Saving Capitalism

1. The "Free Market" Is a Myth: Government Creates and Enforces Market Rules

There can be no "free market" without government. The "free market" does not exist in the wilds beyond the reach of civilization.

Markets require rules. Government establishes and enforces the fundamental rules that allow markets to function, including laws around property rights, contracts, monopoly power, bankruptcy, and enforcement. These rules are not neutral or natural, but reflect societal values and power dynamics. The debate between "free market" and "government intervention" is misguided, as government involvement is inherent to all markets.

Rules evolve over time. As technology and society change, market rules must adapt. For example, intellectual property laws have expanded greatly in the digital age. The key question is not whether government should be involved in markets, but how the rules should be structured and who benefits from them. Recognizing the myth of the "free market" allows for more productive debates about market design and regulation.

2. Power Shapes the Market: Those with Influence Determine the Rules

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

Wealth buys influence. Large corporations, Wall Street firms, and wealthy individuals have gained increasing power to shape market rules in their favor through campaign contributions, lobbying, revolving doors between government and industry, and ideological influence. This creates a self-reinforcing cycle where economic power leads to political power, which is then used to increase economic power further.

Hidden redistribution upward. While debates often focus on explicit government redistribution through taxes and transfers, the more significant and less visible redistribution occurs through market rules that benefit those at the top. Examples include expanded intellectual property protections, financial deregulation, and corporate-friendly contract and bankruptcy laws. This "predistribution" within the market is largely hidden from public view and debate.

3. Property Rights Are Not Natural: They Are Defined by Law and Policy

Private property is the most basic building block of free-market capitalism. In the conventional debate it's contrasted with government ownership, or socialism. What is left out of that debate are the myriad ways government organizes and enforces property rights and who has the most influence over those decisions.

Property is a legal construct. What can be owned, by whom, and under what conditions is defined by laws and policies, not nature. These rules have changed dramatically over time - for instance, the abolition of slavery redefined what could be considered property. Intellectual property laws create new forms of ownership over ideas and information.

Rules reflect power. Those with economic and political influence shape property rights to their advantage. For example:

• Extended copyright terms benefit media corporations
• Expanded patent protections increase pharmaceutical profits
• Lax financial regulations allow new forms of property in complex derivatives

Recognizing property as a legal and political creation allows for debates about how it should be structured to benefit society as a whole.

4. Monopoly Power Has Evolved: From Physical Assets to Networks and Platforms

Unlike the old monopolists, who controlled production, the new monopolists control networks.

Network effects create new monopolies. While antitrust traditionally focused on market share in production, today's most powerful companies often derive their market power from network effects and control of platforms. Examples include:

• Google's dominance of search
• Facebook's control of social networks
• Amazon's power over e-commerce

Data is the new oil. Control over data and the ability to analyze it has become a key source of market power. Companies like Google and Facebook leverage user data to dominate digital advertising markets.

Antitrust law struggles to adapt. Traditional antitrust metrics like prices and market concentration don't capture the power of network monopolies, which often provide free services to users. New approaches are needed to address market power in the digital age.

5. CEO Pay Has Skyrocketed Due to Stock-Based Compensation and Buybacks

Stock options and restricted stock grants have become by far the largest portion of CEO pay.

Incentives misaligned. Tying CEO compensation to stock price was intended to align executive interests with shareholders. However, it has incentivized short-term stock price manipulation over long-term value creation.

Buybacks game the system. Stock buybacks have become a primary means for boosting stock prices and CEO pay:

• Companies spend billions buying back their own shares
• This reduces share supply, artificially boosting stock price
• CEOs then cash in stock options at inflated prices
• Resources are diverted from productive investment

Vicious cycle. As executive pay rises, CEOs gain more power to influence their own compensation through control of boards and compensation consultants. This creates a self-reinforcing cycle of rising pay disconnected from performance.

6. The Decline of Countervailing Power Has Reduced Workers' Bargaining Power

As unions gained economic power in the late 1930s and 1940s, they gained further political power and wielded it to further enlarge the bargaining clout of American workers.

Unions in decline. Union membership has fallen from over 30% of workers in the 1950s to under 7% today. This has reduced workers' ability to negotiate for higher wages and better working conditions.

Political influence lost. As unions have weakened, workers have lost political influence to shape labor laws and economic policies in their favor. Meanwhile, corporate lobbying power has grown.

Middle class squeezed. The decline of worker bargaining power has contributed to stagnant wages for most workers even as productivity and profits have risen. This has fueled rising inequality and a shrinking middle class.

7. Rising Inequality Threatens Capitalism's Stability and Legitimacy

When most people stop believing they and their children have a fair chance to make it, the tacit social contract societies rely on for voluntary cooperation begins to unravel.

Concentration at the top. A small elite has captured a growing share of income and wealth:

• Top 1% own over 40% of wealth
• CEO-to-worker pay ratio rose from 20:1 to over 300:1
• Inheritance is rising as a source of wealth

Middle class under pressure. Most workers have seen little wage growth despite rising productivity. Many struggle with economic insecurity and declining mobility.

Faith in the system eroding. Rising inequality and sense of unfairness threaten to undermine public support for capitalism and democracy. This can fuel political instability and support for extremist policies.

8. Technological Change Is Widening the Gap Between Capital and Labor

We are faced not just with labor-replacing technologies but with knowledge-replacing technologies.

Automation advancing. Technology is replacing not just manual labor but also many knowledge worker tasks. This shifts income from workers to owners of capital and technology.

Winner-take-most markets. Digital technologies create winner-take-most dynamics where a few superstars capture most gains:

• Instagram sold for $1 billion with just 13 employees
• Tech giants earn massive profits with relatively few workers

Skills premium rising. Demand for highly skilled workers in tech, finance, etc. is driving wage inequality. Many middle-skill jobs are being hollowed out.

Future challenges. As technology advances, maintaining broad-based prosperity will require rethinking how gains from growth are distributed.

9. The Working Poor and Non-Working Rich Challenge Meritocratic Justifications

The simultaneous rise of both the working poor and non-working rich offers further evidence that earnings no longer correlate with effort.

Working but still poor. Many full-time workers don't earn enough to escape poverty, challenging the idea that hard work guarantees prosperity. In 2013, 47 million Americans were classified as working poor.

Inherited wealth rising. A growing share of wealth is inherited rather than earned:

• 6 of 10 wealthiest Americans are heirs
• $36 trillion expected to be passed down by 2061

Meritocracy myth. The simultaneous existence of working poor and non-working rich contradicts the notion that income reflects individual merit and effort. It reveals the influence of power, privilege, and rules rigged to benefit certain groups.

10. Restoring Shared Prosperity Requires Rebalancing Economic and Political Power

The only way back toward a democracy and economy that work for the majority is for the majority to become politically active once again, establishing a new countervailing power.

New coalitions needed. Building countervailing power requires forging alliances among groups with common economic interests, even if they differ on other issues. This could include:

• Small businesses and workers against corporate monopolies
• Rural and urban communities for better infrastructure
• Diverse middle and working class voters for policies that boost wages

Reforming the rules. Key areas for reform include:

• Antitrust enforcement for the digital age
• Campaign finance and lobbying restrictions
• Expanded worker rights and protections
• Progressive taxation and inheritance taxes

Long-term vision. Reforms should aim to create a more inclusive form of capitalism with:

• Broader distribution of capital ownership
• Greater worker voice in corporate governance
• Social supports to enhance economic security and mobility

Last updated: September 9, 2024