The Capitalist Illusion

"The Economy, Stupid," read the famous sign that James Carville posted in Bill Clinton's Little Rock campaign headquarters in the 1992 presidential race. It was a reminder to the campaign team that they needed to focus on the weakness of the economic recovery under their opponent, President George H.W. Bush. Both before that election and certainly since, many presidential campaigns have been decided by voters' perceptions of the strength or weakness of the economy. Donald Trump's surprising victory in 2016 had much to do with a large segment of the electorate believing that the economy under Obama had failed to generate the kind of growth that they expected. Even some voters who were willing to credit President Obama with rescuing the economy from free fall at the time of his inauguration were worried that Hillary Clinton was unlikely to do well in generating good jobs and increasing real wages. A lot of voters believed that Donald Trump's business success would make him a more effective economic manager than his opponent.

While views about the health of the economy really matter for politics, so also do beliefs about what kind of economy we have, how it works, and what policies might strengthen or weaken it. Today, virtually everybody — left, right, and center — believes both that our economy is capitalist and that the economy is autonomous, coherent, and regulated by its own internal logics. Many go to the next step and embrace the idea that if we pursue policies that conflict with the imperatives of capitalism, they will inevitably backfire and produce slower growth and fewer jobs.

Here is the problem. For years now, voters have cast their ballots for the candidate they think will manage the economy more effectively, but they are almost always disappointed by the results. Disappointment occurs because presidents and their advisers believe that because we have a capitalist economy, our policy options are extremely constrained. Whatever ambitions a newly elected president has when he first arrives at 1600 Pennsylvania Avenue, he pretty soon discovers that there is no set of legitimate policy tools that can deliver what the public wants because of the constraints of capitalism.

And so our politics have been caught in a loop that alternates between center-left Democrats and increasingly extreme Republicans, none of whom have been able to make good on their economic promises. Meanwhile, much of the electorate remains convinced that the nation is headed in the wrong direction. It now seems inevitable that a disappointed public will turn against whoever is in the White House; the only question is how soon that disillusionment will set in.

There is, however, a way out of this cycle of raised hopes followed by disappointment, and it involves challenging the received wisdom that capitalism operates according to its own inner laws. My title, Capitalism: The Future of an Illusion, is borrowed from Sigmund Freud's 1927 The Future of an Illusion. The illusion that Freud was challenging was religion; he argued in that book that religions tell made-up stories that address some of the primal psychological conflicts of human existence. At the time, Freud's title offended many, but today, it is far more radical and disturbing to suggest that capitalism is an illusion. After all, profit-oriented firms own and control most of the world's productive capacity. Why would anybody suggest that a label that is so obviously appropriate is, instead, an illusion?

Here, Freud is a useful guide. In describing religion as an illusion, Freud did not imagine that it was inconsequential or unimportant. He knew that people's religious beliefs shaped their actions; he wrote his book shortly after World War I, when millions had died at the front imagining that they were fighting with God on their side. Moreover, Freud was keenly aware that religious teachings were linked to puritanical attitudes toward human sexuality that he viewed as psychologically destructive. In a word, Freud was insisting that religion was both extremely important and an illusion.

My argument is parallel to this. The widespread belief that we live in a capitalist society is enormously consequential. But many of the stories that people tell us about the nature of capitalism are myths comparable to the biblical story of the Garden of Eden. The project of this book is to debunk the view of capitalism that has become hegemonic. Dispelling this illusion will open up possibilities for political and economic reform that exist now only on the margins of contemporary political debate.

Deep political crises in both the U.S. and Europe indicate the urgency of opening up space for major reforms. Trump's unprecedented election is a symptom of how badly the U.S. political system is broken. It is the first time since 1940 that a political outsider was able to win the nomination of one of the major parties, but Trump is a far more troubling outsider than Wendell Willkie. Trump won his party's nomination because a majority of Republican voters were in open revolt against the party establishment. His populist rhetoric against immigrants and free trade deals and his promise to "make America great again" resonated with voters. During the same primary season, Bernie Sanders's populist challenge to Hillary Clinton was also far more successful than most observers had expected. Even though Clinton ultimately prevailed, the resonance of Sanders's attacks on the millionaire and billionaire class also indicated deep currents of discontent among voters.

John Judis has recently linked the populist insurgencies led by Trump and Sanders to similar patterns in European politics. Because of the differences in the electoral systems, the European challengers tend to come from outsider parties, but Judis shows that populist parties of the right and of the left have been gaining support in many countries of Europe, while support for the traditional mainstream governing parties has been eroding. The right-wing populist parties include the United Kingdom Independence Party, the French National Front, the Danish People's Party, and the Alternative Party in Germany, while the leftwing populist parties include Syriza in Greece and Podemos in Spain.

Judis and other observers argue that the recent successes of these populist insurgencies are due to the economic difficulties that the U.S. and Europe have experienced since the global financial crisis of 2008. Mainstream parties have insisted for years that a global economy based on free trade and free capital mobility would lift all boats and assure ever-rising standards of living. Yet the public sees instead rising levels of unemployment and underemployment, stagnant incomes, and greater economic uncertainty. Their votes for these various populist insurgencies are a signal to the leaders of the establishment that something is very wrong and that something must be done.

But the...