How Capitalism Lost Its Way

The modern American economy is not just unfair. It’s ruining our democracy.

The historian Per Hansen recently published a study tracking Hollywood’s changing depictions of corporate America over most of the last century—a revealing, if crude, measure of the broader cultural mood. Through the 1950s, Hollywood generally championed Main Street’s role in bolstering local communities and lambasted out-of-touch bankers who exploited those businesses to line their own pockets. But by the 1980s, a heavy disillusionment had crept into the narrative, epitomized by the 1987 satirical hit Wall Street, in which a conniving Gordon Gekko, portrayed as something of a demigod of greed, ends up in jail. 

Can American Capitalism Survive?: Why Greed Is Not Good, Opportunity Is Not Equal, and Fairness Won’t Make Us Poor
by Steven Pearlstein
St. Martin’s Press, 256 pp.

In 2010, a version of Gekko’s amorality was again on display in the film Margin Call, only this time, the heroes become fantastically wealthy fleecing public institutions, pensioners, and the middle class—and get away scot-free. “Nothing happens,” Hansen said in a recent radio interview. “The cynicism and disillusionment is complete.”

It’s here that Steven Pearlstein’s new book picks up the narrative. In Can American Capitalism Survive?, Pearlstein, a Pulitzer Prize–winning columnist for the Washington Post, marshals an army of academic studies to argue that American capitalism has become a “morally corrupting and self-defeating economic dogma.” In the 1950s and ’60s, Pearlstein writes, American businessmen and bankers were constrained by a broad cultural expectation that they serve the greater good. Even powerful trade groups like the Business Roundtable supported “proposals to increase federal support for education and basic research, guarantee worker pensions, protect the environment, improve workplace safety and set a national goal of full employment.” 

That changed in the 1970s and ’80s, Pearlstein writes, as a sense of civic duty was replaced by a newfangled and misguided notion of virtuous selfishness: the single-minded pursuit of one’s own self-interest was suddenly regarded as a necessary lubricant of the free market. Greed, as Gordon Gekko infamously put it, was good after all. 

Pearlstein lays much of the blame for this transformation on a familiar host of pressures: globalization, rising consumerism, mass deregulation, the decline in antitrust enforcement, and lawmakers’ obsession with tax cuts. But he also points a finger at a profound cultural shift in boardrooms and on Wall Street. Beginning in the 1980s, the same American CEOs who had once balanced a host of communitarian priorities began putting shareholder value above all else. “The principal objective of a business enterprise is to generate economic returns to its owners,” wrote the Business Roundtable in 1997. Business leaders, who had once seen themselves as stewards of the American democratic project, became parasites feeding off the very institutions that had allowed them to grow so wealthy in the first place. 

That cultural shift helped drive the ever-widening income gap. In 1965, CEOs made twenty times their average workers’ salaries; now the ratio is 271 to one. Worker productivity has risen 65 percent, while real wages have grown by just 8 percent. If income distribution in the U.S. had remained the same as it was in 1979, Pearlstein notes, about $1 trillion more would be going each year to the bottom 80 percent of households, increasing their current incomes by almost 25 percent from where they are today. This helps explain why, by the 2000s, the “cynicism and disillusionment” that Hansen noted was indeed complete: the American public no longer harbored any belief that business leaders would ultimately act in the public interest. 

Pearlstein argues that this new culture has led not only to a host of economic ills, but also to something more existential: a loss of faith in what it means to be a citizen. When American workers who can’t afford to pay their medical bills see their CEO buying a private island, something vital in the social fabric unravels. When full-time minimum-wage American workers have to rely on food stamps to feed their families while Apple and Amazon post trillion-dollar valuations, our collective sense of moral order erodes, fostering an electorate that is balkanized and cynical. Modern American capitalism, Pearlstein writes, is not just inefficient and unfair. It’s ruining our democracy.

Pearlstein’s principal point is that it doesn’t have to be this way. In a democratic society, he reminds us, we make the rules. “[A]ll of these were deliberate choices,” he writes of the unfortunate policy changes since the 1970s. If we can recognize and identify our past mistakes, he insists, we can build a new economic framework, one defined by a set of “morally intuitive first principles.”

To that end, Pearlstein lists a host of progressive, though hardly revolutionary, policies, most of which are designed to redistribute wealth either preemptively, through the tax code, or retroactively, through new federal programs. He also provides a broad, if painfully optimistic, blueprint for how to proceed. The first order of business, he writes, must be to pass a constitutional amendment that limits the influence of money in politics, a precondition to scoring more progressive legislation. That’s all well and good, but Pearlstein fails to reckon with the fact that passing a constitutional amendment would itself require sweeping electoral victories that secured progressive supermajorities not only in the U.S. House and Senate, but also in thirty-eight out of fifty state legislatures. An alluring fantasy, perhaps. But a fantasy nonetheless. 

Pearlstein’s next prescription may be no less daunting: lawmakers, he writes, must wage and win a battle for Americans’ heart and minds, taking deliberate steps to replenish our “stock of social capital”—that elusive resource that encourages us to trust one another. Leaders must reacquaint Americans with the notion that citizenship confers not just benefits, but also profound responsibilities. “A modern economy often requires us to sacrifice individual rights and liberties in order to achieve cooperative arrangements that make us all better off,” Pearlstein writes. That means things like paying taxes and abiding by rules designed to improve air quality and submitting to legislation requiring that a business sacrifice some profit to provide its employees with a decent life.

To achieve that cultural reawakening, Pearlstein proposes, among other ideas, that lawmakers create a mandatory, nationwide community service program. In exchange for serving their fellow citizens for a year or two, through military service, teaching, trail building, or a multitude of other options, all Americans would be eligible for a modest, guaranteed minimum income. (See Paul Glastris, “What Ever Happened to National Service?,” in the March 2003 issue of the Washington Monthly.) 

This, too, may sound hopelessly pie in the sky. At a time when petty insults, unrepentant greed, and an almost total disregard for the truth dominate Washington, it’s hard to imagine lawmakers capable of encouraging graciousness among their constituents. But the spirit of Pearlstein’s plea is correct: it wasn’t so long ago that Americans, and their corporate enterprises, willingly restrained their own financial ambitions in service to their communities. It’s the idea, in fact, upon which the American century was built. 

Pearlstein seems uninterested in preaching to the choir. His book reads as a careful research brief aimed at a skeptical audience of fiscal conservatives. The most impassioned passages come not when Pearlstein is decrying the moral catastrophe of mass income inequality, but when he is illustrating how inequality actually makes the economy less efficient. We’ve reached a point, he suggests, where “more inequality stops producing a bigger pie and begins to slow economic growth,” meaning “redistribution might actually enhance growth rather than diminish it.” Even by the standards of the pro-market right, Pearlstein notes, the economic system is failing: long-term trends in business investment as a share of the economy are down. Channeling Adam Smith, he writes that “the wealth of nations requires that our selfishness be restrained by our moral sentiments.”

If Pearlstein paints a bleak picture of modern America, he ultimately peddles optimism: social and economic reform is possible so long as we empower courageous leaders and embrace a series of plodding, legislative steps. It’s a calming message, perhaps, but one that feels out of step with the broader political mood. At a time when many of Pearlstein’s readers, toggling between despair and rage, are awaiting directions to the ramparts, he counsels patience, voting, and a series of economic “nudges” designed to encourage citizens and corporate chieftains to do the right thing. 

One of the last films the historian Per Hansen cites in his study is the 2015 hit The Big Short, adapted from Michael Lewis’s nonfiction account of the 2008 financial crisis. In the movie, a Wall Street guru, played by Steve Carell, grapples with the knowledge that a looming financial crisis will eliminate trillions of dollars of Americans’ savings, pensions, 401(k)s, and homes, plunging the world into a sustained economic recession. “I have a feeling that in a few years people are going to be doing what they always do when the economy tanks,” he says, prophetically. “They will be blaming immigrants and poor people.” Carell’s character feels bad about it. He rubs his eyes. He looks anguished. A moment later, our Hollywood hero sells his investments and walks away with $200 million in the bank. Cinéma vérité.  

Haley Edwards

Haley Edwards is a national correspondent at Time, the author of Shadow Courts: The Tribunals That Rule Global Trade, and a former editor of the Washington Monthly.