Saving Capitalism: For the Many, Not the Few

“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.’”

Reich is alluding to the common arguments that the free market is better at doing something than the government and that what one is paid is simply a measure of what one is worth in the market. He argues that with this view, any inequality and insecurity that the market generates is natural and inevitable.

“A market—any market—requires that government make and enforce the rules of the game.”

This passage encapsulates a key point that Reich makes throughout Saving Capitalism: that there can be no free market without government because the rules that govern the market are human made. These rules, in modern democracies, come from legislatures, courts, and administrative agencies.

 “As income and wealth have concentrated at the top, political power has moved there as well. Money and power are inextricably linked.”

In Chapter 3, “Freedom and Power,” Reich discusses the ways in which the market mechanism has been manipulated by the powerful for their own benefit. While it is fairly clear that wealth, both with individuals and corporations, plays a role in this manipulation, many fail to realize how connected it is to electoral politics. Reich cites the 2010 Supreme Court ruling in Citizens United v. Federal Election Commission as an example of how income and wealth and political power have become linked.

“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.”

Here, Reich is referring to the fact that political power has become linked with economic wealth. He adds the rhetorical message that the political debate equating freedom to free market capitalism fails to account for the role that power plays in tilting the market mechanism for the benefit of those at the top.

“Scare 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.”

In Chapter 4, Reich examines “The New Property” as the first building block of the free market. He provides an example of water, and more specifically water usage, being turned into a form of property during recent water shortages in California and suggests that a similar approach could be taken for the environment as a whole. He argues that property rights such as these require that the government determines how they are to be allocated.

“Unlike the old monopolists, who controlled production, the new monopolists control networks. Antitrust laws often busted up the old monopolists. But the new monopolists have enough influence to keep antitrust at bay.”

In Chapter 5, Reich discusses the second building block of capitalism, monopoly, or how much market power is allowed. In explaining how drastically the concept of monopoly has changed because of technology, Reich makes the case that giant corporations such as Amazon have been able to skirt antitrust laws, both because of new technologies and because of their lobbying efforts.

“If property and market power lie at the heart of capitalism, contracts are its lifeblood—the means by which trades are made and enforced.”

In Chapter 6, Reich explains the importance of his third building block of capitalism, contracts. He points out that while trustworthiness is important, promises are not kept automatically, and contracts are essential in enabling this mutual trust. The word “lifeblood” demonstrates how significant contracts are to capitalist processes: For Reich, contracts give life to property because they enable it to move within the economy, generating a transfer of wealth.

“When large corporations have disproportionate power—not only over what’s sold, but also over the rules for deciding what contracts are permissible and enforceable by law—those who are relatively powerless have no choice. The ‘free market’ is not, in this sense, free. It offers no practical alternative.”

Reich is referring to the fact that contracts nowadays do not come from parties with equal bargaining power because giant corporations have the power to demand acceptance. This passage is part of Reich’s bold overarching argument that challenges the accepted nature of the free market in America.

“Bankruptcy was designed so people could start over. But these days, the only ones starting over with ease are big corporations, wealthy moguls, and Wall Street, who have had enough political clout to shape bankruptcy law to their needs.”

In Chapter 7, Reich examines bankruptcy and how laws regarding unpaid debts have been manipulated for the benefit of the powerful. He argues that in America, people with lots of money can easily “avoid the consequences of bad bets and big losses by cashing out at the first sign of trouble” (59). While the original central idea of bankruptcy was of a shared sacrifice between debtors and creditors, it has been transformed because of the lack of consequences paid by the wealthy and large corporations. Again, Reich shows how a building block of capitalism has become aligned with the interests of the already rich and powerful.

“In many respects, the enforcement mechanism is the most hidden from view because decisions about what not to enforce are not publicized; priorities for how to use limited enforcement resources are hard to gauge; and the sufficiency of penalties imposed are difficult to assess.”

Reich’s final building block of capitalism is the enforcement mechanism, which is the role that courts, administrative agencies, and legislatures play in making decisions about the rules of the market. Because this aspect is so hidden from view, as Reich explains, it “offers opportunities for vested interests to exert influence” (67). The way in which the powerful exert influence in this process is typically through their vast number of experienced litigators, which provides them with a systemic advantage over regular individuals and small businesses.

“If the rules governing how the market is organized took full account of the benefits to society of various roles and occupations, moreover, some people would be paid far more.”

Reich is referring to the fact that people in occupations that provide the most benefit to society, roles such as teaching, nursing, social work, and caring for the elderly and children, are often among those earning the least. This fact reinforces the theme of the myths of the free market and meritocracy, which is discussed in Chapter 10.

“The current incentives for the working poor are not nearly large enough to get them to do what society expects of them, while providing them some measure of dignity. Meanwhile, the financial incentives for the non-working rich are far greater than can be justified by any measure of their contribution to society.”

Once again, Reich is providing evidence to support his theme concerning the myths of the free market and meritocracy. The working poor and the non-working rich, two groups that he introduces in the following chapters, are perfect examples of the myth of meritocracy because the overwhelming majority of the working poor are in full-time jobs, while a majority of the non-working rich do not work at all because they have inherited their wealth.

“Apart from the platitude that everyone is, by definition, worth what he or she earns in the market, the specific mechanism by which they earn their incomes—including the hidden too-big-to-fail subsidy as well as the utilization of insider information—suggests that much of what they receive is involuntarily transferred to them from taxpayers and small investors.”

In Chapter 12, Reich examines the subterfuge of Wall Street pay, and specifically the hidden subsidy that big Wall Street banks have gotten because of their “too big to fail” status. Because of this subsidy, Wall Street banks have a competitive advantage over smaller banks, which in turn translates to huge bonuses for their executives.

“The corporate statemen of the 1950s and 1960s were replaced by the corporate butchers of the 1980s and 1990s, whose nearly exclusive focus was—in the meat-ax parlance of that era—to ‘cut out the fat’ and ‘cut to the bone.’”

In discussing the declining bargaining power of the middle, Reich explains how the roles of CEOs drastically changed during the 1980s and 1990s. During this time, their roles shifted from executives with concerns about their communities to executives whose primary goal was to maximize returns for their company’s shareholders. According to Reich, the easiest and most direct way to do this was to cut costs, and specifically payrolls.

“The ‘self-made’ man or woman, the symbol of American meritocracy, is disappearing. Six of today’s ten wealthiest American are heirs to prominent fortunes.”

In Chapters 14 and 15, Reich discusses the working poor and the non-working rich, two groups that have emerged in recent years. Their existence is a reinforcement of Reich’s theme concerning the myth of meritocracy and the fallacy of the work/worth ratio. If those who work can have less than those who don’t, the idea of a meritocracy based on effort is revealed as false.

“The meritocratic ideal with which our form of capitalism has been justified does not match the reality in which most of us live and work. The playing field is tilted toward those who have had the resources and power to tilt it in their direction. And as they gain steadily more resources and power, it tilts further.”

Once again, Reich is debunking the notion that American capitalism is a meritocracy, in which people are compensated based on their merit in the workplace. This notion has become a myth because those with money and power, both individuals and corporations, have been able to alter the rules of the game to their benefit.

“If history is any guide, reform is likely to begin in America and inspire reform elsewhere. That’s because Americans have always tended to choose pragmatism over ideology. When we have recognized a problem and understood the reason for it, our habit has been to get on with the messy job of solving it. Whenever capitalism has before reached points of crisis, we have opted for communism or fascism or any other grand scheme. Again and again we have saved capitalism from its own excesses by making necessary corrections.”

In Chapter 17, Reich examines previous economic crises in America that threatened capitalism and discusses the reforms that took place because of the crises. Contrary to popular rhetorical arguments that America could embrace socialism when enough ordinary people believe the system is rigged against them, we have time and again opted to reform our capitalist system.

“It is impossible to reform an economic system whose basic rules are under the control of an economic elite without altering the allocation of political power that lies behind that control.”

In describing the decline of countervailing power, Reich makes the case that the problem is a political one rather than an economic one. Countervailing power has declined so drastically primarily because lawmakers now hear the voices of moneyed interests, corporations, and wealthy individuals rather than regular voters as they once did.

“When a majority of Americans are becoming poorer while a small and privileged minority is becoming richer than ever—and when the rules of the game redistribute economic gains upward—there exists possibilities for new alliances, and a new politics.”

In Chapter 19, Reich moves to discussing the ways in which countervailing power can be restored. The primary aspect of this is the formation of new alliances from people typically on the right and left to come together because they face the same problems that have been caused by the same manipulation of the system by the powerful.

“The centrifugal forces of globalization and technological change require bolder steps if prosperity is to be more widely shared.”

In Chapter 20, Reich discusses reforms that can be taken by the new countervailing power that will end the upward pre-distributions that are currently baked into market rules. These reforms follow the issues and problems associated with each of the five building blocks of the market.

“Only some of us are corporate shareholders, and a tiny minority of wealthy Americans own most of the shares traded on America’s stock exchanges. But we are all stakeholders in the American economy, and most stakeholders have not done particularly well. Perhaps more stakeholder capitalism is in order, and less of the shareholder variety.”

When Reich refers to shareholders, he is referring to those who own stock in a company; when he refers to stakeholders, he is referring to anyone who has an interest in the company’s performance. This could include investors, the community, employees, and customers.

“The economic model that predominated through most of the twentieth century was mass production by many for mass consumption by many. That no longer holds. The model of the future seems likely to be unlimited production by a handful for consumption by whoever can afford it.”

Reich is referring to the fact that technological changes have fundamentally altered the economic landscape in terms of the huge drop in the number of people who are now responsible for producing things for consumption and the huge increase in the number of people who are consuming. More and more can be done by fewer people now, meaning that profits go to an ever-smaller circle of executives and owner/investors.

“By 2014 six of the ten wealthiest Americans were heirs to prominent fortunes. The six Walmart heirs together had more wealth than the bottom 42% of Americans combined (up from 30.5% in 2007).”

Reich is once again reiterating his point about concentrated wealth and how market rules that have drastically lowered estate taxes have created such a problem. Like the myriad of other ways in which the system has been manipulated for the benefit of the wealthy, it has occurred because of the lack of countervailing power.