Basic belief systems, if regularly reinforced by carefully orchestrated advertising campaigns, are enormously difficult things to shift. Paradigms of thought, once established in dominance, are hard to get rid of. We have just lived through 30 years of an orchestrated consensus on the wonders of free-market capitalism. No matter that the business deregulation it served to legitimate triggered the worst financial crisis since the Great Depression. Facts don't necessarily have to get in the way when the defense of dominant belief systems is at stake; and in vast swathes of the Republican Party, facts visibly are not doing so now.
Think where we are, as we go to vote. Four years back, an inadequately-regulated American banking system went into crisis, and the Republicans paid the electoral price. A mildly progressive administration was elected into office because the crisis occurred on the Republicans' watch; and now -- four years later -- that same mildly progressive administration runs the risk of being ejected from office because the scale of the recovery it has orchestrated is still as modest as its progressivism. The right-wing propaganda machine, momentarily silenced in 2008, is back in overdrive. We need to return to free-market capitalism -- we are now so regularly told -- because the Obama experiment in state-led economic recovery has failed. We need to go back to limited government, to unregulated private enterprise and to labor markets unrestrained by any extensive welfare net. We need to go the Bain Capital way to our collective future -- private prosperity through public austerity.
The only trouble is: we don't. The free market route to prosperity now being canvassed at us by a resurgent Republican Party is a complete illusion, for at least the following reasons.
Whatever else the United States economy is, or has been, in the twentieth century, it has not been free-market capitalism.
We carry in our heads this image of economic markets made up of small producers and rational and fully informed consumers, and we tell ourselves that this is perfect competition and an ideal world. But actually it is a fantasy world. It is certainly not the world -- nor the economy -- that we currently face in the United States. Nor is a world that will miraculously reappear if we simply remove regulations and subsidies from major American industries and companies.
There was a time in which the U.S. economy approximated the ideal of perfect competition: the pre-Civil War era of small capital and independent farmers. Even that, of course, was an era of slavery in the south and indentured servitude in the north -- so it was hardly an ideal economic model for generalized human freedom. But that era fell to the robber barons of the Gilded Age, and to the construction of a huge American tariff. We must remember that the United States used protectionism on the grand scale in the nineteenth century, as a wall behind which to industrialize rapidly. There was no free trade for America then: just the rapid rise of the vast American corporation, and the spread of the managerial revolution. Instead of an economy full simply of small companies, we now have one dominated by vast corporations. Instead of equally-empowered consumers, we now have unprecedented levels of income inequality, entrenched poverty and the arrogance of riches. Instead of an ever-more informed citizenry, we now have a mass culture designed to entertain and obfuscate, and a democratic process flooded by the political assertions of the Super PACs.
So if the world of free-market capitalism ever existed, it has long gone. As recently as 1997, the 50 largest U.S. companies accounted for 24 percent of total U.S. manufacturing value added; and there are currently at least ten major industries in this economy in which just four firms are responsible for over 90 percent of the goods produced and consumed. In 2005, the top 5 largest arms manufacturers were responsible on their own for 45 percent of global arms sales, and four of those companies were American. This is big-scale capitalism: imperfectly competitive capitalism, not perfectly competitive capitalism -- oligopoly capitalism shading towards monopoly capitalism. Moreover, its most profitable sectors are those operating closest to the state, not those operating furthest from it: defense industries, big oil, agribusiness, pharmaceuticals, large banking institutions and now, after the Affordable Care Act, large private health insurance companies as well. Collectively, large private firms in the United States are currently in receipt of almost $100 billion of tax breaks and direct subsidies each and every year.
So we are not in, nor are we going towards, something we might legitimately call "free-market capitalism." At this moment, the U.S. economy is probably more properly described as a classic example of "crony capitalism" -- full as it is of interlocking corporate boards, mutually reinforcing top-salary compensation committees, and revolving-door relationships between Washington and Wall Street. And if we are going anywhere new as an economy, we are in danger of heading from "crony capitalism" to something even worse -- "vulture capitalism:" to a world in which the man who is quite possibly our next president can personally add over $15 million to his private wealth from restructuring deals within the GM bailout -- a bailout he condemned and a restructuring that, in this particular case, cost over 25,000 unionized auto workers their jobs and their pensions.
The Dangers of Further Business Deregulation
The greatest weakness in the argument about letting private firms just do their own thing (Adam Smith's much cited "invisible hand" at the heart of the free-market argument) is that it rests on a fallacy of composition. It is perfectly rational -- indeed, in unregulated markets it is absolutely essential -- for each private firm to seek out the cheapest sources of labor. But what is rational for the firm is not rational for the system as a whole. Racing to the bottom behind Asian wages erodes the hopes and dreams of the entire American middle class, and robs the national economy of the consumer demand vital to the achievement of long-term full employment within it. Wages are not just a cost. They are also the source of consumer demand. We have outsourced good-paying American jobs to countries which tolerate working conditions and levels of political repression that we would find abhorrent at home. The result inside the United States is companies flush with profits and cash, but fearful to invest and hire here for lack of consumer demand. We outsource, and we damage ourselves.
We have just lived through a generation of business deregulation -- and seen what it has generated. Do we really want to go back to a world dominated by Wall Street Masters of the Universe? Do we really want to go back to a world in which environmental degradation can go unchallenged? Do we want to go back to a world where one American in seven has no regular access to health care? Do we want to remain in a world in which men and women of privilege will spend vast treasure trying to block the mild Keynesianism of the Obama administration but will not allow even a small proportion of that treasure to be taxed away to finance better schooling, health cover for more Americans, investments in roads, research and new forms of energy? The greatest threat now before us is that a vote for Romney will be taken by sections of the private sector as a green light for doing the Bain Capital thing: asset stripping, outsourcing and the total denuding from the American economy of any vestigial worker rights. The result will be a genuine free-for-all -- a genuine free-market -- but one with the cards inside it stacked against labor and against the poor. It will be a free-for-all wrapped up in the language of freedom, of course, but with freedom concentrated at the very top.
There is nothing in market competition that automatically leads to equilibrium at socially-desirable levels; and it is hard to deny that the scale of income and wealth inequality in the United States that has come from 30 years of business deregulation and anti-trade unionism is far from optimal: for it has left us with chronic barriers to both immediate and long-term growth.
Immediately: lack of adequate consumer demand. Long-term: depreciating social capital, low skill levels in the base and middle of the economy; a crisis of public funding in deprived areas; and underneath it all, the ticking social time-bomb of a frustrated, deprived and ever-growing underclass. That scale of inequality which we now endure was not inevitable. It was a choice -- something consciously created. Other industrialized countries made different choices, and created different social orders. In the space of a generation, we have turned the United States of America into the inequality capital of the advanced world. Through Washington's enthusiasm for business deregulation -- especially deregulation in relation to finance, outsourcing and off-source tax havens -- we have turned an economy whose wages were once the highest in the world into an economy based on low-wages, long working hours, and high levels of personal debt; and we have turned the greatest creditor nation in the global economy into the greatest debtor one. We have made a terrible choice.
We cannot design further economic strategy on nostalgia for an imagined (and imaginary) golden past. Nor can we deal with the enormous economic and social problems of the 21st century so long as we remain trapped in the mental furniture of the nineteenth. Free-market capitalism is long gone, and will not return. So if we want an economy, structured as ours now really is (and not as how we ideally imagine it to be), if we want an economy that will serve the interests of all Americans and not just those of its privileged elites, we have to recognize that the major barrier to the successful reconstruction of the United States is the income inequality with which it is now scarred, and the anti-democratic sentiments locked away in the call for business deregulation and the pruning of what is already -- in comparative terms -- a very thin welfare net. We have to recognize that, and do something about it.
Doing something about it does not involve electing a Republican President and his ultra-conservative friends. Doing something about it involves reelecting Barack Obama, and making his second term the launching pad for a genuine New Deal.
These arguments are developed further in David Coates, Making the Progressive Case: Towards a Stronger U.S. Economy. New York: Continuum Books, 2012
First posted with full citations at www.davidcoates.net.
Follow David Coates on Twitter: www.twitter.com/coatesdavid