Fixing social inequality in the “free market”

May 24, 2016

By Jeffrey Hollender Mar. 30, 2016

We live with an illusion so powerful that we endlessly mistake it for reality. Merriam-Webster defines “free market” as “an economic market or system in which prices are based on competition among private businesses and not controlled by a government.”

Consumers always wondered why Seventh Generation, the company I co-founded in 1988, sold its bath tissue—made from 100 percent recycled fiber—at a higher price than traditional, nonrecycled brands. Was it because we were small and lacked the leverage to ensure the lowest costs? Was our supply chain inefficient? Was it because we paid our staff higher wages?

The answer had everything to do with the supposed free market, specifically US government subsidies to the virgin fiber industry. A 1999 report calculated that Congress—by assigning capital gains status to timber sales, which allowed forest service sales of timber at below its cost of operation, and free or below-cost road construction—gave the virgin fiber industry $4 billion in government subsidies over a five-year period.

What did that do? It made every roll of Seventh Generation bath tissue more expensive than our competitors’, which used virgin fiber and reaped those benefits. That’s when I knew the game was fixed, and we weren’t operating in a free market.

In his book Saving Capitalism: For the Many, Not the Few, Robert Reich provides an outstanding guide to many of the factors that prevent the possibility of a truly free market. He writes:

Few ideas have more profoundly poisoned the minds of more people than the notion of a “free market” existing somewhere in the universe, into which the government “intrudes.” In this view, whatever inequality or insecurity the market generates is assumed to be natural and the inevitable consequences of impersonal “market forces.” … If you aren’t paid enough to live on, so be it. If others rake in billions, they must be worth it. If millions of people are unemployed or their paychecks are shrinking or they’ll have to work two or three jobs and have no idea what they’ll be earning next month or even next week, that’s unfortunate but it’s the outcome of “market forces.”

Reich’s point is that market forces aren’t the result of a free market, which doesn’t exist, never has existed, and probably never will exist. What we do have is a highly engineered marketplace with hundreds of thousands of rules—rules most often created behind closed doors by people who will benefit from every word and comma they put into place. These rules take endless form—the tax code, appropriations bills, new laws, court rulings, executive orders, and administrative guidance are just a few.

Democrats and Republicans alike—at all levels of government and in all three branches—design these market forces. They grant favors to local businesses, friends, and favored industries, as well as emerging and dying technologies. While these rules are more likely to limit the liability from the disastrous effects of mountain top coal removal than they are to provide tax benefits to solar energy, most industries have figured out how to play the game. They hire lobbyists and former politicians, and donate to politicians—and they find the benefits exponentially greater than the cost. Journalist Nicholas Kristof noted that the chemical and pharmaceutical industries alone spent $121,000 per member of Congress on lobbying last year.

The governing classes and elected officials have always created the rules of the economic game. These legal frameworks and the systems they support affect our nation’s economy and daily life more than the most visible government programs, including social security, food stamps, or health care.

Reich writes:  “The rules are the economy. … As the economic historian Karl Polanyi recognized [in his 1944 book, The Great Transformation], those who argue for “less government” are really arguing for different government—often one that favors them or their patrons. “Deregulation” of the financial sector in the 1980s and 1990s, for example, could more appropriately be described as “reregulation.” It did not mean less government. It meant a different set of rules.”

In the book 23 Things They Don’t Tell You About Capitalism, Ha-Joon Chang writes:

The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How “free” a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined “free market” is the first step towards understanding capitalism.

Our “Unfree Market”

My personal experience with how the market affects the price of toilet paper happened late in the game. Many opposed environmental regulations, which first appeared a few decades ago on things like cars and factory emissions, as serious infringements on our freedom to choose. Opponents asked: If people want to drive in more-polluting cars, or if factories find that more-polluting production methods are more profitable, why should government stop them? Today, most people accept these regulations, but they’re another sign of an unfree market.

Higher education has never been part of the free market—admissions spots at universities are “sold” more often than we’d like to believe, whether through the influence of legal donations, or powerful friends or family. Many countries ban or severely limit the sale of firearms or alcohol. Government explicitly licenses medicines upon proof of safety. There is a ban on selling human beings. This hyperbole makes a point: You can’t just turn up in the New York Stock Exchange with a bag of shares and sell them. There are rules to how we do business, and they frequently don’t engender fairness.

Most would consider monopolies another sign of an unfree market. Monsanto, through the licensing of technology with its GMO seeds, controls 90 percent of the soybeans and 80 percent of the corn planted and grown in America. According to the Center for Food Safety, this drove up the average cost of planting a single acre of soybeans 325 percent and corn 2,659 percent between 1994 and 2011.

Powdered cocaine is a drug generally preferred by rich, white Americans, while the poor tend to use crack cocaine. While both are illegal, crack carries a legal penalty 100 times longer than the same substance in powdered form. There’s also no free market when it comes to jail terms. Not surprisingly, with wealth, power, and influence come lighter criminal penalties.

The free market is an illusion. If some markets look free, it is only because we so totally accept the regulations that are propping them up that they become invisible.

Social Inequity by Design

“We can have a democracy or we can have great wealth in the hands of a few, but we cannot have both.”—Louis Brandeis

An undeniable result of this unfree market is the continued consolidation of wealth and influence. On average, CEO pay has increased 937 percent between 1978 and 2013. The average worker’s pay increased just 10.2 percent over the same period. This increase has little to do with the increasing value of these CEOs, and everything to do with the power and influence they have over the rules of the system that allow them to enrich themselves.

The real earnings of the median male have declined 19 percent since 1970, and the median male with only a high school diploma saw his real earnings fall 41 percent from 1970 to 2010. Among those classified as poor, 20.4 million people live in what is considered “deep poverty,” meaning their incomes are 50 percent below the official poverty line. One quarter of the nation’s Hispanics and 27 percent of African Americans live in poverty.

Reich writes, “There is no longer any significant countervailing force (like powerful labor unions), no force to constrain or balance the growing political strength of large corporations, Wall Street, and the very wealthy.” He also describes research conducted by Princeton professors Martin Gilens and Benjamin Page, which analyzed 1,799 policy issues to determine the influence of economic elites and business groups on public policy issues compared to average citizens. It found that, “The preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact on public policy.”  The notion that we live in a democracy turns out to be just another illusion. The deteriorated state of our democracy more easily enables the wealthy and powerful to write the rules and give themselves the greatest benefits.

In the 2012 election, the Center for Responsive Politics calculated that the political network established by the Charles and David Koch spent more than $400 million to influence the outcome of the election at local, state, and federal levels. The richest .01 percent of US households also gave Democratic candidates four times as much money as all the US unions combined.

We have a system that has already chosen winners and losers. A system that elaborately ensures who gets into Ivy League colleges, gets the best jobs, makes the most money, and enjoys the most privileged lives. This is the same system that decides which businesses receive the most corporate welfare, benefit most from regulations, receive the best protection from foreign competitors, and are most likely to get the best returns on their lobbying dollars. We have, at the end of the day, the freest marketplace that money can buy.

Fixing the Problem

The solution lies not in a freer marketplace with less government intervention, but in a marketplace that expresses the wishes and best interests of the majority—in one that fairly protects the rights of minorities with what we might call a “democratic marketplace,” driven by a commitment to justice, equity, sustainability, and the well-being of all.

How do we move toward this goal? Here are a 14 ways to start (Reich articulates several of these in chapters 19-21 of his book.)

  1. Get money out of politics. The 2010 Supreme Court decision Citizens United v. FEC swept away a century of precedent that barred corporate money in our elections and endorsed the dangerous fiction that corporations have the same constitutional rights as living, breathing people. In effect, this gives corporations a veto over our democratically enacted laws, because a constitutional right trumps a regular law when the two conflict. This threatens our laws protecting the safety of our food, the air we breathe, our health care, our civil rights, and the fundamental underpinnings of our democracy—essentially, any law that could get in the way of corporate profits. We must overturn Citizens United v. FEC, support organizations like Free Speech For People (which has led an attack on the ruling from the start), and ultimately transition to 100 percent publically financed elections.
  2. Restrict the movement between employment in government service and large corporations. Public confidence in the integrity of the federal government is alarmingly low. One of the most potent factors contributing to this phenomenon is the widespread (and not unfounded) belief that powerful special interests have taken over. Special interests—primarily large corporations and their trade associations—spend huge sums on campaign contributions and lobbying. But business also exercises its influence in the movement of certain people into and out of important policymaking posts in the executive and legislative branches. This “revolving door” increases the likelihood that policymakers are sympathetic to the needs of business, either because they come from that world or plan to move to it. (Take a deeper look at the problem and potential solutions here.)
  3. Require disclosure on the source of funding for any and all documents published academically or in the public domain. Authors, for example, should routinely include information about research funding in all papers they prepare for publication. Editors should require statements about conflicts of interest from authors—such as information about financial, personal, political, intellectual, or religious interests relevant to the area of research or discussion—and otherwise follow best practices on publication ethics.
  4. Get serious about preventing and eliminating monopolies. Government has occasionally tried, through both legislation and court cases, to regulate monopolistic businesses, but stand-outs like the railroads of the 19th CenturyMicrosoft, and IBM were then, this is now—and we’re failing miserably. The societal and economic dangers of monopolies are clear. Our failure to regulate, whether it’s Google or Monsanto, results in higher prices, lower-quality service, unfair supply-chain pressure, lack of innovation, and reduced competition.
  5. End all corporate financial subsidies. Reich said it best:  “When corporations get special handouts from the government—subsidies and tax breaks—it costs you. It means you have to pay more in taxes to make up for these hidden expenses. And government has less money for good schools and roads, Medicare and national defense, and everything else you need. You might call these special corporate handouts “corporate welfare,” but at least welfare goes to real people in need. In the big picture, corporate handouts are costing tens of billions of dollars a year. Some estimates put it over $100 billion. … There’s no reason any corporations should be on the dole, or that your hard-earned dollars should be going to them for no reason but their political clout. So we have to demand an end to corporate welfare. No more handouts to particular corporations and industries simply because they’re big enough and powerful enough to get them. No more specialized tax breaks. No more exemptions or special treatment. No more crony capitalism.”  Since 1994, the Green Scissors Campaign has been working with Congress and the administration to end environmentally harmful and wasteful spending.
  6.  End insider trading.Funding to prosecute insider trading must be robust and criminal penalties stiffer. Today prosecutors going after insider trading have a more difficult mountain to climb than ever before. Now prosecutors have to prove the person receiving a tip knew the person providing them insider information would make a personal gain from it. Just providing illegal information isn’t enough.New York Times columnist Joe Nocera wrote, “There is no law on the books banning [insider trading]; rather, it comes under the general purview of securities fraud. Over the years, prosecutors and the Securities and Exchange Commission have worked to expand what constitutes insider trading—and there have been times when the courts have refused to go along.”
  7.  Transition to aliving wage.While the minimum wage sets an earnings threshold under which our society is not willing to let families slip, it fails to take into consideration many of the basic expenses of families. Consequently, many working adults must seek public assistance and/or hold multiple jobs to afford to feed, clothe, house, and provide medical care for themselves and their families. Establishing a living wage—an approximate income needed to meet a family’s basic needs—would enable the working poor to achieve financial independence while maintaining housing and food security.
  8.  Expand the definition of unionized labor to increase the number of workers that unions represent.The percentage of union members in the labor force is 11.1 percent, down from a high of 30 percent in the 1950s. We must pass the Employee Free Choice Act, designed to make it easier for workers to organize in their workplaces. The proposed “card check” system allows workers to call or not call an election for union representation by simply checking off their preference on a card.
  9.  Set a corporate flat tax at 25 percent.Despite the fact that most small and medium-size businesses pay corporate taxes at a rate of 35 percent, most large companies pay nowhere near that amount. Apple, Google, GE, Starbucks, take your pick—they all legally avoid paying taxes that smaller companies can’t escape.
  10.  Eliminate the second home mortgage deduction.Home ownership is essential, but we don’t need to give a tax break to those wealthy enough to own a second home.
  11.  Increase funding available to fundEmployee Stock Ownership Plansand build greater tax incentives for other forms of employee ownership. Job security, satisfaction, and productivity are significantly higher in employee-owned businesses compared to traditional companies, and research has shown that employee-owned businesses are more flexible and resilient in times of economic crisis. They also foster greater employee commitment and engagement, reduced absenteeism, superior attraction and retention of talent, lower turnover, and improved consumer confidence. Best of all they perform better financially!  The Employee Ownership Index (EOI), compiled quarterly by the equity incentives team at law firm Field Fisher Waterhouse, compares the share price performance of companies that are more than 10 percent owned by employees or employee trusts with the performance of FTSE All Share companies. Since 1992, the EOI has outperformed the FTSE All Share by an average of 10 percent annually. For more information visit the National Center for Employee Ownership.
  12. Stop transferring the cost of product externalities from business to society.Today, the cost to clean up the groundwater pollution resulting from traditional agricultures use of pesticides, or the cost of the adverse human health impacts of pollution from automobiles doesn’t show up in product costs. Including those costs in product pricing, and in companies’ profit and loss statements is called full-cost accounting. Companies don’t currently use this accounting practice, and until they do, we will never willingly make choices that are aligned with the best interest of future generations. By mispricing both risks and consequences, we encourage corporate decisions that are at odds with the long-term interests of society.  The American Sustainable Business Council has a working group developing policy recommendations that would begin to move us toward full-cost accounting.
  13. Permanently eliminate payroll taxes.In aUS News and World Report article, Dean Clancy wrote: “The payroll tax is the biggest tax most Americans pay, and regressive. It falls hardest on low-wage workers. Eliminating it would provide meaningful relief to every American wage-earner, with the greatest relief going to those who need the help the most. Abolishing it would be economically beneficial and politically popular. To avoid increasing the deficit, we could raise or impose other taxes that are less regressive.”
  14. Mandate that women make up 50 percent of the directors of all public and private companies over the next three years. In 2015, the Peterson Institute for International Economics and EY analyzed results from 21,980 global, publicly traded companies, in 91 countries, from various industries and sectors. It showed that having at least 30 percent of women in leadership positions, or the “C-suite,” adds 6 percent to net profit margin.

We face no shortage of challenges to transition the freest marketplace that money can buy into the fairest and most just market that a democracy can give birth to. We can do it, but it will require active and ongoing commitment.

Jeffrey Hollender (@JeffHollender) is co-founder and former CEO of Seventh Generation, and now the CEO of Sustain Natural. For more than 25 years, Hollender has been helping millions of Americans make green and ethical product choices, beginning with his bestselling book, How to Make the World a Better Place: A Guide to Doing Good. He went on to author and co-author six additional books, including The Responsibility Revolution and Planet Home. Hollender is on the boards of Greenpeace US and Verite, and is co-founder of the American Sustainable Business Council, a coalition committed to changing the rules of business through public policy.


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