Small Business’s Class War Could Finish Off American Dynamism

Josh G/Boatyard aerial view

When we ask why nations and empires fail, we often point to how their ruling classes ossified and stagnated. Aware of their decline but unable to revive themselves, they instead struck down any possible source of dynamism and innovation that could threaten their rule. On the other hand, the freeness of our political and economic system was supposed to save us from this fate.

As it stands, the line separating America from fossilizing into one of these historical relics is precariously thin, and more so than it has ever been. But there’s a great irony to this fact. Around 40 years ago, the U.S. and Britain embraced the political commitments of what we call neoliberalism, a decision which was supposed to spark growth and disrupt stagnation. But instead of leading to increased dynamism and innovation, this regime presided over and even accelerated the very stagnation it warned against.

The role of political elites is to produce state ideology that is received as legitimate, one that can find support in a coalition of social classes. Throughout the post-war social democratic period, this coalition had mainly been a compromise between large business owners, often exercising a degree of monopoly power, and the working class. The social democratic period, which lasted from the New Deal to around 1980, was a period where capital—as the abstract motor of the economy—had absolute power, rather than any particular social class. It stands in stark contrast to what came both before and after. This was the nature of the compromise: both workers and capitalists yielded to the rationalization of production, to ever growing investment in fixed capital, increasing the ability to produce a great mass of commodities.  

Capital, after all, isn’t reducible to the simple commodity, nor markets, nor even profit. Marx called capital the “dead labor” which subsists on the living—congealed in the machinery of production, and coming to life in the cycle of creating value by employing labor. Capital owners serve the purposes of its development through their competition and profit seeking. But there are also times where the expansion of capital as such can conflict with the interests of its owners. In this case, that conflict arose in the profitability crisis of the 1970s. Caused by supply shocks and strong wage growth pressures, it was the straw that broke the camel’s back. After years of fixed capital investment taking up larger and larger shares of surplus, at the expense of capitalist consumption, the compromise exploded. 

The state response to the profitability crisis wasn’t simply an immediate regulatory adjustment. It created a change that rippled throughout state ideological apparatuses, especially the political parties and the universities. The state and its appendages recognized the crisis of legitimacy which rocked the social democratic consensus. In response, they sought a new base for legitimacy on business alone, through a political economy which drove down wages and undermined organized labor. In the framework of this ideology, those who did not belong to the capitalist class became consumers rather than workers, still selling their labor but benefiting from low prices to maintain their lifestyles. 

The neoliberal reformers didn’t really have any other choice if they wanted to preserve the system of value expansion and circulation of commodities that underpinned the state itself, and this consensus grew to encompass the entire Overton Window in America, Britain, and other Western nations. Despite conservative elements like the Thatcher and Reagan coalitions sparking this process, many reformers ultimately sided with the ongoing cultural changes in the Western world. Economic interests took precedence over moral conflicts, which were relegated to performative squabbles in election seasons.

This was a decisive change from the settlement based on developing capital as such. In doing this, pro-market reformers also cemented the small business owner as a real economic and political entity—a byproduct of atomization. This played into breaking the back of organized labor, and the lowering of real wages. 

But that new class has now come back to haunt political elites. The promised dynamism, and subsequent explosion of productivity and innovation, never came. Even the computer, the internet, and their related technological wonders have done little to boost productivity of industry. This phenomenon was famously identified by economist Robert Solow who noted in 1987: “You can see the computer age everywhere but in the productivity statistics.” Indeed, average productivity growth since 1977, when the first personal computers were mass produced, has dropped to around 60% of what it was from 1949 to 1977. While the first period also saw a number of productivity bursts reaching over 5% growth, these became far rarer in the second one.

But the neoliberal settlement did not just affect the system of production. It also fundamentally undermined how we reproduce and utilize scientific knowledge. Without overturning it, America is set to face an ever greater material decline, accelerated by the class conflicts which continue to beset it.

The Making of Neoliberalism

The political economy of this settlement can only be understood through two major economic shifts that formed its preconditions: a consolidating financial industry and an atomizing non-financial industry. The 1970s profitability crisis that broke out across the developed world made the old regulatory regime untenable. Its chief causes were trade union power, supply shocks, and the end of post-war redevelopment. The real cost of inputs—including both labor and natural resources like oil—rose dramatically in this period. Fixed capital investment, and with it capital consumption costs, had also been rising as a share of output, a signal of lower capital productivity. All the while, American net exports went increasingly negative due to competition from the newly redeveloped Western Europe and Japan.

The goliath conglomerates which formed the base of the U.S. economy in the postwar period began to bleed. They shrunk, broke apart, and began subcontracting instead of directly hiring. By 1985, Fortune 500 companies employed 2.2 million fewer people than they did in 1980, despite the working age population growing by roughly 8 million in that same time. Soon after, the U.S. faced what was at the time the biggest banking crisis since the Great Depression. From 1980 to 1989, the U.S. lost more than a quarter of its savings and loan institutions, and around a third by 1995. At their peak, the number of annual bank failures reached triple the height seen in the depths of the Great Depression. These two trends of atomization and consolidation shaped the destiny of the American economy for the next half century.

Consolidated finance was instrumental in the globalization of production. Without highly liquid derivative, currency, bond, and stock markets, you could not have truly global supply chains. These markets, in turn, were made possible by large banks centralizing all these different market-making activities, in turn providing these markets with access to deep wells of liquidity. 

Former Treasury Secretary Robert Rubin observed this development most intimately in the Peso Crisis of 1995—what Rubin called the first crisis of the 21st Century. Unlike the Latin American debt crisis of the 1980s, when all the U.S. government had to do was organize talks with the banks and their debtors, suddenly the fallout was potentially much larger for the U.S. Now it wasn’t just banks, but also ordinary American investors—both retail and institutional—who took advantage of these newly liquid international markets and owned stock and bonds in Mexican companies. The U.S. government was forced to fund the majority of a $50 billion dollar bailout to guarantee Mexican bonds. Preventing this economic collapse from spreading also preserved the basis for the newly minted NAFTA trade agreement.

The savings and loan crisis, while predictably caused by dramatic shifts in the rate of interest, was made substantially worse by a response grounded in deregulation and lower capital requirements. This hands-off attitude was one of the major shifts brought about by the new political settlement. Deregulation not only hurt the small banks, but allowed the big banks to merge and grow, and to freely engage in international markets.

These measures were seen as necessary to spur dynamism, flexibility and competitiveness. The move to these Schelling points as the justification for radical reforms was effectively the move toward a new ideological frame, namely neoliberalism as such. The same justifications were used in the non-financial sector. The destruction of unions was deeply connected to this atomization of production, as many workers were forced to move from life-long relationships with employers to self-employment. In 1985, there were roughly 1.4 million new enterprises created, comparable to the 1.4 million private jobs being created on average.

Economic theory suggests that monopolies and oligopolies have the power to set prices on more favorable terms for themselves. Theoretically, more businesses could be assumed to be good for workers, as they would have to compete for labor.

The reality of the situation was quite different. Many of these new small businesses were simply enterprises formed as methods of self-employment, a trend fueled by economic desperation. As one writer put it at the time, “We are practically carrying our jobs around on our backs”. This new era of labor dynamism led to a decline in real wages—around a 20% decline from 1973 to 1995. The benefits of America’s new “competitiveness” would be captured elsewhere.

The Hollowing Out of American Innovation

As workers felt the bite of these deep reforms, they were joined by another sector. Direct government funding for research and development fell by around 23% in real terms in the decade after 1987, only reattaining its prior height in the late 2000s. The cost of public universities was precipitously transferred from the government to families, with government spending going from around two-thirds of the cost in 1981 to less than half by 2006, just as tuition prices began to skyrocket. Regulators and policymakers also overhauled intellectual property to expand the scope of what could be patented, including such things as living organisms and mathematical algorithms, often at the behest of the specific companies that would benefit most. This new intellectual property regime was in part sold to the public as a means to replace direct government funding. It would supposedly allow universities, private inventors, and small startups to better monetize their discoveries.

This was always a farce. In truth, much of our groundbreaking private innovation still rests on public research available to all. Privatizing this knowledge through more intensive intellectual property makes it so only the biggest companies can afford to purchase these disparate pieces of knowledge and place them into an actual use. The hopes of small tech startups was based on the success of such firms in Silicon Valley; however this success was itself built upon connections, both formal and informal, to larger institutions like the federal government, major universities, and large corporations. As these sources of funding began to wane, so did the valley, ultimately reaching a low point in the mid-eighties when it was nearly subsumed by the Japanese tech industry. 

But both Silicon Valley and American R&D more generally found a savior: the consolidated finance industry. Global capital flows allowed much of the production process to be outsourced by American corporations, including to China after 2000. Falling interest rates and bloated investment banking firms, along with the structural changes in corporations geared at pleasing shareholders, made the tech stock bubble in the 1990s possible. This speculative period allowed the growth of many new technology firms. This financial speculation was an elaborate and expensive method of funding long-shot and high risk technologies in the private sector that otherwise would have been passed over by investors. It was a method which hardly favored the technologies with the most positive social impact.

The result of this speculation was to create a new social strata: the tech billionaires, patrons of vast industrial and philanthropic networks. These billionaires provide a source of funds for research and development, even if the innovation itself continues to be done by engineers and scientists on the ground. They also embody a contradiction within the neoliberal settlement. On the one hand, these billionaire networks are the result of the trade off made by reformists in the 1980s. But, importantly, their necessity shows just how to what degree these reforms came at the cost of undermining the very foundations of wider prosperity—and not just on purely material grounds. 

With the hampering of basic sciences in universities, and the cutting of direct government research funding, the sorts of billionaire networks centered around the tech industry have become one of the only remaining sources of American innovation. We hear all the time about the newest breakthroughs by such corporations in AI, quantum computing, spaceflight, renewable energy, and so on. Meanwhile, universities and governments chase the diminishing returns of fundamental particle physics and astronomy. The delicate nature of this corporate research was exposed when one of its biggest facilitators, Google, was put on trial for antitrust allegations. What would happen to DeepMind if Google was broken up and its parts put up for sale? Perhaps it would eventually find itself in the hands of a foreign competitor, as the famous Bell Labs did after its parent company was broken up. 

Google is not unique in the tech world for its monopolistic practices. One could make similar cases against Amazon, Facebook and Microsoft, all of which are also major funders for cutting-edge R&D. But if the federal government were to pursue these cases to the fullest extent—without reversing the neoliberal trends in defunding and privatizing science—the long term consequences for the U.S. economy would be disastrous. 

Our contemporary reliance on this handful of companies and billionaires puts us on a precarious perch as all our other social institutions hollow out. Unfortunately for monopoly capital, its rise created deep political grievances. These are now coming to a political head which threatens the last remnants of American dynamism.

Revenge of the Boaters

It is no coincidence that these antitrust cases were pushed forward under the Trump administration, with the backing of a coalition of mostly red states. There has been much talk recently of the implications of the high education realignment towards the Democratic party, but we should also consider the other side: the reorientation of the Republican party away from the educated. This is not a realignment of the Republican party towards the working class—at least, not anymore than it was in the days of Reagan. The Gipper was never able to win union households or the lower income brackets; instead, he improved his showing compared to previous Republicans. Trump too, only won a majority of voters with income above $100,000, and lost a majority of union families. 

However, the Republican party of Reagan was very much a party of intellectuals, and of the educated professionals who represented business interests. It prided itself on being receptive to the efforts of the Mont Pelerin Society and William F. Buckley. Its current internal conflicts have been the overturning of this older party culture by the coalition of high income, low education voters. This coalition is centered in the small business class—the same class that saw massive growth in numbers under the very neoliberal settlement that Reagan and his allies enthusiastically forwarded. It was this base, and their class basis, which incubated the uncouth culture so despised by the Republican establishment in 2016 and which was embodied in Trump. 

This class—the car dealership owners, the “Boaters”, the shopkeepers—benefited greatly under Trump’s tax reforms, and the roaring stock market he shepherded. The administration effectively bridged the gap between the small and large capitalist classes. The latter is embodied in the likes of the McMahons, Sheldon Adelson and Timothy Mellon—regional big players, and even national players in more competitive industries like the Koch brothers. But there was always one issue where its interests differed from the big business interests of America’s high capitalist class: the issue of monopoly power. Competition, after all, implies winners. One competitor can destroy many rivals and consolidate his market share. If antitrust measures aren’t consistently applied, we see handfuls of oligopolies and monopolies naturally consolidate across many markets. Indeed, this has been the natural state of American industrial capitalism for most of its existence. It is often the Boaters and their small businesses who find themselves getting outcompeted by these larger rivals.

This small capitalist class cannot govern on its own. Notably, Trump staffed his administration with big business alumni and focused on areas of agreement in his economic policy—with the glaring exception of trade policy. But it was with trade policy that the true nature of this compromise reveals itself, as it’s here that the ideology of this class is distilled beyond its pure self interest. 

As tariffs became a weapon of the trade war with China, a division became apparent. The majority of people, as well as the majority of businesses, were unaffected by the changes in tariff law. The tariffs were never an economic issue as such; they were a way to signal a hard stance against both China and a cosmopolitan elite. Big business is well-represented among that cosmopolitan elite: globe trotting, Ivy League graduates, readers of The New York Times, The Washington Post, and The Wall Street Journal. As the trade war took off, even Fox news was accosting them to accept lower profits for the sake of the nation. With the expansion of global economic integration, the only truly national bourgeoisie we can still speak of are their erstwhile partners in the small business class. 

The compromise, then, goes something like this: a populist like Trump comes along with a foul mouth to attack these international enemies. He fights a culture war on behalf of the Boaters, but domestic economic policy accommodates both the larger, established business class and the national bourgeoisie reliant on small enterprise. Importantly, the monopoly capitalists aren’t a part of this compromise: Bill Gates, Jeff Bezos, Mark Zuckerberg, and the rest. Moreover, the small business interests, which were uniquely created by the hollowing out of real institutions, have no positive political project. The gentleman’s agreement which unites these two factions is to accept inaction about our ruptured civil society and government, so long as the corporate behemoths which pose a political and economic threat to them are also hollowed out. It is this relative atomization that allows these small capitalists to thrive, a capitalism where the only excess permitted is for business itself. All pains are taken to preserve its ability to consume ever more luxury—high returns on property, consumer goods, access to atomized labor markets, and so on—even at the very expense of all real economic development.

This would hardly be the first time that a class consolidated the political power to shut down the threat of rising, economically dynamic new elites. One classic example is that of Venice, which in the middle ages was the most wealthy and prosperous European city. Venice effectively controlled trade between Europe and the Arab world, and it could only do so due to commercial and financial innovations. Venice saw the creation of rudimentary joint-stock companies, banking systems and other new forms of financial contracts which enabled the great expansion of trade. However, all these financial innovations came at a cost to the existing elite by empowering new families, for example via commenda contracts which allowed less established merchants to share in the profits by taking risky journeys, even as a more established merchant would front most of the capital. 

Much like the U.S., Venice was a republic. These “new men” could and did enter into the political process, and often held positions of power in the legislative bodies. The economic dynamism didn’t just reduce profits for established merchant families, it also reduced their political power. All this changed when the legislature, including a number of former “new men”, voted to make entrance to its body hereditary. The only exceptions required permission from the established families. The commenda contracts were outlawed, and trade was regulated in a way to make it the exclusive domain of nobility. Ultimately, it was northwestern Europe that would spur the rise of economic modernity, while Venice and the rest of Italy languished.

Rebooting the American Settlement

Institutionalist economists point to historical moments such as these to suggest that inclusive economic and political institutions are necessary for a dynamic and innovative economy. But the practical application of this hypothesis exhibits a great deal of ideological hubris; they suggest that this is the reason why the U.S. will succeed, and why China will fail to innovate. What gets ignored is that economic dynamism does not always mean churning out ever more new capitalists, or that it could be in the interests of business owners—small and large alike—to shut down innovation. 

When we produce real innovations in production, and so automate new aspects of production itself, the results are not evenly spread. This is because those industries which adopt new technologies to reduce labor inputs are the first to see real prices fall. And the more fixed investment is required to produce things, the more economies of scale make sense. In turn, the rate of profit decreases, along with the level of consumption those profits can support. This was the reality of production in the post-war social democratic period, and the reality of most of the history of industrial capitalism. Since small businesses endure far greater instability and lower margins than their bigger cousins, they are the first to feel the impact of falling profit rates in an industry. 

This is a concrete disadvantage and a flashpoint for conflict within the business class itself. Small business owners now see large corporations undercutting their prices and devouring their customer bases. And failing an economic solution, there is a political response in the wings: if you can’t beat them, trust-bust them and tariff their international markets and supply chains.

This political economy, including its iteration in post-populist America, presents one of the greatest obstacles to the major breakthroughs projected in the futurism of the mid-twentieth century. It systematically opposes the kinds of innovation which would be necessary to create fully-automated manufacturing or flying cars. Our framework for R&D has totally been subsumed into a system of austerity which restrains the excess necessary for deep, groundbreaking invention. Only those projects with easy commercial applications make sense in this framework, in a world which has stopped rationalizing production—that is, only those projects which can dazzle consumers rather than actually make it easier to meet human needs. Everything else is held suspect, and subject to intense scrutiny. The only exceptions are those individuals or upstart companies that gain access to a scale of capital which can buck the trend, often by gaining state support, giving us the SpaceX exception that proves the rule.

Real invention depends on investing significant resources in capable people while expecting that most will fail, because the value from the few successes outstrips the rest. But as David Graeber wrote in 2012: “[I]f you want to minimize the possibility of unexpected breakthroughs, tell those same people they will receive no resources at all unless they spend the bulk of their time competing against each other to convince you they know in advance what they are going to discover.”

What is the end point of this trend? First to go is the U.S.’s economic edge in innovation. We are already witnessing this being lost to China, where R&D funding is expanding at an incredible rate and intellectual property is weak. Next is the military edge, which has always depended on technological and industrial superiority. And last to go is dollar hegemony and the U.S.-backed global financial system, which rests upon America’s military might and empire. This is an old story, one we saw play out most recently with the UK in the 20th century. 

How could this process be reversed? The political return of the status quo, and former Big Tech executives finding their way into government positions, might decrease the likelihood of the antitrust cases against Google and Facebook being pursued. However, this is only a return to our old stagnation. To truly reverse this trend would require two things.

First, monopoly capital would have to truly comprehend the reality of the barbarians at its gate. The threat posed by the atomized small-capitalist class coalition is an existential one to Big Tech, and this threat has not disappeared with Trump losing an election. Already we are seeing reports that a totally new, more aggressive orientation of antitrust enforcement has achieved institutional status.

Second, monopoly capital would have to politically mobilize the working class which atomization left in an economic spiral.

What could a new compromise between monopoly capital and the working class to ward off this threat look like? Big corporations already offer more in salary and benefits than small or medium sized firms can, and are even sought out by startups wanting to be acquired by a bigger player. Leveraging this and promoting pro-worker legislation would serve both to win over the working class and drive out of business the low-productivity, labor intensive competitors which lack economies of scale. This would reverse the previous trend, slowly reabsorbing this demographic into a well-compensated labor force and, to a degree, into larger business interests, which combined can drive the investment levels demanded by American social and economic renewal.

From the perspective of the state, the kind of intellectual property which has facilitated the success of the new tech monopolies—that of software and end-products—is not the same which is currently wrecking the reproduction of scientific knowledge. A new model is possible based on the communal sharing and ownership of all other forms of information—especially scientific and technological information. The goal here is to fuel the innovation and commodification of end products from American titans of industry. 

Platforms like Sci-Hub and Libgen have been the greatest assets modern scholars and scientists have, maintaining illegal databases and online downloads for almost every book and scholarly article that has ever been digitized. The official sources of open source research are diminutive in comparison. The government could create a more functional version without undermining funding for research by expropriating the major journals and private Ivy league universities, and automatically uploading their papers to a central database free to use. They could even take a page out of Big Tech’s book, and copy Amazon’s Kindle Unlimited program. A fund paid for by some mix of taxes, university tuition, and corporate subscriptions could be dealt out to authors according to how many people download and cite their work. 

We have at our disposal the ability to make the whole corpus of scientific knowledge available to every single person, an ability which would have made the ancients green with envy. It was, after all, the great difficulty of reproducing this knowledge which allowed science to be nearly wiped out in Hellenistic Greece and the Medieval Arab world through war and other social strife. We have no similar excuse.

The thorny question is what can get us to this compromise. If we are to look towards transitions to previous paradigms, it will require an ideological shift among state apparatuses. Social Democracy had Keynes, while neoliberalism had the Mont Pelerin Society and the Chicago School of economics. Unfortunately, much of the discussion about how to preserve dynamism and innovation remains trapped in the neoliberal framework, and heterodox voices on the topic are largely marginalized. From Big Tech’s perspective, they should be funding think tanks combining a critique of antitrust regulation with an ideological escape from decaying neoliberal framework, with the conscious goal of boosting innovation.  

Similarly, labor and its aligned political and media organs should launch broadsides against these ideological opponents, with the goal of avoiding the further atomizing of production. A long tradition of thought exists which identifies the centralization of production as a progressive force. The modern left has several theorists who have effectively criticized neoliberalism’s failure to generate innovation, such as David Graeber and Philip Mirowski. But these ideas have failed to be translated into an economic school of thought or pro-innovation ideological movement. Such an ideology is simply waiting to be made: shorter working days and higher wages, along with greater institutional excess, are closely related to what is needed for the rationalization of production in the firm, and the creation of new technologies. 

We would do well to remember you don’t get scientific advancements by shutting down the sharing of scientific knowledge. And you don’t get economic dynamism and innovation without allowing excesses, both in terms of funding and permissiveness, for the real innovators—not the capitalists who will ultimately profit. To the extent we are at last seeing movement in key fields, it has been the extent to which our giant tech monopolies have generated this excess. If we want to preserve this source of innovation, and regain those we’ve lost, we will need to find alternatives to the antitrust regulatory regime, and reject our sentimentality for our atomized system of production. 

Liberal platitudes about the inherent superiority of our economic-political system serve to lull us into complacency. To recover and change our fate, we must set out to change our economic system. If both American monopoly capital and the working class fail in this historical contingency, the end result will be that American capitalism and the utopian hopes of its radicals are consigned to the dustbin of history.

Nicolas Villarreal works as an analyst for a government contractor and formerly worked in federal banking regulation. He is a graduate of the College of William and Mary, and author of the novel Caeruleus.