In defence of capitalism

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: Robert Reich’s ideology has always been hard to pin down. It is not as if he fits easily into pre-prepared slots: he is not a shrill liberal railing against corporate power, nor is he a cynical pragmatist advising us to make the best of a bad situation. He is not a simplistic populist insisting that control is slipping out of the grasp of the middle class, nor is he one of those clamouring for a return to a simpler, more stable time. There are aspects of all these stands in Supercapitalism, but the whole is considerably more than the sum of its parts, and satisfyingly nuanced.

Reich has never been an enemy of the market. Even as labour secretary during President Clinton’s first term, when he expanded government programmes and supported organised labour, he was notable for arguing against strict protectionism, and suggesting instead an expansion of re-training mechanisms to allow the American workforce to adjust to freer trade. More recently, he was one of the harshest critics of the bloated farm subsidy bill passed by the US Congress last year that helped to derail the Doha round of trade talks. In this book, even as he worries about the effect that corporate power has on democratic politics, he frames it explicitly as a defence of capitalism as he sees it.

The central question, according to Reich, is how the comfortable consensus that existed in the 1950s and 1960s in America — and, indeed, the rest of the Western world — managed to disintegrate. Throughout those happy postwar decades the economy expanded and the middle class grew in size and wealth; underpinning this were powerful trade unions, oligopolistic control of large markets, and regulators overseeing firm behaviour. “Democratic capitalism”, as Reich calls it, required industry associations and boards that would set targets and codes of behaviour across entire industries, including topics related to employee welfare. Senior executives saw themselves as “corporate statesmen”, and their stated duty was to balance the interests of stockholders, employees, and consumers. Their self-confidence was justified by the near-universal public approval of their actions in doing so.

While there is certainly a certain amount of nostalgia in Reich’s retelling of this period, what is unexpected is Reich’s analysis of how this breaks down. He dismisses as facile explanations ranging from a sudden explosion in Gordon Gekko-style corporate greed, or Reaganite anti-regulation sentiment. Nor does he in any way blame corporations or their executives for the passing of this consensus. Instead, he constructs an economic argument: technological innovation has empowered consumers in terms of choice, both through reducing the costs of search, and barriers to entry. This in turn destabilised the great cartels of two or three firms that had dominated industries such as steel, automobiles, airlines and chemicals; as they faced competition or the threat of competition, their CEOs were forced to cut costs, even at the price of breaking explicit and implicit contracts with unions and of giving up their statesmanlike image. Financial innovation played a part as well: fragmented holdings were consolidated into great funds, which meant that they exerted greater control over management: CEOs could no longer “balance” the interests of those whom they technically represented with those of the wider world.

The nature of “big business” thus underwent a change. “Bigness” earlier meant that firms reaped benefits from returns of scale, some of which could be shared with government and their workforce in return for tacit acceptance of their quasi-monopolistic status. With changes in supply chains and entry costs, it began to mean something else: leveraging size into acquiring a direct voice in politics, for one. This is one of Reich’s core concerns: that declining margins and the breakdown of consensus permit rent-seeking behaviour to flourish. In one eloquent passage he compares K Street in Washington DC, where lobbying firms congregate, across two eras: in the 1960s it was filled with greasy-spoon diners and grungy offices; now, there are plush restaurants with hundred-dollar steaks and flashy offices staffed with former Senators.

Together with what he sees as an attempted takeover of government by business, and no less pernicious in Reich’s opinion, are calls for corporate social responsibility. Again, it is impossible to pigeonhole Reich: he delivers for an entire chapter an impassioned defence of the concept that a company’s sole role in today’s world is to defend its bottom-line, and that activists and officials urging other considerations on corporations are not performing any useful function. Calls such as Bill Gates’ for alteration of capitalism, he clearly thinks, are doomed to fail. Capitalism is what it is, liberal democracy is what it is, and the duty of a citizen is to try and distinguish them.

The only villains in Reich’s book are people in general. Muddled thinking infuriates him: cheaper prices, better quality and increased incomes of laissez-faire capitalism benefit everyone in their capacity as consumers, so why should we attempt to destroy the system creating it? On the other hand, rent-seeking and corporate power can hurt people in their capacity as citizens, so why permit those systems to develop? The two might have the same cause, but only one needs curing: and the cure is little more than increased participation in and scrutiny of the democratic process.