Saving Capitalism – or Democracy?

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Few will doubt both globalization and technology are putting many people under economic stress. Symptoms of this in the US and other industrialized countries include raising inequality, stagnant wages, less opportunities and decreased social mobility, and little to no improvement in living standards for most.  Together, they have created an environment characterized by widespread distrust of the current economic system and its regular functioning. Nowadays, such distrust – not communism or fascism – is the main threat to modern capitalism. This is the starting point of Robert Reich’s latest book on how to save capitalism – and democracy too!

But how did we get to this point?

Reich first pinpoints that the ongoing and now repetitive debate on the “free market” vs. government alleged rivalry has been a distraction: “The idea of a ‘free market’ separate and distinct from government has functioned as a useful cover for those who do not want the market capitalismmechanism fully exposed. They have had the most influence over it and would rather keep it that way. The mythology is useful precisely because it hides their power” (pgs. 84-85). Here the powerful managed to set a political agenda that suits their on interests.

The author thus sees such rivalry as a false dichotomy. Instead, he claims markets – any market that is-  require government intervention to be fully operational.  Indeed, the rules of the game for markets are established, in democratic systems, via legislation, public institutions, and courts.  But such rules are not neutral, universal or cast in stone. On the contrary, their dynamics depends on who holds the most economic and political power in society at any particular time in history.

What has changed in the last decades is that political power is now mostly in “the hands of a relative few large corporations and wealthy individuals” (pg. 12)  who in turn use the idea of “freedom” to promote their own agendas. But for Reich “freedom” has little meaning if not linked to the dynamics of economic and political power.

But how is such power exercised?

To answer this question, Reich first defines modern capitalism as having five key building blocks: Property; Monopoly; Contracts; Bankruptcy; and Enforcement. Note that these blocks or pillars are defined from a governance and political perspective. We are not invited by the author to look at the economic structure of society as thus seems to do fine. In any case, each of these building blocks can be and has been properly massaged to accommodate the views, agendas and interests of those who hold  political power, solidifying in this fashion their economic and political advantages. This in turn has created “a vicious cycle: Economic dominance feeds political power, and political power further enlarges economic dominance” (pg. 82-83).  More importantly, this vicious cycle  can be created without the help of increased globalization and rapid technological change. The latter has only exacerbated the former.

The massaging of our five building blocks is reflected in large increases in CEO and Wall Street pay; the rise of the working poor and the non-working rich; and the declining bargaining power of the middle class, each getting a separate chapter in the book. In addition, Reich has a chapter to the idea or meritocracy (“one gets paid what one is worth“, which he sees as tautological) which he openly rejects making no reference to the neoclassical theory of wages – the marginal productivity of labor.

So how do we get out of this mess without having to abandon capitalism?

Given all the above, one would think the answer is simple: reduce the power that  large corporations,  Wall Street, and wealthy individuals have. “The essential challenge is political rather than economic. It is impossible to reform an economic system…without altering the allocation of political power…” (pg. 169).

But Reich introduces here a seemingly subtle twist: “the problem is not their power of influence. It is the comparative lack of power of the other side. There is no significant countervailing power, no force to constrain or balance the growing political power strength of large corporations…The middle class and the poor…have little to no agency” (pg. 157).   So the task at hand is the reestablishment of such countervailing power which one would think will equate a decrease in power of the other side.

Reich sees political change coming only via political parties. No room for contentious politics or class struggle here. The only way to introduce change is that either one of the two existing political parties in the US directly confronts the challenge. Alternatively,  the emergence of a third party could be feasible with the main purpose of reallocating political power towards those who today have little to no agency. Certainly, “No one should expect this to occur smoothly or easily” (pg. 191).

The last part of the book offers ideas on how to restore countervailing power, some of which the author had addressed before in previous publications.  Others such as basic income are being proposed by many others, including those who hold power nowadays.  With this is hand, Reich then ends the book in optimistic fashion.

Nevertheless, the path to get countervailing power back into the picture remains murky at best.  The dynamics between capitalism and democracy are perhaps more complex than what Reich assumes them to be.  While power can be shared, restoring power for one sector of society necessarily implies that those in power lose some. As Reich says it won’t be easy. One clear alternative is to promote the creation of new democratic processes and mechanisms that can restore such power for the rest of us.

All in all, Reich’s main argument seems to support more saving democracy than saving capitalism.  He in fact addresses none of the traits of capitalism as a dynamic economic system. What we seem to experience today is instead a political conundrum where a few have too much power. This is the political theory of the 1%. Political inequality thus is the core issue. But maybe capitalism can survive for a long time without having the type of democracy that has existed in the West for the last 100 years or so. It goes without saying that democracy is not static and has changed overtime – and will continue to change.

Cheers, Raúl

Reich, Robert B. 2015. Saving Capitalism: For the Many, Not for the Few. New York. Alfred B. Knopf. ISBN: 978-0-385-35057.