January 16, 2012

Supercapitalism by Robert B. Reich

Supercapitalism by Robert B. Reich
The transformation of business, democracy and everyday life
[Scholarly book that tries to answer few tough questions]

Milton Friedman reiterated his long-held belief that free markets were a necessary precondition to political freedom and sustainable democracy. Yet as we have seen over the past several decades, particularly in Southeast Asia, democracy may not be essential to democracy. Democracy means more than a process of free and fair elections. Democracy is a system for accomplishing what can only be achieved by citizens together with other citizens - to determine the rules of the game whose outcomes express the common good. Capitalism has become more responsive to what we want as individual purchasers of goods, but democracy has grown less responsive to what we want together as citizens.

Since the 1970s this all has changed radically. Large firms became far more competitive, global and innovative. Something I call Supercapitalism was born. In this transformation we in our capacities as consumers and investors have done significantly better. Consumer power became aggregated and enlarged by mass retailers like Wal-Mart that used the collective bargaining clout of millions of consumers to get great deals from suppliers. Investor power became aggregated and enlarged by large pension funds and mutual funds which pushed companies to generate higher returns. But the institutions that had negotiated to spread the wealth and protect what citizens valued in common began to disappear.

Why CEO pay has soared into the stratosphere and what prevented it from souring before. Why inflation less of a threat than it was three or four decades ago? Why antitrust laws are less important today as a means of restraining economic power than they were previously. Why there are many lobbyists in DC than three decades ago?

Companies of all sizes are competing more vigorously than before. The world economy contains far fewer oligopolies than it did decades ago. The power and the impetus that once came from the giant corporations’ are gone. Deregulation for example, unleashed many of America’s industries. Variously dubbed ‘neoliberalism, neoclassical economics, neo-conservatism or the Washington consensus, these precepts included free trade, deregulation, privatization and in general more reliance on markets than on gov. and more concern for efficiency than equity.

Large firms (e.g. Wal-Mart) are not brutally insensitive or ruthlessly greedy. They are doing what they are supposed to do, according to the current rules of the game - giving their customers good deals and thereby maximizing the returns to their investors. Just like players in any game, they are doing whatever is necessary to win. Personally I’d be willing to sacrifice some of the benefits I get as a consumer and investor in order to achieve these social ends - as long as I knew everyone else was, too.

Roughly between 1945 & 1975, America struck a remarkable accommodation between capitalism and democracy. The economy was based on mass production/ Mass production was profitable because a large middle class had enough money to purchase what could be mass-produced. Before that period too productivity surged. An economic resolution on this scale inevitably had large social consequence. Supply outran demand, leading to sever depression that jolted much of Euro & US in 1873. With silver far more abundant than gold, this would inflate currency values and thereby shrink the debts. Manufactures on both side of the Atlantic wanted higher tariffs to protect from foreign imports (Only Britain whose advanced manufactures were the primary beneficiaries of free trade, decline to raise its tariffs, resulting in what were seen there as German and American ‘economic invasions’)

As America and every other manufacturing nation began scouring more backward regions of the globe for potential markets, the term ‘imperialism’ entered common speech. Britain and Germany equated their economic prowess with their nation’s global spheres of influence. J.A.Hobson - a British Economist - predicted the logical endpoint of such competition: Businessmen opt for war when they have exhausted their home markets.

The size of massive enterprise and their market became almost impregnable for smaller firms that might wish to enter the market. Of the Fortune 500 largest corp. in 1994, more than half founded between 1880 & 1930.These giant corp. of mid-century America necessarily possessed vast discretion and economic power.

Starting in the mid 1970s, the large oligopolies that anchored the American system began to teeter. Technologies have empowered consumers and investors to get better and better deals. Entry barriers collapsed at an accelerating pace. Today low costs can be matched by many potential rivals who don’t produce in large scale. They use software to do their billing, procurement and inventory controls, rely internet for customer service and depend on internet auctions to subcontract production to the lowest-cost and most reliable bidders.

By the late 1970s, the defense dept was underwriting 70% of the R&D fund’s of the nation’s aircraft industry. Look back on many other high technologies that took flight in the last decades of the 20th century, you will see similar patterns. US Gov provided half the R&D funding of the nation’s telecom industry - fiber optics, satellites, etc. University research extended discoveries and entrepreneurs developed it further. Small businesses were founded. Niche market discovered. Within a few years, the entire economy began to shift. Within two or three decades, a new economy was replacing the old.

Three developments bear particular mention.
1. Globalization
2. New production process
3. Deregulation
All these hastened the demise of economies of scale and the mid-century of democratic capitalism.

When Wall-Street analyst’s recommendation changed from buy to sell, the odds increased by nearly 50% that CEO would be fired within the following six months. The impact of such downgrades on CEO tenure was even greater than the impact of declining profits or even falling share prices. CEOs are turning over a faster clip and a record number of are being forced out.

The road to Supercapitalism began with technologies that emerged from the Cold War - containers, cargo ships and planes, fiber-optic cables, Satellite communications... They allowed the creation of global supply chain. they also spurred the commercial development of computers and software that could produce items at low cost without large scale and eventfully distribute services over the Internet. All this shattered the old system of large scale production and dramatically increased competition. Together emerging technologies and financial deregulations opened the way for investors to put their savings into giant mutual funds and pension funds that pressures companies for higher returns. CEOs who delivered were generously rewarded.
Finally intensifying completion for consumers and investors put pressure on companies to cut payrolls, hitting unionized workers especially hard. Power shifted to consumers and investors. Supercapitalism replaced democratic capitalism.

Intensifying competition for us as consumers and investors has made the entire economy more productive. In order to be successful, CEOs and financiers have had to move money, machinery, factories and other assess to where they can be most valuable. And of course, they have moved, demoted or promoted or laid off million people.

[The rest of the book goes over these topics in very detail and followed by author’s recommendation as a citizen to reduce the impact of Supercapitalism for goodness to the citizens. Currently American companies are benefited, not the American people]

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