Normalized Financial Wrongdoing: How Re-regulating Markets Created Risks and Fostered Inequality

NORMALIZED FINANCIAL WRONGDOING

How Re-regulating Markets Created Risks and Fostered Inequality

Harland Prechel

Stanford University Press

Stanford, California

Stanford University Press

Stanford, California

© 2021 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.

No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or in any information storage or retrieval system without the prior written permission of Stanford University Press.

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Library of Congress Cataloging-in-Publication Data

Names: Prechel, Harland, author.

Title: Normalized financial wrongdoing : how re-regulating markets created risks and fostered inequality / Harland Prechel.

Description: Stanford, California : Stanford University Press, 2021. | Includes bibliographical references and index.

Identifiers: LCCN 2020015480 (print) | LCCN 2020015481 (ebook) | ISBN 9781503602380 (cloth) | ISBN 9781503614451 (paperback) | ISBN 9781503614468 (ebook)

Subjects: LCSH: Financialization—United States. | Corporations—Government policy—United States. | Corporation law—United States. | Corporations—Corrupt practices—United States. | Income distribution—United States.

Classification: LCC HG181 .P74 2021 (print) | LCC HG181 (ebook) | DDC 332/.04150973—dc23

LC record available at https://lccn.loc.gov/2020015480

LC ebook record available at https://lccn.loc.gov/2020015481

Cover design: Christian Fuenfhausen

For Helen

Contents

List of Figures and Tables

List of Abbreviations

Preface

1. The Contemporary Corporation and Private Property

2. Historical Transitions from Liberalism to Neoliberalism

3. Transforming Banks from Market Enablers to Market Participants

4. Converging Economic and Political Interests

5. Creating Risk, Engaging in Financial Malfeasance, and Crisis

6. A Great Crisis in the FIRE Sector

7. The Extent and Causes of Financial Malfeasance

8. Inequality in the Twenty-First Century

9. Emancipatory Social Change

Notes

References

Index

Figures and Tables

FIGURES

2.1. Prototypical Multilayer-Subsidiary Form

5.1. Enron’s MLSF and Selected Corporate Entities

7.1. FIRE Sector Alleged Security and Exchanged Commission Violations

7.2. Percent of Corporations Restating Financial Statements by Multilayer-Subsidiary Form, 1994–2004

7.3. Percent of Corporations Restating Financial Statements by Total Number of Subsidiaries (Quartiles), 1994–2004

TABLES

2.1. FIRE Sector Parent Company CEO Compensation, 2000–2007

5.1. Capital Raised at Enron and Selected Subsidiaries from Stock Issuances

5.2. Change in Enron’s Stock Values, 1997–2002

7.1. Statistical Model of FIRE-Sector Financial Malfeasance, 1995–2004

7.2. The Odds That an Event Will Occur

8.1. Expenditures on Dividends and Stock Buybacks, 2007–2016

8.2. The Largest FIRE-Sector Corporations’ Expenditures on Stock Buybacks, 2000–2007, and TARP Distributions

Abbreviations

Preface

This book emerged from my concerns with the political and managerial behavior of the largest US corporations. Like many other people, I am troubled by the detachment of corporate and political leaders from the realities of most people. The political and economic conditions of our time give greater meaning to Max Weber’s response to the events and trends of his era that he described as riding on an express train moving toward an abyss and not feeling certain whether the next switch has been set right. The more I have examined the decisions made by corporate and political leaders, the more convinced I have become that the switches are not set right and must be reset to avoid an abyss. This concern over corporate-state relations motivated me to write this book because the American public deserves to understand the mechanisms that created the current state of affairs so they can mobilize politically, strengthen civic organizations to advance their interests, and elect political leaders willing to and capable of implementing policies that reduce class inequality and create a fair and just society.

Chapter 1 provides a general overview of the book and the conceptual framework. Chapter 2 examines the transition from liberalism to neoliberalism and their effects on corporate property rights and corporate behavior. I examine the policy formation process that contributed to the current corporate-state relation in chapters 3 and 4, where I focus on how corporate actors exercised power to restructure the US political economy to their benefit. Chapter 5 examines how the emerging organizational and political-legal arrangements created opportunities for the energy and FIRE (financial, insurance, and real estate) sectors to engage in high-risk behavior and shift costs and risks from corporations to the American people. Chapter 6 focuses on the 2008 financial crisis and the response by political leaders, who shifted much of the cost of the crisis to American taxpayers. Chapter 7 moves from a historical analysis to a quantitative analysis of financial malfeasance by the largest US corporations and the largest FIRE-sector corporations. Chapter 8 examines how the transition to financialization created organizational and political structures that contribute to high income and wealth inequality in America. In conclusion, chapter 9 begins with an examination of the current high levels of political polarization and the segmentation of the working and middle classes. I then shift to the potential reemergence of civil society and how to take back the political arena to make society work for all Americans.

I thank the National Science Foundation for support through SES-0351496 and SES-0351496-001, which funded data collection on financial malfeasance. Texas A&M University provided the institutional support, facilities, and other resources necessary to carry out this project. Members of the research team that collected most of the data include several highly dedicated undergraduate research assistants, including Jennifer Jameson (formerly Harvey), Hannah Harper, Leslie Herbst, Caroline Seegmiller, and Jessica Spitzer. I owe special thanks to two valued and highly capable colleagues who coauthored articles on the quantitative aspects of the analysis. Theresa Morris (previously at Trinity College) contributed to collecting and compiling data and conducting the analysis of financial malfeasance among the five hundred largest US corporations. Lu Zheng (now at Tsinghua University, Beijing) conducted the analysis of financial malfeasance in the largest FIRE-sector firms.

I am indebted to many other colleagues and friends who contributed to this project in various ways, including forcing me to clarify my ideas, encouraging me to get on with writing the manuscript, and providing social and moral support. I am grateful to the Melbern G. Glasscock Center for the Humanities Research at Texas A&M University for the Internal Faculty Residential Fellowship that was crucial to getting the project started. I thank my department head, Jane Sell, for providing partial financial support during the time that I was at the Glasscock Center. I also thank Jane for her supportive routine question, How is the book coming along?

My interactions with the many students who took my undergraduate course on class in contemporary society and graduate seminars in political sociology were valuable in developing and clarifying my ideas. I had the good fortune to work with several highly skilled and motivated research assistants. Stephanie Kotick, an extremely proficient and diligent undergraduate research assistant, did much of the meticulous historical research locating historical documents on the policy formation process. Dadao Hou, my graduate research assistant, did an excellent job of finalizing the collection of the historical documents for a component of the research on the policy formation process. I received valuable help from other graduate students at various stages of the project, including Alesha Ignatius Bereton (formerly Istvan), Linzi Berkowitz, and Amber Blazek. Linzi read the entire manuscript and did an outstanding job of editing it.

Colleagues from other universities who provided valuable support and feedback at conferences, colloquiums, and informal conversations include Fred Block, Royston Greenwood, John Harms (who read and provided feedback on chapter 8), Mark Mizruchi, Terrence McDonough, Don Palmer, Charles (Chick) Perrow, Robert Putnam, Peter Yeager, and Wayne White. I am sure that I inadvertently omitted some colleagues and offer my apologies to them.

I am especially appreciative to two people. David Willer provided enthusiastic support throughout the project. Dave, who has an uncanny ability to identify central ideas that make a project cohere, identified an organizing idea during the early stages of the project that became a central theme in the book. Bob Antonio provided valuable feedback on the manuscript proposal, raised many important questions as the project unfolded, and was an invaluable bibliographic resource. Although he did not read the manuscript, he was an outstanding sounding board during our discussions, especially during our annual birding trips to the Rio Grande Valley when we had time to discuss the project in detail.

Stanford University Press representatives were supportive from the inception of the project. I owe special thanks to Stanford University Press acquisitions editor Marcela Cristina Maxfield, who provided detailed comments on each chapter and raised important questions and provided direction throughout the process. I also thank Sunna Juhn, Tim Roberts, and Bev Miller, who provided valuable feedback preparing the manuscript for production. I am indebted to the anonymous reviewers of the manuscript whose detailed comments provided crucial insights into how to revise and clarify my ideas.

I appreciate the policies of the publishers that permitted republishing parts of previously published material. The quantitative analysis in this book was previously published in the American Sociological Review and the British Journal of Sociology. Part of the historical analysis previously appeared in Organizational Wrongdoing, edited by Donald Palmer, Royston Greenwood, and Kristin Smith-Crowe and published by Cambridge University Press, and in The Oxford Handbook of White-Collar Crime, edited by Shanna R. Van Slyke, Michael L. Benson, and Francis Cullen, published by Oxford University Press.

I am most indebted to my family and friends, who were supportive and encouraging through the project. My sisters, Karen Jensen and Diane Daines, have provided moral support throughout the process. Our annual family get-togethers were always reinvigorating and left me recharged when I returned to the manuscript. I have the good fortune of support from Dilma Da Silva, whose infectious smile and optimism were invigorating throughout the writing process. I am also indebted to my former spouse and good friend, Ruth Larson, for being a caring partner in raising our daughter, Helen Larson Prechel, who gives me more happiness than I thought possible to experience and continues to teach me to appreciate what is good in the world.

CHAPTER 1

The Contemporary Corporation and Private Property

In September 2008, US financial markets lost more than 30 percent of their value in the crash that ranks as one of the worst financial crises in US history and second only to the October 1929 financial crisis followed by the Great Depression.¹ This book investigates how the way in which political and corporate elites reconfigured organizational and political-legal arrangements created incentives, opportunities, and dependencies for management to engage in the high-risk behaviors that resulted in financial crisis. In addition to better understanding the causes of the 2008 crisis by identifying the historical conditions permitting risk-taking behavior, I seek to provide scholars, policymakers, investors, enlightened corporate leaders, and the public with information for taking preventive measures to ensure against future occurrences. As the Great Recession demonstrated, the flow of capital depends on stable financial markets, and market failures have the most extreme and long-term adverse consequences for the poor and working and middle classes.

Although some scholars, journalists, and politicians maintain that similarities exist between the 1929 and 2008 crises, there has been little systematic analysis on the extent of the similarities and differences of these two crucial periods in US history or their relevance for stable capitalist growth and development. Analysis of social structures and hierarchies has been displaced in recent years in organizational and economic sociology and related fields by cultural analysis, with a particular focus on institutional norms (Gray and Silbey 2014; Walker and Rae 2014) as the prevailing explanation of individual and organizational behaviors. My focus renews emphasis on structures and hierarchies and how changes in them come about.

STRUCTURES AND CORPORATE-STATE RELATIONS

Although Adolf Berle and Gardiner Means are widely known for their observation that managerial control of the modern corporation increased in the early twentieth century, crucial details of their now classic analysis are largely forgotten. In The Modern Corporation and Private Property, Berle and Means ([1932] 1991) examined how the property rights associated with the modern corporation increased the power of the corporation in relationship to the state: The state seeks in some respects to regulate the corporation, while the corporation, steadily becoming more powerful, makes every effort to avoid such regulation (313). They were particularly concerned with the implications of the late nineteenth- and early twentieth-century holding company that facilitated corporate consolidation and permitted financiers to establish control over corporations. In contrast to previous corporate structures where all parts of the company were combined into a single legal entity, this legal structure permitted the holding company to establish ownership control by acquiring just over 50 percent of other corporations’ stock and incorporating them as legally independent subsidiary corporations under the parent holding company.

Many contemporary scholars overstate Berle and Means’s observations on the relationship between stock dispersion and the separation of corporate ownership and control by ignoring two mechanisms that permitted the rise of managerial control: (1) when holding company owners acquired other corporations, they typically paid the owners with holding company securities and hired them to manage operations, and (2) with few mechanisms to monitor operating management, holding company owners and managers had little choice but to allocate decision-making authority. That is, given the limits of internal organizational controls during this period, consolidation of multiple previously independent corporations as subsidiaries under a single giant holding company required capitalists and their top managers to allocate authority to operating and other middle managers. In fact, stock was not widely distributed during this period. Public investment in corporation securities increased from less than $1 billion in 1897 to approximately $6.8 billion in 1904 (Roy 1997). By 1927, only 4 to 6 million people, or 3.4 to 5.0 percent of the population, owned corporate stock (Burk 1988). To put these data in context, when J. P. Morgan created United States Steel Corporation in 1901, he issued $1 billion in corporate securities, a large share of the total stock issued in the entire country. As recently as 1952, only 6.5 million people, or 4.2 percent of the population, owned common stock.

The early twentieth-century holding company permitted its owners and managers to engage in opportunism, high-risk behaviors, and financial chicanery and wrongdoing that weakened corporations and the banks that invested in them, which contributed to the Great Depression that followed the 1929 stock market crash. After these behaviors were exposed to the public, Franklin D. Roosevelt (FDR) and his New Deal coalition and Congress passed a wide range of social and economic reforms, including dismantling holding companies. These organizational and political-legal reforms represent the second stage of Polanyi’s ([1944] 2001) conception of the double (i.e., countervailing) movement. During the first stage of the double movement, political and economic leaders falsely assume that markets are self-regulating and dismantle market controls, which has devastating consequences for society, requiring a second movement to protect society from the market. Stimulated by the demand for manufactured goods during World War II, New Deal and post–New Deal political-legal arrangements created the conditions for stable economic growth and development in manufacturing, which became the dominant economic sector. In subsequent decades, manufacturing corporations cooperated with the federal government to develop policies designed to advance their capital accumulation agendas. During this period, unions expanded and provided a countervailing power to corporate power and succeeded in negotiating safer working conditions and higher wages and benefits for its members (e.g., the capital-labor accord), which were crucial to creating the middle and working classes. At the same time, the economically and politically weakened banking sector was relegated to providing capital to manufacturing corporations and mediating disputes among them (Mizruchi 2013).

By the 1970s, the US manufacturing sector was experiencing declining profits associated with slow economic growth, global competition, the failure of corporations to keep pace with innovative technological change, and oil price increases by the Organization of Petroleum Exporting Countries (OPEC). In response, corporate elites became increasing critical of unions and New Deal and post–New Deal policies and mobilized politically to reconfigure these arrangements (Prechel 1990). Their political strategy was guided by neoliberal ideology, which asserted that government regulations restricted markets and undermined efficiency. Although the Carter administration eliminated some regulations, the 1980 presidential election of President Ronald Reagan, who opposed government’s responsibility to solve social problems, represented a retreat from society.

The Reagan era tax policies provided massive cuts in corporate taxes, but the crucial component of the president’s agenda advanced corporate property rights. As the following chapters show, the organizational and political-legal arrangements that emerged provided the mechanism that created giant corporations that exercised market control, increased financial risk, and fostered inequality.

By the late 1990s, corporate-state relations were transformed in ways to accelerate financialization: an organizational and political-legal strategy that emphasizes capital accumulation through financial transactions and financial controls to evaluate the performance of companies and corporate entities and their managers. Financialization represents a transition away from prioritizing value creation, that is, ways in which different types of resources (e.g., human, physical) are established and interact to produce new goods and services (e.g., steel, automobiles, textiles), to prioritizing value extraction: activities focused on moving around existing resources and outputs, and gaining disproportionately from the ensuing trade without creating new wealth (Mazzucato 2018, 6).

Derivatives, which became a crucial mechanism of value extraction, are contracts between two or more parties whose value derives from the value of another underlying security. Historically, the underlying securities were real commodities such as wheat, corn, and hogs, but the financialization regime permitted the underlying commodity to include virtually anything that represents ownership: currency, mortgages, student loans, and stocks and bonds, for example (Levitt 2002).

Derivatives are not real commodities. Instead, they are fictitious commodities that create profits from the performance of real commodities in another market. Although derivatives do not produce anything new except more securities and contracts, they can be the source of massive profits and losses because they permit investors to bet on future prices (Prechel and Harms 2007). The financialization social structure of accumulation (McDonough, Reich, and Kotz 2010) created multiple opportunities for managers to engage in high-risk behaviors that were not viable during the middle decades of the twentieth century. Participation in financial markets went beyond banks to include many nonbanks, such as hedge funds, insurance companies, mutual and pension funds, real estate, and nonfinancial firms in manufacturing and retail that set up financial subsidiaries.

By the early 2000s, giant corporations including Enron, WorldCom, and Adelphia began to fail. Although these failures provided early warnings of the instability of the prevailing organizational and political-legal arrangements, they were largely ignored by the political and economic elites who dismissed these failures by attributing corporate malfeasance to individual characteristics—a few bad apples (Prechel 2003). Then in September 2008, Lehman Brothers, one of the oldest and largest investment banks, filed for bankruptcy, and the subsequent events demonstrated that capitalism is a complex, dynamic, and interconnected system (Krier and Amidon 2015).

The Lehman bankruptcy, the largest in US history, cascaded into the most severe financial crisis since the Great Depression. Within days, bankers became wary of the ability of other banks to repay their overnight debt and refused to make loans to each other. As credit markets became less liquid, corporate executives, government officials, and leaders of central banks feared a global market failure. Business and political leaders concluded that if this trend continued, it would be impossible for banks to remain open and for corporations to operate, which would bring the global economy to a halt. The threat of widespread corporate bankruptcies turned fear into panic, and political and economic elites decided to bail out banks and other corporations with taxpayers’ money. Among the many disconcerting issues that surfaced after the financial crisis is the fact that bank managers have continued to engage in high-risk behaviors, report high profits, and compensate themselves at record-high levels while unprecedented levels of inequality persist in the country.

Why Focus on Organizational and Political-Legal Arrangements?

After it became known that the underlying causes of Enron era failures entailed financial wrongdoing and chicanery, political and economic elites asserted that these failures were the outcome of the moral weaknesses and ethical flaws of individual managers. However, the systemic bank and corporate failures in the 2008 financial crisis delegitimized the thesis of the few bad apples. In response, many researchers shifted their focus from a breakdown of individual ethics to a breakdown of corporate ethics. Although the informal structures associated with cognition, ethics, norms, and values affect decision making, this focus does not explain why a decline in individual or corporate ethics occurred at this point in history.

The answer to this question requires a focus on the formal organizational and political-legal arrangements—the opportunities and incentives they created and how individuals exploited them to their benefit. To address these items, my analysis in this book incorporates Edwin Sutherland’s (1949) seminal insight that differential social structures create opportunities to engage in wrongdoing. My historical analysis reveals how the political-legal arrangements in which corporations are embedded were transformed in ways that permitted high-risk behaviors that in some cases were previously illegal. This book also offers much-needed attention to the mechanisms that encouraged the middle and working classes to shift their assets from savings accounts, pension funds, and other relatively secure investments into high-risk corporate securities and financial instruments.

There are three interrelated themes in this book. First, I examine how class fractions organized politically and exercised power to change the political-legal arrangements in ways that redefined corporate property rights and created opportunities and incentives to engage in financialization while enriching themselves. Second, I show how the embeddedness of corporations in these organizational and political-legal arrangements permitted managers to engage in financialization activities that sometimes included unscrupulous behaviors similar to those that arose in the 1920s when similar corporate structures existed. Third, I discuss how the new organizational and political-legal arrangements contributed to increased inequality.

Why Focus on Corporate Property Rights?

Corporate property rights define the outside parameters of legitimate business behavior, vary historically, and are defined politically. To illustrate, executives at Enron, WorldCom, Adelphia, and other corporations were convicted of crimes because they engaged in behavior that violated corporate property right laws. In contrast, despite widespread financial wrongdoing and chicanery by banks, which did much more damage to the economy than the 2000–2001 corporate scandals, relatively few executives of the largest corporations that perpetuated these behaviors were convicted of a crime. This leaves an important question unanswered: How were the political-legal arrangements of public corporations redefined to permit bank managers to engage in high-risk behaviors using the public’s capital without informing them?

To answer this question, I examine who exercised power to transform corporate property rights in ways that put the entire economy at risk. My focus is on how the banking and energy industries, which were tightly regulated throughout the middle decades of the twentieth century, gained property rights that permitted them to engage in high-risk behaviors and how those property rights were extended to corporations in other economic sectors.

WHY WRITE THIS BOOK?

Despite the far-reaching effects of financialization on US and global economies, little systematic research exists on the social forces that created the prerequisite organizational and political-legal arrangements. Identifying the social structural causes that permitted risk-taking behavior is necessary for adequate remedies to be implemented that protect the public from future occurrences. Until these underlying mechanisms are understood, the necessary corrective policies to protect the public from future failures in financial markets cannot be enacted.

Most analyses of financialization tend to narrowly examine the financial instruments directly associated with the 2008 crisis. Although these instruments are important, they represent only one dimension of financialization, a complex, dynamic, and interconnected dimension of capitalism that has far-reaching consequences for society.

A primary objective of this book is to clarify the political origins of such organizational and political-legal arrangements. The few studies that give attention to the political origins of financialization tend to assume implicitly or explicitly that it was the outcome of the actions of an autonomous state—for example, that Congress and the executive branch facilitated the emergence of financial markets and high-risk financial instruments (Krippner 2011; Lavelle 2013; Jacobs and King 2016) or pulled the banks into this market and did so trusting that banks understood what they were doing (Fligstein and Goldstein 2010, 31, 63–64). Krippner (2011, 10–23) instead narrowly attributes the emergence of financialization to Federal Reserve Bank policies and monetary policy that encouraged the influx of foreign capital into the United States, and others examine a wider range of government policies (Lavelle 2013). However, all of these accounts assume an autonomous state and thus fail to address a central question: To what extent did political and economic elites exercise power to influence the policy formation process that brought about financialization?

This book provides the American public with a framework to understand how long-term incremental social structural changes are working against them and future generations. Toward that end, I turn to critical theory, which is rooted in the Hegelian-Marxian tradition and was elaborated by the Frankfurt school. This method of immanent critique has its foundation in Hegel’s stress on judging historical moments by their own internal norms and employing them to form one’s critical standpoint (Antonio forthcoming). Its objective is therefore to demystify ideological distortions and thereby detect the societal contradictions which offer the most determinate possibilities for emancipatory social change (Antonio 1981, 330). Drawing on this theoretical tradition, my analysis juxtaposes the ideology of neoliberalism with concrete social structures in order to understand how neoliberal ideology conceals how the organizational and institutional arrangements I address (Mannheim 1936) emerged and created opportunities for corporations to accelerate financialization of the economy and engage in financial wrongdoing and chicanery to their benefit.

This method emphasizes unfolding the historical logic (Roy 1997) that exposes neoliberalism’s flawed assumption that free markets exist in contemporary society (Mises 1949; Friedman 1962; Hayek 1991). My analysis draws on Polanyi’s seminal insight that exposed the flawed free market assumptions of nineteenth-century liberalism by showing that markets are culturally and politically constructed. This approach identifies the social actors that created and commodified (Offe and Ronge 1975; Offe 1985, 86, 245; Jessop 1982, 109) the financial instruments that disadvantaged many Americans dependent on financial markets. Understanding how financial instruments were commodified is critical to creating a more democratic policy formation process and institutional arrangements that provide opportunities for the poor and working and middle classes.

ORGANIZATIONAL POLITICAL ECONOMY

The organizational political economy framework, which incorporates concepts from a range of theoretical perspectives but moves beyond them, consists of several interrelated presuppositions. The core presupposition maintains that the social structure has multiple interrelated components—for example, states, markets, corporations and other organizations, and ideology—that are intertwined and therefore cannot be understood without examining the relationships among them (Marx [1867] 1977; Weber [1921] 1978; Polanyi [1944] 2001). The historically specific social structure of accumulation is affected by how these components are connected because some characteristics of the structure may appear only as a result of the way in which the components are assembled (York and Clark 2007, 720).

The crucial component in this complex structure is corporate-state relations, not markets, which are always politically embedded in modern society (Polanyi [1944] 2001). The historically specific configuration of markets is the outcome of economic conflict that is manifested as political conflict and mediated inside the state. Political embeddedness of markets and corporations varies over time as political-legal arrangements are constructed to address historical capital accumulation constraints (e.g., the rise in oil prices and global competition in manufacturing in the 1970s). Therefore, political embeddedness and disembeddedness are best understood as ideal types located at opposite ends of a single continuum and are affected by historically specific corporate-state arrangements (Prechel 2003, 314).

Political-legal arrangements that shifted markets toward the disembedded end of the continuum in the contemporary era have permitted corporate managers to engage in risk-taking behavior that shifts from fated risks in traditional societies, such as famines and plagues, to created risks in modern society, where the primary focus of technical knowledge is to facilitate economic growth and development (Beck 2009, 25). The primary social actors in this historical process are organizations, which depend on resources that other organizations control (Pfeffer and Salancik 1978). When corporations become more capital dependent, they mobilize politically to pressure governments to redefine their political embeddedness in ways that facilitate their capital accumulation agendas (Prechel 1990, 2000).² The capacity of corporations to pressure the state to advance their interests depends on their political power, the power of their organizational networks, and the degree to which capitalists are unified politically. In modern society, these activities are carried out by organizations, which are the mechanisms to exercise corporate and class power.

Organizations are tools for shaping the world as those in control of them wish it to be shaped (Perrow 1986, 11). In other words, they are not controlled by all segments of society. Rather, they are largely the tools of elites, as Perrow points out: The power of the rich lies not in their ability to buy goods and services, but in their capacity to control the ends toward which the vast resources of organizations are directed (12). Organizational power is therefore the capacity of these elites to advance their agenda even when other social actors resist it (Weber [1921] 1978).

Structural and instrumental power are two interrelated dimensions of organizational power (Levy and Egan 1998). Structural power, a component of the social structure, entails the extent to which organizational structures permit managers to place more resources under their own control. In contrast, instrumental power derives from the vast resources that organizations hold. Thus, structural and instrumental power are intertwined: an increase in structural power provides greater resources for those who control organizations to exercise instrumental power. The instrumental power of corporations is expressed as political capitalism: businesses’ exercise of power to gain control over public policies in order to facilitate their economic growth and development (Kolko 1963). Political capitalism is multidimensional; it entails the exercise of power (1) outside the state, where business interests attempt to control the political debate; (2) in the legislative process, where broad policy parameters are established; and (3) in state agencies that have authority over policy implementation and enforcement (Prechel 1990, 2000, 277). For example, in the mid-1980s, corporations used their instrumental power to pressure the state to redefine their property rights in ways that advance their economic agendas. This extension of corporate property rights facilitated the use of equity financing, which provided management with more capital resources to pursue consolidation that resulted in greater structural power (i.e., control over resources) increasing their instrumental power.

Political capitalism typically entails the concerted effort of multiple corporations, which requires cooperation among them. However, the capitalist class is never fully unified because capitalism consists of competing class fractions: collectives of social actors that represent divisions among economic sectors that conform to the specific relationship each branch of capital has to the economy as a whole (Poulantzas 1978; Zeitlin, Neuman, and Ratcliff 1978; Aglietta 1979; Zeitlin 1989). Due to their structural location in the economy, each branch of capital has unique capital accumulation requirements that necessitate different political-legal arrangements to advance their respective economic agendas that may contradict those of other class fractions. The political interests of class fractions also vary historically as the conditions that facilitate capital accumulation change. Conflict within the capitalist class reaches its highest level during periods of economic decline as the respective relationship of each branch of capital to the economy as a whole requires a different solution, resulting in conflict that is manifested at the political level (Prechel 1990, 2000).³

Nevertheless, capitalists’ competing economic needs and political interests do not preclude their developing a bloc with sufficient power to affect the transition to a new social structure of accumulation (i.e., phase of capitalism). It is not necessary for all fractions of the capitalist class to have the same interest or agree on the direction of economic policy to establish a power bloc. Instead, the political power to influence government policy requires only sufficient capitalist class unity to create a power bloc with adequate power to influence policy. Historical variation in the dominant power bloc is affected by the specific capital accumulation constraints and opportunities at that time and the structural location of economic sectors in relationship to the economy as a whole.

When the rate of capital accumulation declines below a level necessary to ensure the long-term survival of corporations, the conflicting agendas of class fractions result in a political tug-of-war within the state, where politicians attempt to mediate conflict by implementing new policies. In other words, the economy does not have a unified logic of capital accumulation, so there is no unified capitalist class to dominate the political realm over the long term. Instead, fractions of the capitalist class form a new power bloc to dominate the policy formation process. During some historical conditions, for example, the dominant power bloc included fractions of the working class (Poulantzas 1978). The state therefore mediates inter- and intraclass conflict because capitalists themselves are frequently unable to resolve the contradictions that emerge in the economic sphere and the state’s legitimacy is dependent on maintaining economic growth and stability. During periods of relatively stable economic growth and development, conflict resolution takes the form of revising policy in ways that advance the capital accumulation agendas of the dominant power bloc.

Organizational political economy theorizes that the state, the principal social control agent in society, is a complex organization. It is affected by its own agendas (e.g., maintaining economic stability and its own legitimacy) and by structures that include separate large supra-units (the executive, legislative, and judicial branches) and subunits such as the Treasury. The state also has resource-dependent relations with organizations external to it, such as corporations, and it mediates political conflicts that emerge inside and outside it because obtaining resources, such as tax revenues, is dependent on economic growth (Prechel 1990). When the state controls resources such as access to capital and markets that limit corporations’ capacity to realize their goals, corporations mobilize politically to restructure corporate-state relations in ways that favor them.

The balance between corporate power and state power depends on the capacity of economic interests to use organizational resources to advance their economic agendas. Thus, corporations are a primary basis of collective action and constitute the primary means to exercise power in modern society (Offe and Wiesenthal 1980, 76–80; Roy 1997; Prechel 1990, 2000; Walker and Rea 2014). Corporations also provide a mechanism to forge political alliances with other organizations when their economic interests coincide, which contributes to their instrumental power.

Explaining Historical Transitions: Social Structures of Accumulation

The clearest exposition of the historically contingent character of the process of capital accumulation is articulated by social structure of accumulation (SSA) theory, which draws on long-wave theories of capitalist growth and development (Kondratieff 1935). The theory shows that capitalism goes through a cycle that is repeated over time, and variation in the rate of capital accumulation is the primary cause of historical shifts in the prevailing institutional arrangements of which political, economic, and ideological arrangements are primary (Gordon, Edwards, and Reich 1982; McDonough, Reich, and Kotz 2010; Wolfson and Kotz 2010; Kotz 2015).

The cyclic characteristic of capitalism exists because corporate profits depend on institutional arrangements that are external to the firm. These institutional arrangements are designed to ensure conditions favorable to capital accumulation and the reproduction of class relations. However, periodic breakdowns in one dimension of the institutional arrangements in which corporations are embedded undermine capital accumulation, which initiates a shift to the next phase of the cycle.

Each social structure of accumulation has three distinct stages: exploration, consolidation, and decay. In response to economic decay, the exploration phase emerges: politicians and capitalists experiment with restructuring the institutional arrangements in ways that facilitate capitalist growth and development. During this period, ideologies emerge to legitimate the superiority of certain policies over others.

After the new institutional arrangements are enacted and the ideological, political, and economic arrangements are assembled in ways that facilitate capitalist growth and development, consolidation occurs. These arrangements provide the foundation for higher profits and contribute to stable capitalist growth and development that may last for decades. Each consolidation phase is characterized by a dominant power bloc (Prechel 2000). For example, during the consolidation period in the post–World War II era (1945–1973), manufacturing was the dominant power bloc. Throughout this period, most government policies (e.g., trade, tax depreciation allowances) provided greater benefits to the manufacturing class fraction. The state also mediated class conflict by facilitating the capital-labor accord that was designed to limit disruptions in the capital accumulation process caused by labor strikes and work slowdowns by raising pay