Is the Free Market really free? In this conceptual piece, I argue, the help of Nobel Laureate Robert Reich, that the ‘American Dream’ is a myth to deter discussion from the authentic inequality America sees today. Written for a Contemporary Political Issues course at Loyola University Chicago.
The American conversation on its capitalist economy is naïvely dominated with verbose debate on proper government inference with the ‘free market.’ Citizens are distracted by the pursuit of the American Dream, where with the right amount effort and passion, anyone can achieve financial success. This pipe-dream is entrenched in the minds of eager entrepreneurs, pulling focus away from the real mechanisms of capitalism. In Robert Reich’s Saving Capitalism, one is reminded about the practically of government in creating the economic system through rules, regulations, and legislation. Therefore, the “myth” of the free market and its invisible hand is just “distracting the public from…the wealthy and muscular arm” that reigns with absolute power over the capitalist system (Reich 6). The real questions that need to be asked should be who benefits? Why aren’t we all prospering? Is capitalism truly beneficial for the masses? By examining the capitalistic components of property, monopoly, contracts, and bankruptcy in the American Capitalist system, along with their implementation and enforcement, the resulting inequality becomes evident in its political entrenchment.
Prior to deeper analysis of the establishment and reoccurring change of these capitalistic elements, a better explanation of capitalism’s appeal needs to be assessed. Adam Smith’s ‘pure’ capitalism has never been implemented in its ideal state. Its attraction is based on the idea that all can benefit and all have a choice in their livelihood. Ideally, a democratic government implements rules to be fair, efficient, and ever-evolving economy. ‘Ideally’ here is the key word. If this was reality, there would be a level playing field where citizens’ desires would prevail. But the rules are dictated by the elite. The rich possess the power and utilize their influence to modify the system to their financial benefit. The ‘free market’ is thus disguised as the “natural outcomes of impersonal market forces,” where the masses are subject to harsh policies enforced by the elite (Reich 10). The blatant imbalance of power, both political and economic, demonstrates how Smith’s system is foreign to the one that persists today in America. All ‘forms’ of capitalism stem from the idea of freedom of property, where personal desires motivate individual action.
Private property has long been considered a right of all men. Acting “rationally but selfishly,” humans work to perfect their land in efforts to profit off of their labor (Reich 16). The labor becomes a commodity to be traded, in order to attain a profit. The cycle continues, where growing profit becomes power. The ideas of what this property is have evolved from physical plots of land to ideas in academia. In the 1700s, humans were considered property, with over three-fourths of humans living in some kind of bondage (Reich 17). With the industrial revolution introducing cheap and revolutionary technology, laborers moved from agriculture to industry as a means of compensation. As Reich explains, workers no longer owned their means of livelihood—they became laborers for manufacturing giants. Thus, these employees used the property of the factory for their own benefit, which made them too, assets of the factory owner. This custom evolved over time, where capitalists who invested and took a risk in a company owned the means of production. Reich elaborates that these companies were “in effect owned by everyone with a stake in how it performed” (Reich 18). Quickly, one can see how these stake holders, profiting off their property (labor of others and initial capital), then have the means to dictate how property should be handled.
Reich reminds his readers that “what looks like government regulation is sometimes better understood as the creation of a property right…they provide incentives to invest and innovate” (Reich 19,21). To exemplify this, Reich assesses patent politics and medicine in America. “The government,” he says “defines property rights, what that process entails, and who has the most power to determine its outcomes” (ibid). Patents give property rights to ideas and inventions, lawfully dictating rules of procedure and economic benefit. They “promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries” (ibid). For example, in 2013 Congress blocked an incentive that “would expedite the review of questionable software patents filed by big companies [IBM, Microsoft] to lay claim to vast areas of possible invention” (Reich 22). This is a prime demonstration of how ideas, patents, have now been defined as property.
In a similar manner, the medicine industry provides insight to changing ideas of property. Reich exemplifies this claim with Pfizer’s total control of a vaccine in 2012 (Reich 23-24). The law is banned from coercing drug companies to lower cost, so drug prices soar. An estimated fifty million Americans did not fill their prescription in 2012 due to excessive costs. Pharmaceutical companies are legally able to pay doctors to recommend their brand drug. Likewise, the pay-for-delay agreements “generate huge profits both for the original manufactures and for the generic—profits that come from consumers, from health insurers, and from government agencies paying higher prices than would otherwise be the case” (Reich 25). These cost Americans $3.5billion/year, where profit is spent on advertising, entrenching this phenomenon. Defining absolute power of the property of medicine creates “higher corporate profits, higher costs to consumers, and less access for everyone” (Reich 27). As explained, the general idea of property as the means of wealth acquisition has mutated to complete hegemony of industry, often referred to as monopolies.
A monopoly is a conglomerate that maintains total control over an industry. Google, Monsanto and Walmart all fill the shoes of the model corporation. They control total market power, which “provides strong incentives to invest and innovate but also raises consumer prices” (Reich 29). The control of the steal, oil, and railroad industries by Andrew Carnegie, John D Rockefeller, and Cornelius Vanderbilt resemble today’s monopolists, “squeezing out rivals who threatened their dominant positions” (Reich 45). Comprised of a powerful CEO and elite shareholders, the corporation does all in its power to amplify their economic returns. With such a massive reward, monopolists must push their influence into the political scene to achieve their economic prowess. Reich elaborates, stating that “such economic power has simultaneously increased their influence over government decisions about whether such practices should be allowed” (Reich 30). Before analyzing examples, it should be noted that some countries practice a form of capitalism with which Smith would be proud. In France, books, electricity, bread, and water are classified as ‘essential goods,’ forbidden to be modified in reaction to any market change (Reich 40). These commodities have been deemed crucial for human progress, and thus maintain their price throughout political change.
In America, however, corporations have invaded many institutions. Monsanto offers affordable corn and soy seeds from which many farmers profit. A contract stipulates that once signed on, farmers must only rely on Monsanto products. This would not be much of an issue, but the seeds are genetically modified to not produce their own seeds. Now contractually obligated, farmers must buy seeds from Monsanto who, after first harvest, has risen the price (Reich 34). Monsanto hires lobbyists and pays for lawyers to protect this power. The US has banned imports of non-GMO seeds, sheltering Monsanto’s power over the farming industry (Reich 35). As this big corporation uses its financial power to instill its desires in a legal way, so too do big banks operate in a similar way. Reich reports that banks “have become more politically potent,” where they become “major sources of campaign funds for both Republican and Democratic candidates” (Reich 41). The effects of this corporate political activism are quite frightening when comparing the much larger contribution of $16.6 million to Obama’s campaign than of McCain’s $9.3 million (ibid). Corporations and big banks prevail by their sheer economic dominance and resulting presence in politics.
Aspects of property and corporations effect the performance of the ideal capitalist economy. The establishment of these comes from contracts—the agreement and formation of rules and regulations. Ideally, a corporation will have a fair contract with its laborers on who owns and profits from what property. In the 1874 Supreme Court case of Trist v. Child, questions about corporations writing rules for their sole benefit were debated. The court ruled that:
“If any of the great corporations of the country were to hire adventurers who make market of themselves in the way, to procure the passage of a general law with a view to the promotion of their private interests, the moral sense of every right-minded man would instinctively denounce the employer and the employed as steeped in corruption and the employment as infamous” (Reich 51).
The case favored the many over the few, instilling the ideals of Smith’s capitalism. With the dominance of corporations growing, however, this rule has been manipulated away from its constitutional context.
Reich coins the reality of contracts as being “inherently coercive” because there exists no alternative to the terms being set (Reich 54). Corporate elites, entrenched in the politics of the market, set rules and regulations for their advantage. Concisely, “political power is determining what can be traded and how” (Reich 52). Corporations and their elite possess the power to force promises and agreements with laborers because there is no alternative. Facebook, like many other internet sites, forbids a person to use its services until they agree on the terms and conditions. Even though many skip over the reading altogether, agreeing to the terms is required for the use of the site (Reich 55). There is no room for changes—the corporation has “locked up the market through its intellectual property, control over standards, and armies of lawyers and lobbyists” (Reich 54). The culmination of these contracts and their consequences can be seen in bankruptcy policy.
Bankruptcy was meant to protect individuals from the possibilities of market failure within the economic system. The idea is “shared sacrifice,” where creditors spread their losses equitably with backup from banks, continually “under the warful eye of a bankruptcy judge” (Reich 60). Therefore, investors are expected to share in the debt, just as they share in the profits. Over time, elites have cleverly changed the law to protect investments of personal property beyond the corporation if debt can’t be paid off. Reich exemplifies this with his assessment of American Airlines’ bankruptcy. The company called for shared sacrifice of debt, but the CEO secretly kept his executive retirement plan ($19.9 million) locked in a trust. After creditors paid off the final debts, “everyone came out ahead, expect for American’s employees, who, even [though] they retained their jobs, had lost much of their pay and benefits,” Reich continues, “so much for shared sacrifice” (Reich 62). Bankruptcy thus persists by leaving the “underlying mechanisms unexamined” and accepting the easy solution of letting one party fulfill its contractual obligation to the other (Reich 66). The pitfalls of bankruptcy, and the other mechanisms of capitalism, can been seen through their enforcement.
Elites and the corporations they serve have entrenched their power through a practice called rent seeking. Previous examples (IBM/Microsoft, Pfizer, Monsanto, Facebook, American Airlines) have demonstrated how the wealthy can make laws, influence legislation, and even swing elections to get their way. Rent seeking defines the opportunistic methods elites take to ferment their power. By entering the political realm, corporations can quietly alter the laws of trade to benefit their desires. Reich states that the enforcement mechanism “is the most hidden from view because decisions about what not to enforce and not publicized” are often unpopular amongst the voting body of America (Reich 67). Behind closed doors, these powerful corporations implement rent seeking strategies to enforce their power. Reich describes one example, where defanging laws defund watchdog government agencies. “Wall street made sure that government agencies charged with implementing law did not have the funds to do the job,” Reich explains about the defunding of the IRS (Reich 71). Instead of fighting back, the government prefers to settle cases quickly, because agencies in charge of lawful enforcement cannot afford follow up (Reich 77). This fuels a larger public distrust of the entire capitalism system, which “depends on trust, without which, people avoid even sensible economic risks” (Reich 73). Even if an individual were to take up arms and file a lawsuit, the elitist corporation will hire wealthy lawyers to draw out litigation until the wronged cannot afford to stay in court (Reich 79). The wealthy have covered their tracks. Their control over law gives them room to sway any political fault. Reich states coldly, “economic dominances feed political power, and political power further enlarged economic dominance” (Reich 83).
It should be clear now why we all aren’t prospering. Through each function of the capitalist economy, the elite have entrenched themselves into the politics of the system. Inequality persists from the rent seeking practices utilized by wealthy corporations, which continually favor elites while trampling the working class. Whether it be IBM’s influence on Congress, Pfizer’s vaccine monopoly, Monsanto’s agricultural empire, Facebook’s concrete contracts, or American Airline’s corrupt leadership, the elite prevail. Wisconsin Supreme Court Justice Edward G Ryan asked, “which shall rule—wealth or man; which shall lead—money or intellect; who shall fill public stations- educated and patriotic free men, or the feudal serfs of corporate capital?” (Reich 45). We must recognize the elitist strategies used to protect their economic superiority. Reich reminds us that “the underlying issue is not whether the free market is superior to government but how government officials decide how the market is to be organized and which outside groups have the most influence over such decisions” (Reich 54). Debate on the ‘free market’ should not question the amount of government in the economy. It must be a question on who is changing the government, and who will that change benefit.
Determining one’s worth is a feat often flouted, promoting a capitalistic notion of wage comparison as means for identity. Individual uniqueness then exists simply as a response to the market, where income is the sole defining feature of one’s worth. In Robert Reich’s Saving Capitalism, the economic laureate states that “the prevailing assumption that individuals are paid what they’re worth is a tautology that overlooks the legal and political institutions defying the market” (Reich 94). The role of power, according to Reich, is ignored by all. Rather than assessing individual worth, the idea that wage is the only accurate determinant of wealth persists. This is due to the economic elite, or powerful rich’s entrenchment of this idea. The falsity “lures the unsuspecting into thinking nothing can or should be done to alter what people are paid because the market has decreed it” (ibid). The elite instilled a cultural hegemony of income hierarchy that forces the vast majority to value themselves as agents of stored labor, rather than individuals. Analyzing capitalism’s effects on meritocracy, democracy, and justice can determine the perceptions of individual worth.
In a post-WWII America, capitalism thrived; it built up individuals’ small business and promoted natural, efficient growth in the economy. With the aid of worker’s unions, the average American thrived. Accounting for today’s inflation, the average salary in the 1950s was an average of $30/hour (Reich 89). The unions helped to fight for a competitive salary and promote worker rights. Because of this support, people became accustomed to, in a naïve sense, that the market would reward them exactly what they’re worth. In this way, America was a meritocracy, where individuals were rewarded proportionally to their abilities and skills (Reich 91). Entrenched into the ‘American’ lifestyle, this ideal has persisted while capitalists have patiently and quietly changed the rules of the game to foment their power. The same ideal tells the rich that they “must be extraordinarily clever, daring, and superior” to be in their position, where allocating power ensures their place (Reich 90). The elite therefore influence the all aspects of the capitalist system- the rules of the market, property, contracts, bankruptcy, and enforcement to increase their profit and alienate workers away from institutions, like unions, that seek to protect the workers. As Reich says, “[capitalist] innovations are financial and tactical—finding new ways to squeeze more money out of a given set of assets, including employees, or to expropriate the assets and incomes of others” (Reich 93). The wealthy have used their power and influence to manipulate the aspects of capitalism to entrench their power while leaving the average worker handicapped behind (see Walters 2017). To see more concrete example within democracy, investigating upper, middle, and lower class situations is required.
The underlying reason for capitalism’s pitfalls is the rich changing of legislation to further benefit themselves. Looking at CEO’s salary is a fantastic way to see these claims in practice. For corporations, conglomerates of specific industries, profit is the main goal. Owned by various shareholders, a CEO is tasked with maximizing the returns for the initial risk that these capitalists took (Reich 98). There is a caveat, however, because these employees fail to produce labor in the same way of the workers. Rather, they are compensated through corporate income taxes, stock, or pension plans, all of which are taxed at a lower rate that ordinary income (Reich 105). Oddly enough, their pay as dramatically risen, climbing 937% between 1978-2013, while a typical worker’s wage only increased 10.2% (Reich 97). Overtime with influencing the government, lobbying, and changing legislation, corporations have expanded their power. The economic policy institution estimated that over 55% of executive compensation was deducted from corporate earnings, meaning that the CEOs made money off the average tax payer (Reich 106). Corporations do not have to announce if they purchase their own stock, the 1982 SEC removed restrictions to manipulate prices of company profit, and in 1991, the SEC allowed for CEO to cash in stock without public disclosure (Reich 101). IBM embodies these phenomena well; between 2000 and 2013, the corporation spent $108 billion buying its own shares on the market (Reich 103). The financial success of the company, and the subsequent salary of the CEO, is more about “financial engineering than actual performance” (ibid). A CEO’s worth is then determined by their responsibility for the performance of their company—even though their pay draws money away from research, development, expansion, or improvement on higher wages (Reich 102). The rich obviously have used their privilege in the democratic system to alter the laws, allowing themselves to further profit off the exploitations of others.
Understanding that the rich institute their power through every channel is paramount to witnessing how capitalism is serving only themselves. In businesses that hold a privileged place in the American political system, employees will receive higher compensation because the company has infiltrated the rules of the market to benefit itself (Reich 109). To look closer at the trading sector of the market, Wall Street has become a breeding ground for political clout. Reich even says that “Wall Street accounts for such a large proportion of campaign donation to major candidates for Congress and the presidency of both parties,” thus controlling the profitable and cyclical relationship between government and the market (Reich 110). Here, Reich proves that the political elite are funded by the economic elite. Legislation created by these funded candidates instill the success of the wealthy. The symbiotic relationship is then covered up, and touted as a ‘free market’ system for ‘all’—yet this is far from the truth. The aforementioned meritocracy ideal that forms the ‘ideal capitalism’ remains justified but “does not match the reality that most of us live and work” (Reich 150). Accepting this bold fact is needed to witness the despairing reality in which the majority live.
For the less wealthy majority of Americans, perception of worth is often misguided. The productivity after WWII increased average compensation of American workers. Globalization and technological improvements, however, have left high levels of unemployment. These unavoidable factors, paired with the previously-mentioned corporate mission to maximize shareholder returns weakens the reality of a competitive salary. The American workers who initially had valued themselves relative to their decent pay now have to settle for lower wages (Reich 124). In fact, one out of every five working American is in a part time job, and 66% of all American workers live paycheck to paycheck (Reich 125). This should be troubling for capitalists, because a decrease in purchasing power limits the sales of products. Nevertheless, capitalists claim this is efficient because resources have shifted to more practical application. Using Walmart as an example, Reich explains that employees cannot negotiate a better deal because they do not have a union. So, Walmart does not have to match union contracts, letting the CEO receive a higher wage concession while workers continued to be exploited—as a legal condition of their contract with the company (Reich 127). The workers thus cannot compete for competitive wages, yet know they are in an immovable place because the job they have is the only one that hasn’t be automated or outsourced. The steady decrease of the middle class’s power is often blamed on the natural workings of the ‘market,’ yet Reich reminds his readers that this is not the case. This growing divide between classes is the market since the 1980s is the wealthy intentionally reorganizing the market. As the wealthy’s “gains have continued to accumulate, so has their power to accumulate even more” entrenched their ideals into the system (Reich 132). Again, the wealthy use their resources to ferment their location at the top. The cyclical power consistently favors the wealthy, ever growing the poor.
The poor remain at the bottom of society—both perceptually and economically. Poverty was initially reserved to define those who did not work, yet recently the class has become undesirable. In 2014, Speak of the House John Boehner described the poor as people who think that have the thought that “I really don’t have to work. I’d rather just sit around” (Reich 134). This perception of the poor was created by the wealthy, yet the reality is the poor work often the most. Often with two or more jobs, over 40-hour work weeks, “America’s poor work diligently…yet their families remain poor” (ibid). Not surprisingly, the perception of the lazy poor, undeserving of government support programs, was engineered by the wealthy. Corporations seeking higher profits will outsource work or cut costs to increase CEO profit while leaving the poor to deal with the economic repercussions. Significantly, CEOs can force workers to accept lower wages through contract manipulation (Reich 134). Between 2010 and 2013, average incomes for the bottom 1/5 of Americans dropped 8%, while average wealth declined by 21% (ibid). Even more frightening, the effects of today’s economic inequalities will entrench future generations. Reich reveals the striking fact that 43% of children born into poverty in the US will remain there their entire lives (Reich 139). The consistently growing lower class makes a smaller middle class, which as previously mentioned brings less opportunity for all on the economic scale.
Reich discusses a common argument for combatting poverty—minimum wage. Many people that this would be detrimental to the free market, but in reality it would further disenfranchise the poor. “Any attempt to restore the real value of the minimum wage,” will make employers fire workers at the lowest level, because “workers would no longer be worth the cost” (Reich 135). The important factor in the minimum wage debate is there is no obsolete reaction. Getting rid of a wage lets employers pay the exact worth of an employee, which would eliminate unemployment. Or, a high minimum wage would give welcome more cash in the pockets of the poor, increases market activity and overall grow the economy (Reich 136). This debate is important to mention because, although the direct cause of capitalism’s pitfalls can easily be blamed on the elite, the solutions to the problem spark passionate debates. While the problem is easy to define, the possible outcomes remain unexplored.
With this broad analysis of the three tiers of economic distribution of the American social class, it is apparent that the democracy in which we live is not ‘for the people.’ With the rules set up over time by the wealthy, the majority are left with only their dreams of becoming on the few elites on the top. Politics and policy are the tools of the rich’s manipulation, constantly ensuring their power over others. Reich describes this phenomenon in politics, where influence is “either direct through their own contribution and connections, or indirectly through their corporation’s trade associates and the managers of their financial portfolios” (Reich 144). Similar to poor families passing on their economy status to future generations, so too do the rich provide for their descendants. Reich highlights the majority of students at prestigious schools as members of wealth families. To save on expensive tuition costs, however, these expensive schools are subsidized by the government at an excessive rate. “The average annual government subsidy per student at a public university comes to less than $6000, about 1/10th the per student government subsidy at Princeton,” Reich states. (Reich 149). This unfortunate statistic shows that American capitalism only favors the wealth. Said with prose, Reich says that “the playing field is tilted toward those who have had the resources and power to tilt it in their direction. And as they gain steadily more resources, it tilts further” (Reich 150).
Contemporary American capitalism effects all aspects of private and social life. Framed as the democratic savior to state systems, capitalism remains controlled by the elite while exploiting the vast majority. The rich cement their influence in a variety of ways—from funding political candidates to forcing unfair contracts—solidifying their control of perception. The worth of many is then determined by the few. Reich warns of this reality: “to ignore how the market has been reorganized since the 1980s, and by whom is to disregard the power of moneyed interests who have received a steadily larger share of economic gains a result of that power” (Reich 132). The rich use their power through cultural hegemony to carve the economic hierarchy based on their perceived worth. Controlling perception gives them ultimate control. While this meritocracy has been instilled, Americans can still respond in ways that spread “prosperity, enlarge the middle class, and provide avenues of upward mobility for the poor,” yet the country remains too distracted (Reich 150). Reversing the way things are is everyone’s responsibility.
Reich, Robert B. “Saving Capitalism: For the Many, not the Few”. Alfred A Knopf; Penguin Random House.. 2015.