Saving Capitalism: For the Many, Not the Few

The book is extremely rich on both the details of inequality in the USA and the legislative enactments that have made it possible. When it comes to what to do about it, Reich speaks of countervailing power (within a capitalist framework, as the title makes clear). He believes that different enactments could indeed reduce inequality without the need to get into left-right arguments about the appropriate size of government or even any debate about a possible shift towards socialism. For example, he says in Chapter 17 ('The Threat to Capitalism') that 'Americans have always tended to choose pragmatism over ideology'... {that} whenever capitalism has before reached points of crisis, we have not 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'. For a book published in 2015, Chapter 19 ('Restoring Countervailing Power') is very percipient, reading ahead of time the populism that propelled Trump to the Presidency in 2016. He is clear that the countervailing power will not come from the Democratic Party until it re-invents itself, reminding us that during the election campaign big business very much favoured Clinton over the anti-establishment stance of most Republican front-runners (including Trump of course). Whether the protests that started the day after Trump's inauguration signal the new beginnings of an effective countervailing power remain to be seen. Quite appropriately, those protests were triggered by Trump's misogynist views. But will these and future broader-based protests be enough to push capitalism back into (???) a progressive populist direction? Or will the clash lead to a bigger government role and an adoption of socialist practice that Reich seems to believe could not be democratic (for reasons that he does not discuss in this book despite his strong support for Bernie Sanders)? Reich provides us a wealth of invaluable information but doesn't help us to identify the (within capitalism) that will change the thirty-year drift towards ever greater inequality and now with Trump, the rush towards fascism.

Excellent read! It's a must if you want to understand the causes of rising inequality... In my opinion robots (the rise of the robots by Martin Ford is another must read) are certainly part of the cause, but an important cause is democracy, and balance of power. It boils down to democracy, and the lack of it! Inequality of income is caused by inequality in political power. This book points out that it's not about "big government" versus "Free market"... There is no such a thing as free market, the market is ruled by laws, the "rules of the game", and laws must exist for the market to work. But the rules of the game today are written in such a way that they create an "upward predistribution", from the poor to the rich. They are making the rich richer at the disadvantage of the poor. Taxes should re-balance things by distributing downward, but not enough! The very basic principle of democracy is that every citizen of the US should have equal political representation regardless of their economic power. The Walmart employee should have the same political power as the Walmart CEO. And that is true when it comes to voting right: they both get one vote. But we know very well that as a practical matter it's not! And this books shows in how many ways that is not true. The vote is a tiny representation of power. Washington lobby money is what really matters when it comes to power. I like this number: the Walmart family is worth as much as the bottom 42% of Americans! That's an enormous unbalance of wealth. Now 51% of the bottom poorest Americans, in theory, in a democracy, is a majority. 51% of people, if they happen to get together and agree, could represent a majority and they could pass any proposition into law, yes that's power! In theory that 51% of Americans could pass a law that for example would redistribute 90% of the money from the top 1% wealthiest Americans to the bottom 51% of Americans. That's easy! I know that's just theoretical, but it's a sign that some sort of civil revolution, more or less aggressive and violent, could happen very soon, if things keep going in the same direction.

As I have reaffirmed many times in this column, I hold the opinion that no economic system has grown companies and countries faster and more effectively than Capitalism. However, it hasn’t raised the quality of life for all beneficiaries equally - to say the least. It is this regrettable failing that is addressed by Robert Reich, Chancellor’s Professor at the University of California, Berkeley. He served in the administrations of Presidents Gerald Ford and Jimmy Carter, and was Secretary of Labour under President Bill Clinton. Fundamental to Capitalism is the notion of a free market, where people pay for goods or services according to how they value them. What follows logically from this is that what one is paid, reflects one’s worth in the market. If you are paid too little to live on, it is because that is all you are worth, and if you are paid tens of millions you must be worth it. One of many studies found that good teachers increase the average present value of their students’ lifetime earnings by $250,000. Perhaps, if teachers were paid better the profession would attract many more such teachers. “The worth to society of many CEOs, hedge-fund managers, investment bankers, high-frequency traders, lobbyists, and high-end corporate lawyers, may be less than they command in the market. Much of what they do entails taking money out of one set of pockets and putting it into another, in escalating zero-sum activity,” Reich asserts. If Capitalism is so ‘good’, why is it so bad? That is the subject of this profound book, as well as what can reasonably be done about it. To achieve any change to the economy of a society, to make it more equitable, reasonable and humane, requires first a sound understanding of what actually makes it work. To have a ‘free market’, decisions must be made about five critical issues: property, monopoly, contract, bankruptcy, and enforcement. What can be understood as property, and therefore can be owned? Cars? Land? Slaves? A bomb? Intellectual property such as the human genome? Some have been approved and others not. What degree of market power is permissible? How big a control over the market is acceptable? Is a monopoly permissible? What can be bought and sold, and on what terms? Votes? Unsafe food? Babies? Most civilized societies do not allow or enforce contracts that are fraudulent, or that are based on coercion. But how do you understand coercion? Is insisting you buy insurance from me in order to buy something else you want, coercion? What happens when purchasers can’t pay their debts? Do they go to debtor’s prison or declare bankruptcy, and pay all debtors a only portion of what is owed equally? Are employees who have lost their bonus or the rest of their employment contract, seen as debtors? Can homeowners declare bankruptcy and so reduce their obligation on their home loan? Can students declare bankruptcy and be relieved of some of their student loan? How can we make sure no one cheats on any of these rules? We have to rely on decisions about how all these rules are enforced or they will be valueless. What are the priorities of police, inspectors, and prosecutors? Who is entitled to sue whom? Markets, whether a ‘free market’ or a ‘planned’ economy (one that is heavily regulated or controlled by the government, as in socialist or communist countries,) are made by human beings. This is no different to nations, governments, laws, corporations, and sports which are all the products of human beings. These products reflect moral values and judgments, and are not static; they change over time. The rules are made by those with the most power over rule-making, and by changing the rules, the balance can be shifted for or against certain groups. As such, the rules can be skewed to the benefit of a few, rather than the many. Whether in the USA or South Africa, decisions are too often made behind closed doors, in negotiations influenced disproportionately by those with enough resources to be heard. This creates and perpetuates a vicious cycle: economic dominance feeds political power, and political power further enlarges economic dominance. This is most evident in the USA, partly because of the country’s economic sophistication, level of transparency and freedom of expression and democracy. These decisions have real consequences for an economy and for the individual people whose livelihoods are affected by them. In 2000 in the US, for example, labour’s share of nonfarm business income was 63%. In 2013, it was 57%, representing a shift of about $750 billion annually, from those who labour to produce the capital, to those who own the capital. The reality is that government has a pivotal role in designing, organizing, and enforcing the market to begin with. The free market vs. planned market debate clouds the thousands of choices made by legislators, administrators, and judges. It clouds the ongoing task of deciding that can have huge consequences, and that will never cease, so long as there are changes in market conditions, innovations and technological advances. This is the key takeaway from this book. Changing the economic system will not help the many: vigilantly monitoring, influencing, and counterbalancing power, will. This book is a profound account of a very thoughtful and very well informed intellectual. It will shed light on some very troubling issues. Readability Light ----+ Serious Insights High +---- Low Practical High ----+ Low *Ian Mann of Gateways consults internationally on leadership and strategy, and is the author of the recently released ‘Executive Update.

This is an inspiring book. The copyright date is 2016, and it was clearly written before the emergence of Donald Trump as President. In fact, Trump is only mentioned in the book once, and this is because of his infamous bankruptcy issues over his Atlantic City properties. The author actually talks about some prominent Republicans voting for Hillary Clinton, in anticipation of her becoming President in 2017. So much for that prediction or insight. But as this is review is written, and the Presidential era of Joe Biden has begun, it is as if this book may be even more relevant in the current events of American history. The thesis of this book is that there is nothing inherent in capitalism that should lead to “mounting insecurity and economic inequality.” He says that this has been the case in American history, in varying degrees over time, but that it can be changed. When this increasing inequality is unchecked by government intervention, it feeds upon itself and has to be “saved from its own excesses.” If this is not done, we get to a point where the rich and powerful have most of the money and political power. Per Reich, this is not good for anyone, including the rich and powerful. He questions whether the “free market” has every really been free. He says that there can be a government that is there to “make and enforce the rules of the game.” He does not think the size of government is a major issue. What is more important is that government be there to stabilize things, especially when they get out of whack. He says that there are five building blocks of capitalism: property, monopoly, contract, bankruptcy and enforcement. He sees the accumulation of money and power as linked to the core. He talks about how real and intellectual property have been the basis for wealth for centuries. And he shows how some giant corporations, such as Pfizer and Monsanto have been able to monopolize products to produce huge financial gains. He cites Amazon as an entity that sucks all the air out of the room, when it comes to eliminating competition. And he talks about the dangers of insider trading on the stock market. Reich believes in capitalism, but he wants controls. For example, he says that “In America, people with lots of money can easily avoid the consequences of bad bets.” He is good with bankruptcy, but wants it available to common folks, as well. And he points out that many of the super rich are such because of inheritance, not from earning their own money from scratch. He says that things get bad when the majority in the country feel that the system is rigged against them and that they have little chance to make that better. He rails against the argument that American workers are paid what they are worth. He spends a whole chapter talking about the rising payouts to corporate CEOs, especially in comparison to the average income of employees of their companies. He says that it would be far healthier for corporations to pay their CEO and top executives less, then use those saving to reinvest in the company, itself, and/or to pay their employees more. He hates the idea of corporations using money to buy back their own stock to raise the unit stock price. As for the tax system, he says that it is “biased toward the owners of wealth and against people whose incomes are from wages.” He also says that trends in the 1970s led directly to the stagnation of middle-class wages. He cites GE CEO Jack Welch as leading that charge. The guy was hell bent on increasing shareholder returns at the expense of the workers. Another factor that affected the stagnation of wages was the deterioration of unions. Yet another was the emergence of sending manufacturing jobs and industries overseas, mainly to China. Such factors encouraged workers to accept the pay and benefits offered. He cites the rise of the “working poor,” who may be working two jobs, not one, but still cannot pay all the bills. He, I assume, would be encouraging the current Biden efforts to raise the national minimum wage to a level of a “living wage.” He argues that when workers have to seek government programs to help pay their bills, it is the employers who win out here, and the average taxpayer who is really paying the bills. He suggests having the federal government be more involved in paying for the schools and universities. He encourages increased taxation on inherited wealth. He says “no one should confuse income for virtue, (or) net worth for worthiness. The underlying reality is that capitalism is not working as it should or as it can….The playing field is clearly tilted toward those who have the resources and power to tilt it in their direction.” So, what can be done? He says that redistribution of wealth has, for the most part, actually been going in the wrong direction, to the rich and powerful from the working class, not the other way. He questions how the richest four Americans could have as much money as the lower 50% of American households. He says that “The economy cannot function without the purchasing power of a large and growing middle-class.” He feels that these trends toward more and more wealth at the top are not sustainable, economically or politically. “The only way back to a democracy and economy that work for the majority,” he suggests, “ is for the majority to become politically active once again.” What needs to be done is to establish a “new countervailing power.” Reich suggests that we “lift the curtain” on how the economy and so-called free market work. “The explicit aim of this new (effort) would be to save capitalism, by enabling most Americans to benefit from its success.” He also says that “with effective countervailing power, the American corporation could be reimagined and reinvented.” He says that today’s employment opportunities involved about 20% of the jobs being in “routine productions work,” while about 50% are now in “personal services.” Another 20% of jobs are in problem-solving or analysis. But he says that the allocation of work and jobs is not the primary challenge. It is the distribution of income and wealth. And, clearly, for what it is worth, there are about 10% of American households today who do not need to “work.” As far as income and wealth redistribution, he talks about ways to “share future wealth.” He also talks about a basic minimum income. And, he encourages us to find ways to “design the rules of the market so that the economy generates what most people would consider a fair distribution on its own, without necessitating large distributions after the fact.” As I said above, it seems like this book and its ideas are very much in sync with what is emerging from the Biden administration in its first 100 days in office. May some of the ideas in this book be useful in that effort and beyond.

The middle class is shrinking and has become poorer. The median American household was earning less in 2013 than it did in 1989, while the proportion of income going to the top one percent has skyrocketed. Economist Robert B. Reich explains why in his latest book, and does so in a way non-economists can understand. Conservatives tend to explain rapidly growing inequality as merely the result of “market forces” and globalization. They say unions are an anachronism that actually reduce jobs. Yet, not all modern economies have experienced a declining standard of living for the middle class and rapidly widening inequality. In Canada, for example, unions still represent 27 percent of the workforce, compared to 11 percent in the USA, and the Canadian middle class is doing better than the American. In Germany, unions also remain an important institution in the private sector. Real hourly pay in Germany has risen by almost 30 percent since 1985, while it has stagnated or declined in the USA. The percent of total income going to the top 1 percent in the US grew from 10 percent in the 1960s to well over 20 percent by 2013, while in Germany, the richest 1 percent continue to receive about 11 percent of total income there, a percentage that has remained steady for four decades. The share of national income going to the middle class has remained relatively stable in Germany, while it has declined sharply in the US. The consequence is the German middle class remains healthy, while their American counterparts are struggling. Germany is subject to the same market forces as the USA. What differs are the rules. Reich argues that the concept of the free market is widely misunderstood. Rules create markets, and government generates the rules. Consequently, “government doesn’t ‘intrude’ on the ‘free market’ when it creates the market.” On the contrary, government plays an indispensable role in organizing and reorganizing the market, in setting the rules about copyrights, patents, bankruptcy, and much more. Thus it is a false dichotomy whether the “free market” is superior to government; that debate, however, serves to obscure the rule changes and whom they serve. Political power influences the rules, and the corporate and financial elite, due to its increasing concentration of political power, “has been able to influence the rules by which the economy runs…The consequence has been a market organized by those with great wealth for the purpose of further enhancing their wealth.” By contrast, the political influence of the middle-class and working poor has declined, and their share of the national income has declined accordingly. This book critically examines the rules that serve the financial elite, and proposes a remedy, namely for the vast majority to regain influence over how the market is organized. As has happened before, writes Reich, capitalism needs to be saved from its own excesses. Readers of this book face a basic question: Do you prefer the economic status quo of the past 30 years, where much of the middle class has suffered a declining living standard, upward economic mobility has become more difficult, corporate profits in 2014 were at an 85-year high, while labor’s share of the economy continued shrinking, and the CEOs of large corporations enjoy incomes more than 200 times that of their typical worker? It was not always that way. During the three decades after WWII, the income of the typical worker doubled, while the average CEO earned just 20 times more than his typical employee, and the top 1 percent received just 9-10 percent of total income. The economy doubled during both 30-year periods, so the much broader sharing of prosperity during the earlier period apparently did not retard growth. But the three decades after WWII were consistent with the American Dream, where hard work meant upward mobility, and where children would enjoy better lives than their parents. Reich rejects the Marxian view that capitalism inexorably leads to economic insecurity for the masses and widening inequality. It all depends upon the rules. Reich advocates changing the rules to make capitalism work for most Americans by more widely shared prosperity and opportunity, as happened during most of American history. The main obstacle to such reforms is the corporate and financial elite that benefits the most from the status quo. Those who benefit defend the status quo using the either/or fallacy – we either have a “free market” or we have Big Government. The real underlying issue is not whether government should play a rule-making role, since there would be no patents or copyrights without government. The real issue is HOW government defines property rights and who benefits. The bankruptcy rules, for instance, allow business moguls like The Donald to declare bankruptcy four times to protect their fortunes, while homeowners who go underwater with their mortgages can’t use bankruptcy. Neither can young adults burdened with college debt. The rules don’t allow it. It appears those rules protect the people who need it least and exclude those who need it most. The solution is the reemergence of a countervailing power to end the political and economic dominance by the super-rich. Reich calls this inevitable, because neither the economy nor democracy can be sustained when 70 percent of the population continues getting poorer, and their views are ignored. One reason for Reich’s optimism is that the 2015 has been the year of the anti-establishment presidential candidates in the GOP, while establishment candidates such as Jeb Bush have been rejected. Among the specific reforms that could only be enacted by a different power structure would be boosting the minimum wage to half the median wage and adjusting it to inflation thereafter, restoring limits on campaign contributions, slowing the revolving door between government service and jobs on Wall Street, regulated corporations, or lobbying firms. By 2014, six of the ten wealthiest Americans were heirs to prominent fortunes, and that trend of great inherited wealth is accelerating. New rules could “cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it.” The critical debate, writes Reich, is not about the size of government, but about whom government is for; it is not about the free market vs. government, but between a market organized for broadly based prosperity and one designed to deliver almost all the gains to a few at the top. ###

Dr. Reich expresses his concern over the growing gap in the maldistribution of income in the US economy. Over the last 30 years, the size of US economy has doubled yet middle income earnings have been flat. However, the richest 1% of the US population receives about 20% of the total national income and their earnings continue to grow. Because the way the market has been dominated by special interests with disproportionate influence on federal regulations, the income gap continues to grow in favor the wealthy. Reich foresees a collapse in the middle class which could lead to major social disruption in the next decade. The loss of the middle class which is the consumer component of the economy can also actually threaten the wealthy class which needs a consumer market for their goods and services. He foresees a compounding deterioration of the national economy because of a breakdown in the interdependency of the classes. Because of their short-term opportunistic profit mentality, the wealthy class is not likely to pursue altruistic policies to benefit the lower classes. The income gap is likely to grow even larger in the near-term unless federal government economic reforms lead to redistributing the national income to the middle class. Reich proposes that a popular national movement could pressure the US Congress to reform laws and regulations that have been favoring compounding the wealth for the already monumentally wealthy. The short-lived movement of protests against the "two-percenters" has clearly demonstrated that the middle class does not have the organization or collaborative infrastructure that could begin to challenge the wealthiest people in the nation. It would take a gigantic economic meltdown like the Great Depression to force serious national economic reform. Even then, those who are too big to fail economically will not likely suffer at all from any future economic crisis. Most of us will be helplessly watching our economic train wreck in slow motion while the wealthy will be on another track. Reich further explains that an underlying vehicle for accelerating the income flow to the wealthy is the growing intrusion of automation and robots into the mainstream workforce. Robots can replace almost any redundant and repetitive function at very low operating costs. And although this appears to be a threat primarily to the "blue-collar" class, Reich makes a strong argument that the middle-class will also be threatened by robots for "white-collar" jobs. Robots could very well change the entire labor structure in the next decade to the increasing benefit of the very wealthy and to the impoverishment of the middle class. He defines three categories of labor and how their income has deteriorated over the past 25 years. He further expects these trends of increased unemployment through automation to become more aggravated for all labor classes. Only the wealthiest 2% capitalists will be immune to the threat of robot replacement. In looking for the possible roles for the future middle-class in the future robot dominated labor market, he proposes that the super wealthy will have to offer some accommodation to the middle-class. Somehow, a welfare state will emerge and the federal government will offer a guaranteed base income to all citizens. In his example, every adult would receive a check for up to $10,000 annually as a basic guaranteed income. Individuals might be allowed to earn a ceiling of about $50,000 before some of the guaranteed income would be reduced. But because of the wide use of robots in place of human labor, only a small fraction of the population would really generate any independent income. This basic guaranteed income would provide a fundamental means for survival by most of the middle class and could keep the consumer economy on life-support. Reich’s future American welfare state reads like science-fiction utopia. The large, highly belligerent politically conservative faction in US would all have to self-deport to Mars for any such welfare state to emerge in the US. At the same time, how will the public adapt to an economy that is operated primarily by robots and automation and with diminishing need for human labor? No rational solution is apparent. Either a great social crisis erupts on the scale of the Civil War or the upper class will just continue to monopolize on the wealth of the nation. But then, soothsayers are often wrong. By some unexpected turn of technology and education, the middle-class may find a role in the robotic society that creates whole new labor opportunities. Maybe somehow, middle-class income will exhibit a new growth spurt in the future robotic society. Then Reich will be will be reviled as some academic kook who was on hallucinatory drugs back in the early 21st-century. Only time will tell.

This is an excellent overview of how the market is defined and managed by the government, and how the rules managing the market have been subtly altered over the years to benefit the top 1 percent (crony capitalism). The book then goes over potential solutions to the problem, some fixing/reverting the rules and others addressing the symptoms (minimum wage, unions). Interestingly, the last 2 chapters of the book discusses a completely unrelated problem that presents an even bigger danger to income inequality. The rise of automation has been pushing manufacturing jobs to service and making "problem solving" jobs more and more of a premium. In fact, the real danger is that eventually all of the manufacturing and much of the service jobs will be completely crowded out by automation. The only solution proposed for this eventuality is to provide a minimum standard living allowance to all Americans. Personally, I find it a little ironic that some of the solutions proposed for crony capitalism (minimum wage, unions) will tend to increase the cost of labor and exacerbate the presumably more dangerous automation issue. I also do not share the authors belief that it would be in any way a good thing to provide all Americans unconditionally a minimum standard of living with limited incentive to generate more income. In general, I think humans need some kind of purpose and structure in there lives. There are exceptions, like the authors suggested "starving artist", but for the majority I think such an environment would have a very negative social impact. Personally, I think if it really came to this a better solution would be to tie that income to some form of government employment, not necessarily because I think it will generate additional productivity (I'm not sure that it will) but because I think it will ultimately provide benefits to both the individual and society. Regardless, even though I disagree with some of the authors solutions, the book had me thinking for days on the topic after I finished reading making it more than worth my time.

"Saving Capitalism" is the best explanation of the current economic situation in America that I have ever read. Reich proposes somewhat progressive solutions to the massive problems, not necessarily by expanding government, but by changing the way government sets the rules of the marketplace. Robert Reich points out that there is no such thing as a free market in nature. Every market in the history of civilization has been regulated by some authority, usually government. Whether governed by pharaohs or kings or democratically-elected congresses, some authority must set the basic rules by answering the following questions about the five building blocks of capitalism: 1. Property: What can be owned? 2. Monopolies: What degree of market power is allowed? 3. Contracts: What can be bought and sold? On what terms? 4. Bankruptcy: What happens when purchasers can't pay? 5. Enforcement: How do we assure that no one cheats on these rules? According to Reich, current arguments about the conflict between the free market and government are specious. They are designed to deflect public attention away from the real question, namely "Who is writing the rules of the marketplace?" Ever since the 1980s, when government virtually halted anti-trust enforcement, corporations have merged to become so large that one or a few corporations control each segment of the economy. With their wealth, and the wealth of a few powerful individuals, they have purchased armies of lawyers and lobbyists who incessantly walk the halls of Congress making their wishes known, suing over any government regulation that they dislike and even writing self-benefiting laws at the state and federal level which obliging legislatures enact, sometimes verbatim. During the 30-year period after WWII, corporate CEOs understood that they have many constituents in addition to shareholders. There are employees, customers, the public, and local governments which provide the infrastructure in which the corporation operates. Beginning in the 1980s, attitudes changed to regard shareholders as the only CEO constituent and share price as the only measure of CEO success. CEOs who focused on share price benefited by changes in regulations allowing them to accumulate more shares and sell them based on inside information. Any other constituencies, from employees to customers, came to be disregarded. The end result has been the massing of income and assets by a tiny minority and the fall of real wages and opportunity in the middle class and below. The economic elite has taken control; they write the rules of the marketplace for their own benefit. The solution, according to Reich, is to restore the influence of countervailing power such as labor unions, small investors, small farmers, small business people, small banks, various interest groups, and anyone else whose influence over the rules of the market has been virtually eliminated. How to achieve this? • Campaign finance reform to get big money out of politics. • Eliminate the revolving door between government and the industries it regulates. • Full disclosure of campaign contributions, funding of think tanks and studies about public policy. • Full enforcement of anti-trust laws. • Restore Glass-Steagall to separate ordinary banking from investment banking. • Set the minimum wage at half the median wage and adjust it regularly for inflation. • Reform the way we fund public education. He points out many more possible corrective measures not requiring an increase in government, but rather a change in the way government regulates the relative power of the moneyed elite and the American public. Reich presents hundreds of persuasive, detailed and nuanced arguments to make his case. Everyone should read this book.