Book Review: Saving Capitalism, For the Many, Not the Few

By Robert B. Reich

“The thing is Bob, government would only get in the way when it comes to fighting poverty. We need to trust the free market and not intrude upon it with stifling regulations. All this red tape is what´s behind our problems. You don´t want monolithic, bumbling, government leading by committee, what you need is the unencumbered and flexible free market to swoop in and save the day”.

Robert Reich, a professor of public policy at the University of California Berkeley and former secretary of labor in the Clinton Administration, is a prolific debater who has attended countless seminars and discussions about the state of the economy. Squaring off against a conservative, he is time and time again confronted with the question over government versus the free market. The above quote is made up, but trust me, I have seen enough of these gatherings on YouTube to get a gist of how the debate usually goes. A frustrated Reich will try to explain why that question misses the mark entirely, while his opponent triumphantly declares the debate to be over. Saving Capitalism was born as a consequence of being asked the government versus free market question too many times. In this latest book, Reich lays bare the fundamentals of the US economy, explains what has gone wrong during the last few decades, and how one might go about fixing it. Just like in Aftershock, which I reviewed on this blog a little more than a year ago, Reich illustrates his points in a scholarly manner by showing a plethora of charts and diagrams. It occasionally feels like you are sitting in his lecture hall at Berkeley, but luckily the lecture is engaging a though provoking, not one of those where you have to fight the temptation to fall asleep.

Somewhere, in a galaxy far away, Reich explains, there might be a mythical free market, where no government ever intrudes and, the spirit of Ayn Rand smiles benevolently upon all who enter. On earth however, a market of any kind cannot exist in a state of anarchy. A market necessitates someone setting the rules that its participants must follow, and in most cases this would be the government. These rules protect the property of individuals and ensures that contracts are enforced. A haberdasher could go out of business if the wholesaler he or she has already paid for a shipment of hats decides to not deliver them and instead sell them to someone else. Our haberdasher needs the government to monitor the marketplace and force the wholesaler to deliver the hats that he or she is bound by contract to deliver. Without government there is no such thing as a legally binding contract, and as a consequence there is also no economy of a kind that we would recognize. This debate is oftentimes not a consequence of stupidity, Reich argues, instead it can be used as a way to misdirect and mislead others from debating the issues that really should be debated. If a government is necessary for the marketplace to exist, and the rules aren´t handed down from the heavens, shouldn´t we instead debate the current rules that govern the marketplace?  

As a European, access to high speed broadband is generally cheap, and I have several different operators to choose from in case I´m not satisfied with my current provider. In the United States, customers face higher prices for internet connectivity, and they are often forced to choose from very few service providers. Reich tells us this is because the market suffers from an existing pre-distribution upwards, to benefit the big cable providing companies at the expense of their customers. Big corporations in this industry bankroll the election of politicians, who in turn make sure that the regulators they appoint to scrutinize them are of a lenient disposition. When these regulators retire from their government job they may choose to start working for the very companies they were previously policing, possibly in the form of a lobbyist, in which case they will be frequenting the same restaurants and cocktail bars in Washington DC as their former colleagues. All of this adds up to a climate where big corporations are the most important constituency for politicians and regulators, instead of the American people they ostensibly serve.

This sector is only one of many examples where there is an existing pre-distribution of wealth in favor of those at the top, that is hurting not only American consumers but small businesses as well. Established actors don´t want competition from pesky startups, and prefer to buy them up or make sure they go out of business so they won’t have to compete. Otherwise they would be forced to provide lower prices and better services. This leads to a monopoly effect on the marketplace, where many sectors of the economy see fewer and fewer big actors take control, which hurts startups and smaller companies.  FDR once said that consumers and businesses large and small have the right to be protected from unfair competition, and there are currently laws on the books such as the Sherman Antitrust Act of 1890 to prevent this, but they are not being enforced. Government regulators, fearful of jeopardizing a lucrative future career in the private sector, prefer to leave things as they are.

All of this no doubt sounds gloomy, and you might wonder why no countervailing power seeks to stop this, the answer is that these forces have been systematically hollowed out and weakened during the last few decades. As the number of American workers who are unionized has declined, the average hourly compensation of workers has declined almost in lockstep. As trade unions and similar institutions that look after the interests of workers and the middle class loose influence, the marketplace is rigged even more forcefully in favor of wealthy interests.

A long running myth that Reich wishes to bust is that in the marketplace, everyone is paid according to what they contribute to society, therefore, raising the minimum wage would be akin to taking a sledgehammer to the beautiful mechanism that is the underpinnings of the economy. If a hedge fund manager on Wall Street is payed millions of dollars a year while a high school teacher only makes 45 000 dollars, does that mean that the Wall Street guy is performing a service that is immeasurably more important to society? Ayn Rand though so, but Robert Reich, who unlike her has actually studied economics, does not. What the two are payed is not necessarily indicative of their relative worth to society. It merely tells us that the financial institutions that line the street adorned with a golden bull hold much more clout than all the teacher´s unions combined.

This outsized influence also shows when it comes to the shareholder value discussion. Fifty years ago, the titans of American industry saw themselves as catering to the interests of several disparate groups, customers, shareholders, employees, the community at large etc. During the last thirty years CEOs have been under increasing pressure to create value for shareholders, at the expense of all other considerations. This has led to a maniacal dash to pump up quarterly earnings while long term profitability and competitiveness has actually declined. More hard earned corporate savings are now spent on stock buybacks than on research and development. Reich presents the credible argument that in order to for capitalism to start working profitably again for everyone concerned, the countervailing power that labor unions, small businesses and other interest groups once had need to start becoming a factor again. Otherwise we will keep seeing this upward redistribution of wealth built into the system continue unchecked. There is actually some hope for this happening, Reich notes. A majority of Americans, regardless of party affiliation, supports ending subsidies to large multinational corporations and getting money out of politics, through a constitutional amendment or similar means.

Reich ends Saving Capitalism with an attempt to look through the crystal ball and predict what the future of the economy holds. Steadily rising industrial productivity means that a fixed amount of workers can produce ever increasing amounts of goods. Even if America cancels all trade with China and returned the simple manufacturing jobs the country has lost, it wouldn´t be enough to provide employment for everyone. As The Economist recently argued in regards to free trade, increased automation and rising effectiveness means that fewer people are now required to do the job. For example, let´s say that a factory was closed down in 1990, a hundred workers were laid off and the machines were shipped to China. Today, far fewer than one hundred workers are required to produce the same output. Taken together with the fact that the technology industry sees powerful actors such as Facebook and Google consolidating their power and influence, you start to see why it might be a challenge to find jobs for everyone in the future.

This needn´t be a problem, argues Reich. If the system is set up to benefit the many, then prosperity can be shared, freeing up humanity for the first time in recorded history from the drudgery of day to day toil. He suggests a universal basic income, a measure that was recently put to popular vote in Switzerland, as a way of making this system work. The challenge with a universal basic income, I might argue, is to keep citizens productive and hungry to innovate, but it is nonetheless an interesting proposition.   

Saving capitalism reads like a blueprint for shaking the economy out of lackluster growth and great inequality. Reich is a visionary economic scholar whose teachings are well researched and presented in a way that is easy to grasp. Those who have studied his previous works will already be familiar with much of what he says in Saving Capitalism, but Reich´s latest book is well worth reading. Even if you might not agree with his point of view, it helps widen the debate in a time when politicians are scrambling to come up with solutions to the great issues of our time.