Book review: Supercapitalism
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.
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."
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.