‘When Americans think of how the economic rules are stacked against them, they naturally think of Wall Street.’

The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalisation and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

The left’s standard solution has been an activist government that taxes the wealthy, invests the proceeds in excellent schools and in other means that people need to become more productive, and redistributes to those in need. These prescriptions have been opposed vigorously by those on the right, who believe the economy will function better for everyone if government is smaller, public debt is reduced and taxes and redistributions are curtailed.

But the standard explanation, as well as the standard debate, overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs.

And the interminable debate over the merits of the “free market” versus an activist government has diverted attention from how the market, both in Britain and in the United States, has come to be organised differently from the way it was half a century ago, why its current organisation is failing to deliver the widely shared prosperity it delivered then and what the basic rules of the market should be. This means that the fracture in politics will move from left to right to the anti-establishment versus establishment.

The standard explanation cannot account for why the compensation packages of the top executives of big companies soared from an average of 20 times that of the typical worker 40 years ago to almost 300 times in the United States.

Nor can the standard explanation account for the decline in wages of recent university graduates.

To be sure, young people with university degrees have continued to do better than people without them. In 2013, Americans with four-year college degrees earned 98% more per hour on average than people without a university degree. But since 2000, the real average hourly wages of young university graduates have dropped. While a college education has become a prerequisite for joining the middle class, it is no longer a sure means for gaining ground once admitted to it. That’s largely because the middle class’s share of the total economic pie continues to shrink, while the share going to the top continues to grow.

A deeper understanding of what has happened to incomes over the past 25 years requires an examination of changes in the organisation of the market, a transformation that has amounted to a pre-distribution upward. Intellectual property rights – patents, trademarks and copyrights – have been enlarged and extended, for example. This has created windfalls for pharmaceuticals, hi-tech, biotechnology and many entertainment companies, which now preserve their monopolies longer than ever. It has also meant high prices for average consumers.

Meanwhile, certain corporations have gained enormous market power, including those owning network portals and platforms (Amazon, Facebook and Google); cable companies facing little or no broadband competition (Comcast, Time Warner, AT&T, Verizon); and the largest banks. In the United States, financial laws and regulations instituted in the wake of the Great Crash of 1929 and the resulting Great Depression have been abandoned – restrictions on interstate banking, on the intermingling of investment and commercial banking and on banks becoming publicly held corporations, for example – thereby allowing the largest Wall Street banks to acquire unprecedented influence over the economy. The growth of the financial sector, in turn, spawned junk bond financing, hostile takeovers, private equity and “activist” investing and the notion that corporations exist solely to maximise shareholder value.

Bankruptcy laws have been loosened for large corporations, notably airlines and car manufacturers, allowing them to abrogate labour contracts, threaten closures unless they receive wage concessions and leave workers and communities stranded. Bankruptcy in the United States has not been extended to homeowners, who are burdened by mortgage debt and owe more on their homes than the homes are worth, or to graduates laden with student debt. Meanwhile, the largest banks and vehicle manufacturers were bailed out in the downturn of 2008–09, shifting the risks of economic failure on to the backs of average working people and taxpayers.

In America, contract laws have been altered to require mandatory arbitration before private judges selected by big corporations. Securities laws have been relaxed to allow insider trading of confidential information. CEOs have used stock buybacks to boost share prices when they cash in their own stock options. Tax laws have created loopholes for the partners of hedge funds and private equity funds, special favours for the oil and gas industry, lower marginal income tax rates on the highest incomes and reduced estate taxes on great wealth. All these instances represent distributions upward – towards big corporations and financial firms and their executives and major shareholders – and away from average working people.

Meanwhile, corporate executives and Wall Street managers and traders have done everything possible to prevent the wages of most workers from rising in tandem with productivity gains, in order that more of the gains go instead towards corporate profits. Public policies that emerged during the 1930s and the Second World War had placed most economic risks squarely on large corporations. But in the wake of the junk bond and takeover mania of the 1980s, economic risks were shifted to workers. Corporate executives did whatever they could to reduce payrolls: outsource abroad, install labour-replacing technologies and use part-time and contract workers.

A new set of laws and regulations facilitated this transformation. Trade agreements, for example, encouraged companies to outsource jobs abroad, while enhancing protections for the intellectual property and financial assets of global corporations. Government budgets that prioritise debt reduction over job creation have undermined the bargaining power of average workers and translated into stagnant or declining wages. Some insecurity has been the result of shredded safety nets and disappearing workforce protections.