Saving Capitalism

Saving Capitalism Plot Summary

Introduction

The prevailing narrative about our economic system presents a false dichotomy between "free markets" and "government intervention," suggesting these are opposing forces in constant tension. This framework fundamentally misunderstands how markets actually function. Markets do not exist in some natural state; they are created and maintained through rules that determine who gets what and under what conditions. These rules establish the very foundations of economic exchange: what can be owned and traded, what constitutes a monopoly, what makes a contract valid, how bankruptcy operates, and how these rules are enforced. Understanding that markets are created by rules, and that these rules are shaped by politics, opens up new possibilities for reform. The choice is not between "free markets" and "government intervention" but between rules that concentrate economic gains among the few and rules that distribute them more broadly. This perspective shifts the debate from the size of government to the fundamental question of whom the government serves when establishing the market's architecture. By examining how power shapes market rules, we can develop strategies to create an economy that works for everyone, not just those at the top.

Chapter 1: The Free Market Myth: Rules Define Economic Outcomes

The central myth that has poisoned public discourse about our economy is the notion of a "free market" existing somewhere in the universe, into which government "intrudes." This framework assumes that whatever inequality or insecurity the market generates is simply the natural consequence of impersonal market forces. What you're paid is merely what you're worth. If millions are unemployed or working multiple jobs with shrinking paychecks, that's just the outcome of market forces. This prevailing view has become so dominant that it's now taken for granted across political discourse. The debate typically centers on how much intervention is warranted - conservatives want smaller government and less intervention; liberals want larger and more activist government. But this entire framework is fundamentally false. There can be no "free market" without government. Markets don't exist in the wilds beyond civilization; they are defined by rules, and governments generate these rules. The market requires government to make and enforce the rules of the game through five essential building blocks: property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be bought and sold, and on what terms), bankruptcy (what happens when purchasers can't pay), and enforcement (how to ensure compliance). These rules aren't neutral or universal - they reflect who in society has the most power to influence them. The question isn't whether the "free market" is better than "government" - this false dichotomy prevents us from examining who exercises power over the rules, how they benefit, and whether such rules need to be altered so more people benefit. The size of government matters less than the rules for how the market functions, which have far greater impact on an economy and society. When democracy works properly, elected officials, agency heads, and judges make rules roughly aligned with most citizens' values. But when democracy fails, rules might enhance the wealth of a comparative few while keeping almost everyone else relatively poor and economically insecure. Those with sufficient power and resources influence politicians to ensure the "free market" works mostly on their behalf.

Chapter 2: Power Concentration: How Wealth Shapes Market Rules

The concentration of economic power in America has reached levels not seen since the Gilded Age. This concentration manifests not just in market share statistics but in the ability of dominant firms to shape the very rules under which markets operate. The financial sector exemplifies this trend, with the five largest banks controlling assets equivalent to more than half of the U.S. economy, up from less than 30 percent three decades ago. This concentration gives these institutions enormous leverage over both the economy and the political system. This power is exercised through multiple channels. Campaign contributions represent just the most visible form. In the 2008 presidential campaign, for example, Goldman Sachs employees were among the largest donors to Barack Obama's campaign. But financial influence extends far beyond direct political donations. The financial industry employs over 2,500 lobbyists in Washington—more than five for each member of Congress. These lobbyists don't just advocate for their clients' interests; they often draft the very legislation that regulates their industries. Perhaps most insidious is the revolving door between government and industry. Treasury secretaries, regulatory officials, and congressional staffers routinely move between public service and lucrative private sector positions. This revolving door creates both the reality and appearance of a system where regulatory decisions are influenced by the prospect of future employment in the industries being regulated. The tech sector has followed a similar trajectory. Companies like Google, Facebook, Amazon, and Apple have achieved unprecedented market dominance, often by establishing control over vital platforms that competitors and consumers alike depend on. These companies have also built formidable lobbying operations—Google's annual lobbying expenditures increased from $80,000 in 2003 to over $18 million a decade later. The consequences of this power concentration extend far beyond economics. As corporations and financial institutions gain greater control over the political process, they reshape market rules to further entrench their advantages. Intellectual property protections are extended, antitrust enforcement is weakened, and financial regulations are diluted or eliminated. These changes are often justified in the name of efficiency or innovation, but they primarily serve to protect incumbent firms from competition and redistribute wealth upward.

Chapter 3: Countervailing Forces: The Decline of Democratic Capitalism

For much of the twentieth century, the concentration of economic power in large corporations was balanced by countervailing forces that ensured the benefits of economic growth were widely shared. Labor unions provided workers with collective bargaining power, enabling them to secure higher wages and better working conditions. Small businesses, protected by antitrust laws and fair trade regulations, offered meaningful competition to larger firms. Community banks, credit unions, and other local financial institutions ensured capital flowed throughout the economy, not just to the largest players. These countervailing forces didn't emerge spontaneously; they were deliberately created through political action and sustained through rules that limited the power of large corporations and financial institutions. The National Labor Relations Act of 1935 established workers' right to organize and bargain collectively. The Glass-Steagall Act separated commercial and investment banking, preventing the formation of financial behemoths. Antitrust laws were vigorously enforced, breaking up monopolies and preserving competitive markets. Beginning in the late 1970s, however, these countervailing forces began to erode. Union membership declined precipitously, from about one-third of private sector workers in the 1950s to less than 7 percent today. This decline reflected both economic changes and deliberate policy choices, including the weakening of labor laws, the spread of "right-to-work" legislation, and increasingly aggressive anti-union tactics by employers. As unions weakened, so did workers' ability to secure a fair share of productivity gains. The deregulation of financial markets removed crucial guardrails that had prevented excessive risk-taking and concentration. The repeal of Glass-Steagall in 1999 allowed the formation of financial conglomerates that were "too big to fail." Meanwhile, community banks were squeezed out by regulatory burdens that disproportionately affected smaller institutions, leading to a banking sector dominated by a handful of giant firms. As these countervailing forces weakened, political power increasingly concentrated among those who already held economic power. Grassroots membership organizations that had once given voice to ordinary citizens declined, replaced by professional advocacy groups that lacked the same broad base of support. Political parties transformed from bottom-up organizations rooted in local communities to top-down fundraising machines dependent on wealthy donors.

Chapter 4: Meritocracy Fallacy: Wealth Accumulation vs. Value Creation

The concentration of wealth and income at the top is often justified by the notion that markets reward people according to their contributions—that those who earn the most are those who create the most value. This meritocratic ideal serves as a powerful legitimizing narrative for growing inequality. However, a closer examination of how wealth is actually accumulated in today's economy reveals a more complex reality, one where the connection between wealth and value creation has become increasingly tenuous. Consider the compensation of top corporate executives. CEO pay at large American corporations has skyrocketed over the past four decades, from roughly 30 times the average worker's pay in the 1970s to over 300 times today. This dramatic increase is difficult to explain as a reflection of increased value creation. Studies consistently find little correlation between CEO compensation and long-term company performance. Instead, the explosion in executive pay reflects changes in corporate governance and tax policies that gave executives greater control over their own compensation. The rise of the financial sector tells a similar story. Financial professionals now account for a disproportionate share of the highest-earning individuals, despite questions about the social value of many financial activities. High-frequency trading, for example, may generate enormous profits for traders but contributes little to the efficient allocation of capital that is finance's ostensible purpose. The largest Wall Street banks receive an implicit subsidy from their "too big to fail" status, allowing them to borrow at lower rates than smaller institutions. Even in technology, where innovation clearly creates substantial value, the distribution of rewards often reflects market power more than value creation. The founders and early investors in successful tech companies capture enormous wealth, while the workers who contribute to these companies' success see much more modest gains. This reflects not just the value of entrepreneurial risk-taking but the ability of these companies to establish dominant market positions protected by network effects, control of essential platforms, and intellectual property laws. The growing disconnect between wealth accumulation and value creation undermines the meritocratic justification for inequality. If the wealthy are not necessarily those who contribute most to society but rather those who are best positioned to extract value from existing systems, then their outsized rewards cannot be justified as necessary incentives for productive activity. Instead, they represent a form of rent-seeking—using market power and political influence to capture a larger share of existing wealth rather than creating new wealth.

Chapter 5: Upward Pre-distribution: Market Rules Favoring the Wealthy

The conventional understanding of economic inequality focuses on redistribution—how government taxes and transfers move money from the wealthy to the less affluent. This framing misses a more fundamental dynamic: how market rules themselves distribute income and wealth before any government redistribution occurs. This "pre-distribution" shapes who gets what from market activities in the first place and has increasingly favored those at the top of the economic ladder. Intellectual property laws provide a clear example of this upward pre-distribution. Patent protections have been extended and strengthened, creating longer monopolies that generate enormous profits for pharmaceutical companies, technology firms, and other intellectual property holders. When a drug company can charge monopoly prices for a medication because of patent protection, the resulting profits represent a transfer from consumers to shareholders—a form of upward redistribution built into the market's rules. Similarly, the weakening of antitrust enforcement has allowed increasing market concentration across industries, from telecommunications to agriculture to healthcare. This concentration gives dominant firms the power to raise prices, suppress wages, and extract more value from both consumers and workers. When a few cable companies control broadband access in most markets, they can charge higher prices than would be possible in a truly competitive market. These higher prices transfer wealth from consumers across the economic spectrum to the shareholders and executives of these companies. Labor market rules have evolved in ways that reduce workers' bargaining power. The decline of unions, the spread of non-compete agreements, and the misclassification of employees as independent contractors all weaken workers' ability to secure fair compensation. Meanwhile, corporate bankruptcy laws allow companies to shed pension obligations and renegotiate labor contracts, while individuals facing financial distress—particularly those with student loan debt—have far fewer options for relief. Financial regulations have been reshaped to favor large institutions and wealthy investors. The repeal of Glass-Steagall and the weakening of other financial regulations allowed the formation of financial behemoths that extract fees from throughout the economy. Rules governing insider trading and high-frequency trading give advantages to those with access to specialized information and technology. Tax policies favor income from capital over income from labor, with lower rates on capital gains and dividends than on wages and salaries. These market rules don't just allow the wealthy to keep more of what they earn; they fundamentally shape who earns what in the first place. By giving certain actors more market power, more protection from competition, and more ability to extract value from economic activities, these rules ensure that a larger share of the economic pie goes to those who already have the most. This happens before any government redistribution through taxes and transfers.

Chapter 6: Restoring Balance: Institutional Reform for Shared Prosperity

Addressing the imbalances in our economic system requires more than tinkering with tax rates or expanding safety net programs. It demands a fundamental reinvention of the institutions that shape market outcomes. This reinvention must focus on restoring countervailing power—creating forces that can balance the influence of large corporations and wealthy individuals over both the economy and the political process. A first priority must be reforming the political system to reduce the influence of money. This includes overturning Citizens United and related Supreme Court decisions that have allowed unlimited corporate spending on elections. It requires establishing public financing for campaigns to reduce candidates' dependence on wealthy donors. And it means closing the revolving door between government service and lucrative private sector positions that creates conflicts of interest and skews policy decisions. Labor market institutions need reinvention to restore workers' bargaining power. This goes beyond traditional unionization to include new forms of worker organization suited to today's economy. It means strengthening protections against employer retaliation for organizing activities and making it easier for workers to form unions. It also requires addressing the growing power imbalance in labor markets by limiting non-compete agreements, preventing misclassification of employees as independent contractors, and ensuring that antitrust law addresses employer monopsony power. Financial markets need reform to ensure they serve the broader economy rather than extracting value from it. This includes breaking up the largest banks to end the "too big to fail" problem, reinstating a modern version of Glass-Steagall to separate traditional banking from speculative activities, and implementing a financial transaction tax to discourage short-term speculation. It also means strengthening consumer financial protections and ensuring that bankruptcy laws treat individuals and corporations with equal fairness. Corporate governance must be redesigned to balance the interests of shareholders with those of workers, communities, and the environment. This could include requiring worker representation on corporate boards, as is common in many European countries. It means reforming executive compensation practices to align incentives with long-term value creation rather than short-term stock price manipulation. And it requires reconsidering the legal doctrine that corporations must prioritize shareholder value above all other considerations. Intellectual property regimes need rebalancing to promote innovation while preventing excessive monopoly power. This includes shortening patent and copyright terms, limiting patent protections to truly novel inventions, and expanding fair use provisions. It means ensuring that publicly funded research benefits the public rather than being privatized for corporate profit. And it requires international agreements that balance intellectual property protections with access to essential technologies and medicines.

Chapter 7: Beyond Regulation: Democratizing Economic Power

Creating an economy that works for everyone requires going beyond traditional regulatory approaches to fundamentally democratize economic power. This means not just constraining the excesses of concentrated economic power but actively dispersing that power throughout society. Such democratization would give ordinary citizens greater control over the economic forces that shape their lives and ensure that prosperity is widely shared. One promising approach involves expanding forms of shared ownership. Worker cooperatives, employee stock ownership plans, and community ownership models give those who contribute to an enterprise a stake in its success and a voice in its governance. These models have proven successful in various contexts, from the Mondragon Corporation in Spain to the Employee Stock Ownership Plan companies in the United States. By aligning the interests of workers and owners, they reduce the extractive dynamics that characterize many conventional corporations. Platform cooperativism offers a democratic alternative to the dominant digital platforms. Rather than allowing a few tech giants to control the digital infrastructure on which we increasingly depend, platform cooperatives would be owned and governed by their users and workers. This would ensure that the benefits of technological innovation are shared with those who create value on these platforms rather than being captured primarily by investors and executives. Public banking provides another avenue for democratizing economic power. Public banks, owned by states, cities, or other public entities, could ensure that financial resources are directed toward community needs rather than speculative activities. They could provide affordable credit to small businesses, finance infrastructure improvements, and support affordable housing development. The Bank of North Dakota, the only state-owned bank in the U.S., has demonstrated the viability of this model. Commons-based approaches recognize that many resources are most appropriately managed as shared assets rather than private property. This includes not just natural resources like air and water but also knowledge commons, genetic information, and other intangible assets. Managing these resources as commons ensures they benefit society broadly rather than being enclosed for private profit. Universal basic income represents perhaps the most radical approach to democratizing economic power. By providing everyone with a basic level of economic security independent of market participation, UBI would fundamentally alter power dynamics in labor markets. Workers would have greater freedom to reject exploitative employment, start businesses, pursue education, or engage in care work. This would shift bargaining power toward labor and away from capital. These approaches share a common principle: economic power should be widely distributed rather than concentrated in a few hands. This principle aligns with democratic values that emphasize the importance of dispersed power in the political sphere. Just as political democracy requires checks and balances to prevent the concentration of political power, economic democracy requires institutional arrangements that prevent the concentration of economic power.

Summary

The fundamental insight that emerges from this analysis is that markets do not exist independently of the rules that structure them, and these rules are not neutral or natural but rather the product of political choices that reflect power dynamics. When economic power concentrates, it translates into political influence that shapes market rules to further concentrate economic power—a self-reinforcing cycle that undermines both shared prosperity and democratic governance. Breaking this cycle requires not just policy tweaks but a fundamental rebalancing of power through the creation of countervailing forces that can ensure market rules serve broader interests. This perspective transcends the traditional debate between "free markets" and "government intervention" by focusing attention on the more fundamental question of who shapes market rules and for what purpose. It suggests that addressing growing inequality and economic insecurity requires not just redistributing income after the fact but changing how markets distribute income in the first place. By democratizing economic power—through reformed political institutions, strengthened labor rights, dispersed ownership, and other mechanisms—we can create markets that generate broadly shared prosperity rather than concentrating gains at the top.

About Author

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Robert B. Reich

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