Is There a “Capitalist System”? Part II

In part one of our response to the RTD’s claim that there is no “capitalist system,” we pointed to the fact that the institution of the market itself is a political creation, and to the power those who control capital have over the lives of workers.


We also observed that at present America’s version of capitalism distributes ownership of the means of production to a very narrow group of people. In 2004, the richest 1% of the population owned nearly 37% of all stock market holdings; the richest 10% together owned nearly 79% of such holdings. Before rushing to declare that the existing system simply reflects the natural order of things, perhaps we might consider whether it might be possible to have a market system which distributed control of capital and jobs a bit more widely.

The third point to make in response to the RTD, however, points to a different feature of our political economy. The corporations which dominate most if not all sectors of the American economy have more than just economic power; they also have political clout, and the ability to bend or alter rules in ways that favor their interests.

The enormously disproportionate voice corporate interests have in American politics and in the funding of our electoral system is well-documented; a quick summary statistic is that the pharmacetuical and insurance industries alone spent nearly $1.7 billion on lobbying activity between 1998 and 2005, compared to just $235 million for all of organized labor. (See here for more data along these lines.)

But corporations have a different kind of clout, too: because they control where and when they invest, their decisions directly impact the lives of localities. Because job creation and economic development is a top priority—very often, the top priority—in most localities, corporations have leverage over communities and local public officials seeking to attract or retain new investment.

As a result, corporate investment in the United States is now routinely subsidized by taxpayers, in the form of tax forgiveness, loans, grants, infrastructure assistance, and other subsidies. Moreover, some types of corporations are better positioned than others to receive this kind of assistance. Stacy Mitchell has provided superb documentation of how this works in the case of Wal-Mart, which has obtained countless subsidies from misguided local communities. The result, all too often, is shuttered down local businesses and dying downtowns.

Recognizing this point helps illustrate why it’s meaningful to speak of a capitalist “system.” Markets and the rules governing them (such as the laws which charter limited liability corporations and establish patent rights) are constructed politically; these rules in turn allow certain actors to flourish and secure disproportionate economic power and control over investment; that power, in turn, enhances the political capacity of those same actors to alter the rules still further, or at least to fend off challenges to their own power. In short, politics and economics are intertwined.

But that’s not all. Our fourth and final observation is that for this system to work, it has to be managed, and it has to continually grow. The economy is not simply the sum of individual, autonomous market actors. Rather, the actual economy is managed and steered by public officials—including not just the Congress which sets fiscal policy, but also the Federal Reserve which oversees the flow of money within the economy and sets interest rates. To be sure, policymakers are imperfect in these efforts, and often cannot control the underlying dynamics.

But the U.S. government, at least, has devised ways to tame those dynamics and prevent downturns from turning into depressions. Relevant tools include automatic “stabilizers” such as Social Security and unemployment insurance; the use of countercyclical fiscal policy; federal insurance of bank deposits; restricting or opening the money supply.

This is important because left on its own, unrestrained capitalism tends to be wildly volatile, oscillating between boom and bust, highly depression-prone.

It’s also important because for our system to continue to work—to continue to provide employment and income to a large number of people—it must continually grow. Standing in place—or simply saying, “don’t we have enough stuff?”—are not options.

That fact in turn has all kinds of consequences—for the environment and for the structure of our daily lives.

“So what?” you may wonder. Why take all this trouble to try to argue that there is a “capitalist system”?

Precisely because the logic of the system does shape our lives and our politics, creating some possibilities while closing off others. Moreover, the possibilities we have as individuals for making our own lives within this system depends greatly on the resources and effective power at our disposal.

Recognizing these points is important, whether one is a defender or a critic of capitalism.

Smart defenders of capitalism recognize that the system produces costs and benefits, and argue that the creative energies the system generates outweigh the costs, while looking to public policy to try to protect those most vulnerable to capitalism’s dynamics.

Smart critics of capitalism argue that mounting environmental and social costs should force a more fundamental reassessment of the system, and insist that growing corporate power and political influence and gaping economic inequalities are fundamentally at odds with democratic norms.

These are important and provocative questions that democratic publics need to debate. Even the most ardent capitalist enthusiast needs at some point to think critically about his or her views and hear the criticisms if he or she is to have more than a blind faith in the system.

Published in: on January 8, 2007 at 4:43 pm  Comments (4)  

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  1. Good stuff as always, Thad. And as always, I’m under ferocious time pressure or would ruminate at greater length on your own ruminations.

    Constraints being what they are, I’ll toss out just two points for pondering.

    (1) You write: “America’s version of capitalism distributes ownership of the means of production to a very narrow group of people.”

    (1a) How does “it” do that? I was under the impression anyone could buy stock, and it doesn’t take much more than the cost of a TV set at Wal-mart to get started. Sometimes even less.

    (1b) How do you reach the “very narrow group of people” conclusion? That is, do your figures include institutional investors? I was under the impression that the biggest single investor in the U.S. was CALPERS, the California Public Employee Retirement System. I’m sure the pension funds of a lot of large companies such as GM and GE also hold vast amounts of stock on behalf of their employees. Warren Buffett can’t begin to compete with the holdings of vested Microsoft employees, or Virginia’s VRS.

    I would wager that if you include such institutional investors, who hold stock on behalf of janitors, teachers, coders, and, er, professors and journalists, just about everyone owns some of the means of production.

    (2a) Yes, corporations spend a lot to lobby government. Some of the spending is defensive — aimed at protecting profitability (and ultimately, pensions!). Some is offensive — the rent-seeking pursuit of corporate welfare (subsidies, tax breaks, etc.), which I imagine you and I deplore about equally.

    That being said, there would be vastly less lobbying if there were a greater separation of state and economics. If more Congressmen took a principled stand against giving taxpayers’ money to agribusiness, then Archer Daniels Midland wouldn’t waste its money seeking handouts. It’s partly the blending of politics and economics that enables such influence-peddling.

    (2b) But once again, that being said — corporations aren’t alien entities standing apart from the man in the street. Tobacco is a deadly drug, but talk to folks who work for Philip Morris, and you’ll find them fiercely resentful of efforts to regulate smoking. GlaxoSmithKline and Blue Cross put food on a lot of tables, too. Lobbyists represent more than just the Merchants of Death in the corporate suite.

    (3) What the heck, I’ll toss out another question. If corporations aren’t going to decide, for instance, where they should locate and how they should invest in new plants and equipment, then who should make that decision for them? Is it to be centrally planned? Or is each of us going to have to bone up on the marketing strategies and production lines of Adidas, Bayer, Coca-Cola, Dunlop. . . .

    Just some thoughts. Keep up the good blogging!


  2. Great discussion here.

    In response to Hinkle’s IA….. There is a big difference between the theory that everyone *can* invest and the numbers showing how few people actually do invest in the stock market. The difference is in priorities. For many of us, there are many, many monetary priorities that will supersede heading over to Chuck Schwab–maybe even a TV, which delivers fast and entertaining returns on the dollar, might be one of them. Or perhaps food, insurance, gifts at the holidays, childcare, gas in the car …

    Perhaps the question goes back to the RTD’s strange “creed” which depicts rational individuals (actually, “men”) who fight some heroic battle for existence, as opposed to members of a collectivity where many choices are limited by the system/culture/political climate one is born into. Some people are born into debt and others are born into riches. Sure, with a little effort and a few hundred bucks, anyone *can* invest in the stock market. But such choices are not made in a vacuum, and today the stock market has become something of a luxury for the top half or two-thirds, and and a complete boon for the top 10 percent. Before worrying about whether or not they are able to gamble in the market, it might be more important to make sure more people have a living wage.

    Looking forward to more on the RTD’s creed…

  3. Bart and Acther–Thanks for reading and the comments/questions.

    Re 1a) Of course you’re right that anyone can buy stock, and there was a bit of a trend in the last boom towards more people owning some stock. The proportion of folks own stock directly increased from just under 15% in 1995 to just under 21% in 2004, and the proportion with indirect holdings (via pension funds) went from 30 to 44%. If you ask what percentages of households have holdings of at least $5,000, the respective percentages fall to 13.5% (direct) and 31% (indirect).

    But the proportion of people who can live off returns from their capital holdings is very small, and the overwhelming benefits even from the last boom went to the very top; the top 10% captured 77% of the growh in stock market value between ’89 and ’04, the top 1% alone captured 34.4% as a whole. It’s fair to say, I think that the percentage of people who can be full-time capitalists–making a livelihood off of investing–is quite small.

    1b) The point about institutional investors is a good one, but note that the distributon of indirect stockholdings in pension funds is also skewed towards the affluent. Households earning over $250,000 a year (2.5% of all households) have nearly 25% of all holdings tied up in pension funds and households earning over $100,000 a year (16.1% of all households) cumulatively hold nearly 70% of this stock.

    It’s also just not the case that pretty much everyone has at least some kind of stock holding. In fact, only 48.6% of households did in 2004. Most excluded are households earning less than $25,000–well under 20% of those households have any kind of holdings, direct or indirect.

    (I’m getting all this data from here:

    Nonetheless, I don’t regard the observation that institutional investors control lots of stock and that they even have the capacity to influence corporate behavior (not always benignly) as unimportant, for reasons I’ll get to below.

    2a) In theory a greater separation of politics and economics could lead to less lobbying, but I don’t regard this as a remotely plausible possibility. The corporations don’t want a libertarian state–they want special privileges: in the tax code, in trade agreements, etc.

    Moreover, the present system depends in crucial ways on politics and economics being intertwined. Two examples: the limited liability corporation charter, and the patent system, both established by government. If the government were truly hands off, it wouldn’t issue charters to corporations, but would instead force owners of businesses to be fully liable for the debts they incurred. And it wouldn’t allow Bill Gates to have a monopoly on sales of Windows. (I’m borrowing both those examples from Dean Baker’s fine little book “The Conservative Nanny State”). Corporate charters and patent protection are obviously two fundamental elements of the existing system, but they are both creatures of government.

    If we really wanted to have a separation of politics and economics, we’d do away with those special privileges. Doing so I’d venture would make us much closer to Jefferson’s vision, but I’m afraid that horse has left the barn.

    You’d also have to have a much, much smaller government, and probably do away with the Pentagon entirely, to disentangle politics and economics at this late date. Government contracts are a huge source of stable income and more-or-less guaranteed profits for corporations, and who gets those contracts is inherently a political process.

    2b) I agree that corporations do represent employment for people. In fact, that’s the source of a lot of their political clout–the fact they really do provide jobs, and most public officials want more jobs. I’d caution though that while corporations promise states and localities jobs, their real interest and responsibility is in maximizing shareholder value, not employment, and hence their interests are not the same as their employees.

    3) This is a great question and I’m glad you asked it. If by central planning, you mean a system in which government in Washington made all the investment decisions in the entire economy, no, I’d be categorically against that.

    If the goal were to reduce the conflict between corporations and communities, so that communities were not as dependent for their prosperity as they are now on the decision of private investors, I wouldn’t start on the planning end at all.

    Instead I’d start with trying to broaden ownership, and in particular to develop firms in which significant or majority stock is held by employees, community organizations, or local government. The idea here is to encourage forms of business ownership that are inherently rooted in the local community, and hence will invest locally and keep the jobs within the community. Small locally-owned enterprise obviously also fits this bill.

    I’ve written quite a bit about these alternatives in a book, Making a Place for Community (Routledge, 2002); one of my co-authors has a recent piece spelling out a progressive version of an “ownership society” which is a helpful summary of the argument:

    I also would promote having pension funds target their investments in ways which benefit local and state economies. A LOT of this is already happening; an interesting example is Alabama, where the public pension funds (Retirement Systems of Alabama) have aggressively invested in Alabama firms for over 25 years; CALPERS has done a fair amount of this too. Unions also now are using union pension funds more proactively to invest in worker-friendly firms, etc. In short, the institutionally-held capital Bart mention could play a key role in steering at least some corporate investment towards specific states or regions.

    I don’t rule out some kind of planning altogether as a tool to influence the flow of investment–we already have planning in the form of the federal government and where it locates its activities. An interesting model to think about is the military base conversion program of the 90s which last time I checked was regarded as pretty successful in helping communities hurt by base closings bounce back economically. I don’t see why we couldn’t help all communities impacted by economic downturns in a similar way. This is a form of planning, but the way it worked is the the fed gov’t set up a process and provided some funds, then allowed local actors to take it from there.

    It’s a far cry from what comes to mind when you hear the term “central planning,” but it is a form of planning and could have a constructive role if we decide we want to modify the system.

    Darn it, this comment just passed the 1100 word mark–longer than the original post. Don’t be shocked if some of it gets recycled into some future post 🙂

  4. Thanks so much for this. What a tabu subject! You probably are familiar with Karl Polanyi, but some of yr readers may not be. He does a marvelous job of showing that capitalism (and all economic systems) are very much subsets of the larger political/social/cultural system. The separation of “economics’ from moral concerns is of course a critical ideological element of capitalism.

    A few years back, I self-published a pamphlet on US history that included this comment — “Not long ago, a small but bold group of intellectuals came up with a political and economic concept. To make it work, they had to get control of the government. They had to drive peasants off their land and starve them into the cities. The power of the church had to be broken, so that old-fashioned moral teachings wouldn’t get in their way. Centralized technology had to be glorified as embodying inevitable progress. Dissidents had to be crushed when they tried to operate freely outside of the system imposed by the state.That system, of course, was capitalism.”

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