When capitalism supersedes democracy

"Inclusive growth" is the mantra in India now. The NDA government fell unexpectedly while India's GDP was reaching new heights and now the UPA government is wary of calling an election even though GDP growth has accelerated even further to 9 per cent. How can growth be both high and inclusive? Reich gives a masterly analysis of the forces that are shaping economies and societies in this century. If unregulated, they will make it inevitable that high growth will be accompanied by increasing inequality. He analyses the interplay of these forces in the US since the 1950s. The two principal forces are capitalism and democracy, both of which the US champions across the world, and against which the Soviet Empire was seen to stand. He explains the growing imbalance in the power of these forces within the US, as well as other democratic countries.

Reich is professor of public policy at the Goldman School of Public Policy at the University of California in Berkeley. He served in government as secretary of labor under President Clinton. An author of eleven books including The Work of Nations and The Future of Success, Reich is an insightful observer of socio-economic change. In 2003 he was awarded the prestigious Vaclav Havel Foundation Prize for pioneering work in economic and social thought.

Reich compares the condition of US society in two periods: 1947-1973 and 1974-2004. The first he calls the era of "democratic capitalism"; the latter an era of "supercapitalism". The earlier period was almost the golden age of the US, and the rest of the world aspired to attain the economic, social, and political freedoms US citizens enjoyed. During this period, real family incomes of all five quintiles of the population grew similarly "" the poorest-fifth grew by 116 per cent and the richest-fifth by 85 per cent. Then something began to change, and while the US economy continued to grow from 1974 to 2004, family incomes of the lowest-fifth grew by only 2.8 per cent, the middle-fifth by 23.3 per cent, and the highest-fifth by 63.6 per cent. Growth was no longer as inclusive as it had been before.

Reich points out that this fundamental shift had very little to do with which party governed the country, whether the Democrats or Republicans, but with more fundamental changes in the US. In particular, institutions that catered to the needs of consumers and investors, such as business corporations and mutual funds, grew in size and influence, whereas institutions such as unions and neighbourhood associations, which aggregated the needs of citizens, withered. Thus "capitalism has invaded democracy", he says, and while the needs of individuals and families as customers and investors are well cared for, their concerns as citizens "" such as need for social harmony, and care of the environmental commons "" are not.

The financial industry in particular has grown so large and dominant that whereas "Wall Street used to work for industry, now industry works for Wall Street", he declares. Earlier, CEOs were seen as industrial statesmen who concerned themselves with the condition of the nation. Now, woe betide any CEO who cannot meet investors' demands. The calculus of economic efficiency has overtaken considerations of social justice and, moreover, the combination of large corporations and financial markets has overwhelmed the public policy- making process. Reich points out that in 1963, the US Congress passed six of ten bills designed to reduce economic inequality. In 1991, it passed only two out of seven.

Reich is extremely sceptical of the Corporate Social Responsibility (CSR) movement. Competition for customers and pressures to satisfy investors must drive the behaviour of corporate managers: to expect otherwise is foolish. At the same time the increasing power of corporations must be directed towards ends that society desires, and this he says can be done only by regulations that are democratically framed to ensure that citizens' needs are met. Unfortunately, the power of corporate lobbies to influence legislation has become so strong in the US, he says, that citizen voices are drowned.

Reich calls for strengthening the institutions of democracy in the US that will enable citizens' voices to be aggregated and properly represented in the process of governance and policy-making. His book is very well written: his arguments are compelling and supported by ample data. Its value to citizens of democratic societies embracing free markets and capitalism, including India, is the reminder to build and strengthen our institutions of democracy that will serve our needs as citizens, and stabilise our society against the global onslaught of supercapitalism.

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SUPERCAPITALISM
THE TRANSFORMATION OF BUSINESS, DEMOCRACY, AND EVERYDAY LIFE

Robert B Reich
Alfred A Knopf
271 pages