Saving Capitalism: For the Many, Not the Few

In Chapter 6, Reich explains that contracts are “agreements between buyers and sellers to do or provide something else” (48). He also points out that “if property and market power lie at the heart of capitalism, contracts are its lifeblood—the means by which trades are made and enforced” (48). As with property and monopoly, contracts require rules and regulations, which can be influenced by those with power. Reich also points out that technological advances and social norms about what should and should not be legal to sale have opened the way for political influence to be wielded. Citing the fact that much of what is earned on Wall Street is likely based on information unavailable to average investors, and supposedly illegal, Reich argues that “insiders fix the market for their own benefit” (53).

As with property and monopoly, the debate over government versus the free market is irrelevant compared to the debate over how the market is organized and which groups have influence over market decisions. Another example is that laws saying that contracts entered under coercion are illegal are largely ignored because buyers, sellers, consumers, and even small businesses basically have no alternatives other than entering into contracts with powerful corporations. Reich argues that these contracts do not reflect equal bargaining power between parties but reflect the interests of “giant corporations that have the power to demand acceptance” (56). Whereas lawmakers at one time sought to protect consumers, employees, and borrowers from the contractual terms placed on them by large corporations and banks, those limits have been done away with under lobbying and political pressure by the corporations and banks.

In Chapter 7, Reich explains that rich Americans can “avoid the consequences of bad bets and big losses by cashing out at the first sign of trouble” (59). Bankruptcy and limited liability laws protect such wealthy people, but ordinary workers can be destroyed when large corporations fail. As with the previous aspects of capitalism, large corporations, wealthy moguls, and Wall Street “have had enough political clout to shape bankruptcy laws to their needs” (59). According to Reich, bankruptcy, the fourth basic building block of the market, reflects a trade-off between competing goals. He argues that “contracts depend on a mechanism for dealing with failures to pay what’s due” (60). If the penalty is too lenient, carelessness will likely continue, but if the penalty is too severe, purchasers, debtors, and borrowers will have no way of actually earning back the money they owe.

Reich argues that bankruptcy seeks a balance between “allowing debtors to reduce their IOUs to a manageable level while spreading losses equitably among all creditors” (60). The idea behind this is shared sacrifice among debtors and creditors, but when powerful corporations face bankruptcy, it is typically only workers who have to sacrifice. Reich provides examples of this with the American airline industry and the financial crisis of 2008. In both of these cases, powerful banks and corporations used bankruptcy to their benefit, but employees, small investors, and homeowners were the only ones who were really hurt. In closing the chapter, Reich brings to light political and moral questions that come with laws of bankruptcy. Such questions focus on the supposed idea of shared sacrifice and how relief should trickle down to help employees as much as shareholders and homeowners as much as big banks.

The fifth and final building block of the market is enforcement. Reich explains that broad consensus exists on the fact that enforcement is essential to the market, but the details of enforcement differ greatly. Decisions about the details are rarely permanent, and the “process offers opportunities for vested interests to exert influence” (67). The reason for this is that enforcement mechanisms are generally not transparent. Additionally, elite individuals and corporations have ways of avoiding responsibility. Reich cites examples of entire industries, such as the pharmaceutical industry and gun manufacturers, that have used their political clout to avoid prosecution. However, he also points out that in previous decades, it was not as easy for the automobile and tobacco industries to use their political clout for immunity.

Common techniques used by powerful corporations to stop enforcement of the law are ensuring that Congress cannot fund the enforcement and “hollowing out” the agencies responsible for the enforcement. The Occupational Safety and Health Administration (OSHA), the National Highway Traffic Safety Administration, and the Internal Revenue Service (IRS) are three agencies cited by Reich that have systematically been underfunded and hollowed out of workers charged with enforcing the laws. According to Reich, this is possible because the public isn’t aware of it. While the enactment of a law attracts attention and media exposure, the defunding and hollowing out process does not, despite the fact that it is the practical equivalent of repealing the law.

Through litigation, moneyed interests water down agency rules, small fines, and mild settlements. Both JP Morgan Chase, in 2012, and Citigroup, in 2014, were charged for fraudulent sales of troubled mortgages, but the fines and settlements had no significant effect on their stock prices. Another tactic used by giant corporations with the help of Congress is to have maximum penalties written into law. Doing this is a way to defang the law while avoiding the perception of being opposed to it. Reich provides the examples of Haliburton, in 2013, and General Motors, in 2014, which both received maximum penalties for their respective environmental and safety transgressions. These penalties are meaningless for $100 billion corporations.

In Chapter 9, Reich provides a summary of his five building blocks of capitalism by explaining that markets are created by human beings and that their rules reflect the moral values of societies. The rules change over time, and in recent decades, changes have occurred because some people have had the power to change them in self-interest. The rules are decided upon by a large range of lawmakers, agency heads, and judges, and they amend or modify their decisions as circumstances change. Factors such as improved efficiency and public good should serve as the guides for such decisions, but more recently, the real decisions are made in private to reflect the interests of powerful parties, “giant corporations, big banks, and wealthy individuals” (82). Reich describes this as a vicious cycle between economic dominance and political power. Because widening inequality is now “baked into” the structures of the free market, this vicious cycle has led to skyrocketing corporate profits and a dropping share of the economy for labor (83). According to Reich, this cycle can be reversed. He promotes a virtuous cycle in which “widely shared prosperity generates more inclusive political institutions,” influencing the market to “further broaden the gains from growth and expand opportunity” (84).