Those of a right-wing disposition may care to look away now.
Robert Reich’s 2004 book, Reason, argues that liberals* have twice saved capitalism from its own excesses:
The first time was in the early 1900s. By then, captains of American industry had monopolized the economy into giant trusts, American politics had sunk into a swamp of patronage and corruption, and many factory jobs were unsafe – entailing long hours of work at meager pay, often exploiting children. In response, liberals championed anti-trust laws, civil service reforms, and labor protections.
The second save occurred in the 1930s, after the stock market collapsed and a large portion of the American workforce was unemployed. Then liberals regulated banks and insured deposits, cleaned up the stock market, and provided social insurance to the destitute.
Both times, liberal reformers were accused of interfering in the free market. But in both instances, liberal reformers prevailed. They did so by appealing to public morality and common sense.
It is time, once again, for liberals to restore confidence in our system and save capitalism from itself.
This seems interesting in two ways. First, Reich is right that progressive politics has rescued capitalism from a tendency to self-destruct. In this way, progressives have enabled capitalism to continue to serve its purpose as a driver of innovation and prosperity in society. Pure laissez faire policies would have failed, resulting in a collapse of the capitalist project. Second, this is a powerful narrative for the progressive left to adopt. Progressive politics should define itself not in opposition to capitalism but as its guardian.
Is Reich right that it is time, once again, for liberals to step in to restore confidence in capitalism? I think he probably is: we are seeing structural challenges which capitalism does not seem to be able to solve on its own terms.
The origins of capitalism’s next crisis?
To my mind, the heart of the problem of capitalism today is its interaction with politics in modern democracies. Many of us want to live in a world in which citizens elect and control governments; and governments, in turn, regulate business to create well-functioning markets. But over the past quarter of a century we have an increasing sensation that this has been reversed. To an increasing extent, businesses fund the political process and much of the media, and so control government; and government increasingly controls the citizen.
That reversal of the normal flow, in which businesses rather than citizen determine government decision-making, is increasingly shifting our societies away from the outcomes which we expect from well-functioning markets. The consequences include:
- The large and widening gap between rich and poor within developed countries.
Top earners now earn 300 times as much as the bottom earners, compared with 20 times as much only twenty years ago. There is no economic rationale for the salaries earned by the super rich – far above their economic value on any reasonable measure – but the forces of corporate governance have been captured and seem powerless to bring the irrational exuberance of excecutive pay into line with the fundamentals.
- The large and widening gap between rich countries and poor countries.
The inequality between rich and poor is at historically unprecedented levels, and poor countries (such as many in Africa) appear to be trapped in a future of low growth. The traditional mechanisms of catch-up – such as trade, technology and knowlege transfer and migration – are being deliberately choked off by the rich countries, apparently determined to pull up the ladder behind them.
- A failure to grapple with the world’s most important long term challenges
A drive to short term economic performance is leading us to ignore critical long-term challenges. We are unable to create incentives for our markets to tackle the growing environmental crisis. We face an obesity time bomb, driven by the cynical and deliberate efforts of the processed food industry to sell us food that is addictive but unhealthy. We face an alarming growth of drug-resistant diseases, caused by mismanagement of existing pharmaceuticals, and an unwillingness to invest enough in future medicines.
- Erosion of confidence in financial services: heads-I-win-tails-you-lose
The financial services industry is failing in its task of ensuring an efficient allocation of capital. Financial services companies earn large salaries investing our savings on our behalf, which is an economically valuable activity if they do it well. I don’t expect traders and investors to anticipate expected profits in 15 years time within a margin of 50 percent either way. But I do expect them to be able to distinguish a viable business with real customers, revenues and profits from a company with no economic foundations such as Enron or Worldcom. Furthermore, we have reneged on society’s contract – implicit or explicit – to provide a decent life after a lifetime of work. The companies that took "pensions holidays" when the stock market was rising – unilaterally choosing not to make contributions for their employees’ pensions – now walk away from their obligations when pension funds underperform.
These are not short term, temporary problems, like the US current account deficit. These are deep, structural challenges that require enlightened, intelligent intervention to restore the conditions in which free markets are able to deliver the kind of society we want.
To achieve this, we have to address the relationship between corporations and government. That may require relatively modest, and quite inexpensive changes such as campaign finance reform and an adjustment of the legal status of companies. It is not a plea for wholesale regulation and government interventionism: but rather to create a different sort of relationship between government and business, so that it government more responsive to the collective, long-term welfare of society, and less to the short term commercial pressures of powerful firms.
The F117A Nighthawk fighter aircraft is aerodynamically unstable. It stays aloft because a computer constantly adjusts the flaps of the plane to keep it from falling out of the sky. The plane is faster as a result of this design, but it needs constant trimming and adjustment to make it work.
Capitalism seems to be the same. The very forces that make it so effective at generating innovation, growth and incentives also make it unstable. The rewards that drive innovation also reward rent-seeking and creation of monopolies. The accumulation of wealth that motivates the most inventive people in our economy results in an accumulation of power that we do not find acceptable. Capitalism is a great way to deliver the benefits of a dynamic, fast-moving economy; but like the F117A, it needs an occasional intervention to prevent it falling into a tailspin.
Retaking the agenda
Conservatives and neo-conservatives have succeeded in framing liberals as idealogues, driven by their political agenda to undermine the efficient functioning of proven mechanisms to deliver growth, jobs and prosperity.
Liberals should resist this. It is Conservatives who claim that unr
egulated markets are not only efficient but also the only morally justified way to organise society: and hence their ideology that hinders understanding of how markets can be effective at delivering the kind of society we want to build. Liberals, by contrast, are pragmatists who see competitive markets as an essential and efficient way to deliver prosperity and opportunity for everyone; and who recognise that there is a role for Government to create the conditions in which they will do so consistent with our vision of how we want to live.
Perhaps I am too pessimistic about the ability of democratic, liberal societies to adjust course. But Reich’s examples are compelling: in both cases, intervention was needed to put the evolution of capitalism back on course.
We are facing failures of capitalism that are potentially cataclysmic: whole generations of the developing world condemned to unacceptable poverty, financial systems which lack credibility, and ticking time-bombs, visible to us all, that we are unwilling to defuse. Is it time for liberals, once again, to save capitalism from itself?
(* Note that the word "liberal" is being used here in the American way, not with the European meaning).