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Macmillan Childrens Publishing Group

Can American Capitalism Survive?

Why Greed Is Not Good, Opportunity Is Not Equal, and Fairness Won't Make Us Poor

Steven Pearlstein

St. Martin's Press



It was only 25 years ago that the world was celebrating the triumph of American capitalism. After a long cold war, communism had been vanquished and discredited, with China, Russia and Eastern Europe seemingly rushing to embrace the market system. America had widened its economic lead over European-style socialism while the once-unstoppable export machine, Japan Inc., had finally hit a wall. Developing countries such as India, Brazil and Russia were moving to embrace the “Washington consensus” of privatization, deregulation and free trade. Around the world, this embrace of market capitalism would lift more than a billion people from poverty.

In the years since, however, confidence in the superiority of the American system has badly eroded. A global financial crisis that started in Asia and spread to Russia and Latin America shattered the Washington consensus. Americans have lived through the bursting of two financial bubbles, struggled through two serious recessions and toiled through several decades in which almost all of the benefits of economic growth have been captured by the richest 10 percent of households. A series of accounting and financial scandals, a massive government bailout of the banking system, the inexorable rise in pay for corporate executives, bankers and hedge fund managers—all of these have generated widespread resentment and cynicism. While some have prospered, many others have been left behind.

A decade ago, 80 percent of Americans agreed with the statement that a free market economy is the best system. Today, it is 60 percent, lower than in China. One recent poll found that only 42 percent of millennials supported capitalism.1 In another, a majority of millennials said they would rather live in a socialist country than a capitalist one.2 Even champions of free markets tend to shy away from using the capitalism moniker.

“They’re not rejecting the concept [of capitalism],” explained John Della Volpe, polling director at the Institute of Politics at Harvard’s Kennedy School of Government. “The way in which capitalism is practiced today, in the minds of young people—that’s what they are rejecting.”3

Part of this disquiet has to do with the market system’s inability to continue delivering a steadily rising standard of living to the average household, as it had for the previous half century. In the 15-year period from 1953 to 1968, the inflation-adjusted income of the median American family increased by 54 percent. In the 15-year period from 2001 to 2016, the increase was just 4 percent. No wonder that just 37 percent of Americans now believe they will do better financially than their parents, the driving idea behind the American Dream.4

But another part of our disquiet reflects a nagging suspicion that our economic system has run off the moral rails, offending our sense of fairness, eroding our sense of community, poisoning our politics and rewarding values that easily degenerate into greed and indifference. The qualities that once made America great—the optimism, the commitment to equality, the delicate balance between public and private, the sense that we’re all in this together—no longer apply.

It has got to the point that we are no longer surprised when employees of a major bank sign up millions of customers for credit cards and insurance they didn’t want or even know about, just to make their monthly numbers.

We are reluctantly reconciled to a system that lavishes $800 million in compensation a year—that’s $250,000 an hour—on the head of a private equity firm simply for being clever about buying and selling companies with other people’s money, while half of the employees of those companies still work for $25 an hour or less.

We are now barely shocked when a company tells longtime workers that their jobs are being sent overseas and that they will get a modest severance—but only if they train the foreign workers who will be taking their jobs.

We are both outraged and resigned when yet another corporation renounces its American citizenship just to avoid paying its fair share of taxes to the government that educates its workers, protects its property and builds the infrastructure by which it gets its products to market.

While we may have become desensitized to these individual stories, however, collectively they now color the way we think about American capitalism. In less than a generation, what was once considered the optimal system for organizing economic activity is now widely viewed, at home and abroad, as having betrayed its ideals and its purpose and forfeited its moral legitimacy.

* * *

To understand how we got to this point, we have to travel back to the mid-1970s. After decades of dominating U.S. and foreign markets, many of America’s biggest and most successful corporations had become complacent and lost their competitive edge. They were less efficient, less innovative and less willing to take risks. Excessive government regulation had raised costs and sapped the dynamism of sectors such as transportation, communication, finance and energy, with government officials dictating which companies could compete, what services they could provide, what prices they could charge and what profits they could earn. Overzealous antitrust enforcement had prevented mergers among rivals that would have allowed them to achieve economies of scale. Unions had pushed wages and benefits to unsustainable levels, driving up prices and draining companies of the capital needed for investment and modernization. Loose interest-rate policy at the Federal Reserve and overspending by Congress had triggered double-digit inflation.

All that was happening at a time when European and Japanese exporters were beginning to make inroads into the American market. It began with shoes, clothing and toys, then spread to autos, steel, consumer electronics, computers and semiconductors, cameras, household appliances, chemicals and machine tools. Initially, the appeal of these foreign products was that they were cheaper, but before long these foreign firms began to offer better quality and styling as well. By the time American firms woke up to the competitive challenge, many were already playing catch-up. In a few industries, it was already too late.

With their costs rising and their market share declining, the large blue-chip companies that had dominated America’s postwar economy suddenly found their profits badly squeezed—and their share prices falling. Although few remember it today, the Dow Jones index, reflecting the share prices of the 30 largest industrial companies, essentially ran in place for the ten years between 1972 and 1982, resulting in a lost decade for investors. Indeed, it was worse than that. When adjusted for inflation, the Dow lost half its value over that period.

By the mid-1980s, serious people were wondering if the days of American economic hegemony were quickly coming to an end. When Japan’s Mitsubishi conglomerate purchased Rockefeller Center from the descendants of America’s most celebrated business mogul in 1989, it seemed to many as if the American Century had come to a premature and inglorious end.

“The central task of the next quarter century is to regain American competitiveness,” declared MIT economist Lester Thurow in a widely read jeremiad, The Zero-Sum Solution. Blue-ribbon panels were commissioned, studies were published, hearings held. In the corridors of government, at think tanks and business schools, on the covers of magazines, there was a sense of urgency about America’s industrial decline and a determination to do something about it. And do something they did.

With support from both Republicans and a new generation of centrist Democrats, federal and state governments deregulated whole swaths of the economy, unleashing a burst of competition from upstart, low-cost rivals in airlines, trucking, freight rail, telephony, financial services and energy. Government spending was cut, along with taxes. Antitrust regulators declared that big was no longer bad, unleashing a flood of mergers and acquisitions. New trade treaties were negotiated that lowered tariffs while opening overseas markets for American products.

Across the manufacturing sector, inefficient plants were shuttered, production was reengineered, employees laid off and work shifted to non-union shops down South or overseas. Companies that once employed their own security guards, ran their own cafeterias, operated their own computer systems and delivered products with their own fleet of trucks outsourced those “non-core” functions to cheaper, non-unionized specialty firms. Over-indebted companies used the bankruptcy courts to wash their hands of pension and retiree health-care obligations and force lenders to accept less than they were owed. Japanese management gurus were brought in to lower costs, improve quality and create new corporate cultures.

Meanwhile, in the fast-growing technology sector, established giants selling mainframes and tape drives suddenly found themselves out-innovated and out-maneuvered by entrepreneurial startups peddling minicomputers, disc drives and personal computers that were smaller, cheaper, easier to use and surprisingly powerful.

The transformation was messy, painful, contentious and often unfair, generating large numbers of winners and losers—exactly what the economist Joseph Schumpeter had in mind when he identified “creative destruction” as the essential characteristic of capitalism. Along the way, the old social contract between companies and their workers—and more broadly between business and society—was tossed aside. No longer could workers expect pensions, full-paid health insurance, job security or even a Christmas bonus from their employers. And no longer would business leaders feel the responsibility, or even the freedom, to put the long-term interests of their country or their communities ahead of the short-term interests of their shareholders.5 Chief executives found it useful to cultivate an aura of ruthlessness, winning sobriquets such as “Neutron Jack” and “Chainsaw Al.”

And it worked. By the mid-1990s, the hemorrhaging stopped and corporate America was again enjoying robust growth in sales, profits and stock prices. Chief executives and Wall Street dealmakers were lionized on magazine covers and on the front pages of newspapers, their dalliances chronicled in the gossip columns, their soaring pay packages a source of both fascination and controversy. Students at the best universities flocked to business schools, and from there to high-powered jobs on Wall Street or at management consulting firms. Individual investors began piling into the stock market through new tax-exempt retirement accounts and a dazzling array of new mutual funds.6 For the first time, business books with titles like In Search of Excellence, Reengineering the Corporation and Competing for the Future regularly made it onto the bestseller lists.

America—and American capitalism—was back, stronger and more globally competitive than ever.

* * *

In June 1998, I tried to capture this turnaround with a long front-page story in the Washington Post that ran under the headline “Reinventing Xerox Corp.”7

Xerox was something of an American icon, a homegrown company that sprang from American ingenuity, conquered the world and was run with old-fashioned American values. With the introduction of its 914 copier in 1959, which at the push of a button could turn out six plain-paper copies a minute, Xerox became a ubiquitous presence in every corporate office. Its sleek machines became the spot where gossip was exchanged and romances begun, while its name was turned into a verb. With a 97 percent global market share and 70 percent gross profit margins, Xerox shares topped the “Nifty Fifty” list of hot stocks during Wall Street’s go-go years of the 1960s.

In many ways, Xerox was the model American corporation, cosseting its workforce with generous pay and benefit packages and lavishing its largess on its hometown of Rochester, New York, where entire families could be found on the Xerox payroll. Its sales force—proud, slick and high-commissioned—inspired countless imitators. At a corporate research laboratory in Palo Alto, California, Xerox scientists were encouraged to push back the frontiers of knowledge even if their innovations didn’t seem to have much to do with xerography.

All that began to crumble, however, by the mid-1970s. The Federal Trade Commission launched an antitrust investigation that restrained the company’s competitive impulses and ultimately forced Xerox to license its technology not only to American rivals, such as Kodak and IBM, but to Japanese firms such as Canon and Savin, which soon began flooding the market with low-cost alternatives. Around the world, meanwhile, once-loyal customers were growing frustrated with Xerox machines that were so poorly designed and manufactured that “Clear Paper Path” became a frequent butt of jokes from late-night talk show hosts and a metaphor for the decline in quality of American products.

Perhaps the biggest challenge, however, would come from the advent of the personal computer, which when hooked up to desktop printers threatened to make the Xerox machine a thing of the past. As it happened, much of the foundational work for the personal computer had actually been done at Xerox PARC, where the pathbreaking Alto personal computer system had been designed and built, mostly for internal use. Then, on a day in 1979 that is now the stuff of Silicon Valley legend, Steve Jobs and a team from Apple Computer arrived for a visit, part of a carefully negotiated arrangement in which Xerox made a $1 million investment in the young computer company in return for Apple’s access to Xerox’s computer technology. Jobs was so excited when he saw the mouse that was used to move a cursor around the computer screen, and the graphic interface that allowed the user to click on a function rather than type in commands, that he could barely contain himself. “Why aren’t you doing anything with this?” he demanded of the Xerox engineers. “This is the greatest thing! This is revolutionary!”

Two years later, Xerox finally came out with a line of computers that was clunky and expensive and never caught on with users, and Xerox soon exited the market. Instead, it was the Apple Macintosh, with its Xerox-inspired menus and windows and sleek little mouse, that captured everyone’s fancy when it was introduced in 1984. And the rest, as they say, is history.

“If Xerox had known what it had and had taken advantage of its real opportunities,” Jobs would say years later, “it could have been as big as IBM plus Microsoft plus Xerox combined—the largest technology company in the world.”8

Back in Rochester, however, Xerox executives remained in denial about the twin existential threats posed by lower-cost copiers from Japan and computer technology still in its infancy.

“The reality, which nobody wanted to admit back then, was that manufacturing was abysmal, research disconnected to products, corporate headquarters was bloated and smug and profits evaporating before our eyes,” recalled Paul Allaire, at that time a top Xerox executive in Europe, who would go on to become chairman and chief executive.

Although the company’s financial statements continued to tell a favorable story, that was largely a reflection of a one-time boost to earnings as corporate customers switched from leasing copiers to buying them. In reality, gross margins had declined from 70 percent to 10, and Xerox’s share of the world copier market was hovering precariously around 10 percent. Then-chairman David Kearns told associates that unless something radical was done, Xerox would soon be forced out of the industry it had invented.

As Kearns remembered it, the turnaround began at one of his annual meetings with employees at the company’s manufacturing center in Webster, New York. At the time, Xerox was ramping up production on a new low-cost copier, the 3300, which was supposed to be the answer to the Japanese competition. Unfortunately, the company hadn’t really designed a low-cost machine—it had just simplified one of its old designs and then used a lot of cheap, shoddy parts to make it. Even at that, the $7,300 price tag was significantly above that of the competition, but well below a price that the commissioned sales force thought was worth its time. As the employees gathered under a tent in the parking lot, a line of idled rail cars sat nearby, each one packed with unsold 3300s.

“David, why didn’t you ask us what we thought about this?” a union shop steward asked at the meeting. “We could have told you it was a piece of junk.” At that moment of utter humiliation, Kearns recalled, he vowed to turn the company inside out to ensure it never happened again.

The renewal process proved anything but smooth, and at numerous points Kearns feared it would collapse under the weight of cynicism, poor execution and out-and-out resistance. While a new combination laser printer and copier boasted a new commitment to quality, it came to market too early, before much demand had developed. And an ill-timed foray into real estate and insurance eventually cost the company more than $1 billion. Plants were closed, pay cut and frozen, top executives fired and more than 40,000 jobs eliminated. Slowly but surely, however, Xerox was learning to do things faster, better and cheaper. For the typical corporate customer, the four-cent per copy cost was cut in half, and then in half again, along with the frequency of machine breakdowns.

To report the story, I had traveled to Aguascalientes, an industrial town north of Mexico City, to visit what had become the company’s showcase production facility. Not only were labor rates in “Aguas” a fifth of what they were in the United States, but with its just-in-time inventory system, robots, laser-guided assembly and computerized production system, the plant there could produce 48 variations of the same copier on a single production line, using fewer man-hours and with fewer defects than other plants in Xerox’s newly globalized supply chain. Ten percent of the 2,000 Mexican employees had engineering degrees, and they were responsible for making all design changes for all of Xerox’s mid-range copiers.

Meanwhile, a joint venture with Fuji, Japan’s photo giant, had allowed Xerox to get to market with a quality color copier in time to compete with one introduced by Canon. And following a seven-year, $400 million development effort, during which 3 million lines of computer code were written and more than 500 patents were filed, Xerox introduced a new line of high-volume digital copier-printers that were selling so fast that a second shift had to be added back in Webster. The new Document Centre 265 returned the luster to the Xerox brand, and sent its stock—which had floundered at $25 for the entire decade of the 1980s—to an all-time high above $160 a share.

* * *

Crucial to the revival at Xerox and other American corporations were three ideas used by political and business leaders to justify these dramatic changes in the relationship between companies and their customers, their workers, their investors and the rest of society.

Idea #1: The government was significantly responsible for the decline in American competitiveness. High taxes had discouraged investment and risk-taking by individuals and businesses, while overzealous regulation had driven up costs and snuffed out innovation. For Ronald Reagan and his heirs in the Republican Party, along with a supporting chorus of economists and business executives, it became economic gospel that cutting taxes and eliminating regulations would increase incentives to work and invest, and thereby increase the supply of goods and services produced by the economy. They called it supply side economics.

“Government’s view of the economy could be summed up in a few short phrases,” quipped Reagan in belittling the liberal approach to economic policy. “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Idea #2: The sole purpose of every business is to deliver the highest possible financial return to its investors. This was the only way to ensure that managers would take the tough actions—cutting costs, laying off workers, selling less profitable divisions—to ensure a company’s survival in hypercompetitive global markets.

“There is only one social responsibility of business—to use its resources and engage in activities designed to increase its profits,” conservative economist Milton Friedman wrote in 1970 in the New York Times Magazine. “Anything else,” he declared, was “unadulterated socialism.”

Idea #3: No matter how unfair it might seem to cut taxes for the wealthy, no matter how ruthless a company might have to be in its dealings with workers and consumers, no matter how unequal the distribution of income and wealth might become, we must ignore and dismiss such moral concerns as naïve and ultimately self-defeating. Such unpleasant outcomes were seen as the inevitable and unavoidable features of a free market system that had lifted much of humanity from the subsistence existence in which it had been trapped for millennia, generating the greatest prosperity for the greatest number. For that reason alone, free markets had to be accepted as fair and just. Let’s label that view “market justice.”

Beginning in the 1980s, these three ideas—supply side economics, maximizing shareholder value and market justice—were woven into the everyday rhetoric of economists, business leaders and conservative politicians, providing the economic, political and moral legitimacy for dismantling the welfare and regulatory state and jettisoning a complacent business culture. In time, they came to be reflected in a wide range of government policies, corporate strategies and business practices. And it was those policies, those strategies and those practices that, by the mid-1990s, had succeeded in restoring the competitiveness of the American economy.

However, when the competitiveness challenge had been overcome and the American economy was once again back on top, free market ideologues and those with vested economic interests continued to push these ideas to extremes never envisioned by those who first proposed them—pushed them so far, in fact, that they have now lost their validity and their legitimacy. What began as a useful corrective has, 25 years later, become a morally corrupting and self-defeating economic dogma that threatens the future of American capitalism. Almost everything people now find distasteful about it can be traced to these three flawed ideas.

The mindless animosity toward all regulation, for example, has now provided a rationale for handing over the keys to independent regulatory agencies to lobbyists and executives from the very industries they are supposed to regulate. In a very real sense, the foxes have been put in charge of the chicken coop, and their ambitions go well beyond “reforming” the agencies or “restoring a balance” between government and business. Their aim is to hollow out these agencies from the inside—to maintain the fiction that the government is still protecting workers, consumers, investors and the environment while, in reality, trusting markets to restrain predatory business behavior. These antiregulatory zealots speak only of the cost of regulation but never the benefits; of the jobs lost but never the lives saved; of efficiency but never fairness.

After gaining control of both the White House and Congress in 2016, Republicans moved aggressively to rescind dozens of Obama-era regulations that would surely strike most Americans as fair and reasonable. These include a rule setting strict environmental standards for oil and gas drilling in national parks and wildlife refuges, a rule barring federal student loans at for-profit colleges whose graduates never get jobs and a rule requiring financial advisers to act in the best interest of their customers. They include a rule preventing mines from dumping debris into nearby rivers and streams and a rule preventing cable and phone companies from collecting and selling information about the Internet sites visited by their customers. They even set out to repeal a long-standing rule preventing restaurant owners from taking waiters’ tips for themselves.

So virulent is Republican opposition to regulation that Don Blankenship, the former chief executive of Massey Energy—a man who spent a year in federal prison for conspiring to violate mine safety rules in connection with a 2010 mine explosion that killed 29 of his workers—used his conviction as a springboard for seeking the Republican nomination for the U.S. Senate in West Virginia. Rejecting the findings of a federal jury and a panel of mine safety experts, Blankenship blamed—you guessed it—government regulators for causing the explosion. He was defeated only after President Donald Trump and the party establishment mounted a last-minute campaign against him.

Supply side tax fantasies, meanwhile, have so warped the thinking of Republican politicians that many genuinely believe they can create jobs and raise wages for the struggling working class by lavishing a trillion dollars of tax relief on businesses and investors—the very businesses and investors who have spent the last 25 years eliminating working-class jobs and driving down working-class wages. The jihad against taxes has progressed to the point that any Republican politician who even contemplates raising any tax at any time is certain to be vilified by the conservative media and driven from office by an unforgiving and well-financed conservative mob. Even long-cherished conservative ideals such as balancing budgets and investing in infrastructure have been tossed overboard in the relentless pursuit of tax cuts, which are now the reflexive Republican solution to any problem.

A similar single-mindedness has taken hold in the private sector around maximizing shareholder value. For too many corporate executives and directors, that mantra has provided a pretext for bamboozling customers, squeezing employees, evading taxes and engaging in endless rounds of unproductive mergers and acquisitions. It has even provided a pretext for defrauding shareholders themselves. The executives at Enron, WorldCom, HealthSouth and Waste Management who concocted elaborate schemes to inflate reported revenues or profits in the late 1990s rationalized their actions as necessary steps to prevent share prices from falling. It has become the end that justifies any business means.

The obligation to maximize shareholder value has also led business leaders to abandon their role as proud stewards of the American system. In today’s business culture, it’s hard to imagine them as stewards of anything other than their own bottom lines. But it wasn’t always this way.

Working through national organizations such as the Committee for Economic Development, the Business Council and the Business Roundtable, the chief executives of America’s major corporations during the decades right after World War II 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. Although most of the chief executives were Republicans, business organizations took pains to be bipartisan and maintain close ties to politicians of both parties. Some of their motives were self-serving, such as reducing the lure of socialism or unionization, but there was also a genuine belief that companies had a duty to balance their own interests with those of society. As General Motors chairman Charlie Wilson famously put it at his confirmation hearing to be secretary of defense, “I always thought that what [was] good for the country was good for General Motors, and vice versa.”

At the major business organizations today, that sense of collective social responsibility has given way to the grubby pursuit of narrow self-interest, irrespective of the consequences for the rest of society. While continuing to declare their bipartisanship, business groups such as the U.S. Chamber of Commerce, the Business Roundtable and the National Federation of Independent Businesses have essentially become arms of the Republican Party. For the most part, these organizations are now missing in action on broad issues they once declared as priorities, such as climate change, health-care reform, immigration, infrastructure investment, education and balancing the budget, occasionally paying them lip service but expending no political capital on them.9

“Big business was a stabilizing force, a moderating influence in Washington,” Steve Odland, president of the Committee for Economic Development and a former chief executive of Office Depot, told me several years ago. “They were the adults in the room.” Nobody, including Odland, thinks business leaders play that role today.

And what of the third idea, market justice? For the most part, Americans are no longer willing to accept the glaring injustices created by the economic system simply because it provides them with a higher standard of living. For starters, many feel their standard of living is now falling, not rising. And even for those living better than ever, the American capitalism they experience feels more and more like a morally corrupt and corrupting system in which the prevailing ethic is every man for himself. Old-fashioned norms around loyalty, cooperation, honesty, equality, fairness and compassion no longer seem to apply in the economic sphere. As workers, as consumers and even as investors, they feel cheated, manipulated and disrespected.

I regularly ask undergraduates at George Mason University, where I teach, about their career aspirations and am struck by how few have any interest in working in a business (those who do invariably want to work for a startup run by a small group of idealists like themselves). It is the rare student who volunteers a desire to be rich—not because they wouldn’t enjoy what the money could buy them, but because they wouldn’t want to engage in the unsavory behavior they think necessary to attain it. To them, market justice sounds like a contradiction in terms.

* * *

Not quite two years after my story about Xerox was published in the Post, a colleague handed me a copy of a story that had just moved over the wires of the Associated Press. There was a mischievous smile on his face.

“SEC Investigates Xerox for Alleged Accounting Irregularities in Mexico Division,” read the headline. The initial release from the company reported that a few rogue executives in Mexico had cooked the books to inflate sales in order to meet their quarterly targets. Subsequent investigation by the Securities and Exchange Commission, however, revealed that the accounting gamesmanship was endemic in Xerox operations across the globe, and reached right up to the top echelons at corporate headquarters. The goal, the SEC found, was to boost the company’s stock price by consistently meeting and exceeding the expectation of Wall Street analysts. The company would later agree to pay a fine of $10 million for using aggressive accounting tactics to inflate its reported profits by $1.4 billion from 1997 through 2000. At the time, it was a record fine for an enforcement action. Xerox stock fell below $7 a share on the news. Two years later, six former executives, including the chief executive and financial officers, agreed to $22 million in fines and returned bonus payments to settle civil fraud charges. Xerox’s longtime auditors, KPMG, also agreed to pay $22 million to settle charges that it had collaborated with the company to manipulate earnings.

The accounting scandal, however, was hardly Xerox’s only problem. Competition from lower-cost Japanese copiers continued to cut deeply into sales, while Xerox’s entry into the computer printer business flagged. As revenues fell and profits turned to losses, a new chief executive brought in from IBM was fired. A syndicate of banks threatened not to renew a $7 billion line of credit, without which the company would have had to file for bankruptcy protection. The company’s new chief executive, Anne Mulcahy, was forced to fire more than half of the company’s 96,000 workers, cut the research budget by 30 percent and sell half of Xerox’s stake in its successful joint venture with Fuji to raise cash.

While Mulcahy managed to stabilize the company, the imperative to continually satisfy shareholders with quarterly earnings growth meant that Xerox was never able to invest sufficiently in technology or brand development to thrive again. And by late 2015, the company attracted the attention of a number of bottom-fishing investors, among them Carl Icahn, who had first made his name on Wall Street in 1980 by buying Trans World Airlines, then a storied airline, and selling it off in pieces. Icahn threatened to run his own slate of directors unless Xerox agreed to fire its top executives and explore “strategic options”—a Wall Street euphemism for selling the company and distributing the cash to shareholders. Caught between an unforgiving marketplace and unforgiving investors, Xerox bowed to the investors. In January 2018, Xerox announced it would sell what was left of its copier business to Fuji, distribute a one-time dividend of $2.5 billion to Icahn and other shareholders and cease to exist as an independent business.10 The next day, a clever New York Times headline writer noted that the company whose name became a verb would now only be used in the “past tense.”11

* * *

The old Xerox, the successful Xerox, the innovative Xerox—the Xerox that inspired loyalty and admiration—thrived in an America in which there was a high level of trust in each other and in our common institutions, in which we felt responsibility for each other and believed that we all would sink or swim together. In economics, that locus of characteristics is called “social capital.” What the proponents of supply side economics, maximizing shareholder value and market justice overlook—why their formula no longer works, why their ideas are no longer valid—is that they have produced a kind of capitalism that corrodes social capital by undermining trust and discouraging socially cooperative behavior. That is the essential message of this book.

We all enjoy the benefits of social capital without thinking much about it. Social capital explains why our newspapers are still lying on the front lawn when we go to retrieve them in the morning, and why we take at face value the advice we get from doctors and lawyers and financial advisers. Because of social capital, we leave deposits with businesses we’ve never dealt with and work for days or even weeks in expectation of being paid later. Social capital explains why we hold doors for each other, and leave tips in restaurants we will never revisit and why we think nothing of withdrawing cash from the ATM with strangers standing behind us. In countries with high levels of social capital, people leave their front doors and bicycles unlocked, politely queue at bus stops and think nothing of letting their young children walk to school by themselves.

Social capital also provides the necessary grease for the increasingly complex machinery of capitalism, and for the increasingly contentious machinery of democracy. It gives us the confidence to take risks, make long-term investments and accept the inevitable dislocations caused by the gales of creative destruction. Social capital provides the support for formal institutions and unwritten rules and norms of behavior that foster cooperation and compromise—between management and labor, between businesses and their customers, between business and government and among people of different races, classes and political beliefs. Societies with more social capital are happier, healthier and wealthier. In societies without it, democratic capitalism struggles to survive.

Today, Americans see erosion of social capital in the declining trust they have in almost every institution in society.

We see it in lagging measures of worker engagement and the increase in the number of working-age males who have dropped out of the workforce.

We see it in the frequency of mass shootings, the decline in social contact with our neighbors and the appalling lack of civility on the Internet.

We see it in the way Americans sort themselves geographically—and virtually—into closed communities where everyone lives and thinks like they do.

We see it in a politics that has become polarized, partisan and paranoid.

We see it in a government where consensus is elusive, compromise is equated with treason and the aim of every newly elected Congress or administration is to undo everything done by its predecessor.

As a society, we are now caught in one of those self-reinforcing, downward spirals in which the erosion of social capital, government dysfunction, rising inequality and slowing rates of economic growth are all feeding off each other, with more of one leading to more of all the others. Such vicious cycles, by their nature, are very hard to stop. The rise of the Tea Party and the election of Donald Trump are both a consequence and a contributor to this dangerous dynamic.

The only way to break that cycle and replenish our stock of social capital is to do what Americans have done several times in our history, which is to embrace a different form of capitalism.

“Capitalism has always changed in order to survive and thrive,” wrote Martin Wolf, the highly respected and uncompromisingly pro-market columnist for the Financial Times, in an essay published in the wake of the 2008 financial crisis. “It needs to change again.”12

No less a figure than Laurence Fink, chairman of BlackRock, the world’s largest manager of other people’s money, recently wrote to the chief executives of every public company in America to declare that an economy organized solely around the goal of making profits was no longer economically or politically viable. “Society is demanding that companies, both public and private, serve a social purpose,” Fink admonished. “To prosper over time, every company must not only deliver financial performance, but also make a positive contribution to society.”13

The starting point for this book is the recognition that our current prosperity is not sustainable because it is not producing the kind of society that most of us desire. While Donald Trump’s election surely represented a rejection of the establishment elites, it was anything but an endorsement of leaving everything for the markets to decide. Those Americans waving pitchforks are not defenders of supply side economics, maximizing shareholder value or market justice—they are its victims.

Although this book is a critique of the free market ideas and conservative ideology that have recently shaped American capitalism, it also demands that liberal critics think harder about what is required for a just and prosperous society. Those who never miss an opportunity to complain about the level of inequality have rarely been willing to say what level, or what kinds, of inequality would be morally acceptable. Does it really offend our moral intuitions that billionaire hedge fund managers are pulling away from millionaire lawyers and doctors? Is it relative income and economic standing we really care about, or will gains in absolute income and mobility satisfy our concern? What if rising inequality in rich nations is part of a process by which billions of people in poor countries are lifted out of poverty—shouldn’t we welcome that?

My aim in this book is to help rescue the public conversation about American capitalism from the easy and predictable moralizing of the pro-market right (“greed is good, redistribution is theft and concern about inequality is nothing but class envy”) and the anti-market left (“all inequality is bad, the rich are just lucky and markets are morally corrupting”). Or, as Catholic University historian Jerry Muller has put it, to move beyond the unsatisfying choice between the “politics of privilege” and the “politics of resentment.”14 There is a rich and important conversation still to be had about what kind of society we want and what variety of capitalism would best achieve it. The reason our economic debate is in a rut is that it has become too much about means and not enough about ends—too much about tax rates and income shares and not enough about things like virtue, community and justice. It has become too much about rights and not enough about responsibility, too much about moral absolutes and not enough about striking the right balance among conflicting moral obligations.

What I bring to this discussion are the talents and habits of mind of a journalist who has been observing business, politics and the economy for more than four decades. I am not a social scientist, but I have drawn from a great deal of research by people who are, and I have tried to give a good account of their work and reconcile their often conflicting points of view. My hope is that you will find the analysis sound, the conclusions convincing and the observations consistent with what you have observed and experienced. But I will consider it a success if this book simply helps you to think about American capitalism in a new way, to see it in a different light and consider it from a different angle of view. In today’s polarized and ideologically charged environment, that alone would be an accomplishment.

Copyright © 2018 by Steven Pearlstein