February 9, 2016

Saving capitalism (Robert Reich)

Some time ago I wrote about economist Richard Wolff's book Democracy at work. A cure for capitalism in which he argued that capitalism is inherently threatening to democracy and that a fundamental change is needed in the direction of Worker Self-Directed Enterprises (WSDEs) which would be an alternative to capitalism (read my explanation of this argument here).

While I found the book interesting, I wasn't convinced that capitalism should be replaced. Now, there is a book by another economist, also one who is very critical about current day capitalism and concerned for the protection of the democracy, Robert Reich. The book is called Saving Capitalism: For the Many, Not the Few and it argues not for the replacement of capitalism but for its rescue.

Like Wolff, Reich is very concerned about the rising inequality in the US, and about the threat to democracy which the power of big corporations and billionaires pose. Yet, he says, these problems do not arise from capitalism as such but from the way the rules of the capitalistic game or set. Problems which now exist can be solved by changing the ways in which the market is structured. Instead of saying that capitalism is inherently wrong, he says it has be defined and structured in such a way that it supports the majority of the people, instead of the wealthy elite. He is optimistic, too, saying: "Time and again we have saved capitalism from its own excesses. I am confident we will do so again."

An central argument he makes in the book is that it is mistaken to believe that the market and government are completely separate entities and that government should interfere as little as possible with the market so as to not distort it. He explains that this view is completely wrong. In order to have markets function, government needs to make definitions and decisions about five types of things: (1) property: what can be owned, (2) monopoly: what degree of market power is permissible, (3) contract: what can be bought and sold and on what terms, (4) bankruptcy: what happens when purchasers can't pay up, and (5) enforcement: how to make sure no one cheats on any of these rules.

As Reich explains, the market is a human creation and we should design it in such ways that it works best to serve societies as a whole. How it is designed determines the level of economic inequality there will be and how much of a threat to democracy there will be.

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