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The Transformation of Business, Democracy, and Everyday Life

Written by Robert B. ReichAuthor Alerts:  Random House will alert you to new works by Robert B. Reich

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On Sale: September 04, 2007
Pages: | ISBN: 978-0-307-26785-6
Published by : Vintage Knopf
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Synopsis|Excerpt

Synopsis

From one of America's foremost economic and political thinkers comes a vital analysis of our new hypercompetitive and turbo-charged global economy and the effect it is having on American democracy. With his customary wit and insight, Reich shows how widening inequality of income and wealth, heightened job insecurity, and corporate corruption are merely the logical results of a system in which politicians are more beholden to the influence of business lobbyists than to the voters who elected them. Powerful and thought-provoking, Supercapitalism argues that a clear separation of politics and capitalism will foster an enviroment in which both business and government thrive, by putting capitalism in the service of democracy, and not the other way around.

Excerpt

Chapter One: The Not Quite Golden Age

Roughly between 1945 and 1975, America struck a remarkable accommodation between capitalism and democracy. It combined a hugely productive economic system with a broadly responsive and widely admired political system. America in those years achieved its highest degree of income equality (since measurements have been available). It generated a larger proportion of good-paying jobs than before or since, and more economic security than ever for more of its people. Perhaps not coincidentally, in those years Americans also expressed high confidence in democracy and trust in government, both of which sharply declined in subsequent years.[1] That singular success and that powerful promise extended the moral authority of the American system throughout the world. In contrast to Soviet communism, America became an exemplar of both political freedom and suburban middle-class affluence.

The economy was based on mass production. Mass production was profitable because a large middle class had enough money to purchase what could be mass-produced. The middle class had the money because the profits from mass production were divided up between the giant corporations and their suppliers, retailers, and employees. The bargaining power of these latter groups was enhanced and enforced by government action. Almost a third of the workforce belonged to a labor union. Economic benefits were also spread across the nation—to farmers, veterans, smaller towns, and small businesses—through regulation (of railroads, telephones, utilities, and energy supplies) and subsidy (price supports, highways, federal loans). Thus did democracy offset the economic power of large-scale production and widely disperse its benefits.

But it was not quite a golden age. Women and minorities still struggled for political equality and economic opportunity. Much of the nation’s poverty was hidden away in rural hollows or black ghettos. Foreign policy, ostensibly shaped by the perceived threat of Soviet communism, all too frequently pandered to the needs of large American firms for cheap raw materials abroad, such as bananas, tin, and oil. Civil liberties were imperiled during Senator Joe McCarthy’s anti-communist witch hunt. Much of American life was monotonous, conformist, and deadly dull. And yet for all its shortcomings, democratic capitalism seemed to be working remarkably well, and on the way to working even better.

In order to understand what happened to the Not Quite Golden Age, we first need to understand how it came about.



The evolution began as the nineteenth century ended, when large corporations posed a profound challenge to American democracy. They brought a new level of prosperity to the nation but also sweatshops, child labor, and unsafe working conditions, and they monopolized whole industries. The unprecedented economic power of these giant companies made them politically unaccountable. America groped for a way to respond.

It started with outsized personalities whose footprints are still visible—J. P. Morgan, a banker’s son who sold stocks for the railroads, engineered a huge rail combination, and became a wealthy financier (J. P. Morgan and Sons, which evolved into today’s Morgan Stanley); Andrew Carnegie, who began as a telephone clerk, rose to the presidency of the Pennsylvania Railroad, and then made a fortune as a steel magnate (Carnegie Steel); John D. Rockefeller, who started as a bookkeeper in Cleveland, bought his first oil refinery in 1862, cornered the oil market in the 1890s with his Standard Oil Company (whose descendant is ExxonMobil), and then moved into coal, iron, shipping, copper, and banking (Chase Manhattan); and, subsequently, Henry Ford.

With these men and others like them flowed a stream of new inventions—steam engines, railway locomotives, the telegraph, electric turbines, internal combustion engines, and iron and steel machinery with interchangeable parts—that allowed all sorts of things to be made and shipped in very large volume. Costs could be spread over so many units that each single one was cheap to produce. Procter & Gamble devised a new machine for mass-producing Ivory soap. Diamond Match used a machine that made and boxed matches by the billions. A cigarette-making machine invented in 1881 was so productive that just fifteen of them satisfied America’s annual demand for cigarettes. Standard Oil, American Sugar Refining, International Harvester, and Carnegie Steel, among others, gained unprecedented efficiencies through giant furnaces, whirling centrifuges, converters, and rolling and finishing equipment.

Productivity surged. While the typical American worker in the early 1800s had produced a tiny .3 percent more each year (seeding and harvesting crops, logging, fishing, or applying his craft with hand tools), by the last decades of the century his productivity was rising at six times that rate.[2] Output also exploded. Iron production doubled in just a few years; steel production multiplied twenty-fold.[3] Railroad and telegraph networks expanded in tandem. Fast, regular, and reliable transportation and communication brought raw materials from far corners of the country into factories and sent finished goods out to wholesalers and retailers all over the nation.

An economic revolution on this scale inevitably had large social consequence. Supply outran demand, leading to a severe depression that jolted much of Europe and America in 1873. Another depression in the summer of 1893 impoverished thousands of farmers, closed banks, and left more than a quarter of America’s unskilled urban workforce unemployed. A growing chorus of socialists in Europe and America proclaimed the imminent collapse of capitalism. A swelling cadre of western populists in deepening debt to eastern bankers demanded that currencies be converted from gold to silver. With silver far more abundant than gold, this would inflate currency values and thereby shrink the debts. Manufacturers on both sides of the Atlantic wanted higher tariffs to protect themselves from foreign imports. (Only Britain, whose advanced manufacturers were the primary beneficiaries of free trade, declined to raise its tariffs, resulting in what were seen there as German and American “economic invasions.”)[4]

Hundreds of thousands of people moved from farms to factories. In 1870, fewer than 8 percent of America’s adult population worked in a mill and only one in five lived in a place with 8,000 or more inhabitants; a half century later, almost a third were in factories and almost a half lived in cities. During this tumultuous span of time, New York City’s population swelled fourfold; Chicago became ten times its former size. In the 1870s, 280,000 immigrants entered the United States each year. In the 1880s, 5.5 million came; in the 1890s, another 4 million. By the first decade of the twentieth century, the flow of immigrants, most of them destitute when they arrived, rose to a million a year. According to a 1908 government study, almost three-fifths of the wage earners in principal branches of American industry had been born abroad.[5] Immigrants then constituted a higher percentage of the total American workforce than they would a hundred years hence.

As America and every other manufacturing nation began scouring more backward regions of the globe for potential markets, the term “imperialism” entered common speech. Teddy Roosevelt asserted America’s imperial destiny in Latin America.“Territorial expansion,” explained an official of the United States State Department in 1900, “is but the by-product of the expansion of commerce.”[6] Britain and Germany equated their economic prowess with their nations’ global spheres of influence. The British economist J. A. Hobson dourly predicted the logical end-point of such competition: Businessmen, he warned, opt for war when they have exhausted their home markets. Like John Maynard Keynes three decades later, Hobson urged instead that advanced nations increase their domestic markets by making more of their citizens rich enough to buy domestically produced goods. “If apportionment of incomes were such as to evoke no excessive saving, full constant employment for capital and labor would be furnished at home.”[7] But the world war Hobson feared would occur before enough citizens had the wherewithal to buy a substantial portion of what they produced.

In the first decades of the twentieth century, productivity again surged. Sweatshops and mills were replaced by large manufacturing plants, inspired by Frederick Winslow Taylor’s new theories of “scientific management,” which broke down every factory job into highly specialized and repetitive steps. Henry Ford’s assembly line became the model. Not only could workers positioned along the line produce more cars in a shorter time but production could be concentrated in a few giant factories and materials could be bought in bulk at great savings. In 1909, Ford produced 10,607 cars; in 1913, 168,000; the following year, 248,000. By the beginning of World War I, much of American industry had consolidated into giant firms whose names became almost synonymous with America—Ford Motor, U.S. Steel, American Telephone & Telegraph, United States Rubber, National Biscuit, American Can, the Aluminum Company of America, General Electric, General Motors, and Rockefeller’s Standard Oil.

The size of such enterprises became an almost impregnable barrier to entry. They dominated the American, and much of the world’s, economy for most of the twentieth century. Of the Fortune 500 largest corporations in 1994, more than half were founded between 1880 and 1930.[8] A far smaller portion was founded during the long stable period between 1945 and 1975, an important fact to bear in mind as the story unfolds.


Notes
[1] The most useful polling series of American attitudes toward government is The American National Election Studies, undertaken by the University of Michigan. It can be found at http://www.umich.edu/~nes/nesguide/toptable/tab5.
[2] Figures from Simon Kuznets, Economic Growth and Structure (New York: W. W. Norton, 1965), pp. 305-27.
[3] Figures from U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, D.C.: U.S. Government Printing Office, 1975), Vol. I, pp. 201-2, 224.
[4] At the end of the nineteenth century, British citizens were treated to a series of lurid accounts of German and American economic onslaught and baleful consequences for Britain. Among them were E. E. Williams, Made in Germany (London: William Heinemann, 1896), and Frederick McKenzie, American Invaders (London: G. Richards, 1902). In form and substance, this literature bore remarkable resemblance to accounts of Japanese "invasions" offered American readers a century later.
[5] Figures from Jerehmiah Jenks and Jett Lauck, The Immigration Problem (New York: Funk & Wagnalls, 1926), p. 148.
[6] Cited in W.A. Williams, The Tragedy of American Diplomacy (Cleveland: World, 1959), p. 44.
[7] J. A. Hobson, Imperialism (London: J. Nisbet, 1902), p. 112.
[8] Selected from Harris Corporations, "Founding Dates of the 1994 Fortune U.S. Companies," Business History Review 70 (Spring 1996), p. 69-90.


From the Hardcover edition.
Robert B. Reich|Author Q&A

About Robert B. Reich

Robert B. Reich - Supercapitalism

Photo © Perian Flaherty

Robert B. Reich is Chancellor’s Professor of Public Policy at the Richard and Rhoda Goldman School of Public Policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton, and he served as an adviser to President-elect Barack Obama. He has written twelve books, including The Work of Nations (which has been translated into twenty-two languages), Supercapitalism, and the best sellers The Next American Frontier, The Future of Success, Locked in the Cabinet, and, most recently, Aftershock: The Next Economy and America’s Future. His articles have appeared in The New Yorker, The Atlantic, The New York Times, the Financial Times, The Washington Post, and The Wall Street Journal. He is co-founding editor of The American Prospect magazine and chairman of Common Cause. His bi-weekly commentaries on public radio’s Marketplace are heard by nearly five million people. In 2003, Reich was awarded the prestigious Václav Havel Foundation Prize for pioneering work in economic and social thought. In 2008, Time magazine named him one of the ten most successful cabinet secretaries of the twentieth century, and The Wall Street Journal named him one of the nation’s ten most influential business thought-leaders.

Author Q&A

Q: What exactly is Supercapitalism?
A: It’s a turbo-charged, Web-based system in which anyone can buy almost anything anywhere on the planet. It’s powered by consumers and investors who search for great deals around the world with the click of a computer mouse. As a result, companies are in more intense competition than ever to attract and keep customers and shareholders.

Q: So it’s good, right?
A: Well, consumers and investors have never had it so good. Just look at how plentiful our choices have become over the past few decades. There used to be only three big auto companies, one telephone company, three tv channels, and one or two local savings banks, for example. And many products have become cheaper in real terms, with lots of innovations. Medical technology has made huge advances, and the average life span has increased dramatically. Look also at how the stock market has soared — the Dow went from 600 in 1980 to over 1300 today.

Q: Any downsides to supercapitalism?
A: You bet. Inequality hasn’t been this wide in 80 years. Jobs are far less stable, and the median wage is below where it was in 1980, adjusted for inflation. Main Streets are disappearing. And our planet’s environment is endangered.

Q: How are these bad trends connected to the good ones?
A: Where do we suppose the great deals come from? In part from lower payrolls — from workers who have to settle for lower wages and benefits. Or from companies that fight off unions. Or from CEOs and financiers who earn vast fortunes making ruthless decisions insuring the best deals for consumers and investors. Or from big-box retailers that kill off Main Streets because they undercut prices charged by independent retailers. Or from companies that pay pennies to twelve-year-olds in poor countries and wreak havoc on the environment. Today’s economy can give us great deals but too often at the expense of our common values.

Q: Aren’t you letting corporations off the hook?
A: Corporations are responding to our demands as consumers and investors. They have to, to stay competitive.

Q: So do you think this Faustian bargain is inevitable — that we’re trapped in it?
A: Not necessarily. That’s where democracy comes in. You see, we’re not just consumers and investors. We’re also citizens who have concerns about the common good. Democracy is a system for accomplishing what can only be achieved by citizens joining together with other citizens — to determine the rules of the game whose outcomes express that common good. Most of us don’t want to live in a two-tiered society divided between the very rich and the very poor, with a shrinking middle class. Most of us want stable jobs and stable neighborhoods, and we value our Main Streets. We want a sustainable environment. Most of us don’t want to exploit young children in poor nations.

Q: So there are tradeoffs?
A: Yes. The easier it is for us as consumers and investors to get better deals, the more intense the competition becomes among companies for our dollars. And the more intense that competition, the worse the consequences for many values we hold in common — including equality, steady jobs, Main Streets, the environment, and human rights at home and abroad.

Q: But you say we’re not addressing these tradeoffs. Why not?
A: Because democracy isn’t working. This is the central paradox of our age. Capitalism is triumphing but democracy is failing. We used to think of the two as linked. In fact, we used to call our system "democratic capitalism" — with the democratic process deciding the rules of the game and companies battling it out within those rules. But supercapitalism has replaced democratic capitalism. The consumers and investors in us have trumped the citizens in us. Although we’re doing better and better as consumers and investors, most of us feel less and less effectual as participants in a democracy.

Q: Why is democracy failing?
A: Because supercapitalism has overwhelmed politics. Remember, companies are in more intense competition than ever. Goaded by us, they have to do whatever is necessary to gain and keep competitive advantage. What drives this escalation is the fact that public policies often help some companies or industries while putting rivals at a disadvantage. As competition has intensified, so has this arm’s race. It’s no coincidence that there has been a mammoth increase in Washington lobbyists over the last twenty-five years (from 5,500 to over 32,000), Washington lawyers (26,000 to 77,000), corporate public relations specialists, and corporate-related campaign contributions.

Q: What can be done?
A: The real challenge is to keep the two realms — capitalism and democracy — separate. We have to end the corporate arm’s race. That means strict limits on corporate lobbying, on corporate spending for public relations intended to influence legislation, on legislators and public officials turning to lobbying when they leave office, and on corporate money otherwise flowing in politics.

Q: Easy to say, but isn’t that just about impossible to do?
A: Hard, but not impossible. Remember — it’s an arms race. Many corporations would rather not pay these escalating costs if they could be certain their competitors would refrain as well.

Q: How do we begin?
A: The first step is for the public — and the media — to give up several myths that distract us from genuine reform.

Q: What myths?
A: For example, beware of politicians or advocates who blame corporations and CEOs for the negative social consequences of supercapitalism — such as low or declining wages, job losses, widening inequality, loss of community, and global warming. For example, stop blaming Wal-Mart. Corporate executives are responsible for obeying the law but they can’t be more generous than the law requires. It’s illogical to criticize companies for playing by the current rules of the game. If we want them to play differently, we have to change the rules.

Q: Are you also suggesting we shouldn’t believe corporations or their spokesmen when they say they’re doing something to advance the public good or fulfill their social responsibilities?
A: Exactly. The bottom line is that companies aren’t in the business of the public good; they’re in the business of turning a profit. They may do good things to improve their brand image and curry favorable public opinion, so as to increase sales and profits. But they won’t act in the public interest at the expense of profits, and we can’t expect them to. The only way to get companies to do what’s in the public interest rather than purely in the interests of consumers and investors is to pass laws requiring them to do so.

Q: Any other myths?
A: The most basic myth is that corporations are people. As a result of this fallacy, the public assumes companies have duties and rights that properly belong to people. This blurs the boundary between capitalism and democracy, and leads to a host of bad public policies.

Q: Bad policies like what?
A: Consider the corporate income tax. Companies don’t really pay it; people do. The tax is passed on mostly to shareholders and to some extent employees and consumers. The false idea that companies pay taxes leads to the conclusion that they deserve to be represented in the political process. It would be more logical to get rid of the corporate income tax and have shareholders pay taxes on all income earned by the corporation on their behalf.

Q: You’re also saying that under supercapitalism, corporations can’t be moral or immoral, patriotic or unpatriotic, generous or greedy?
A: Exactly. That’s why it’s nonsensical to hold companies such as Arthur Andersen criminally liable, rather than the specific people responsible for breaking the law. Similarly, it’s illogical to confer on American-based companies special benefits or responsibilities because of their presumed American identity. Most companies these days are becoming part of an integrated global economy, and have worldwide connections regardless of where they’re based. And it's nonsensical to depend on corporate generosity to solve public problems. Corporations aren't charitable institutions.

Q: So corporations have no legitimate role in the political process?
A: Only people do. Shareholders themselves should be able to express their interests, but that’s different than the corporation doing so on their behalf. In fact, there should be "stockholder protection" laws analogous to "paycheck protection laws" (designed to protect union members from paying dues in support of union political activities they oppose). Stockholder protection laws would require that shareholders specifically agree to any corporate political activity. For example, if a company dedicates $100,000 to lobbying in a given year, shareholders who object would get a special dividend or additional shares representing their pro rata share of that expenditure.

Q: Are you optimistic?
A: Yes. While the triumph of supercapitalism has led, indirectly and unwittingly, to the decline of democracy, it’s not inevitable. We can have a vibrant democracy as well as vibrant capitalism. But to accomplish this, the two spheres must be kept distinct. The purpose of capitalism is to get the best deals for consumers and investors. The purpose of democracy is to accomplish ends we can’t achieve as individuals — and to set the rules of the capitalist game. We’re all consumers and many of us are investors, but these private benefits often come with social costs. We’re also citizens who have a right and a responsibility to participate in a democracy, and reduce those social costs. We can accomplish this larger feat only if we take our roles as citizens seriously, and protect our democracy. The first step, which is often the hardest, is to get our thinking straight.


From the Hardcover edition.

Praise

Praise

"Reich documents in lurid detail the explosive growth of coporate lobbying expenditures and campaign contributions since the 1970s. . . . Supercapitalism is a grand debunking of the conventional wisdom in the style of John Kenneth Galbraith." —The New York Times"Reich turns the standard liberal critique of corporations on its head."—Forbes"A thoughtful and heartfelt critique of the ruthless, hell-bent-for-profit brand of capitalism that has been in vogue under Democrats and Republicans alike since roughly the end of the cold war."—Portfolio"Supercapitalism describes important and sweeping economic changes. . . . Reich has a talent for making economics accessible and sometimes even fun."—The Los Angeles Times

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