BOOK REVIEW: Capitalism's regrettable failing

Oct 04 2017 16:23
Ian Mann

Saving Capitalism: For The Many, Not The Few, by Robert Reich

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 civilised 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 debtors' 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 judgements, and are not static; they change over time.

Rules can be skewed

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 $750bn 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, organising, 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, as 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 Executive Update. Views expressed are his own.

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