People, Power, and Profits – Book Review

 

 

The Book Review Series

 

 

Written by Joseph E. Stiglitz in 2019, People, Power, and Profits contains some hard-hitting truths that deserve every bit of attention. Indeed, I found much of what he had to say thought-provoking, and I underlined quite a bit as a result. There is much to appreciate in this book.

It’s also worth noting that I did not agree with everything he wrote. There were times I believed he was more partisan than he should have been. I understand that politics and economics are often intertwined, and that politics are, overall, a problem; however, there have been political issues on both sides. Still, no matter what side of the political divide you find yourself on, this book is definitely worth reading.

Below, then, is the People, Power, and Profits – Book Review, where we take a look at this timely book, its analysis of current American capitalism, the results of this economic model, and what we can do to course correct.

 

Preface

 

There is a concept that the author states in the preface that is absolutely vital to understanding our current form of capitalism:

“I have to explain the true source of the wealth of nations, distinguishing wealth creation from wealth extraction. The latter is any process whereby one individual takes wealth from others through one form of exploitation or another. The true source of ‘wealth of a nation’ lies in the former, in the creativity and productivity of the nation’s people and their productive interactions with each other.” – Page xiv

For my part, I believe he is absolutely right. Wealth creation, rather than wealth extraction, is a key theme of the book. Wealth extraction draws striking parallels to the term economists use for rent seeking. Investopedia defines it this way: “Rent seeking, a concept introduced by economist Gordon Tullock, refers to the pursuit of wealth without contributing to society’s overall productivity or well-being.”

Census.gov details the increase in Americans renting, noting the significant rise in multi-unit buildings over the past 19 years.

Why do I bring this up? The answer is simple: Stiglitz is absolutely correct when he says we have moved away from wealth creation and embraced wealth extraction.

 

“We also need to abandon the mistaken faith in trickle-down economics, the notion that if the economy grows, everyone will benefit…The record is clear that the benefits of growth simply do not trickle down. Look at the broad swath of the population in America and elsewhere in the advanced world living in anger and despair after decades of the near stagnation in their incomes produced by supply-side policies, even as GDP has increased.” – Page xxv

His analysis is spot on, and the Congressional Budget Office substantiates it.

 

Part I

Introduction

Here are a few noteworthy pieces from the introduction.

 

“Our economy hasn’t been working for large parts of the country. Meanwhile, it has been enormously rewarding for those at the very top…Those with money and power have used their power in politics to write the rules of the economic and political game in ways that reinforce their advantage…Buffet, the legendary billionaire investor, got it right when he said, ‘There is class warfare, all right, but it’s my class, the rich class, that’s making the war, and we’re winning.'” – Pages 5, 6

“In short, our elites, in both parties, thought that focusing on GDP could be a substitute for focusing on people. In effect, they dissed large parts of the country.” – Page 22

“The American economy today is characterized, to too great an extent, by underregulated, monopolistic markets, where wealth creation has been replaced by exploitation.” – Page 26

 

Toward a More Dismal Economy

 

Addressing economists, he writes,

“If that is done [increasing the size of the pie], all will benefit – as President Kennedy put it, a rising tide lifts all boats. I wish it were true. But it’s not. In fact, a rising tide, if it happens too quickly can – and often does – smash the smaller vessels.” – Page 33

I think this is an apt description of the error that focuses solely on GDP as a measure of economic well-being. What has happened is that America’s GDP has grown, but the wealth from that growth has been absorbed by today’s select few robber barons, while millions across the country have seen their wages stagnate and the cost of living increase. GDP is a poor barometer of a nation’s wealth.

 

“While America doesn’t excel in growth, it does so in inequality: the country has greater income inequality than any other advanced country; in terms of inequality of opportunity it also ranks well toward the bottom.” – Page 37

 

“Lack of opportunity means that those born of poor parents are not living up to their potential. This is morally wrong, but it also means that America is wasting its most precious resource, the talents of its young people.” – Page 45

His perspective, to be frank, is refreshing.

 

Exploitation and Market Power

 

Do you want to know one of the capitalists’ best-kept secrets?

They are VERY good at double-talk: constantly talking about the “free market” (which does not even exist) and competition, and simultaneously hating competition.

They hate competition when their position is challenged, hate competing for workers, and hate when their market power is threatened.

“Market power also allows firms to exploit workers directly, by paying lower wages than they would otherwise, and by taking advantage of labor in other ways. Market power gets translated into political power. The huge profits generated by market power allow corporations – in our money-driven politics – to buy influence that further enhances their power and profits, for instance by weakening unions and the enforcement of competition policy, giving free rein to banks to exploit ordinary citizens, and structuring globalization in ways that further weakens workers’ bargaining power.” – Page 49

 

“A variety of changes in institutions (the weakening of unions), rules, norms, and practices have weakened workers’ bargaining power. For instance, when unions negotiate a better deal for workers, all the workers in a factory benefit – including those who don’t belong to the union. But some workers would like to “free ride,” to enjoy the benefits of the union without paying for them. That’s why unions often negotiate what are called “union shops,” requiring all workers to contribute to support the unions. All can then participate in voting, for instance, on what should be the union bargaining position, on what is most important to workers…They [companies] know that any single worker has no bargaining power in dealing with the firm and its management; but workers collectively may have bargaining power…Thus, in many states companies have turned to government to outlaw union shops in what are called right-to-work laws, but are more aptly called right-to-work-free-ride laws.” – Pages 66, 67

Stiglitz highlights a long-time complaint from those in the labor movement: namely, the creation and existence of “free-riders” – those who receive the benefits without paying for them. To add insult to injury, the union is required to represent those “free-riders” when they have issues with management. It’s a money-driven political maneuver aimed at weakening unions.

 

America at War with Itself over Globalization

 

Globalization has been one of the most economically devastating things ever perpetrated on the American people by corporations. Indeed, even back in the 1990’s people like Ross Perot and Pat Buchanan said as much. Ross Perot accurately predicted that NAFTA would be disastrous for American workers. Here is Pat Buchanan, former White House Communications Director, on the devastating effects of globalization.

Stiglitz is another who rightly highlights the many problems associated with globalization.

 

“Not everyone wants American-style capitalism, with its corporate power and inequality. And certainly, not everyone wants China’s level of intrusion in the economy or its lack of concern for privacy.” – Page 97

“In the name of globalization – to keep countries competitive – workers have been told that they must accept lower wages, worse working conditions, and cutbacks in essential government services that they depend on. How can such policies possibly lead to an increase in workers’ living standards? We now know that the growth benefits in the advanced industrialized countries have been exaggerated and the distributive effects underestimated.” – Page 98

“The rules of globalization have been far from ideal. They have protected corporations’ interests at the expense of workers, consumers, the environment, and the economy.” – Page 99

Don’t skip this chapter; it’s eye-opening for those who are unaware of just how terrible globalization has been.

 

Finance and the American Crisis

 

“A sector that should have been a means to an end, the more efficient production of goods and services, has become an end in itself. ” – Page 101

There is much to say about this; indeed, financialization has become the tail that wags the dog. Such is the consequence of deregulation.

 

“But standing between long-term investors and long-term savers are shortsighted financial markets. The bankers were simply not up to the task of making long-term resource allocation decisions. They wanted short-term projects that yielded quick returns.” – Page 106

The above quote reminds me of something Peter Drucker said in his stellar book Managing In The Next Society:

 

---

“I once was a securities analyst, so that gives me license to say that it is virtually impossible to make a financial person understand business. I am not being facetious. Financial people don’t deal with the issue of balance between often conflicting elements – short versus long term, continuity versus change, improving today versus creating tomorrow.”

Related: Read Managing In The Next Society – Book Review

 

---

 

It’s no surprise to me, then, that Stiglitz writes something that agrees with Drucker.

 

“We evolved into a system of what is called fractional reserve banking, where the amount that banks hold in reserves is just a fraction of what they owe. Today, this system works because we rely on government to ensure that the reserves are sufficient, that what is not in reserves has been prudently managed, and to step in when there is a shortfall…In effect, banks make their money by cashing in on – by taking advantage of – the trust in the US government.” – Page 111

 

“The shortsightedness and moral turpitude of our money-focused bankers spread, infecting our economy, our politics, and our society.” – Page 113

“One needs comprehensive regulations preventing banks from being too big and too interconnected to be allowed to fail, from engaging in excessive risk taking, market manipulation and the exploitation of their market power, and abusive and predatory behavior.” – Page 115

Hear, hear – what Stiglitz said amplified.

 

The Challenge of New Technologies

 

“Today, as a result of advances in economics, we know better how to manage an economy confronting innovation. The key is maintaining full employment…The ‘jobs’ problem of hi-tech is thus a political problem.” – Page 121

 

“Trickle-down economics won’t work, just as it didn’t work for globalization…Strengthening the bargaining power of workers and weakening the monopoly power of firms would create a more efficient economy with greater equality.” – Page 122

ABSOLUTELY – I have said this very thing often. The only effective power against this is collective action and negotiation.

 

“The new technologies can be used for manipulation, not only to enhance economic profits, but also to foster certain views, and cast doubt on others.” – Page 132

I appreciate the author’s take on new technologies and privacy; navigating through the quagmire is something many do not attempt. Yet it is here a bit of his partisanship shows, highlighting the likes of Robert Mercer – yet ignoring the outright ban of many conservative voices on social media. More recently, and something that occurred after this book was published, was the cover-up of the Hunter Biden laptop before the 2020 election. There are several examples to choose from.

 

Why Government?

 

“Markets on their own did what the rules of the game allowed them to do, what those rules incentivized them to do. What is needed are different rules of the game – we need collective action to reform our market economy.” – Page 140

“This book has repeatedly stressed, for instance, the pervasive discrepancies between social and private returns – for instance, in the absence of regulations, individuals will fail to take into account the cost of their pollution in their economic calculus. Markets on their own produce too much pollution, inequality, and unemployment, but too little basic research.” – Page 140

HE. IS. ABSOLUTELY. RIGHT.

Markets will NEVER solve those problems – and why would they? They created many of them in the first place.

 

“Markets on their own will not invest sufficiently in basic research, the wellspring from which all other advances come – which is why government has taken on the central role at least in financing it…Markets, on their own, have shown themselves capable of making cities unlivable: think of London’s pea soup smog or that of Los Angeles. The market didn’t clean these cities up on its own: it was government regulations that forced changes in behavior…The 2008 crisis was not an act of God; it was man-made, something our system did to us.” – Pages 153, 154

“Because of the “free-rides” problem – so many would like to benefit from publicly provided goods and services, from the military, police and fire protections, and the basic knowledge produced by government laboratories, to the protection of our environment, without paying their fair share of the costs – contributions have to be compulsory, that is, there has to be taxation.” – Pages 155, 156

Another great chapter from the author.

 

Part II

Restoring Democracy

 

Here are some of the more interesting and quoteworthy sections in this chapter (along with my thoughts, of course):

“In fact, the country has had a long history of disenfranchisement: one of the most vivid examples of this is not allowing convicted felons to vote, which occurs in many states.” – Page 161

For my part, either someone has paid their debt to society, or they haven’t – it’s one or the other – not some murky quagmire of both. The framework we’ve operated under has been disingenuous for too long now and needs to change.

 

“One of the reasons that so many Americans think the political system is rigged is that they believe, rightly, that it is being driven by money.” – Page 170

“In short, Citizens United, the Supreme Court case that effectively allows the unlimited spending of money on political campaigns, needs to be reversed.” – Page 172

Once again, the author lets us know he has his finger on the pulse of how it all works. With so many never making it out of the working class and the middle class diminishing, is it any wonder a whole generation leans away from our current economic model and approves of socialism?

The question was rhetorical – we already know the answer.

 

“The revolving door is pervasive and corrosive. That those in the US Treasury and elsewhere in government quickly go from serving their country to working on Wall Street leads to questions about whether they have been serving Wall Street all along.” – Page 173

I’d only add that RFK Jr. has also spoken about this very thing with other government agencies.

 

“This is an arena where what is required about all else is the right norms and ethics. And the greed-is-good ethic of twenty-first-century American capitalism works against creating the right norms.” – Page 173

 

Restoring a Dynamic Economy with Jobs and Opportunity for All

 

There was much to like about this chapter, as detailed below:

“Managing markets to make them serve our economy is one part of getting America back on track. The market can produce wonders – but not so for the distorted and misshapen capitalism that has emerged in twenty-first-century America.” – Page 180

“The power of corporations over workers is just too great; they don’t need to do these things [proposed fixes]; and they don’t care about the greater benefits to our society.” – Page 182

“Monopolies have less incentive to innovate, and the barriers to entry that they set up actually stifles innovation.” – Page 183

Again, I’d like to point out the double talk that many companies and corporations engage in. They say they are for competition, but they seek monopolies to curb it. Indeed, the spirit of anti-competitiveness lives on.

 

“Markets on their own won’t ensure full employment, and ‘markets’ do even more poorly in ensuring that jobs will be well paid. Markets do a still poorer job of addressing these issues of work-life balance.” – Page 192

“In spite of the fact that many conservative economists believe that markets always work efficiently, it should be obvious: there have been long periods of time in which the market, on its own, has failed to achieve full employment. Massive unemployment is a great waste of resources.” – Page 193

“As we’ve said, markets don’t exist in a vacuum; they have to be structured, through rules, regulations and policies.” – Page 199

Again, markets do solve problems, but so-called “free market” capitalists ignore the problems they create. What’s particularly disingenuous is when those same problems are glossed over, dismissed, or even repackaged as potential growth for – you guessed – the market. Meanwhile, clean environments and the safety of workers – not to mention livelihoods – are sacrificed on the altar of supposed “free markets.”

To be sure, there is a balance to be had, but our current form of capitalism (corporatism, propagandized as capitalism) is not it. Stiglitz is correct.

 

“Our generation got the capital gains. The next generation has to figure out how to get affordable housing.” – Page 205

For those who are unfamiliar, what he is describing is the breakdown of the social compact. Scott Galloway discusses this very thing, here:

 

A Decent Life for All

 

“When wages for very large parts of the country stagnate or decline over a period of a half a century in the most prosperous large country in the world, it is clear that something has gone wrong.” – Page 209

 

I appreciate the author’s perspective, and once again, I find his method of highlighting “competition” is a golden move:

“The reason that the private sector wants to manage these retirement accounts is, of course, the fees – what is going on in privatization is a simple transfer from the pockets of retirees to the pockets of the bankers. There is no evidence that bankers generate higher or safer returns; quite the contrary…

The lesson is clear: Americans cannot be asked to rely on markets for their retirement. The fluctuations in market values and the incomes generated are too great and the bankers are too avaricious. They need an alternative – not the cutbacks in Social Security that the Right is demanding, but the revitalization of Social Security, making sure that it is on sound financial footing, and providing a public option. The easiest way to provide the public retirement option would be to allow any individual to put additional funds into his Social Security account with a commensurate increase in retirement benefits.

The public option would provide effective competition to the private sector, and might be able to induce banks and insurance companies to produce better financial products, at lower costs and fees – the public option may, in fact, be a better instrument for encouraging good behavior even than government regulation. Of course, those in the financial sector are adamantly opposed to such a public option. They talk a big game about believing in competition, but when push comes to shove, they like their cozy arrangements (bold emphasis mine).” – Pages 215, 216

LOUDER FOR THOSE IN THE BACK, PLEASE.

 

“The government-headed mortgage system we have now is a public-private partnership, where the private side takes the gain in the form of high fees and the public takes the losses. This is not the kind of efficient capitalism depicted in textbooks or by the advocates of free and unfettered markets. It is, however, the ersatz American-style capitalism that has evolved in practice.” – Page 218

The word ersatz is well deserved.

 

Reclaiming America

 

This is one of the best chapters in the book, in my opinion.

“The problem with the economic changes of the past four decades, and a central theme of this book, is that while we as a country are so much richer today than we were then (at least as measured conventionally, say, by GDP), many have not shared in that prosperity. Some have seen their prospects diminish not just relatively, but absolutely. Many have felt a middle-class life gradually eluding their grasp.” – Pages 226, 227

 

---

 

Related: Read Middle Class Vs Working Class

 

---

 

“We got the economics wrong: we thought unfettered markets – including lower taxes and deregulations – were the solution to every economic problem; we thought finance and globalization and advances in technology would, on their own, bring prosperity to all. We thought that markets were, on their own, always competitive – and so we didn’t understand the dangers of market power. We thought the blind pursuit of profits would lead to societal well-being.” – Page 239

“We got our values wrong. We forgot that the economy is supposed to serve our citizens, not the other way around. We confused ends and means: globalization was supposed to create a stronger economy to better serve our citizens; but then we told our people, because of the globalization that we created, they had to have cutbacks in wages and public programs. Finance too became an end in itself, leading to a more unstable economy, growing more slowly, with more inequality, preying on ordinary citizens. Its pursuit of profits did not lead to their betterment” – Page 239

“We have to have a sense about what those ends are: the success of the economy is to be measured not just by GDP but by the well-being of citizens.” – Page 242

I’d like to applaud Stiglitz for his spot-on analysis; I agree completely. We have our economics and values out of balance, and we need to correct course.

 

“The view that government is the problem, not the solution, is simply wrong. To the contrary, many if not most of society’s problems, from excesses of pollution to financial instability and economic inequality, have been created by markets and the private sector. In short, markets alone won’t solve our problems.” – Pages 243, 244

“It is not ‘natural’ economic forces that have resulted in near stagnation in incomes of the majority while those of the 1 percent have soared. It is not the laws of nature but the laws of man that have resulted in these unnatural outcomes.” – Page 244

 

---

“For the love of money is a root of all kinds of evil.”

1 Timothy 6:10

 

---

 

“Properly designed, well-regulated markets, working together with governments and a broad array of civil society institutions, are the only way forward.” – Page 247

 

And how does he end the book?

“It is still not too late to save capitalism from itself.” – Page 247

 

If this sounds familiar, that’s because the opening line of Georgescu’s book, Capitalists Arise, was this:

 

---

“For the past four decades, capitalism has slowly been committing suicide.”

 

Related: Read Capitalists Arise! – Book Review 

 

---

 

Conclusion

 

Despite what some on the right say, it appears there are prominent economists who simultaneously believe capitalism is a viable market while acknowledging the need for substantial reforms. For those in denial, they need to understand that their inability to discuss and identify the problems with our current form of capitalism today is directly leading an entire generation to take a fresh look at socialism. People like Joseph Stiglitz should be taken seriously.

This book, while informative and prescriptive, occasionally exhibits a partisanship bias. Despite this, it is well worth the purchase and deserves its place on your bookshelf. I highly recommend it, and you can get it here.

 

 

Find this book review helpful? Consider following by subscribing 👇