Capitalism Will Not Be Saved
Liberal progressives like Elizabeth Warren understand many of the problems with modern capitalism, but their loyalty to capitalism prevents them from being able to solve them.
I am in the process of writing what I hope to be the first of many published papers on regulation: how predominant ideas of regulation are either empirically flawed or ethically horrific, and are at the heart of the inability of the United States to reconcile a capitalist economy with a democratic political system. It will be, if you will, hella wonky. It has to be unfortunately because our federal bureaucracy and regulatory scheme is ridiculous and if you cannot show specifically how you will change it, you might as well be making a vision board (which I do, when I’m not writing about regulation, because I’m basic).
But I strongly believe that any Leftist theory should be able to be reduced to a formulation that does not require a law degree to understand, challenge, and debate. We all have brains that are capable of complex thinking — that seems to me to be a basic premise behind democracy. So as I write this hell-paper with stochastic word-vomit, I also will write blog posts to explain, minus statutory schemes and systemic risk algorithms, why the way regulation is thought about is wrong and what alternative should be put forward by the Left.
This post will focus on the theory that has most shaped U.S. regulation throughout the country’s history and especially after World War II. While there are many commonly used terms for the economic philosophy behind this theory of regulation (from “free market” to “classical liberalism” to “neoclassical”), there are not many for this theory of regulation. I believe the reason why comes from a major misconception that theories of regulation neatly divide along the two-party U.S. political system: Democrat regulation and Republican regulation (or liberal regulation and conservative regulation). This is not true: most regulation in the U.S. is based on the same basic theory, regardless of whether a Democrat or Republican is behind it (the far-right of the Republican Party does have an alternative minority theory which I will cover in a later post). This theory was at the roots of the Affordable Care Act as much as it was at the roots of Medicare Part D.
I call the theory behind the majority of U.S. regulation “Market Facilitation Theory.” I chose this name because it describes succinctly the aim of regulation under this theory — to facilitate the capitalist market. This facilitation is both about basic mechanics (i.e. enforcing contracts) and about “guiding” the market to conduct that society wants. Ironically the “guiding” regulations are premised on an idea that contradicts the very need for the mechanic regulations: that the market is natural and social welfare can only be created through it.
The market (by which I mean the modern capitalist economic system) is not natural and is fairly new in human history. Before capitalism, markets were recognized as being at the whim of both the government and society in general. “Where markets did exist in pre-market societies,” writes Ellen Meiksins Wood in The Origin of Capitalism, “even where they were extensive and important, they remained a subordinate feature of economic life, dominated by other principles of economic behaviour...state regulation continued to prevail over competitive principles.” Later, in the 17th century and through the 19th century as capitalism began to develop and establish domination across the globe on the back of European colonialism, the idea of “free markets” was generally in the minority, if not outright rejected.
Mercantilism was generally accepted as the theoretical norm during this time. Mercantilism is the belief that capitalists and markets are subservient to national interests. Imagine that Trump’s vapid promises to working class people about getting fair trade deals and jobs for America were actual policy — that is mercantilism. Mercantilism was first seriously challenged by a book called The Wealth of Nations by Adam Smith. Contrary to some revisionist ideas about the book and its author, Smith did not espouse the kind of radical anti-government capitalist ideology of a Ronald Reagan or Cato Institute or Koch Brothers. His formulation of the “invisible hand” was simply an assertion that elements of the market act to regulate other elements of the market. And most notably for our purposes here, Smith was also an avid believer in what I call Market Facilitation Theory. Smith endorses dozens of government regulations in The Wealth of Nations, from requiring wages to be made in money to setting a low legal interest rate, as well as criticizing other government regulations that disrupt the market.
As Smith’s ideas about free market capitalism gained popularity, so too did Market Facilitation Theory among the governments of the world, especially the United States. It was creditors in the late 19th century who advocated for consumer bankruptcy, for the purpose of freeing their customers from debt burdens that were preventing them from buying more and thus preventing capitalists like them from making a profit. Fast-forwarding to the 1970’s, Market Facilitation Theory was adapted to the neoclassical economic and neoliberal political consensus. The civil rights of the 1960’s, and certainly the worker rights of the 1930’s, were replaced with a focus on “consumer rights.” By empowering people as consumers, as agents within the market, goals of social welfare could theoretically be reconciled with the dogma of always working within the market. Statutes like the Fair Debt Collection Practices Act expressly laid out its purpose as facilitation of the market with language like “It is the purpose of this [law]…to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged.” The FDCPA sought to so “insure” these non-abusive debt collectors through a right of private action, thus regulating mostly through market actors (with all due respect to the CFPB and FTC for what regulation they do of debt collectors).
However, neoliberalism also brought to prominence another theory of regulation: Regulatory Cost Theory. Unlike Market Facilitation Theory, Regulatory Cost Theory posited government as the “enemy,” and regulation, not as facilitation, but as per se disruption of the market, and that this disruption reduced social welfare since the market was the source of social welfare. While this Theory was championed by the far right, it did at times win support from the more conservative people in the Democratic Party. One of Regulatory Cost Theory’s victories was the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In a dramatic reversal of the Market Facilitation Theory justification of consumer bankruptcy itself, BAPCPA created a presumption of abuse for consumers filing for Chapter 7 bankruptcy. Consumer bankruptcy was redefined from a way to facilitate continued consumption in the market to a harm that government does to creditors and the ever-elusive “taxpayers.”
One of the most vocal opponents of BAPCPA was a Harvard Law Professor named Elizabeth Warren.
Warren clashed with the bill’s sponsors (including then-senator Joe Biden), trying to prevent the bill from passing. But what might surprise those who do not remember those hearings was that Warren was couching her arguments about protection of consumers in arguments about protecting the market and even creditors themselves.
The gas company doesn’t have the capacity to change its pricing to reflect these risk, or has very limited capacity…My point is the losses will go to some creditors who cannot reflect this in their prices.
Some would fairly question whether these arguments are representative of Warren’s beliefs or whether they were crafted by her to fit the concerns of the time. After all, this was pre-Great Recession, and pre-Occupy Wall Street: the Overton Window for economic justice was different then than it is now. And to some extent I agree that the arguments are a product of their time. But so too is Warren, and other liberal progressives like Robert Reich and Joseph Stiglitz who believe that they can “save” capitalism.
Capitalism is a cyclical economic system — few if any dispute that economic downturns like recessions are built into the system. Regulation is also cyclical. And the reason why it is cyclical is because of the Market Facilitation Theory that undergirds it. Take, for example, the Glass-Steagall Act. This law essentially created a firewall between banks that hold your money and the shadier and more speculative financial companies like hedge funds. It was created in the wake of the Great Depression, specifically an investigation of the crash called the Pecora Investigation. The purpose of Glass Steagall was stated as:
To provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.
The language here is typical of Market Facilitation Theory. The purpose is stated not as trying to protect the deposits of ordinary people, nor even to prevent another crash. Instead, the purpose is to steer the banks into “safer and more effective” conduct. “So what?” you may ask, “If the regulation does protect people, who cares what the intent was?”
First, the intent shapes the legislation. There’s a reason why this segregation was on the table rather than nationalizing the banks. But more importantly, it shapes the future of the legislation. Glass-Steagall’s legislative purpose dug its own grave: if it just exists to steer banks to “safer and more effective” practices, then there’s no reason for it to exist if the practices already seem safe (or even too safe) and not effective at maximizing profit. And that’s exactly why it got repealed:
To enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers, and for other purposes.
Elizabeth Warren understands most of the harms being done by capitalism, such as how the burden of student loan debt threatens to permanently depress consumption and growth for an entire generation. Her solution is certainly ambitious relative to what has existed so far: the elimination of the vast majority of student loan debt.
Let’s dream for a second that we live in the good timeline where somehow Elizabeth Warren wins and implements this policy roughly as it is currently being proposed. And after dozens of lawsuits, years of protests, and maybe the arrest of the CEOs of all the student loan servicers, it happens. Let’s even assume that the initial aftermath goes as she projects.
The best aspect of Warren’s plan is that, unlike her policies on healthcare and other issues (and for what it’s worth, previous stance on the issue), she does support college as a public and universal program. The worst part, and what would likely undo it whether it was ten or twenty years down the road, is its “pay-go” funding scheme.
Our government is not a household nor a business. It’s ability to spend is not limited by cash-on-hand because, quite simply, it controls the supply of money and can print more when needed. Instead, its spending is constrained by economic concerns and ideological dictates. It is true that government spending without proper counterbalances (price controls, financial regulation, taxation, a federal job guarantee, etc.) leads to inflation. But the balance is not 1:1 spending to taxation. The ideology that it needs to be 1:1, referred to as “paygo,” is a common characteristic of regulation under Market Facilitation Theory. “Paygo” adherents keep government regulation as a guide to the market (rather than an alternative) by netting-out the effect. Or to put it more snidely, paygo is about rearranging chairs on the Titanic.
Hypothetically, under Warren’s plan, the net immediate dollar effect of her student loan plan is $0: for every dollar being “taken” from the market (taxes), a dollar is being put in (loan forgiveness and tuition). Theoretically the behavior of the market can be changed, shifting the burden of secondary education to the wealthiest, without adding to or taking away from the value produced by the market.
We do not need to guess about how this kind of regulation pans out because the whole history of austerity provides an ample forecast. We have a clear domestic example with the City University of New York (CUNY) system. The CUNY system of schools in New York City was made tuition-free in 1964 through the City’s budget plan. That came to an end in 1976 during NYC’s fiscal crisis. The federal government under President Gerald Ford and the state government under Governor Hugh Carey, influenced heavily by financial corporations, forced the City to implement tuition. Their reasoning was simple: NYC could no longer afford it.
This reasoning was false for a number of reasons. The federal government could have (and indeed some expected it to) bailed out NYC. The loans it eventually provided in exchange for austerity measures like imposing tuition in CUNY could have been simply been provided without strings attached. And as Samuel Stein pointed out on the podcast The Dig, funding was notably not cut for the $400 million World Trade Center project (adjusted for inflation about $2.27 billion today). The reason it did not is Market Facilitation Theory — there was no way to cover the cost that did not (or at least did not seem to) do so without disrupting the sacred market. The scales had to be balanced.
None of this is to say that Warren’s plan wouldn’t be somewhat beneficial or that taxes are bad or unnecessary. Rather it is the imposed-necessity of any measure, whether it’s taxes or exemptions for competition or whatever else, to make regulation only facilitate the market and always avoid disrupting it, regardless of whether disruption would be good, that ensures eventual deregulation. When the market conditions change, capitalists will always use it as an opportunity to push to deregulate — after all, they have a legal responsibility as well as ideological disposition to maximize accumulation and profits, and those that fail it are quickly snuffed out in the ongoing war of competition.
Elizabeth Warren wants to save capitalism. With all due respect to Warren, one of the most accomplished policy advocates of our time, we should not save capitalism. It is capitalism that created the student debt crisis. It is the constraints imposed by Market Facilitation Theory, a baseless and harmful limitation to only “guiding” the market, that created the cyclical deregulation that stopped the government from protecting its people from this exploitation. Capitalism does not need to be saved. Capitalism needs to be challenged. Capitalism needs to be challenged not only by grassroots movements and politicians like Bernie Sanders but also by a new theory of regulation that will not prioritize profits over public welfare. And that is exactly what I will propose — in a later blogpost.