Americans used to have a relatively egalitarian view of markets. How did they come to accept extreme inequality as an innate part of their economic system? At the heart of this change is a radical shift in the meaning of American capitalism itself.

great depression
People waiting for relief checks during the Great Depression. Dorothea Lange, 1937 [Public domain]

American capitalism used to mean economic equality and security. When I mention this in speeches or talks today, this observation prompts laughter, or outright disbelief. But it’s true. Americans used to believe economic equality was foundational to our political system. That America—at least for those considered citizens—carried with it an implicit promise of rough commercial equality. How did this notion change so radically?

In 2008, we faced an earth-shattering financial crisis. More than anything, this crisis structured how Americans consider their economic system. As former Clinton official Reed Hundt recently observed, President Barack Obama and his advisors missed the opportunity the crisis presented to reorder social priorities. Though operating in good faith, these political officials ended up embracing a political economic framework that shifted wealth and power upward, and ultimately created a more chaotic political order. Today, young people have a higher favorability rating for socialism than capitalism.

I was a staffer in Congress during the crisis, and it was incredibly difficult to understand why our political leaders handled the collapse of our financial system in such a destabilizing manner. Did they not understand that massive interventions to prioritize the interests of the powerful would undercut the legitimacy of the political system?

To begin answering this question, I looked at how American leaders handled the financial crisis of rolling bank runs occurring from 1929-1933, which was the last time we dealt with such a profound political challenge. What I noticed were profound ideological differences that played out in the response to the crisis. In short, in the 1930s New Dealers broke up banks and restructured the economy. This time, we didn’t.

My conclusion, after researching how New Dealers thought about the world, versus how the New Democrats surrounding Obama thought about the world, led me to the observation that the meaning of American capitalism changed. We transitioned from a relatively egalitarian New Deal state to today’s unequal and concentrated corporate apparatus. This change was accompanied by a parallel shift in how Americans thought about themselves as economic and political actors.

Let’s start with where we were.

In 1954, Harvard antitrust economist Carl Kaysen wrote in the New Republic about his perception that liberals’ suspicion of financiers had lost its ardor. “The Money Trust,” he wrote, referencing the dominant financial structure of early 20th century monopolists, “has disappeared, and Wall Street is a symbol only to students and those with long memories.” Kaysen had concerns over monopoly, but his piece was as much an argument that liberals had won the battle. “We have grown very rich,” he contended, and “no longer are hours long and wages low for the mass of industrial workers.”

This view—that conflict over economic power had been resolved in favor of democratic forces—was so accepted at the time that Republican President Dwight Eisenhower distanced himself from Depression-era Republican President Herbert Hoover and mocked the idea that anyone might want to eliminate Social Security. In the business community, it was just as accepted. “Banks offer an opportunity to an educated, personable, and uncourageous young man for a pleasant, interesting, dignified life,” wrote a Chicago banker in 1950.

John Kenneth Galbraith, the preeminent economist of his day, jeered at the notion business executives sought excessively high pay. The “typical business executive,” he wrote in 1958, “would surely endanger his chance for advancement if he were suspected of goldbricking because of his resentment over the inadequacy of his after-tax income.”

Writing of John D. Rockefeller, Walter Lippmann stated in 1937: “Before he started his enterprises it was not possible to make so much money; before he died, it had become the settled policy of this country that no man would be permitted to make so much money. He lived long enough to see the methods by which such a fortune can be accumulated, outlawed by public opinion, forbidden by statute, and prevented by the tax laws.”

In 1952, New Dealer David Lilienthal argued that the New Deal had accomplished its purpose. “The all-powerful tyrannic employer is all but gone. Gone too, except for historians, is the picture of workers who must endure long hours of labor, with no vacations, no decent opportunity to have their grievances heard.”

To find monopoly and inequality, as Congressman and anti-monopolist Emanuel Celler wrote in his 1953 biography, you’d have to travel to Europe, where among the impoverished former aristocracies and kingdoms you’d observe “concentrated wealth in the hands of a few and the grim daily struggle for bread for the majority of the people.” Celler chalked these differences up to America’s market-based system of small business, versus Europe’s system of monopolies and cartels. “European production,” he observed, “to keep its profits high and its headaches few, rejected the vigor of competition, the infusion of new ideas the prod and the spur of matching wits, which create the dynamic economy.”

Celler’s passage reminded me of the opening lines of Alexis de Tocqueville’s great discussion of democracy in the 1830s, when he wrote that “nothing struck me more forcibly than the general equality of conditions.” Economic equality was not, of course, the only tentpole of American self-perception. Racial and gender-based divisions and tyrannical structures were also foundational elements of the American experiment. But debates over cultural identity were often oriented around who could be a citizen. Citizenship, once someone had it, included a host of political and economic rights.

Even before the Revolution, in 1765, John Adams said, “Property monopolized or in the Possession of a few is a Curse to Mankind. We should preserve not an Absolute Equality.—this is unnecessary, but preserve all from extreme Poverty, and all others from extravagant Riches.” From what I found, the conventional wisdom of American markets as a force for equality and against aristocracy represents a long-standing trend, not necessarily of economic equality but of the self-perception that economic equality among citizens was foundational to the American experiment.

In this framework, the politics of production, the idea of equality of rights to the marketplace as a mechanism to induce equality, took center stage. How did this attitude change so radically? How did we move our sense of self, from the idea that America was an experiment in economic egalitarianism for citizens to today’s general understanding that radical inequality is an innate characteristic of American capitalism?

I trace this change to three men. The first two are on the left: John Kenneth Galbraith, the great economist, and Richard Hofstadter, the great historian. Both wrote beautiful essays. Galbraith, a courageous opponent of the war in Vietnam, penned best-seller after best-seller, famously coining the term “conventional wisdom.” Both had a view that history unspooled in a sort of mechanistic scientific manner, and that monopoly was progressive and inevitable. Galbraith created a set of theories that encouraged left-wingers to stop seeing economic power, using terms like countervailing power, the technostructure, and most importantly, affluence—his view that America was just endlessly and automatically productive.

Hofstadter wrote a new version of history in which he airbrushed out earlier well-known fights over monopoly power and financial capital. Here’s a sentence from Hoftstadter’s early work: “Americans may not have quarreled over profound ideological matters as these are formulated in the history of political thought, but they quarreled consistently enough over issues that had real pith and moment.” “Pith and moment” is a gorgeous phrase, but this version of history obscures genuine conflict over the politics of production. Hofstadter even went so far as to mock the idea that there were any real ideological disagreements between Herbert Hoover and Franklin Delano Roosevelt.

Hofstadter substituted a different vision of social justice, one that replaced the struggle for economic equality and the fight against aristocracy in the form of monopoly and financial concentration. Hofstadter maintained that earlier conflicts, though garbed in the clothing of political economy, were really about Anglo-Saxon men who were losing their influence over culture because of an emerging polyglot immigrant society. Populists of the 1890s were in his view not farmers upset with railroads, but proto-fascists similar to racist white small businessmen who loved Joseph McCarthy and his anti-Communist witch hunts in the 1950s. By contrast, Wall Street bankers were forward-looking cosmopolitan progressives. The point of politics became not fighting plutocracy, but to work at tolerance, peace, psychological satisfaction, beauty, and art in an affluent society beset by immoral foreign conflicts. They were not wrong in observing important social problems, and with powerful beautifully expressive arguments, they ended up erasing corporate power as a significant problem among Democrats.

The third man was Aaron Director, who created the law and economics movement to institutionalize pro-concentration theories on the right. Director was not a great writer, and in fact he suffered from writer’s block. But he was a brilliant empire-builder and strategist, and quietly converted others to his powerful way of thinking. More than anyone else, Director broke conservatism away from its traditional skepticism of concentrated power and shifted it towards a full embrace of corporate monopoly. Director helped persuade a whole host of men you may have heard of like Milton Friedman, George Stigler, Robert Bork, John McGee, Richard Posner, and so forth.

“From 1975 until the early 1980s, these new, increasingly dominant factions of both parties restructured politics around the view that concentrated financial power—monopoly power—was mostly inevitable and efficient.”

In the 1960s, the minds of the giant baby boom generation were shaped by Hofstadter, Galbraith, and Director, whether directly or indirectly. In the next decade, the change over from the New Deal concept of justice to this neoliberal framework happened. In his book “Changing Sources of Power,” Fred Dutton, a political operative who helped reorganize the Democratic Party after the 1968 convention, essentially recommended eliminating the white working class as part of the Democratic coalition.

“The balance of political power,” Dutton wrote, had gone “from the economic to the psychological to a certain extent—from the stomach and pocketbook to the psyche, and perhaps sooner or later to the soul.” In 1975, a generation trained on these ideas arrived in the Democratic Party. This was Bill Clinton’s generation, the so-called Watergate Babies. In 1978, the Republican version of the Watergate Babies came into office in the form of the New Right (a class which included a young Newt Gingrich).

From 1975 until the early 1980s, these new, increasingly dominant factions of both parties restructured politics around the view that concentrated financial power—monopoly power—was mostly inevitable and efficient. Jimmy Carter changed rules in finance, trucking, airlines, and telecommunications, allowing private concentrated capital to regulate these spheres of the economy rather than democratic institutions. Reagan continued this trend, which came to be known as ‘deregulation.’ Reagan also eliminated antitrust enforcement. Democrats noticed the government cuts and attacks on unions, but they largely missed the shift in antitrust.

Enter Michael Milken, the banker who belongs to the 1880s robber baron era. Milken is fascinating, because he is a key organizer of the 1980s restructuring of corporate America, but with the attitude of a counter-cultural revolutionary. This is what he wrote in 1970: “Unlike other crusaders from Berkeley, I have chosen Wall Street as my battleground for improving society.”

Milken helped a number of important companies gain financing in the 1980s, among them CNN and MCI. But his lasting contribution to the American economic order is changing the corporation from a legal structure designed to produce goods and services to one designed purely to generate cash. Milken used junk bonds to concentrate corporate power from the early 1970s until 1989, when the junk bond market crashed. The corporate raiders he staked often targeted companies that were well-managed, with large research divisions, prudent cash management, and lots of assets (aka factories), stuff you could take and sell for ready cash to pay out to management or financiers. Milken pushed corporate leaders to focus purely on cash generation.

These raiders operated in the name of efficiency, using some of the theories that Director’s disciples had created. Many of the characters behind Trump, like Carl Icahn, are part of the revolution initiated by Milken. And it’s not just Trump. Mitt Romney, for instance, made his money in “private equity,” which is the name of the leveraged buyout industry that had to be rebranded because its name was so toxic.

Milken didn’t do this because he was brilliant, but because the political context had changed. Reagan relaxed antitrust and white-collar criminal enforcement, with little pushback from Democrats. The Reagan and Carter deregulatory efforts, along with the removal of New Deal era rules on finance, opened the door Milken walked through. Just the prospect of takeovers changed the way corporations operated. Between 1984-1985, 398 of the 950 largest companies in North America restructured—only 52 in response to actual takeover bids—mostly by loading up on debt.

In 1993, it looked like this structural shift might revert. Bill Clinton, a Democrat, took office, along with a Democratic Congress. And this is when the new intellectual framework organized by Hofstadter, Galbraith, and Director was firmly solidified. Clinton was a Watergate Baby, and he organized the government to globalize the political economy revolution Reagan had helped organize domestically. There were roll-ups in almost every sector of the economy, especially in computing technology, the new railroads of the era.

The Clinton era looked to many like a success, with wage gains and the personal computer and internet revolution. And with shows like the West Wing and copycat politicians like Tony Blair all over the world, the vision Clinton promoted became inculcated into how most Americans, and the center-left globally, saw politics. Questions of industrial organization just didn’t matter. To the extent that they did, they were reduced to faint echoes of calling for higher wages for the poor through higher minimum wage laws, or for stronger consumer protection.

This shrinking of politics to exclude corporate power was a profound shift. In 1953, Americans took for granted an equality of economic conditions. They saw markets as equalizing, and monopolies and concentrated finance as a potential threats to the egalitarianism of American capitalism. By 2009, our leaders could no longer tell the difference between a healthy open market and concentrated financial power, and just assumed American capitalism meant radical inequality.

That year, Barack Obama was asked why America hadn’t taken over the banks and restructured them, like Sweden had in the early 1990s, when it suffered a similar banking crisis. Sweden based its bank resolution model on what FDR had done in the 1930s. When Obama was asked this question, people were talking about the idea of Too Big to Fail banks as the first popular anti-monopoly slogan put forward since Brandeis’s Other People’s Money.

Obama said that Sweden’s plan was a good ideafor Sweden. But there was a problem. Sweden was a small country with a small number of banks. America, by contrast, is really big.

Besides, he added, “We also have different traditions in this country.”

Matt Stoller is the author of the upcoming book Goliath: The Hundred Year War Between Monopoly Power and Democracy. You can pre-order it here. You can follow him on twitter @matthewstoller.

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