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.

In the wake of the junk-bond and takeover mania of the 1980s, economic risks were shifted from corporations to workers

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.

Facebook Twitter Pinterest ‘Wall Street managers and traders have done everything possible to prevent the wages of most workers from rising in tandem with productivity gains.’ Photograph: Eric Thayer/Reuters/Corbis

As a result, economic insecurity has been baked into employment. Full-time workers who had put in decades with a company have often found themselves without a job overnight – with no severance pay, no help finding another job and no health insurance. Today, nearly one in five working Americans is part-time. Many are consultants, freelancers and independent contractors. Two thirds are living paycheck to paycheck. And employment benefits have shrivelled. The portion of workers with any pension connected to their job has fallen from just over half in 1979 to less than 35% today.

The prevailing insecurity is also a consequence of the demise of trade unions. Fifty years ago, when General Motors was the largest employer in America, the typical GM worker earned $35 an hour in today’s dollars. By 2014, America’s largest employer was Walmart and the typical entry-level Walmart worker earned about $9 an hour.

This does not mean the typical GM employee half a century ago was “worth” four times what the typical Walmart employee in 2014 was worth. The GM worker was not better educated or motivated than the Walmart worker. The real difference was that GM workers 50 years ago had a strong union behind them that summoned the collective bargaining power of all carworkers to get a substantial share of company revenues for its members. And because more than a third of workers across America belonged to a trade union, the bargains those unions struck with employers raised the wages and benefits of non-unionised workers as well. Non-union firms knew they would be unionised if they did not come close to matching the union contracts. Today’s Walmart workers do not have a union to negotiate a better deal. They are on their own. And because fewer than 7% of today’s private-sector workers are unionised, most employers across America do not have to match union contracts. This puts unionised firms at a competitive disadvantage.

Here again, public policies have enabled and encouraged this fundamental change. More states have adopted “right-to-work” laws. The National Labor Relations Board, understaffed and overburdened, has barely enforced collective bargaining. When workers have been harassed or fired for seeking to start a union, the board rewards them back pay, a mere slap on the wrist of corporations that have violated the law. The result has been a race to the bottom.

Given these changes in the organisation of the market, it is not surprising that corporate profits have increased as a portion of the total United States economy, while wages have declined. Those whose income derives directly or indirectly from profits – corporate executives, Wall Street traders and shareholders – have done exceedingly well. Those dependent primarily on wages have not.

Britain is not as far along the path toward oligarchic capitalism as is America, but it is following the same trail. Markets do not exist without rules. When large corporations, major banks and the very rich gain the most influence over the composition of those rules, markets invariably tilt in their direction – adding to their wealth and their political influence. Unaddressed and unstopped, the vicious cycle compounds itself.

Yet the trend is not sustainable economically. The American economy cannot maintain positive momentum without the purchasing power of its vast middle class. This is one reason why today, six full years into an economic recovery, the US economy is barely back to where it was before it fell into the Great Recession.

Facebook Twitter Pinterest ‘Bernie Sanders represents a tradition of leftwing reform populism that seeks to limit the influence of big money on the political process.’ Photograph: Zuma Wire/REX Shutterstock/2015 Rex Features

Nor is it sustainable politically. A large portion of the American electorate, working harder than ever but seeing no wage gains for years, is becoming angry and frustrated. That anger and frustration, in turn, is fuelling a populist revolt against the prevailing establishment. The revolt is already manifest in the presidential election of 2016 in the forms of Democratic candidate Bernie Sanders and Republican candidate Donald Trump.

But the two are quite different. Sanders represents a tradition of leftwing reform populism that seeks to limit the influence of big money on the political process, thereby clearing the way for the enactment of new laws and rules that can deliver more broadly shared prosperity. Trump comes out of a tradition of rightwing authoritarian populism that seeks a strongman who will take power away from the prevailing oligarchy and deliver it back to the people directly. Often accompanying authoritarian populism is making a scapegoat of vulnerable minorities, including immigrants.

Both Britain and America have had brushes with authoritarian populism in the past. In the Depression decade of the 1930s, Oswald Mosley in Britain and Father Charles Coughlin in the United States offered authoritarian solutions to the nations’ economic problems. But neither nation has succumbed. In times of economic stress, both Britain and the United States have opted instead for reform. President Franklin D Roosevelt arguably saved American capitalism from its own excesses, as did William Beveridge and the postwar Labour government, with regard to British capitalism.

It is impossible to know when we will again reach a tipping point, but there can be little doubt it will come. Political economies that bestow most gains on small groups at the top are inherently unstable. The real question is not whether change will occur, but whether it will come through democratic reform or authoritarian mandate.

Robert Reich is chancellor’s professor of public policy at the University of California, Berkeley, and was secretary of labour in the Clinton administration. His new book, Saving Capitalism, is published in the UK next year