Elizabeth Warren’s Theory of Capitalism

A conversation with the Democratic senator about why she’s doubling down on market competition at a moment when her party is flirting with socialism

Joe Raedle / Getty / Boule / ImageFlow / Shutterstock / The Atlantic

While so much of the action on the American left in recent months has come in the form of revived enthusiasm for socialism, Senator Elizabeth Warren has positioned herself quite differently. During the past two weeks, she has expounded about the prospects for capitalism in a much-covered speech and in a Wall Street Journal op-ed.  Instead of championing the system’s demise, she presents herself as its savior.

Embedded in her musings were two aggressive proposals for overhauling American business. One is the Accountable Capitalism Act, which would require the largest corporations to allow workers to choose 40 percent of their board seats. The proposal is meant to provide an antidote to short-term thinking in the biggest businesses—and to short-circuit the ease with which CEOs make decisions that enrich themselves at the expense of workers and the underlying health of their firm. A similar system exists in Germany, and it goes by the name “codetermination.”

A second set of proposals is what Warren calls the Anti-Corruption and Public Integrity Act. Warren has called for a frontal assault on lobbying, including a lifetime prohibition that would prevent federal officeholders (including the president, members of Congress, and Cabinet secretaries) from ever becoming paid influence peddlers. Her argument is that lobbying undermines the functioning of markets, by permitting corporations to exert outsize control over the regulatory state and use government to squash competitors.

When I heard Warren speak about the crisis in capitalism, I asked to sit down with her to explore her theory of the case. I interviewed her in her Washington, D.C., office. The transcript of our conversation has been lightly edited and condensed.

Franklin Foer: All the investment bankers who have voodoo dolls of you might be a bit surprised that you recently described yourself as “capitalist to the bone.” What did you mean?
Elizabeth Warren: I believe in markets and the benefits they can produce when they work. Markets with rules can produce enormous value. So much of the work I have done—the Consumer Financial Protection Bureau, my hearing-aid bill—are about making markets work for people, not making markets work for a handful of companies that scrape all the value off to themselves. I believe in competition.
Foer: To what end?
Warren: Markets create wealth. Okay, so I used to teach contract law, and if you really want to go back to first principles: On the first day, I used to take my watch off and I would sell it to someone in class. We’d agree on a price, $20. Then the question I always asked the students was: What did the buyer value the watch at? Much of the class would say $20.
That’s not the right answer. All we know is that the person would rather have the watch than have the $20 bill. What did you know about the value I placed on it? Exactly the inverse. I’d rather have the $20 bill than have the watch. Now, most people think the benefit of markets is: I walked away with a $20 bill, great, which I valued more highly than the watch, and you walked away with the watch that you valued more highly than the $20, but look at all the excess value there.
Maybe you wanted that watch because it completed your fabulous watch collection or you desperately needed a watch or it was so attractive to you that the value you placed on it would be in the hundreds of dollars. You got all that surplus value, and me, I really needed that $20. I had an investment opportunity over here for that $20 that has yielded a manyfold return for me. That’s how markets create additional value.
Foer: But markets right now are doing a good job of producing wealth. Yes?
Warren: Right.
Foer: In your description, that’s markets working.
Warren: The problem is that when the rules are not enforced, when the markets are not level playing fields, all that wealth is scraped in one direction. For example, leading up to the financial crash, there were a lot of mortgage brokers out there selling mortgages. Wow, did they get rich doing it. Families thought they were buying a product they could afford, whose payments they understood. Many of them lost everything. That’s a market that clearly was not working. The Consumer Financial Protection Bureau, after it passed, the first thing we did there at the bureau was to put new rules in place about mortgages. Not so that you could control the mortgage market, but so that the market would work.
I don’t know if you’ve ever looked at the rules, but the rules were basically to say you can compete, but you’ve got to be real clear about the things you're competing on. Things like: Information has to be put in the same place on each of the forms, so people can lay the forms down next to each other and see what’s there and you don’t get to put it back on page 32 in fine print.
Foer: Oftentimes, it seems that you’re not really criticizing the behavior of markets—you’re describing  outright theft and deception.
Warren: Exactly. Theft is not capitalism. Right?
Foer:  Was there a moment when capitalism in America worked?
Warren: There are times that parts of the markets worked better. Look at it this way: 1935 to 1980, a time when there’s much more emphasis on worker power. Union membership is going up. There’s more aggressive regulation of markets, more enforcement of antitrust laws. The Securities and Exchange Commission had just been created and was a strong cop on the beat. Glass-Steagall was strictly enforced, FDIC insurance had gone into place. And you watch: GDP goes up 1935 to 1980 and the 90 percent of America—everybody outside the top 10 percent—gets 70 percent of all new income growth.
Foer: Policing, rules—these are really core concepts for you.
Warren: Yes.
Foer: What does it say about human nature? We have this almost innate inclination to trade with one another. And yet, the market also brings out an innate human tendency toward avarice and greed.
Warren: I would describe it differently. There’s always somebody who will see if they can run the light. The question is whether we maintain good rules and an effective cop to enforce those rules. This is where the wheels came off starting in the ’80s.
This is a political issue. It’s not a markets issue. There were years of not perfect but fairly well-enforced rules that were pretty firmly hit and held. Then you hit the ’80s and the lobbying by the wealthy and the well-connected steps up and the rules start shifting. The rules tilt just a little more toward the rich and the powerful. Just a little more, just a little more. Enforcement gets weaker and weaker. Remember the whole description that started in the ’80s about deregulation and the beauties that deregulation would bring America? I understand no one wants to have to abide by dumb regulations. I get that, but deregulation became a code word for “fire the cops.” Not the cops on Main Street, the cops on Wall Street.
Foer: The 1980s seem to be the moment of your own personal political transformation. Right? [Warren  says that around that time she went from identifying as a Republican to becoming a consumer activist.]
Warren:   Yes.
Foer: That's when you—
Warren: —I never want to overstate this, because the truth is I was never very politically active. I was active in economic ideas and what was happening to working families. That’s been the animating feature for me since the first time I got to do research.
Foer: But it changed your analysis of capitalism?
Warren: Absolutely.
Foer: On this question of regulation and capture, you have your own wariness.
Warren:   I do.
Foer: When you think about erecting new structures, like in your Accountable Capitalism Act, creating a new federal structure for the licensing of corporations—why isn’t a structure like that ripe for capture?
Warren: This is about taking the current structure and making it work better. Every corporation in America is chartered somewhere. The big banks in the country are already federally chartered. Chartering is just where the rules reside. For decades there have been restrictions in the charters on what it is the corporations can do and instructions on what they must do. Quarterly shareholder, annual shareholder meetings ... What I propose is to amend those rules for billion-dollar-plus corporations. The reason is because the rules are not working now. We were talking about how when GDP goes up, productivity goes up and workers' wages go up. In the ’80s, that just flattens out. GDP continues to go up, productivity continues to go up, but workers fall behind and the gap has now become enormous. Eighty-four percent of the wealth in the stock market goes to 10 percent of the population.
Half of all America owns not one share of stock. Not one. Not even in a 401(k) or an employer retirement plan, and yet a huge portion of the worth of the corporation is being directly diverted to the shareholders. That was not always true. There was a time in America when that wealth was shared among those who helped produce it. The workers and the investors. That’s just not true today.
Foer: There are all these hints of Louis Brandeis in what you do. Brandeis had a vision of how the economy could be structured differently when the rules that he wanted were applied. He  favored the small shopkeeper. In your vision, who gets favored? Are there forces in the market that you feel like are being unfairly shackled that you want to see unleashed?
Warren: Yes. Perfect. Competition. I love competition. I want to see every start-up business, everybody who’s got a good idea, have a chance to get in the market and try. This is what's so interesting to me. There are so many people right now who argue against these reforms and other reforms, who claim they are pro-business. They’re not. They’re pro-monopoly. They’re pro–concentration of power, which crushes competition.
This is where the political and the economic interact. Once a corporation climbs up the ladder so that it’s got hundreds of millions—no, so that it’s got billions of dollars in resources—today too many of them turn around and use those resources to influence government to cut off that ladder, so nobody else climbs it. To cut off that ladder so that the big guys don’t have to compete with the little guys anymore.
I was just going to say, you were asking me, what excites me about markets? I was telling you that gains-from-trade argument, but really what excites me about markets is competition. I want to make sure we’ve got a set of rules that lets everybody who’s got a good, competitive idea get in the game.
Foer: I’ve heard your latest proposals described as an attempt to save capitalism, which implies that it’s in pretty dire straits. How dire do you think the state of American capitalism is?
Warren:  I worry both for capitalism and for democracy. People across this country once believed that folks who work hard and play by the rules have a chance to be able to build real security and that their kids will do better than they did. Today, that dream runs into a very hard reality that this is now a world that works better and better for a smaller and smaller number of people. That's a problem for capitalism and for democracy at the same time.
Foer: There’s so much talk right now on the left about socialism, which seems somewhat misguided given everything you say capitalism has to recommend itself.
Warren:  I love the competition that comes with a market that has decent rules. I love the structure that encourages anyone with a good idea to try their hand in business.
Foer: When Franklin Roosevelt talked about the crisis in capitalism, he looked and he saw the left and alternatives to capitalism emerging, and that was one of the things that he was able to argue to the country—to say, “Look, we need these reforms in order to save this system, in order to prevent something dangerous from happening in another direction.”
Warren: Okay. You’re taking it to a hundred thousand feet, which is great, but my argument is far more personal. We need to make capitalism work for your family and we need to make democracy work for your family ... It’s not that you’re wrong, I’m just saying this is where I land it, right with how families experience this economy. A rising stock market is not helpful to the half of all America who own not one single share of stock. Rising productivity that doesn’t translate into rising wages for the people who actually do the work is not building a better future for them. Costs that are skyrocketing for education and health care and housing put a squeeze on families that are struggling with flat wages, so every one of those is about the lived experience, and that’s what colors our view of both capitalism and democracy in 2018.
Foer: I find it interesting that you have frequently used the word liberty in connection with all of this.
Warren: That’s what it’s really about. You’ve got an idea and you want to get into the market, or you’re an employee and you want to be able to negotiate, you want to have some bargaining power in getting a share of the value that you produce. That’s participation, but it’s participation in democracy as well.
When Big Pharma rolls into Washington and gets a law passed that says that the federal government cannot negotiate down the prices of drugs, then democracy is not working for families. When the big [coal] companies can get a new rule out of the EPA that will increase particulates in the air and trigger over 100,000 premature deaths, then democracy is not working for the American people. So you are exactly right. Everything I’m working on is about giving individuals the opportunity, the liberty to participate in this economy and in the governance of this country. I love this stuff. Isn’t this stuff fun?