Notable Book of the Year 2016 – Saving Capitalism

“I believe that if we dispense with mythologies that have distracted us from the reality we find ourselves in, we can make capitalism work for most of us rather than for only a relative handful.”

tl;dr

Repeating what I wrote in my Goodreads review. If you’re reading one non-fiction book this year, it should be this one.

Cold winds of change are blowing across the world. One cannot but think gloomily about our future in the midst of revanchist tendencies simultaneously and organically emerging in countries otherwise different in almost every aspect – think of the UK and the Philippines. There is no one grand overarching thesis that I think describes why all these countries are turning to the Dark Side. That would be ambitious or worse, disingenuous.

Being from India though, it is often surprising and a tad chilling to see the very beacons of “progress” and “development” (the quotes offered because their connotations vary wildly) turning their backs against the same ideals they held up to us for over decades now. Globalization is a doctrine that was developed when the benefits of fair trade and free mobility of labor and capital was seen as an essential step towards progress. When emerging countries resisted components of this policy it was the developed world that reminded us of its supposed virtues.

Similarly, despotic or xenophobic regimes were assumed to be signs of immaturity. In a democracy it was hoped that a combination of institutions and experience (and guidance from Paternalistic States) would push these backward tendencies away. There were other lessons that were offered not least of which were the benefits of unfettered markets, of intellectual property rights, of balanced budgets and what not1. Francis Fukuyama’s End of History hypothesis was a symptom of the optimism that liberal democracy would soon take over the world.

It didn’t. Clearly.

So what went wrong? Many say that the benefits of trade were oversold – while the economics behind it was solid it was based on giving adequate compensation to the losers (implicitly or explicitly). Some say that a productivity decline and the probable future absence of new inventions (of the order of the telephone) imply that growth in the developed world may never be the same. Others talked about a skill mismatch as technology demanded a more skilled workforce and rewarded these workers with higher wages.

Whatever it is, the ground facts are distressing and are routinely reeled off, by Left and Right. To quote one common example, a slow down in median household wages in the US means that, after adjusting for inflation, the levels were lower in 2013 than they were in 1989.

This is where Saving Capitalism comes in. I had ordered the book for the IIM Ahmedabad library last year (I wonder if anyone read it after me). The book arrived late and convocation was around the corner. I could only manage to get through 75% of it and, with a heavy heart, returned it to the library.

That was until I got my PhD admit at Columbia, and to say thank you to friends and professors (the intersection is pretty high), I was back in the institute in June. I finished the rest of the book in under an hour at the KLMDC makeshift library. I’ve been meaning to review the book ever since.

The fundamental thesis of Saving Capitalism is that capitalism is under threat from the concentration and subsequent abuse of market power. It starts with a simple and persuasive argument that is difficult to deny. Can markets exist without the government? Surely not, the government sets the rules of the game and offers protection to its participants. But that’s what people are told. The simple and erroneous dichotomy offered to most people is that it’s government versus free markets. That’s problematic in several ways.

“Government doesn’t “intrude” on the “free market.” It creates the market. The rules are neither neutral nor universal, and they are not permanent. Different societies at different times have adopted different versions. The rules partly mirror a society’s evolving norms and values but also reflect who in society has the most power to make or influence them.”

Reich, a professor at UC Berkeley, spends chapter after chapter describing how concentration of market power has weakened the better angels of capitalism. It’s pretty persuasive and the data he presents is uncomplicated yet revealing.

It is important to note at this point that the intuition offered by the basic economics most of us learn is often not sufficient to understand real life. In other words, it’s too simplistic. Consider this example: for years the idea of increasing minimum wages at the Federal or State level was taken to be taboo. The argument, as some of you may say, is that if you artificially increase wages, this price floor will lead to lower overall employment in the labor market – firms will hire less.

But that understanding is dangerously incomplete. In a now seminal paper in 1994 by David Card and Alan Krueger, a natural experiment found that employment does not fall when the minimum wage is hiked. The reason? The leading answer to this is believed to be a monopsony. Buyers of labor are concentrated and therefore they have the market power to artificially push down wages in the labor market. A mandated wage hike therefore, in a sense, remedies this situation2.

So that’s market power. It distorts the incentives in the market and can lead to a loss in welfare. Reich argues that this concentration hasn’t happened naturally. It is the result of decades of lobbying activities that have ensured that legislation does not curb the excesses of companies – allowing for only two players, for example, in cable; or letting patent laws being ridiculously generous. You can read more on this here. Another interesting discussion is on the argument that you get paid what you deserve.

“Yet the notion that you’re paid what you’re “worth” is by now so deeply ingrained in the public consciousness that many who earn very little assume it’s their own fault.”

It’s a smooth read. The last part deals with what Reich calls countervailing forces. In other words, unlike what many of my friends complain about in books like these, he actually offers solutions to remedying the situation. Admittedly, this part reads a bit optimistically; some suggestions ring a bit hollow with the recent election results but others are thought-provoking.

However, this book is your best bet to assess and analyze the state of an important developed nation. It gives you cues to understand and predict what’ll transpire in the coming five years. In many ways, Reich was prescient about what came to be…

You’ll struggle to find a shorter and crisper book that does that.

Other reviews

I am listing just the one by Paul Krugman which offers a more informed history of the conditions leading to, as he sees it, the mess we are in today. Also, on how Robert Reich changed from writing a book offering optimism and bullishness in the 90s to downright despairing in this book.

1. I have disagreements with many of these points but they are nuanced. There is great virtue in having a market for goods and commodities but is it necessary or even desirable to have markets in healthcare or primary education? We need strong contract and property rights but how do you ensure that these rights are not in favor of those who can manipulate them? Expect more rigorous discussions on these topics in the coming months.

2. In case you’re wondering about the viability of a 25 year old study, here’s a recent one that compares the performance of minimum wage increases in 18 states in the US. The results are the same. By and large, what we do know is that there is no negative effect on employment. Studies over the past two decades have encouraged governments to implement minimum wage laws in over a dozen countries.

(Quiz: So what does NREGA do well and how is it different, not necessarily in a wrong way?)

(This is third in a series of 5 posts on the best books I read through the year 2016. The last one was on comic books/graphic novels and one before was an Autobiographical work. The next in this series include fiction and science fiction novels! Follow me at hamstersqueaks.blogspot.in)

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