Supercapitalism
Invisible Handcuffs
SUPERCAPITALISM
The Transformation of Business, Democracy, and Everyday Life.
By Robert Reich.
272 pp. Alfred A. Knopf. $25.
When news first leaked out that presidents of some elite universities were being paid more than a million dollars a year, many people accused university boards of having lost their moral compass. Was it an outrage, as these critics believed, for nonprofit organizations to compensate their executives so handsomely?
The trustees who recruited David J. Skorton as Cornell’s 12th president last year knew that his most important responsibility would be to head the university’s recently announced $4 billion capital campaign. The trustees identified several candidates they felt would succeed in reaching that goal. But none could have handled the task nearly as well as Skorton, they eventually decided, and, having seen him in that role during the past year, I find it easy to agree. Skorton, a man of great warmth and charm, is a distinguished research cardiologist and an accomplished jazz musician. He is also extremely funny. Alumni adore him, and if his compellingly articulated vision of the university’s future persuades them to donate only 3 percent more than the next-best candidate would have, he will have boosted the university’s endowment by more than $100 million.
I don’t know how much Cornell pays Skorton. But I do know that leaders of his stature are in short supply. Because every university wants a Skorton, it is quixotic to imagine he could have been hired on the cheap.
The supply of moral outrage is limited. When we aim it at the wrong targets, we squander a valuable resource. In “Supercapitalism,” Robert B. Reich argues that the current political debate in the United States is drowning in misdirected moral outrage. We cannot hope to solve our problems, he says, without first understanding the forces that have caused them.
Reich, a public policy professor at the University of California, Berkeley, and formerly President Clinton’s secretary of labor, is quick to concede that rising inequality, environmental degradation and a dysfunctional health care system are problems worth worrying about. But he argues that social critics are wrong to attribute them to increased greed and corruption. Today’s corporate and political leaders are no different, he says, from their earlier counterparts. What has changed is that new technology has made the economic environment dramatically more competitive.
As Adam Smith first described clearly, individuals who pursue only their own narrow interests in a competitive system often inadvertently create widespread social gains. But not always. Unlike many of his modern disciples, Smith was keenly aware of the invisible hand’s limitations. Individual and social interests often diverge, he realized, and in such cases, greater competition makes matters worse. If a firm can cut costs by removing the filter from its smokestack, for example, it will feel greater pressure to do so when competition intensifies.
If our social ills are indeed rooted in increased competition, our only recourse, Reich argues, is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, we must make taxes more progressive. If we want cleaner air and water, we must adopt more stringent environmental laws.
Reich’s narrative begins with his account of the “not quite golden age” — roughly, the three decades following World War II — in which limited competition enabled large companies to earn high profits. High profits, in turn, enabled unions to bargain for high wages and benefits. Legislators, who were less influenced by corporate cash in those days, passed laws in the public interest.
Things changed when the Internet and other new communications and transportation technologies enabled the economy’s most able producers to extend their reach. Many established firms were swept away.
At about the same time, financial deregulation increased the influence of capital markets on corporate behavior. Wall Street’s message to chief executives was “Slash your payrolls or we’ll buy your company and hire someone who will.”
Reich notes that consumers and investors have profited handsomely from these developments. Wal-Mart may offer its employees low wages and benefits and squeeze its suppliers to do likewise. But it also offers extremely low prices. Investment managers may pressure corporations to lay workers off, but they also generate robust returns for their clients.
As citizens, however, we have fared less well. Competition has driven salaries of the best performers in every sector to unparalleled heights, while the incomes of all others have stagnated. Today’s more competitive environment has also made it harder for us to insulate ourselves from risks, especially those related to health and employment security. Some 47 million Americans now lack health insurance, up seven million since 2000.
Why hasn’t government stepped in? Again, Reich fingers greater competition as the culprit. Once some companies discovered they could gain an edge by influencing government decisions in their favor, rivals had little choice but to join the fray. And once some candidates began altering their votes to attract contributions, others faced strong pressure to follow suit. Reich documents in lurid detail the explosive growth of corporate lobbying expenditures and campaign contributions since the 1970s.
Can other institutions assume government’s abandoned role? Reich thinks not. Reliance on voluntary “corporate social responsibility,” he argues persuasively, is a pale substitute for effective laws against corporate misconduct. The only remedy, he concludes, is to purge corporate cash from the political system. This, of course, will be a tall order.
But because attempts to buy influence are often mutually offsetting, there is hope. Microsoft lobbies Congress to inhibit Google, only to prompt costly retaliation from Google. One legislator sells his vote, only to see rivals promise even greater favors. Because the process resembles a wasteful military arms race, astute political leaders ought to be able to persuade warring factions to sign an arms-control agreement.
Reich probably doesn’t expect any such agreement in the waning months of the Bush administration. But today’s presidential candidates should study his message carefully. “Keeping supercapitalism from spilling over into democracy,” he writes, “is the only constructive agenda for change.” All else is “frolic and detour.”
“Supercapitalism” is a grand debunking of the conventional wisdom in the style of John Kenneth Galbraith. Like Galbraith, Reich will draw fire from economists for some of the details of his argument. I think he misses the mark, for example, in saying that economies of scale are less important than in the 1950s. Now, as then, giving consumers more product variety means smaller production runs with higher unit costs. And because wealthier customers demand greater variety, production runs are indeed often smaller than before. But firms can still cut their unit costs by expanding their markets, just as in the 1950s, and heightened competition creates more pressure than ever to do so.
For present purposes, nothing of importance hinges on that point. Indeed, the main thrust of Reich’s argument is right on target. Those who seize their opportunities in highly competitive environments tend to survive and prosper. “To confuse greed with opportunity,” he writes, “is to confound desire with availability.”
It’s often useful to get angry when things aren’t going well. But moral outrage is counterproductive unless directed at the right targets. By focusing our attention on those who continue to block effective campaign finance reform, Reich shows that he can spot a worthy target when he sees one.
posted by Jim at 3:30 PM
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