"Invisible Handcuffs"

Robert Frank reviews Robert Reich's "Supercapitalism: The Transformation of Business, Democracy, and Everyday Life" [first chapter]:

Invisible Handcuffs, by Robert Frank, NY Times: ...The supply of moral outrage is limited. When we aim it at the wrong targets, we squander a valuable resource. In “Supercapitalism,” Robert B. Reich argues that the current political debate in the United States is drowning in misdirected moral outrage. ...

Reich ... is quick to concede that rising inequality, environmental degradation and a dysfunctional health care system are problems worth worrying about. But he argues that social critics are wrong to attribute them to increased greed and corruption. Today’s corporate and political leaders are no different, he says, from their earlier counterparts. What has changed is that new technology has made the economic environment dramatically more competitive.

As Adam Smith first described clearly, individuals who pursue only their own narrow interests in a competitive system often inadvertently create widespread social gains. But not always. Unlike many of his modern disciples, Smith was keenly aware of the invisible hand’s limitations. Individual and social interests often diverge, he realized, and in such cases, greater competition makes matters worse. If a firm can cut costs by removing the filter from its smokestack, for example, it will feel greater pressure to do so when competition intensifies.

If our social ills are indeed rooted in increased competition, our only recourse, Reich argues, is to change the rules. Denouncing greed is simply wasted energy. If we want less inequality, we must make taxes more progressive. If we want cleaner air and water, we must adopt more stringent environmental laws.

Reich’s narrative begins with his account of the “not quite golden age” — roughly, the three decades following World War II — in which limited competition enabled large companies to earn high profits. High profits, in turn, enabled unions to bargain for high wages and benefits. Legislators, who were less influenced by corporate cash in those days, passed laws in the public interest.

Things changed when the Internet and other new communications and transportation technologies enabled the economy’s most able producers to extend their reach. Many established firms were swept away.

At about the same time, financial deregulation increased the influence of capital markets on corporate behavior. Wall Street’s message to chief executives was “Slash your payrolls or we’ll buy your company and hire someone who will.”

Reich notes that consumers and investors have profited handsomely from these developments. Wal-Mart may offer its employees low wages and benefits and squeeze its suppliers to do likewise. But it also offers extremely low prices. Investment managers may pressure corporations to lay workers off, but they also generate robust returns for their clients.

As citizens, however, we have fared less well. Competition has driven salaries of the best performers in every sector to unparalleled heights, while the incomes of all others have stagnated. Today’s more competitive environment has also made it harder for us to insulate ourselves from risks, especially those related to health and employment security. ...

Why hasn’t government stepped in? Again, Reich fingers greater competition as the culprit. Once some companies discovered they could gain an edge by influencing government decisions in their favor, rivals had little choice but to join the fray. And once some candidates began altering their votes to attract contributions, others faced strong pressure to follow suit. Reich documents in lurid detail the explosive growth of corporate lobbying expenditures and campaign contributions since the 1970s. ...

The only remedy, he concludes, is to purge corporate cash from the political system. This, of course, will be a tall order. ... “Keeping supercapitalism from spilling over into democracy,” he writes, “is the only constructive agenda for change.” ...

Reich will draw fire from economists for some of the details of his argument. ... But ... Reich’s argument is right on target. Those who seize their opportunities in highly competitive environments tend to survive and prosper. “To confuse greed with opportunity,” he writes, “is to confound desire with availability.”

It’s often useful to get angry when things aren’t going well. But moral outrage is counterproductive unless directed at the right targets. By focusing our attention on those who continue to block effective campaign finance reform, Reich shows that he can spot a worthy target when he sees one.