My solution-- and I'm hardly alone in suggesting this-- has been an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to get ahead, and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function better for everyone if government is smaller and if taxes and redistributions are curtailed.
While the explanation I have offered for what has happened is still relevant, I've come to believe it overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. And the governmental solutions I have propounded, while I think still useful, are in some ways beside the point, because they take insufficient account of the government's more basic role in setting the rules of the economic game. Worse yet, the ensuing debate over the merits of the "free market" versus an activist government has diverted attention from several critical issues: how the market has come to be organized differently from the way it was a half century ago, why its current organization is failing to deliver the widely shared prosperity it delivered then, and what the basic rules of the market should be.
I have come to think that the diversion of attention away from these issues is not entirely accidental. Many of the most vocal proponents of the "free market"-- including executives of large corporations and their ubiquitous lawyers and lobbyists, denizens of Wall Street and their political lackeys, and numerous multimillionaires and billionaires-- have for many years been actively reorganizing the market for their own benefit and would prefer these issues not be examined.
It is my intention in this book to put these issues front and center. My argument is straightforward. As I will elaborate in Part I, markets depend for their very existence on rules governing property (what can be owned), monopoly (what degree of market power is permissible), contracts (what can be exchanged and under what terms), bankruptcy (what happens when purchasers can't pay up), and how all of this is enforced.
Such rules do not exist in nature. They must be decided upon, one way or another, by human beings. These rules have been altered over the past few decades as large corporations, Wall Street, and wealthy individuals have gained increasing influence over the political institutions responsible for them.
Simultaneously, centers of countervailing power that between the 1930s and late 1970s enabled America's middle and lower-middle classes to exert their own influence-- labor unions, small businesses, small investors, and political parties anchored at the local and state levels-- have withered. The consequence has been a market organized by those with great wealth for the purpose of further enhancing their wealth. This has resulted in ever-larger upward pre-distributions inside the market, from the middle class and poor to a minority at the top. Because these pre-distributions occur inside the market, they have largely escaped notice.
In Part II, I show what this has meant for the resulting distribution of income and wealth in society. The meritocratic claim that people are paid what they are worth in the market is a tautology that begs the questions of how the market is organized and whether that organization is morally and economically defensible. In truth, income and wealth increasingly depend on who has the power to set the rules of the game.
As I will show, CEOs of large corporations and Wall Street's top traders and portfolio managers effectively set their own pay, advancing market rules that enlarge corporate profits while also using inside information to boost their fortunes. Meanwhile, the pay of average workers has gone nowhere because they have lost their aforementioned countervailing economic power and political influence. The simultaneous rise of both the working poor and non-working rich offers further evidence that earnings no longer correlate with effort. The resulting skewed pre-distribution of income to the top inside the market has generated demands for larger downward redistributions outside the market through taxes and transfer payments to the poor and lower-middle class, but such demands have simply added fuel to the incendiary debate over government's size.
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