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ALFRED A. KNOPF

1915 100 YEARS 2015

 ALSO BY ROBERT B. REICH

Beyond Outrage
Aftershock

Supercapitalism
Reason
I’ll Be Short
The Future of Success
Locked in the Cabinet

The Work of Nations

The Resurgent Liberal

Tales of a New America
The Next American Frontier

AS EDITOR

The Power of Public Ideas

AS CO-AUTHOR, WITH JOHN D. DONAHUE

New Deals
Saving Capitalism

Y
 Saving
Capitalism
FOR THE MANY, NOT THE FEW

Robert B. Reich

ALFRED A. KNOPF ] NEW YORK | 2015

 T H I S IS A BORZOI BOOK
PUBLISHED BY ALFRED A . KNOPF

Copyright © 2015 by Robert B. Reich

All rights reserved. Published in the United States by Alfred A. Knopf,

a division of Penguin Random House LLC, New York,
and distributed in Canada by Random House of Canada,
a division of Penguin Random House Ltd., Toronto.

www.aaknopf.com

Knopf, Borzoi Books, and the colophon are registered trademarks

of Penguin Random House LLC.

Library of Congress Cataloging-in-Publication Data

Reich, Robert B.
Saving capitalism : for the many, not the few / Robert B. Reich.— 1st United States edition,
pages cm
Includes bibliographical references and index.
isbn 978-0-385-35057-0 (hardcover : aik. paper) — isbn 978-0-385-35058-7 (eBook)
1. Capitalism — United States. 2. Democracy —Economic aspects — United States.
3. Income distribution — United States. I. Title.
HB501.R359 2015
330-973—dc23
2015001873

Jacket image: So Rad/Shutterstock

Jacket design by Joe Montgomery

Manufactured in the United States of America

First Edition
In fond memory of John Kenneth Galbraith
There are two modes of invading private property; the
first, by which the poor plunder the rich . . . sudden and
violent; the second, by which the rich plunder the poor,
slow and legal.
— john taylor. An Inquiry into the Principles and Policy
of the Government of the United States {1814)
 Contents

INTRODUCTION XI

PARTI T H E FREE M A R K E T
1 The Prevailing View 3

2 The Five Building Blocks of Capitalism 8

3 Freedom and Power 11

4 The New Property 16

5 TheNew. Monopoly 29

6 The New Contracts 48

7 The New Bankruptcy 59
8 The Enforcement Mechanism 67

9 Summary: The Market Mechanism as a Whole 81

part 11 W O R K A N D W O R T H

10 The Meritocratic Myth 8 9

11 The Hidden Mechanism of CEO Pay 97

12 The Subterfuge of Wall Street Pay 108

 x / Contents

13 The Declining Bargaining Power of the Middle 115

14 The Rise ofthe Working Poor 133

15 The Rise of the Non-working Rich 143

part i n C O U N T E R V A I L I N G POWER

16 Reprise 153

17 The Threat to Capitalism 158

18 The Decline of Countervailing Power 168

19 Restoring Countervailing Power 183

20 Ending Upward Pre-distributions 193

21 Reinventing the Corporation 196

22 When Robots Take Over 203

23 The Citizen's Bequest 211

24 New Rules 218

ACKNOWLEDGMENTS 221

NOTES 223

INDEX 265
 Introduction

Do you recall a time when the income of a single schoolteacher

or baker or salesman or mechanic was enough to buy a home,
have two cars, and raise a family? I do. In the 1950s, my father, Ed
Reich, had a shop on the main street of a nearby town, in which he
sold women’s clothing to the wives of factory workers. He earned
enough for the rest of us to live comfortably. We weren’t rich but
never felt poor, and our standard of living rose steadily through
the 1950s and 1960s.
That used to be the norm. For three decades after World War II,
America created the largest middle class the world had ever seen.
During those years the earnings of the typical American worker
doubled, just as the size of the American economy doubled. Over
the last thirty years, by contrast, the size of the economy doubled
again but the earnings of the typical American went nowhere.
Then, the CEOs of large corporations earned an average of
about twenty times the pay of their typical worker. Now they get
substantially over two hundred times. In those years, the richest
1 percent of Americans took home 9 to 10 percent of total income;
today the top 1 percent gets more than 20 percent.
Then, the economy generated hope. Hard work paid off, edu-
cation was the means toward upward mobility, those who con-
 xii / Introduction

tributed most reaped the largest rewards, economic growth cre-

ated more and better jobs, the living standards of most people
improved throughout their working lives, our children would
enjoy better lives than we had, and the rules of the game were
basically fair.
But today all these assumptions ring hollow. Confidence in
the economic system has declined sharply. The apparent arbi-
trariness and unfairness of the economy have undermined the
public’s faith in its basic tenets. Cynicism abounds. To many, the
economic and political systems seem rigged, the deck stacked in
favor of those at the top.
The threat to capitalism is no longer communism or fascism
but a steady undermining of the trust modern societies need for
growth and stability. When most people stop believing they and
their children have a fair chance to make it, the tacit social con-
tract societies rely on for voluntary cooperation begins to unravel.
In its place comes subversion, small and large —petty theft, cheat-
ing, fraud, kickbacks, corruption. Economic resources gradually
shift from production to protection.
We have the power to change all this, re-creating an economy
that works for the many rather than the few. Contrary to Karl
Marx, there is nothing about capitalism that leads inexorably to
mounting economic insecurity and widening inequality. The
basic rules of capitalism are not written in stone. They are written
and implemented by human beings. But to determine what must
be changed, and to accomplish it, we must first understand what
has happened and why.
For a quarter century, I’ve offered in books and lectures an
explanation for why average working people in advanced nations
like the United States have failed to gain ground and are under
increasing economic stress: Put simply, globalization and techno-
logical change have made most of us less competitive. The tasks
we used to do can now be done more cheaply by lower-paid work-
ers abroad or by computer-driven machines.
My solution — and I’m hardly alone in suggesting this — has
 Introduction / xiii

been an activist government that raises taxes on the wealthy,

invests the proceeds in excellent schools and other means people
need to get ahead, and redistributes to the needy. These recom-
mendations have been vigorously opposed by those who believe
the economy will function better for everyone if government is
smaller and if taxes and redistributions are curtailed.

While the explanation I have offered for what has happened is still
relevant, I’ve come to believe it overlooks a critically important
phenomenon: the increasing concentration of political power in
a corporate and financial elite that has been able to influence the
rules by which the economy runs. And the governmental solu-
tions I have propounded, while I think still useful, are in some
ways beside the point, because they take insufficient account
of the government’s more basic role in setting the rules of the
economic game. Worse yet, the ensuing debate over the merits
of the “free market” versus an activist government has diverted
attention from several critical issues: how the market has come to
be organized differently from the way it was a half century ago,
why its current organization is failing to deliver the widely shared
prosperity it delivered then, and what the basic rules of the mar-
ket should be.
I have come to think that the diversion of attention away from
these issues is not entirely accidental. Many of the most vocal pro-
ponents of the “free market”—including executives of large cor-
porations and their ubiquitous lawyers and lobbyists, denizens
of Wall Street and their political lackeys, and numerous multi-
millionaires and billionaires — have for many years been actively
reorganizing the market for their own benefit and would prefer
these issues not be examined.
It is my intention in this book to put these issues front and
center. My argument is straightforward. As I will elaborate in
Part I, markets depend for their very existence on rules governing
property (what can be owned), monopoly (what degree of mar-
 xiv / Introduction

ket power is permissible), contracts (what can be exchanged and

under what terms), bankruptcy (what happens when purchasers
can’t pay up), and how all of this is enforced.
Such rules do not exist in nature. They must be decided upon,
one way or another, by human beings. These rules have been
altered over the past few decades as large corporations, Wall
Street, and wealthy individuals have gained increasing influence
over the political institutions responsible for them.
Simultaneously, centers of countervailing power that between
the 1930s and late 1970s enabled America’s middle and lower-
middle classes to exert their own influence —labor unions, small
businesses, small investors, and political parties anchored at the
local and state levels—have withered. The consequence has been
a market organized by those with great wealth for the purpose of
further enhancing their wealth. This has resulted in ever-larger
upward pre-distributions inside the market, from the middle class
and poor to a minority at the top. Because these pre-distributions
occur inside the market, they have largely escaped notice.
In Part II, I show what this has meant for the resulting distri-
bution of income and wealth in society. The meritocratic claim
that people are paid what they are worth in the market is a tautol-
ogy that begs the questions of how the market is organized and
whether that organization is morally and economically defensi-
ble. In truth, income and wealth increasingly depend on who has
the power to set the rules of the game.
As I will show, CEOs of large corporations and Wall Street’s
top traders and portfolio managers effectively set their own pay,
advancing market rules that enlarge corporate profits while also
using inside information to boost their fortunes. Meanwhile, the
pay of average workers has gone nowhere because they have lost
their aforementioned countervailing economic power and politi-
cal influence. The simultaneous rise of both the working poor and
non-working rich offers further evidence that earnings no lon-
ger correlate with effort. The resulting skewed pre-distribution
of income to the top inside the market has generated demands
for larger downward redistributions outside the market through
 Introduction / xv

taxes and transfer payments to the poor and lower-middle class,

but such demands have simply added fuel to the incendiary
debate over government’s size.
As I elaborate in Part III, the solution is not to create more or
less government. The problem is not the size of government but
whom the government is for. The remedy is for the vast majority
to regain influence over how the market is organized. This will
require a new countervailing power, allying the economic inter-
ests of the majority who have not shared the economy’s gains.
The current left-right battle pitting the “free market” against gov-
ernment is needlessly and perversely preventing such an alliance
from forming.
As I will explain, the biggest political divide in America in years
to come will not be between the Republican and Democratic par-
ties. It will be between the complex of large corporations, Wall
Street banks, and the very rich that has fixed the economic and
political game to their liking, and the vast majority who, as a
result, find themselves in a fix. My conclusion is that the only way
to reverse course is for the vast majority who now lack influence
over the rules of the game to become organized and unified, in
order to re-establish the countervailing power that was the key to
widespread prosperity five decades ago.
While this book focuses on the United States, the center of
global capitalism, the phenomena I describe are increasingly
common to capitalism as practiced elsewhere around the world,
and I believe the lessons drawn from what has occurred here
are as relevant to other nations. Although global businesses are
required to play by the rules of the countries where they do busi-
ness, the largest global corporations and financial institutions
are exerting growing influence over the makeup of those rules
wherever devised. And the growing insecurities and cumulative
frustrations of average people who feel powerless in the face of
economies (and market rules) that are not working for them are
generating virulent nationalist movements, sometimes harboring
racist and anti-immigrant sentiments, as well as political insta-
bility in even advanced nations around the globe.
 xvi / Introduction

I believe that if we dispense with mythologies that have distracted

us from the reality we find ourselves in, we can make capital-
ism work for most of us rather than for only a relative handful.
History provides some direction as well as some comfort, espe-
cially in America, which has periodically readapted the rules of
the political economy to create a more inclusive society while
restraining the political power of wealthy minorities at the top. In
the 1830s, the Jacksonians targeted the special privileges of elites
so that the market system would better serve ordinary citizens.
In the late nineteenth and early twentieth centuries, progressives
enacted antitrust laws to break up the giant trusts, created inde-
pendent commissions to regulate monopolies, and banned cor-
porate political contributions. In the 1930s, New Dealers limited
the political power of large corporations and Wall Street while
enlarging the countervailing power of labor unions, small busi-
nesses, and small investors.
The challenge is not just economic but political. The two
realms cannot be separated. Indeed, the field on which I draw
in this book used to be called “political economy” —the study
of how a society’s laws and political institutions relate to a set of
moral ideals, of which a fair distribution of income and wealth
was a central topic. After World War II, under the powerful influ-
ence of Keynesian economics, the focus shifted away from these
concerns and toward government taxes and transfers as means
of both stabilizing the business cycle and helping the poor.' For
many decades this formula worked. Rapid economic growth gen-

* The emergence of economics as a discipline distinct from political economy began in

1890 with the publication of Alfred Marshall’s Principles of Economics. The new discipline
sought to identify abstract variables applicable to all systems of production and exchange
and paid little or no attention to the distribution of those resources or to a specific society’s
legal and political institutions. The study both of economics and of many other aspects
of society thereafter began shifting from historically specific political, moral, and institu-
tional relationships to more universal and scientific “laws.” John Maynard Keynes’s General
Theory of Employment, Interest, and Money (1936) dominated American economic policy
from the end of World War II until the late 1970s.
 Introduction / xvii

erated widespread prosperity, which in turn created a buoyant

middle class. Countervailing power fulfilled its mission. We did
not have to attend to the organization of the political economy or
be concerned about excessive economic and political power at its
highest rungs. Now, we do.
In a sense, then, this book harkens back to an earlier tradition
of inquiry and a longer-lived concern. The book’s optimism is
founded precisely in that history. Time and again we have saved
capitalism from its own excesses. I am confident we will do so
again.
 • PART I •

The Free Market

 1

The Prevailing View

It usually occurs in a small theater or a lecture hall. Someone intro-

duces me and then introduces a person who is there to debate me.
My debate opponent and I then spend five or ten minutes spar-
ring over the chosen topic — education, poverty, income inequal-
ity, taxes, executive pay, middle-class wages, climate change, drug
trafficking, whatever. It doesn’t matter. Because, with astounding
regularity, the debate soon turns to whether the “free market” is
better at doing something than government.
I do not invite this. In fact, as I’ve already said and will soon
explain, I view it as a meaningless debate. Worse, it’s a distraction
from what we should be debating. Intentional or not, it deflects
the public’s attention from what’s really at issue.

Few ideas have more profoundly poisoned the minds of more

people than the notion of a “free market” existing somewhere
in the universe, into which government “intrudes.” In this view,
whatever inequality or insecurity the market generates is assumed
to be the natural and inevitable consequence of impersonal “mar-
ket forces.” What you’re paid is simply a measure of what you’re
worth in the market. If you aren’t paid enough to live on, so be
it. If others rake in billions, they must be worth it. If millions of
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