Keeping supercapitalism from spilling over into democracy is the only constructive agenda for change

By ROBERT FRANK NYT: October 21, 2007

In “Supercapitalism,” Robert B. Reich argues that the current political debate in the United States is drowning in misdirected moral outrage. We cannot hope to solve our problems, he says, without first understanding the forces that have caused them. Reich, a public policy professor at the University of California, Berkeley, and formerly President Clinton’s secretary of labor, 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.”...

“Supercapitalism” is a grand debunking of the conventional wisdom in the style of John Kenneth Galbraith. Like Galbraith, Reich will draw fire from economists for some of the details of his argument. I think he misses the mark, for example, in saying that economies of scale are less important than in the 1950s. Now, as then, giving consumers more product variety means smaller production runs with higher unit costs. And because wealthier customers demand greater variety, production runs are indeed often smaller than before. But firms can still cut their unit costs by expanding their markets, just as in the 1950s, and heightened competition creates more pressure than ever to do so... Robert Frank, an economics professor at Cornell University, is the author, most recently, of “Falling Behind.”