Robert Reich Issues a Warning in 'Supercapitalism'

Robert Reich

Robert Reich teaches public policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under Bill Clinton. Supercapitalism is his eleventh book. Perian Flaherty hide caption

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In Supercapitalism, Robert Reich argues that there's a growing conflict between democracy and capitalism. As citizens, we have ideals, but as consumers, we have needs. We abhor child labor, for instance, but we want a cheap pair of jeans. And we might be dismayed over Main Street's demise, but we still look for bargains at Wal-Mart.

Reich says that those two impulses have not always been at war. Between 1945 and 1975 — a period he calls the "Not Quite Golden Age" — the imperatives of business, government and labor were more or less in balance with one another. (The "not quite" refers to the fact that women and minorities were still lagging behind.)

But in the 1970s, according to Reich's analysis, advancements in technology and a growing, dynamic economy set the stage for corporate competition to enter politics. Today, companies battle it out with other companies, fighting for laws and regulations that favor them and disadvantage their competitors. Such pressures make it more difficult for citizens to have a meaningful say in public policy.

But, Reich adds, "If we think that we can just treat companies as moral beings and yell at them ... for not being more socially responsible ... we are diverting our attention from the hard work of democracy — of making laws and rules that reflect our real values."

Reich says he had a hunch about the "inverse relationship" between democracy and capitalism when he served in the U.S. trade representative's office during the Carter administration. But it took him a while to see the problem "in the round."

In the meantime, he served as labor secretary during the Clinton administration's first term. Locked in the Cabinet, his 1998 recollection of the Clinton years, and The Future of Success, his 2002 examination of work life in America, were both best-sellers.

This discussion of Supercapitalism took place in September 2007 at the Politics and Prose bookstore in Washington, D.C.

Excerpt: 'Supercapitalism'

'Supercapitalism' Book Cover

Chapter One: The Not Quite Golden Age

Roughly between 1945 and 1975, America struck a remarkable accommodation between capitalism and democracy. It combined a hugely productive economic system with a broadly responsive and widely admired political system. America in those years achieved its highest degree of income equality (since measurements have been available). It generated a larger proportion of good-paying jobs than before or since, and more economic security than ever for more of its people. Perhaps not coincidentally, in those years Americans also expressed high confidence in democracy and trust in government, both of which sharply declined in subsequent years.[1] That singular success and that powerful promise extended the moral authority of the American system throughout the world. In contrast to Soviet communism, America became an exemplar of both political freedom and suburban middle-class affluence.

The economy was based on mass production. Mass production was profitable because a large middle class had enough money to purchase what could be mass-produced. The middle class had the money because the profits from mass production were divided up between the giant corporations and their suppliers, retailers, and employees. The bargaining power of these latter groups was enhanced and enforced by government action. Almost a third of the workforce belonged to a labor union. Economic benefits were also spread across the nation — to farmers, veterans, smaller towns, and small businesses — through regulation (of railroads, telephones, utilities, and energy supplies) and subsidy (price supports, highways, federal loans). Thus did democracy offset the economic power of large-scale production and widely disperse its benefits.

But it was not quite a golden age. Women and minorities still struggled for political equality and economic opportunity. Much of the nation's poverty was hidden away in rural hollows or black ghettos. Foreign policy, ostensibly shaped by the perceived threat of Soviet communism, all too frequently pandered to the needs of large American firms for cheap raw materials abroad, such as bananas, tin, and oil. Civil liberties were imperiled during Senator Joe McCarthy's anti-communist witch hunt. Much of American life was monotonous, conformist, and deadly dull. And yet for all its shortcomings, democratic capitalism seemed to be working remarkably well, and on the way to working even better.

In order to understand what happened to the Not Quite Golden Age, we first need to understand how it came about.

The evolution began as the nineteenth century ended, when large corporations posed a profound challenge to American democracy. They brought a new level of prosperity to the nation but also sweatshops, child labor, and unsafe working conditions, and they monopolized whole industries. The unprecedented economic power of these giant companies made them politically unaccountable. America groped for a way to respond.

It started with outsized personalities whose footprints are still visible — J. P. Morgan, a banker's son who sold stocks for the railroads, engineered a huge rail combination, and became a wealthy financier (J. P. Morgan and Sons, which evolved into today's Morgan Stanley); Andrew Carnegie, who began as a telephone clerk, rose to the presidency of the Pennsylvania Railroad, and then made a fortune as a steel magnate (Carnegie Steel); John D. Rockefeller, who started as a bookkeeper in Cleveland, bought his first oil refinery in 1862, cornered the oil market in the 1890s with his Standard Oil Company (whose descendant is ExxonMobil), and then moved into coal, iron, shipping, copper, and banking (Chase Manhattan); and, subsequently, Henry Ford.

With these men and others like them flowed a stream of new inventions — steam engines, railway locomotives, the telegraph, electric turbines, internal combustion engines, and iron and steel machinery with interchangeable parts — that allowed all sorts of things to be made and shipped in very large volume. Costs could be spread over so many units that each single one was cheap to produce. Procter & Gamble devised a new machine for mass-producing Ivory soap. Diamond Match used a machine that made and boxed matches by the billions. A cigarette-making machine invented in 1881 was so productive that just fifteen of them satisfied America's annual demand for cigarettes. Standard Oil, American Sugar Refining, International Harvester, and Carnegie Steel, among others, gained unprecedented efficiencies through giant furnaces, whirling centrifuges, converters, and rolling and finishing equipment.

Productivity surged. While the typical American worker in the early 1800s had produced a tiny .3 percent more each year (seeding and harvesting crops, logging, fishing, or applying his craft with hand tools), by the last decades of the century his productivity was rising at six times that rate.[2] Output also exploded. Iron production doubled in just a few years; steel production multiplied twenty-fold.[3] Railroad and telegraph networks expanded in tandem. Fast, regular, and reliable transportation and communication brought raw materials from far corners of the country into factories and sent finished goods out to wholesalers and retailers all over the nation.

An economic revolution on this scale inevitably had large social consequence. Supply outran demand, leading to a severe depression that jolted much of Europe and America in 1873. Another depression in the summer of 1893 impoverished thousands of farmers, closed banks, and left more than a quarter of America's unskilled urban workforce unemployed. A growing chorus of socialists in Europe and America proclaimed the imminent collapse of capitalism. A swelling cadre of western populists in deepening debt to eastern bankers demanded that currencies be converted from gold to silver. With silver far more abundant than gold, this would inflate currency values and thereby shrink the debts. Manufacturers on both sides of the Atlantic wanted higher tariffs to protect themselves from foreign imports. (Only Britain, whose advanced manufacturers were the primary beneficiaries of free trade, declined to raise its tariffs, resulting in what were seen there as German and American "economic invasions.")[4]

Hundreds of thousands of people moved from farms to factories. In 1870, fewer than 8 percent of America's adult population worked in a mill and only one in five lived in a place with 8,000 or more inhabitants; a half century later, almost a third were in factories and almost a half lived in cities. During this tumultuous span of time, New York City's population swelled fourfold; Chicago became ten times its former size. In the 1870s, 280,000 immigrants entered the United States each year. In the 1880s, 5.5 million came; in the 1890s, another 4 million. By the first decade of the twentieth century, the flow of immigrants, most of them destitute when they arrived, rose to a million a year. According to a 1908 government study, almost three-fifths of the wage earners in principal branches of American industry had been born abroad.[5] Immigrants then constituted a higher percentage of the total American workforce than they would a hundred years hence.

As America and every other manufacturing nation began scouring more backward regions of the globe for potential markets, the term "imperialism" entered common speech. Teddy Roosevelt asserted America's imperial destiny in Latin America. "Territorial expansion, explained an official of the United States State Department in 1900, "is but the by-product of the expansion of commerce."[6] Britain and Germany equated their economic prowess with their nations' global spheres of influence. The British economist J. A. Hobson dourly predicted the logical end-point of such competition: Businessmen, he warned, opt for war when they have exhausted their home markets. Like John Maynard Keynes three decades later, Hobson urged instead that advanced nations increase their domestic markets by making more of their citizens rich enough to buy domestically produced goods. "If apportionment of incomes were such as to evoke no excessive saving, full constant employment for capital and labor would be furnished at home."[7] But the world war Hobson feared would occur before enough citizens had the wherewithal to buy a substantial portion of what they produced.

In the first decades of the twentieth century, productivity again surged. Sweatshops and mills were replaced by large manufacturing plants, inspired by Frederick Winslow Taylor's new theories of "scientific management," which broke down every factory job into highly specialized and repetitive steps. Henry Ford's assembly line became the model. Not only could workers positioned along the line produce more cars in a shorter time but production could be concentrated in a few giant factories and materials could be bought in bulk at great savings. In 1909, Ford produced 10,607 cars; in 1913, 168,000; the following year, 248,000. By the beginning of World War I, much of American industry had consolidated into giant firms whose names became almost synonymous with America — Ford Motor, U.S. Steel, American Telephone & Telegraph, United States Rubber, National Biscuit, American Can, the Aluminum Company of America, General Electric, General Motors, and Rockefeller's Standard Oil.

The size of such enterprises became an almost impregnable barrier to entry. They dominated the American, and much of the world's, economy for most of the twentieth century. Of the Fortune 500 largest corporations in 1994, more than half were founded between 1880 and 1930.[8] A far smaller portion was founded during the long stable period between 1945 and 1975, an important fact to bear in mind as the story unfolds.

Notes

[1] The most useful polling series of American attitudes toward government is The American National Election Studies, undertaken by the University of Michigan. It can be found at http://www.umich.edu/~nes/nesguide/toptable/tab5.

[2] Figures from Simon Kuznets, Economic Growth and Structure (New York: W. W. Norton, 1965), pp. 305-27.

[3] Figures from U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1970 (Washington, D.C.: U.S. Government Printing Office, 1975), Vol. I, pp. 201-2, 224.

[4] At the end of the nineteenth century, British citizens were treated to a series of lurid accounts of German and American economic onslaught and baleful consequences for Britain. Among them were E. E. Williams, Made in Germany (London: William Heinemann, 1896), and Frederick McKenzie, American Invaders (London: G. Richards, 1902). In form and substance, this literature bore remarkable resemblance to accounts of Japanese "invasions" offered American readers a century later.

[5] Figures from Jerehmiah Jenks and Jett Lauck, The Immigration Problem (New York: Funk & Wagnalls, 1926), p. 148.

[6] Cited in W.A. Williams, The Tragedy of American Diplomacy (Cleveland: World, 1959), p. 44.

[7] J. A. Hobson, Imperialism (London: J. Nisbet, 1902), p. 112.

[8] Selected from Harris Corporations, "Founding Dates of the 1994 Fortune U.S. Companies," Business History Review 70 (Spring 1996), p. 69-90.

Excerpted from Supercapitalism by Robert B. Reich Copyright © 2007 by Robert B. Reich. Excerpted by permission of Knopf, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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