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The Capitalist Illusion
"The Economy, Stupid," read the famous sign that James Carville posted in Bill Clinton's Little Rock campaign headquarters in the 1992 presidential race. It was a reminder to the campaign team that they needed to focus on the weakness of the economic recovery under their opponent, President George H.W. Bush. Both before that election and certainly since, many presidential campaigns have been decided by voters' perceptions of the strength or weakness of the economy. Donald Trump's surprising victory in 2016 had much to do with a large segment of the electorate believing that the economy under Obama had failed to generate the kind of growth that they expected. Even some voters who were willing to credit President Obama with rescuing the economy from free fall at the time of his inauguration were worried that Hillary Clinton was unlikely to do well in generating good jobs and increasing real wages. A lot of voters believed that Donald Trump's business success would make him a more effective economic manager than his opponent.
While views about the health of the economy really matter for politics, so also do beliefs about what kind of economy we have, how it works, and what policies might strengthen or weaken it. Today, virtually everybody — left, right, and center — believes both that our economy is capitalist and that the economy is autonomous, coherent, and regulated by its own internal logics. Many go to the next step and embrace the idea that if we pursue policies that conflict with the imperatives of capitalism, they will inevitably backfire and produce slower growth and fewer jobs.
Here is the problem. For years now, voters have cast their ballots for the candidate they think will manage the economy more effectively, but they are almost always disappointed by the results. Disappointment occurs because presidents and their advisers believe that because we have a capitalist economy, our policy options are extremely constrained. Whatever ambitions a newly elected president has when he first arrives at 1600 Pennsylvania Avenue, he pretty soon discovers that there is no set of legitimate policy tools that can deliver what the public wants because of the constraints of capitalism.
And so our politics have been caught in a loop that alternates between center-left Democrats and increasingly extreme Republicans, none of whom have been able to make good on their economic promises. Meanwhile, much of the electorate remains convinced that the nation is headed in the wrong direction. It now seems inevitable that a disappointed public will turn against whoever is in the White House; the only question is how soon that disillusionment will set in.
There is, however, a way out of this cycle of raised hopes followed by disappointment, and it involves challenging the received wisdom that capitalism operates according to its own inner laws. My title, Capitalism: The Future of an Illusion, is borrowed from Sigmund Freud's 1927 The Future of an Illusion. The illusion that Freud was challenging was religion; he argued in that book that religions tell made-up stories that address some of the primal psychological conflicts of human existence. At the time, Freud's title offended many, but today, it is far more radical and disturbing to suggest that capitalism is an illusion. After all, profit-oriented firms own and control most of the world's productive capacity. Why would anybody suggest that a label that is so obviously appropriate is, instead, an illusion?
Here, Freud is a useful guide. In describing religion as an illusion, Freud did not imagine that it was inconsequential or unimportant. He knew that people's religious beliefs shaped their actions; he wrote his book shortly after World War I, when millions had died at the front imagining that they were fighting with God on their side. Moreover, Freud was keenly aware that religious teachings were linked to puritanical attitudes toward human sexuality that he viewed as psychologically destructive. In a word, Freud was insisting that religion was both extremely important and an illusion.
My argument is parallel to this. The widespread belief that we live in a capitalist society is enormously consequential. But many of the stories that people tell us about the nature of capitalism are myths comparable to the biblical story of the Garden of Eden. The project of this book is to debunk the view of capitalism that has become hegemonic. Dispelling this illusion will open up possibilities for political and economic reform that exist now only on the margins of contemporary political debate.
Deep political crises in both the U.S. and Europe indicate the urgency of opening up space for major reforms. Trump's unprecedented election is a symptom of how badly the U.S. political system is broken. It is the first time since 1940 that a political outsider was able to win the nomination of one of the major parties, but Trump is a far more troubling outsider than Wendell Willkie. Trump won his party's nomination because a majority of Republican voters were in open revolt against the party establishment. His populist rhetoric against immigrants and free trade deals and his promise to "make America great again" resonated with voters. During the same primary season, Bernie Sanders's populist challenge to Hillary Clinton was also far more successful than most observers had expected. Even though Clinton ultimately prevailed, the resonance of Sanders's attacks on the millionaire and billionaire class also indicated deep currents of discontent among voters.
John Judis has recently linked the populist insurgencies led by Trump and Sanders to similar patterns in European politics. Because of the differences in the electoral systems, the European challengers tend to come from outsider parties, but Judis shows that populist parties of the right and of the left have been gaining support in many countries of Europe, while support for the traditional mainstream governing parties has been eroding. The right-wing populist parties include the United Kingdom Independence Party, the French National Front, the Danish People's Party, and the Alternative Party in Germany, while the leftwing populist parties include Syriza in Greece and Podemos in Spain.
Judis and other observers argue that the recent successes of these populist insurgencies are due to the economic difficulties that the U.S. and Europe have experienced since the global financial crisis of 2008. Mainstream parties have insisted for years that a global economy based on free trade and free capital mobility would lift all boats and assure ever-rising standards of living. Yet the public sees instead rising levels of unemployment and underemployment, stagnant incomes, and greater economic uncertainty. Their votes for these various populist insurgencies are a signal to the leaders of the establishment that something is very wrong and that something must be done.
But the messages of these protest voters are not getting through. In Greece in 2015, an angry electorate put Syriza, a newly formed leftist populist party, in charge of the government. But in negotiating a new financial aid package for Greece, the leaders of the European Community told the new government that it had to ignore the voters. The European leadership insisted that Greece continue the same cruel austerity measures that had led the electorate to revolt in the first place.
To be sure, Greece is an extreme case. But for years now, highly respected economists have been saying that in both Europe and the U.S., governments should take advantage of historically low long-term interest rates to make major investments in new infrastructure spending as a way to revive these weak economies. Big government investments in infrastructure would put some people to work, might stimulate greater private investment, and could assist the fight to ameliorate the ravages of climate change. And yet this increased infrastructure spending has not happened. Centrist, center-right, and hard-right political leaders have worked together to block increased infrastructure spending.
How do we explain this? When voters everywhere are turning to populist protest candidates, the job of mainstream politicians is to do something to reduce voter discontent. That is certainly what happened in the United States in the 1930s. When faced with a threat from socialist and communist movements on the left and populists such as Huey Long and Father Coughlin on the right, Franklin Roosevelt and congressional Democrats carried out the ambitious legislative reforms of the New Deal. And in the period right after World War II, centrist politicians in Europe threatened by strong left-wing movements carried out sweeping reforms that included a significant expansion of the state's role both in managing the economy and in providing various forms of social insurance. However, this most recent period of populist agitation has produced no comparable experimentation with bold reforms.
One would think that there would at least be extensive debate and discussion of major reform measures that might restore economic prosperity. But that has not happened. Aside from some discussion about more spending on infrastructure, there have been very few bold ideas to revitalize the European Community or accelerate growth in the U.S. economy. And despite his election rhetoric, once in office, Trump has simply followed the familiar Republican agenda of steep tax cuts for corporations and the rich. At the very least, one might expect that the parties that are out of power would be debating these kinds of reform ideas in the hope that voters would turn to them in the next election, rather than to the protest parties, but such new thinking is largely absent on both sides of the Atlantic.
One standard explanation for this policy inertia is that mainstream politicians in all of these countries have become so tightly intertwined with entrenched business interests that they are unwilling to entertain any ideas that might threaten those powerful economic elites. But business interests are not highly unified; many business leaders are also unhappy with the poor performance of the global economy in recent years. Many large firms, for example, would benefit enormously from greatly increased public-sector infrastructure investments. In fact, even in the U.S., there are signs of business interests lobbying for such expenditures. In earlier reform epochs when political leaders were pressured by populist revolts, they found ways to shape a reform agenda that business leaders could live with.
But it is not so easy to dismiss the role of far-right business interests in the U.S., such as the extremely wealthy Koch brothers. They have organized right-wing billionaires and millionaires who espouse an extreme anti-state ideology. Through campaign funding and think tanks, this group has gained extraordinary influence over the Republican congressional delegations, and they have been able to block even relatively modest reform ideas that violate their "small state" beliefs. However, this does not explain the caution of the Democratic Party establishment, and Europe by and large does not have groups analogous to the Koch brothers' network.
A more persuasive argument focuses on the specific influence of one sector of the business community — the financial sector, which has grown enormously over the last thirty years. Bankers have long been the upholders of economic orthodoxy; they almost always oppose deficit spending by governments and any significant changes to the status quo. Moreover, we have seen recent examples of center-left governments that were strongly supportive of financial interests. Bill Clinton's administration (1993–2000) and Tony Blair's New Labour government in England were notorious for their solicitous approach to financial firms on Wall Street and in the City of London.
In tracing out the linkages between financial interests and establishment politicians, the most useful idea is that of "cognitive capture." It is not just personal connections and campaign contributions that make political leaders beholden to financial interests. The core problem is that most politicians, including "populists" such as Trump, have adopted the same beliefs about how the economy works as the financial community. It is as though they all went to school together and read the same books, so they share the same belief system. This means that bold reforms of the existing system are automatically ruled out as irrational and counterproductive.
But what are the actual ideas that have cognitively captured the minds of these political leaders? This is precisely what I am calling the capitalist illusion. Both elites and the wider public have come to believe that given the nature of capitalism, all that can be done to stimulate growth is to balance government budgets, cut regulations, and rely on central banks to expand the money supply. Any more radical reforms are rejected in advance because they are allegedly incompatible with the nature of capitalism.
This cognitive capture occurs because of the formidable power of finance, direct linkages between politicians and wealthy donors in the financial sector, and a decades-long campaign to convince everyone that capitalism is an internally coherent and unchangeable system. In short, political elites have been extraordinarily passive in the face of growing populist discontent precisely because they are in thrall to these capitalist illusions, which rule out consideration of reforms that could potentially revitalize weakening economies.
Reversing this cognitive capture could not be more urgent. As long as political and business elites imagine that they are powerless because capitalism cannot be changed, we face a replay of the 1930s, with dangerous authoritarians seizing power and unleashing the threat of another world war. But this danger can be averted if large segments of the public and some of these elites are able to recognize our collective ability to carry out bold reforms that could, once again, produce an economy that meets the needs of the citizenry. This is the argument of the present book.
Since cognitive capture looms so large, the focus of this book is on the definition of capitalism that prevails on the center and the right of the political spectrum. But the story is complicated because the term "capitalism" was basically invented and popularized by the socialist left. However, key aspects of that leftist definition have been appropriated by mainstream thinkers. So, for example, the idea that capitalism cannot be effectively reformed was central to the writings of Karl Marx, Friedrich Engels, and many later Marxists. They insisted that the only way to overcome the evils of the existing order was to replace it with something radically different — socialism. Now, however, it is writers on the center and the right who argue that we have to accept the negative aspects of the current system precisely because the only real alternative is socialism, which, they insist, would mean accepting a much diminished standard of living.
As I seek to debunk the capitalist illusion, it would be too confusing to weave in the story of the complex ways in which thinkers on the left and on the right have influenced each other's formulations. Instead, my plan is to concentrate on criticizing the understanding of capitalism that prevails among thinkers in the center and on the right. In the afterword, I address some of the illusions about the nature of capitalism that are held by some on the political left.
THE NATURE OF THE CAPITALIST ILLUSION
When I describe the capitalist illusion and its principal components, they will not all be immediately recognizable. These are not the kinds of claims that one puts on bumper stickers or that candidates shout out on the campaign stump. They are, rather, like the hidden part of the iceberg that lies submerged and invisible under the water's surface. They are the unstated assumptions and beliefs that are necessary to support the familiar rhetoric about economic policy that dominates our political debates. It is precisely because they are not readily visible that it takes a whole book to identify and challenge these illusions.
The core illusion is the idea that capitalism is a system that has its own logic and rules that must be obeyed or we risk losing the material well-being that has been achieved to date. It is also believed that this system has been largely stable for at least two hundred years. Most definitions of capitalism are explicit in defining it as a system in which owners of private property compete on markets to make profits, with the consequence that firms have strong incentives to become ever more efficient. But this now hegemonic understanding of capitalism includes four implicit corollaries that are responsible for the illusion of unity, coherence, and permanence.
Excerpted from "Capitalism"
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Table of Contents
1 The Capitalist Illusion 1
2 Elaborating an Alternative 28
3 The Illusion That Democracy Threatens the Economy 60
4 The Illusion That Greed Is Good 86
5 The Illusion of an Unchanging System 116
6 The Illusion of Global Order Organized by Capitalism 146
7 Beyond Illusions 176