’s conclusions about what the government should do with respect to the economy. Friedman writes:

    “A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify government intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child——such a government would clearly have important functions to perform.”

    My point here is that Reich’s tasks for government and Friedman’s are virtually the same. So where is the difference? Does Reich’s assertion that the government and the market are not independent of each other make any difference? If so, how?

    I’m not sure I can answer these questions satisfactorily.

    My view so far is that the difference in points of departure for Friedman and Reich are not economic at all. Indeed, the discipline of economics cannot resolve the issues between the two economists. Rather, the differences are philosophical. Friedman states at the outset that individual freedom is his primary value. He argues that individual economic activity through voluntary exchange in the marketplace is the actualization of individual freedom. Any promulgation of law, affecting the whole of the population, is ipso facto a restriction of freedom.

    It appears that Reich’s primary political value is democracy. Government for Reich should be the collective activity of the community as it attempts to establish social justice for its members. Friedman sees economics and government as two analytically distinct kinds of human activity. Reich, in denying the separation of the market and government, appears to favor a more organic approach to human organization.

    If anyone else has views or clarifications they are willing to share, I would much appreciate them.

    Liked by 1 person

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