Book review: Supercapitalism

By Philip Brewer on 7 February 2008 (Updated 3 December 2008) 9 comments

Supercapitalism: The Transformation of Business, Democracy, and Everyday Life by Robert B. Reich.

For most of the 20th century, capitalism and democracy seemed to go hand-in-hand. After all, every democratic country was largely capitalist and nearly every capitalist country was, at least to some extent, democratic. What we've seen since the 1970s, though, has been a huge upswing in capitalism, while democracy has weakened. Robert Reich's book is about how this happened and what we might do about it.

The upswing in capitalism

As early as 1984, Alvin Tofler (in The Third Wave) was talking about the technological shifts that were making short-run and custom manufacturing competitive with mass production. Those changes, together with improvements in transportation, began to make it possible for small firms to compete effectively with large firms in many areas.

Before that, economies of scale meant that there could only be a handful of firms in most markets. Although those firms would compete, the competition was circumscribed by the fact that neither consumers nor investors had many choices. This situation also strengthened the hand of organized labor--a large company taking full advantage of its economies of scale was both highly profitable and highly vulnerable to a strike. It was cheaper to share those profits with labor than to have them vanish as a result of a work stoppage.

Beginning in the 1970s, though, new production technologies began to allow smaller firms to offer niche products that were better (for their niche) than anything the big companies could mass produce. New transportation technologies began to allow companies to source their supply chains anywhere in the world--including in countries where wages were low and environmental protection didn't add to costs.

Not only did more choices let consumers get closer to exactly what they wanted, it also let them choose the cheapest alternative. Over time, that produced relentless pressure on all companies to lower their costs.

At the same time, changes in capital markets gave investors more choices, making it easier for them to move their money to the most profitable investments. That produced relentless pressure on all companies to raise their profitability.

Reich uses the term "supercapitalism" to refer to this situation, where the ordinary choices of ordinary consumers and investors are aggregated in a way that simply forces businesses to choose minimizing costs and maximizing profits over all other objectives. It is pointless to suggest that a corporation would make any other choice. Even if an executive was inclined to do so, the corporation's profits would suffer, the stock price would suffer, and the executive would be quickly replaced.

Supercapitalism has had two positive effects:

  • Consumers have vastly more choices than they had before.
  • Goods are much cheaper than they were before.

These things are great. And, just as it is pointless to suggest that corporations do anything other than minimizing costs and maximizing profits, it is largely pointless to suggest that consumers do anything other than buy the products that best suit their needs at the lowest possible price. Some consumers (especially affluent consumers) do--they buy local, they buy organic, they buy fair-trade, they buy green--but in the aggregate, consumers buy what they want at the lowest possible price.

This is where Reich's book really starts to get good. Up to here, he hasn't really covered much that hasn't already been covered by Tofler or by William Greider in One World Ready or Not: The Manic Logic of Global Capitalism. Now, though, he shows how this situation is driving changes in standards of living.

Results of supercapitalism

Other people have observed that incomes for the poor and middle-class have stagnated, while incomes for the wealthy have risen sharply. Reich points out that this is entirely to be expected. With shareholders demanding maximum profits, corporations don't have any choice but to give it to them. A lot of those shareholders are ordinary people, who hold significant amounts of stock in their 401(k)s and elsewhere. But although there are many people getting a share of these maximized profits, most of the dollars are going to the already wealthy--because they have so much more of the shares than anyone else.

Also to be expected is the very high pay for CEOs. Not just anybody can do the job of minimizing costs and maximizing profits. The people who can do it well make so much more profit for the corporation, that they more than cover the incremental cost of hiring a first-rate CEO.

Many people are entirely happy with this situation. Corporations are supposed to maximize profits, and the CEOs who guide them earn their high salaries and huge bonuses (or, at least, many of them do).

Most people, though, Reich says, are of two minds about supercapitalism. Most people think that at least some more of the revenue that flows through corporations ought to end up flowing to the workers in the form of health insurance, higher wages, a pension, and so on. Most people think that working conditions should be safe, products should be safe, and that environmental destruction should be avoided.

So, if most people are of two minds, why are we in the situation we're in? Because markets powerfully aggregate the desires of consumers for low prices and the desires of shareholders for high profits. However, says Reich, "The institutions that used to aggregate citizen values have declined."

The point Reich wants to make most strongly is that there is no hope to make change through exhorting corporations or corporate leaders to behave differently--the corporations are functioning as they are supposed to, and any corporate leader who tried to do differently would quickly be out of a job. Because of this, all manner of "guidelines" for good corporate citizenship and "voluntary programs" that corporations undertake for publicity are pointless--worse than pointless, because they distract from the real issues.

Reich spends a good section of the book detailing some efforts supposedly intended to try to shame corporations into better behavior, such as making corporate officers testify before congress on why their corporation did something bad. His point is to demonstrate that such things are always a distraction from actually fixing the problem--which would be to pass legislation requiring the desired behavior. One example is the massive oil leak in Alaska caused by undetected corrosion in a BP feeder pipe. BP executives were grilled about why they hadn't done the same sort of inspection and maintenance that was done every two weeks on the Trans-Alaska Pipeline that the feeder pipe fed into. Nobody mentioned, however, that the inspections of the Trans-Alsak Pipeline were required by law and the inspections of the feeder pipe were not.

If there is no hope to get corporations to behave better (except through legislation), Reich also feels that there is little hope that consumers or investors could be convinced to behave differently.

I know that many Wise Bread readers would put the onus on the consumer. If consumers don't want third-world sweatshops, they shouldn't buy products produced in them. If they don't want dangerous toys or dangerous food-like edible products, they shouldn't buy them. If they want employees to be well-treated, they should buy from companies that treat their employees well.

The problem is, the market doesn't work this way. You can go to the store and see which bag of dog food is cheapest. You can't see which one is contaminated with melamine. You can tell which tennis shoe fits best by trying it on, but there's no way to know if it was manufactured by slave labor. (There are people who try to find out and publish the information, but their efforts are thwarted, standards are unclear, opinions differ, and in any case, the information is rarely to hand at the moment when the consumer knows whether the shoe fits.) When all companies are arguing how much greener they've become by using renewable energy, the stock price stands uncontested as the market's estimate of future profitability.

So, this is Reich's point: markets can be expected to produce vast arrays of products at attractive prices and with a good return to shareholders--and that's all they can be expected to produce. If we want something other than that--if we want fairness, health, safety, a clean environment, and so on, then the place to turn is not the market; it is to government.

Solutions

Reich has some suggestions. He has a few suggestions for modestly easing the pressures of the market, none of which are new ideas. He has more interesting suggestions for changing the balance between corporations, individuals, and the government.

The most important is to get rid of the idea that corporations have rights. "Corporations should have no more legal rights to free speech, due process, or political representation in a democracy than do any other pieces of paper on which contracts are written. . . . Only people should possess such rights."

Issues

As you can imagine, I've left a lot unsaid here. There's a long and interesting section on income inequality, and another fascinating section on how corporate lobbyists have captured the legislature. If you're at all interested in these topics, definitely pick up the book and read it.

However, there are two topics related to using legislation to control corporate behavior that Reich doesn't touch on. One has to do with the difficulty in following the law when laws become complicated, and the other has to do with the modern corporation's ability to escape.

It is all well and good to suggest that, in a democracy, the citizens should decide what the proper bounds of corporate behavior are and mandate those bounds with legislation. In practice, though, it can easily become absurdly difficult for any business to keep track of all the laws and regulations that it has to comply with. This leads to all manner of ill effects: expense (money paid to lawyers and others, just to figure out what the law is), unfair results (when it's impossible to know what's legal, ending up a criminal turns into a matter simply of bad luck), disdain for the law (if anything you do is likely to be illegal, perhaps the law isn't worth respecting), and corruption (if it's impossible to comply with all the laws, the officials charged with enforcing them can extort bribes as a cost of doing business).

Of course, we've got all those things already without the advantage of better corporate behavior, but more legal strictures will lead to more of it.

When businesses had large factories and large workforces that worked at them, they had no choice but to accept the legal restrictions that were in force wherever the factory happened to be. Now that businesses have global supply chains, they're in a position to play states and countries off against one another. If one state has laws they don't like, they can move production to another state, or move it offshore. They don't have to move their business itself--they can buy what they need from some business in another jurisdiction--but they can move the business if they want to. In many cases, businesses hardly exist as a physical entity anymore. More and more they are just a corporation that owns some intellectual property and has some contracts with suppliers and with customers. Any jurisdiction that passes onerous laws will find that such corporations choose to register elsewhere.

Reich doesn't seem to address that issue at all.

Aside from those two issues, I think Reich has done a great job of analyzing the changes of the past few decades. I really enjoyed this book. If you're interested in the intersection of capitalism and democracy, I expect you'll enjoy Supercapitalism.

5
Average: 5 (1 vote)
Your rating: None
ShareThis

comments

9 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Minimum Wage

Sounds like class warfare by the middle class and wealthy against the poor.

Philip Brewer's picture

I think the middle class is on the same side as the poor. They just don't all know it yet.

In fact, though, the poor have probably benefited as much as anyone from the vast availability of cheap stuff. As recently as the 1970s, setting up a first apartment was a very expensive undertaking (which is why there's a tradition of things like house-warming parties and wedding showers). In 2007, the cost of setting up a minimal household (a pot, a skillet, two or four place settings, a few glasses, something to sit on, and something to sleep on) was probably as cheap as it has ever been. (I suppose hunter-gatherers who made all their own tools could do it cheaper.)

This fact serves as a great wedge between the poor and working-class folks on the one hand, and the upper-middle class folks on the other. When someone says, "Hey! Shopping at places like WalMart is shooting yourself in the foot! You're supporting the same folks who are getting rich by grinding you into the dust!" all the poor person knows is that someone is trying to take away his one chance at coming close to a middle-class standard of living.

Bringing it back to Reich's book, that's why economic actions by consumers aren't going to do the trick. It will take political action.

Guest's picture
Lucille

The point of businesses just taking their factories elsewhere of course is a valid concern. At one point we seriously considered taking our citizenship elsewhere. There are other developed countries with better standards of living, better social guarantees and better current quality of life standards. We have put it on the back burner for now but if things really got stupid we would seriously consider moving.

But that is also a very extreme action and one that couldn't really be done in large numbers.

I find his outlook on that we need to take our government back and start operating as one big voice again is probably our best chance. 40 hour work weeks and the idea of vacations were not just handed down to workers because companies were nice.

Philip Brewer's picture

One of the things about the way things are now, is that the citizenship of the business could change without the owners needing to change their own. Many things that would be a crime for you to do in the US would not be a crime if some contractor did them for you in some other country where it wasn't illegal.

And I agree--much better to take back our own government than to just give up on it.

Guest's picture
Kelja

Reich is a central command economist that believes the heavy hand of government is needed to make things right. Where is it written that government bureaucrats are smarter than anyone else?

The men that wrote the Constitution sought to limit governmental intrusion in an individual's life. An ideal that isn't cherished anymore. I, for one, resist the idea of others telling me what to do.

Capitalism isn't perfect but it's far superior to any idea of a central controlled economy. .

In order for Capitalism to work properly, there must be absolute transparency. For example, products and produce should be clearly marked as to origin. Products are but the labeling could be larger, more prominent. Produce, by and large, is not. If my potatoes are being imported from somewhere in the world that has no controls on pesticides, I'd like to know that. It would cause me, and others I suspect, not to buy those potatoes.

When you think of it, Capitalism is a perfect democracy where every dollar is a vote

Guest's picture
WG

Capitalism naturally leads to monopolies and cartels. There will always be some aspect of production that is capital-intensive, and there, capital will tend to concentrate, and monopolies and cartels will form.

Also, the thing about labels. It reminded me of a situation that recently happened at the local 99 Cents Only store (name supplied for labeling purposes). They were selling glassware that contained hazardous levels of lead. They even had a tiny sticker on the cups and plates stating that the products were not intended for food.

Think of the poor people using these toxic products, and the workers who produced these toxic products. It's just wrong.

Philip Brewer's picture

I've read some of Reich's earlier books, and I think his views have changed a good bit over the past 20 years or so. Judging from Supercapitalism, I don't think he wants the government to decide what gets produced or how much (the things that a central command economy did, but never very well).

Making sure that consumers have good information is important, but it's not a trivial solution. Any kind of labeling mandate has costs at multiple levels--companies spend money making sure they understand the rules and then more money complying with them, the government spends money creating the rules and then monitoring compliance. In addition, any particular rule has winners and losers--how low of a usage of pesticides do you need to have to leave them off your label?

Businesses will inevitably push costs to a minimum, which can easily produce health and safety issues for workers and communities. I don't think rules requiring that companies, for example, limit the release of toxic substances really amount to a "central controlled economy."

Guest's picture
Katy

I was at my 99cent store and saw vitamins that people were snapping up. the expiration dates were covered on most of the labels by stickers, but I was able to see on some bottle an expiration of four previous months. People don't read - or they cannot read english. I tried to tell the woman in front of me they had expired but no one else listening spoke spanish or offered to help, if they did. it's just sad what companies get away with

Guest's picture

The issue of avoiding regulation by shifting operations to a different jurisdiction is a very real concern. To prevent such shifts within the US, the kind of regulation Reich suggests would have to come at the federal level.

Barack Obama's position about integrating labor and environmental policy into international trade agreements seems partly aimed at ensuring uniformly fair practices by one company in different countries. There are ways around the jurisdiction problem, but it will require politicians brave enough to act and an awakened electorate that understands the issue.

Kelja's earlier comment espousing the merits of a largely hands-off approach to economic policy represents, I think, a flawed model of how things really work today. Economic libertarians love to talk about enlightened self-interest and Adam Smith's concept of the market's Invisible Hand. Smith's The Wealth of Nations was a visionary work of its time, but its time was the Age of Enlightenment and not the Information Age.

In 1776, when The Wealth of Nations was published, the Industrial Revolution was still in its infancy and modern corporations didn't even exist yet. Now, 232 years later, we're in a post-industrial economy. The production of physical goods is increasingly commoditized, to the point that it makes less and less sense as the basis of a large national economy. Physical goods and manual labor are devalued, while information takes precedence as the most potent currency of global trade.

Our modern reality is one that Smith and his contemporaries could only have dimly foreseen, and which their work doesn't adequately cover. Trying to resolve today's economic complexities with theories from the 18th century is like trying to rewire a supercomputer with only a screwdriver. You may be able to open it up and get some insight into the machine, but you'll need better tools to really get anywhere. I'm glad people like Reich are encouraging discussion of what those tools could be, because we need to get it figured out very soon.