This post is part of a symposium highlighting the second issue of the Journal of Law and Political Economy. All of our posts highlighting releases of JLPE issue releases are here.
The basic facts are now familiar: economic inequality has risen substantially since the 1970s in most industrial countries, and particularly sharply in the United States. The US surge is unprecedented in that it is driven more by inequality of wage income than by inequality of capital income. This severe inequality denies ordinary workers the fruits of their labor, constrains economic opportunities, impedes economic growth, and compromises the legitimacy of the political and economic systems. The returns from higher productivity and economic growth have gone disproportionately to the most wealthy within society: the top one percent, and especially the top one-tenth of a percent.
In my article in the inaugural issue of the Journal of Law and Political Economy, I argue that market governance is pivotal to the core dynamic of the accumulation of inequality (the “inequality snowball”), especially in the United States since the 1970s. Market governance refers to the formal laws and regulations, informal business practices, and social norms that structure markets. It includes everything from corporate governance to financial regulation, labor regulation, antitrust, and intellectual property rights. I refer to this as “marketcraft” because it constitutes a core function of government roughly comparable to statecraft.
The Marketcraft of Inequality
The government plays a critical role in promoting or constraining inequality by setting the terms of market competition. The core relationships in a market economy—such as those between employers and workers, borrowers and lenders, and producers and consumers—are relationships of power. The rules of the marketplace define the balance of power among these participants, and the balance of power in turn affects the outcomes of the bargaining, such as contract terms, risk allocation, prices, and wages.
Some scholars blame technological progress or globalization for inequality, yet these factors cannot account for the increasing gap between most college-educated workers and the top one percent, or for the considerable variation inequality among the industrial countries. In any case, they are themselves propelled and constrained by government policies, and policies are rooted in politics. This then raises the political economy puzzle of inequality in America: Why did the government do so much to exacerbate inequality and so little to moderate it?
The article stakes out a position distinct from those who view increasing inequality as an inevitable feature of capitalism and those who view redistribution via taxes and welfare spending as a satisfactory remedy. It stresses, in contrast, that the propensity for economic inequality is driven by specific policies and business strategies, and therefore varies considerably across time and space. Firms and individuals lobby to shift market governance in their favor and then take advantage of these policy changes in the marketplace, and thus political and market power reinforce each other over time. Hence capitalism can only be reformed effectively by transforming the market governance that defines the power relationships in the economy.
The US in Comparative Perspective
Why has this inequality snowball been particularly pronounced in the United States since the 1970s? The US is distinctive in at least three ways: business policy preferences, political structure, and business strategies. With regard to policy preferences, firms in liberal market economies like the United States and Britain competed more on the basis of cost and less on quality than firms in coordinated market economies like Germany and Japan. So, they were more likely to advocate policies designed to lower costs such as financial liberalization, labor deregulation, or regulatory reforms in transport and utility sectors. And they were less inclined to advocate policies to cultivate, preserve, or strengthen institutions that foster coordination, such as giving labor more voice in firms or strengthening welfare policies. With regard to political structure, these policy preferences were mediated through a more winner-take-all political system conducive to solutions that boosted returns for business, finance, and wealthy individuals, especially when Republicans were in power. And with regard to business strategy, US firms challenged the prevalent market governance regimes more aggressively than their counterparts in Western Europe and Japan in ways that favored capital over labor and incumbents over challengers. Industrial firms boosted executive pay and deployed anti-union tactics, and banks devised new financial instruments that helped them to extract higher rents without providing more value for their customers.
Finally, racial discrimination accelerated the surge in economic inequality in the United States since the 1970s via both the political and the business strategy channels of the inequality snowball model. Political leaders used a “dog whistle” strategy to leverage racism to win elections while pursuing policies, such as cuts in taxes and welfare spending and market governance reforms, which benefited the wealthy and powerful. And for businesses, discrimination fueled extractive business strategies, including predatory lending and low-road labor management.
The body of the Journal of Law and Political Economy article fleshes out the inequality snowball model by surveying developments in the United States since the 1970s in corporate governance, financial regulation, labor relations, antitrust, regulatory reform, and intellectual property rights. Each section reviews how laws and regulations changed in that particular issue-area, how firms took advantage of these changes, and how that exacerbated inequality in America.
The Prospects for Reform
Moderating inequality will require major political, legal, and regulatory reforms. Market governance reforms could shift the balance away from those with the most wealth and power, thereby not only moderating inequality in the short run but also curtailing the accumulation of inequality over time. This does not in any way preclude other measures to address inequality, such as tax policy and welfare spending. Yet in some ways the marketcraft agenda is more foundational because it strives to restructure capitalism rather than to compensate society for its social costs.
If wealth and power reinforce each other over time, however, then does the marketcraft reform agenda really have a chance? On the one hand, the propensity for those with wealth and power to seek further advantage is a universal feature of capitalism. On the other hand, this dynamic varies considerably over time and space. And if the balance of power can shift incrementally in the direction of those with wealth and power at some times in some places, then it can move the other way as well. Moreover, there are moments such as the New Deal or post-World War II recovery or the civil rights movement when the US government has made more substantial moves toward greater equity and inclusion. And the current combined public health, economic, and ecological crisis might present the conditions for such a transformation.
The inequality snowball model, and its extreme variant in the United States of the past 40 years, also suggests that political institutions are critical to the capacity to reform. That means that political reforms such as limiting corporate campaign contributions or expanding voting rights may be pre-requisites to enacting a marketcraft reform agenda. Likewise, it suggests that those elements of the agenda that constrain both the political and the market power of dominant firms—such as antitrust and labor regulation—should be prioritized because they could doubly constrain the inequality snowball.