Instead of compensating for inequalities, liberals should reshape the markets
By Steven Vogel
For decades, liberals have called for government action to correct the excesses of the free market: progressive taxation; public health insurance; unemployment insurance; Social Security; and health, safety, and environmental regulations. The 2020 campaign — featuring proposals for higher taxes on the wealthy, Medicare-for-all, and the Green New Deal — is no exception.
But some of the candidates, Sen. Elizabeth Warren in particular, are taking a fundamentally different approach. Rather than compensating citizens for the unfortunate side effects of markets, they seek to reshape the markets themselves.
Warren’s latest idea, the “Stop Wall Street Looting Act,” is a perfect case in point. She seeks to rewrite the rules to constrain private equity firms from simply selling off assets and laying off workers in companies they invest in, and to press them to deliver more value to middle-class consumers and the economy as a whole.
This concept, which I call “marketcraft,” makes market governance a core function of government comparable to statecraft, the art of diplomacy. Governments are the architect of markets: They not only lay the foundation for markets with the rule of law and property rights, but also establish corporations, the institutions at the heart of the capitalist economy.
They foster stock markets via limited liability, disclosure requirements, and trading rules. They promote competition via antitrust policy and pro-competitive regulation. And they define the core commodity of the digital age — information — via intellectual property rights.
Thinking of government in this way opens us up to a profound rethinking of policymaking, one that is both less radical than democratic socialism — because it embraces capitalism — and more radical, because it seeks to transform capitalism from its roots.
This perspective abandons the pretense that markets are free or natural in favor of a more realistic view: The alternative to government action is not free markets, but real-world markets riddled with imbalances of power, collusion, and fraud.
Rather than trying to correct the results of these imbalances after the fact, the government should not be shy about reshaping these markets to make them work better, through measures like corporate governance, financial regulation, labor practices, and antitrust enforcement.
The New Deal was marketcraft in action
Both left and right misunderstand how governments craft markets.
Those on the right tend to argue that the government should “leave” things to the market. Yet such laissez-faire is not only undesirable — it is impossible. Modern economies rest on the foundation of government regulation. The real choices are not about whether the government should intervene in the economy but about how the government should structure markets from the outset.
Many on the left are equally confused, but in a different way. They are suspicious of market solutions because they view these solutions as undemocratic and threatening to their values. But governments can craft markets to promote whatever policy goals they choose, including progressive goals such as economic equality or environmental protection.
The recent proposals to reform marketcraft have historical precedent, beginning with the ideas of the early-20th-century Progressive movement. Proactive marketcraft became national policy under the New Deal in the 1930s. The Banking Act of 1933 separated commercial from investment banking and created the federal deposit insurance system. The Securities Act of 1933 mandated financial information disclosure, and the Securities Exchange Act of 1934 created the Securities and Exchange Commission. The National Labor Relations Act of 1935 guaranteed collective bargaining rights and prohibited employer practices that would undermine them.
These reforms enabled financial markets to deliver more value to the economy at less risk, and gave workers more bargaining power vis-à-vis their employers.
After World War II, though, liberals focused less on marketcraft and more on Keynesian macroeconomic policies, welfare services, social regulation, and equal rights amid strong economic growth. Economic thinkers such as Friedrich Hayek and Milton Friedman claimed government intervention undermines free markets. Their arguments gained popular appeal after the stagflation of the 1970s provided the opening for President Ronald Reagan and others to put these ideas into practice by loosening financial regulation, attacking union power, and easing antitrust enforcement.
Reagan’s overhauls were not really about “deregulation” in the literal sense of reducing regulation, but rather a reorientation of market rules to benefit the wealthy and powerful. The neoliberal ideology that views government as an obstacle to the free market rather than as the architect of markets became so pervasive that progressives internalized some of its core precepts even as they battled the resulting policies — proposing remedies for specific “market failures” rather than a more fundamental transformation of markets.
The Democratic Party even took a partial neoliberal turn under the administration of President Bill Clinton, which enacted NAFTA and decided not to regulate financial derivatives.
Market governance and inequality
To illustrate how the marketcraft approach differs from the more traditional liberal policy agenda, consider economic inequality, a defining challenge of our time.
As Thomas Piketty demonstrated in his magisterial work Capital in the Twenty-First Century , the United States since 1980 has experienced a historically unprecedented boom in the incomes of the top 1 percent of wage earners, mostly corporate executives, and especially the top 0.1 percent. Meanwhile, most Americans have gained little or nothing from the substantial productivity gains over this period. Piketty focuses particularly on tax policy in explaining this surge in inequality and in proposing remedies.
But failed marketcraft is at the heart of both the boom for the 1 percent and the stagnation for the rest, and better marketcraft will be essential to reversing these trends.
US executive compensation has soared as corporate governance shifted toward the shareholder model, under which managers are supposed to maximize financial returns for shareholders and not to reward stakeholders such as workers or customers. Legal and regulatory adjustments encouraged the business practices at the heart of this trend, such as stock options and share buybacks, which have not only boosted shareholder returns but also propelled skyrocketing executive pay at the cost of wages and investment.
Meanwhile, financial liberalization and lax enforcement have contributed to outsize profits and pay packages in the financial sector, which has taken up a growing share of the economy in recent decades without delivering greater value to household investors.
Changes in labor regulation and employer practices help explain the lack of gains for lower and middle-class workers. President Ronald Reagan cracked down on public sector unions and appointed more business-friendly representatives to the National Labor Relations Board (NLRB). State governments passed “right to work” laws that undermined union power by prohibiting mandatory union dues. Employers grew more combative in fighting unions, hiring specialized consultants to help them decertify the organizations. And Democrats failed in attempts to pass legislation to preserve union strength throughout this period.
The increase in market concentration across many sectors of the economy has boosted inequality by raising the gap in corporate returns and executive compensation between the superstar firms and all others, and undercut wages because dominant firms do not have to compete as much for workers. Laws governing intellectual property rights have contributed to economic inequality, as firms in sectors that rely heavily on intellectual property, such as high tech and pharmaceuticals, have garnered especially high profits and executive pay.
The more standard liberal approach would compensate for inequalities that emerge from market competition with redistribution via the tax system and social services.
The marketcraft approach would shift the focus to “predistribution” — the market rules that generate the inequality in the first place. The government could recalibrate rules in these areas to give workers a more powerful voice in corporations; to press financial institutions to deliver more value for the economy and fewer rents to themselves; to shift the balance of power between employers and workers; and to constrain market power to the benefit of workers and consumers. That would not undermine American capitalism but revitalize it.
Among the Democratic candidates for president, Warren has gone the furthest with this agenda. She proposes corporate governance reform to give labor representatives a voice on corporate boards and to constrain executives from manipulating financial returns to maximize their income from stock options. She supports labor reforms to shift bargaining power from employers to workers. She advocates more aggressive antitrust enforcement to constrain the market and political power of dominant firms. And she backs regulation to impede finance executives from seizing outsize rents for themselves and their firms, and to protect consumers from fraud.
To be clear, this isn’t a case against any of the other essential elements of a progressive agenda, such as a more equitable tax system, universal health insurance, and public investment in education and infrastructure. We need all of those things.
But progressives should embrace the reordering of capitalism as their priority. Instead of tolerating a rigged market system and then compensating workers or consumers for injustices through tax and welfare policies, a turn to marketcraft would empower them to earn fair wages and to pay fair prices from the outset.