Productive Markets

A great benefit of the free market is the latitude it affords individuals to pursue their own self-interest however they may wish to define it. When that pursuit advances the common good as well, capitalism generates unparalleled prosperity. But the free market alone does not guarantee that individual and public interest will in fact align. Market fundamentalism’s basic error is to misunderstand this point.

Conservative economics distinguishes amongst free markets and recognizes that only some have the alignment between self- and public interest necessary to harness capitalism’s power for the benefit of American workers, their families and communities, and the nation. Adam Smith shows how the system can work, not that it always will. Recent decades confirm that sometimes it does not. It is the productive market, not any free market regardless of conditions and outcomes, that public policy must have as its goal.

At American Compass, we work to understand the forces rendering modern markets unproductive and develop public policies that would create conditions in which capitalism can once again flourish.

We focus in particular on the parallel trends of globalization and financialization, which have pulled capital toward activities that generate profit while undermining the nation’s prosperity. Globalization severed the bond between capital and labor, so that growth and profit no longer depended on investment in a domestic workforce. Shareholders in multinational corporations saw their wealth skyrocket while workers saw their wages stagnate. Entire industries shifted overseas, decimating communities, reducing productive capacity, and slowing innovation. Financialization severed the bond between capital and the real economy altogether, offering huge paydays for producing nothing of value. Capital and talent surged toward Wall Street, the financial sector metastasized, and real investment declined. 

For more of our work on globalization, start with the Regaining Our Balance collection. The Where’s the Growth? Atlas provides an overview of the data on globalization’s costs and, conversely, the failure to generate promised benefits. Searching for Capitalism in the Wreckage of Globalization provides an explanation for why globalization has gone wrong. And The Balancing Act offers a comprehensive set of responses for policymakers. 

On financialization, start with We’re Just Speculating Here…, which shows how U.S. corporations have shifted their behavior from consistent investment in their capacity to provide goods and services to active disinvestment for the sake of disgorging cash back to shareholders. Our Coin-Flip Capitalism Primer highlights the corrosive role played by private equity and hedge funds, which collect hundreds of billions of dollars in fees while performing no better than the stock market. Confronting Coin-Flip Capitalism makes the case that American financial markets are misallocating capital, talent, and risk in ways that directly weaken the economy and suggests a range of reforms. And our Corporate Actual Responsibility collection considers the private sector’s obligations to the nation and the constraints necessary to ensure they are fulfilled.

Our work also emphasizes the unique role of manufacturing in an advanced economy, which investors may not consider when pursuing their own profit—thus the need for public policy to bring their self-interest and the public interest into closer alignment. Our work on semiconductors, including the Guide to the Semiconductor Industry and advocacy for the CHIPS Act, provides a case study of the broader phenomenon. Our Moving the Chains symposium brought together a wide range of policy experts to explore the many levers that policymakers have at their disposal.