The death of capitalism has been a common topic of conversation lately. Millennials seem resigned to it, the younger generations can’t wait for it. Bastions of global capitalism—alleged capitalism—such as the World Economic Forum in Davos are quite eagerly promoting the concept of post-capitalism, and Wall Street for whatever its reasons follows in lockstep. Whether it’s socialism, localism, techno-feudalism, red anarchism, or state capitalism, whatever is advanced as the replacement for capitalism includes a firm rejection of markets and their role in social organization. Across the political spectrum, the voices of the early twenty-first century are calling for humanity to take back the reins from markets. Are they right? Is it time to move on from capitalism?
Maybe there is a problem with capitalism.
The Fraser Institute, a Canadian think-tank positioned as center-right in the eyes of establishment media, contributed their view concerning the death of capitalism. In an argument amenable to libertarians, a 2021 blogpost invokes economist Joseph Schumpeter. He argued that capitalism would become so successful, creating so much wealth, that it would support a large class of bureaucrats and wealth elite who could maintain their position of dominance even if the engine of entrepreneurial discovery was shut down. Schumpeter predicted that the social and political effect of this development would be an emerging disdain for capitalism institutionally. He agrees with Karl Marx, foreseeing a time when capitalism would outpace itself, and entrepreneurial merit would no longer be a relevant consideration in the political clash between rich and poor. Unfortunately, while Schumpeter agreed with Marx that this crisis of capitalism would lead to post-capitalist economics, he lamented the outcome, predicting that it would lead to lower standards of living.
Schumpeter and Marx seem to be focusing on the political economic effects of capitalism, but I take special note of Schumpeter’s view of capitalism as an entrepreneurial engine. In this view, humanity thrives when that engine is running at full speed. One problem with stagnant capitalism is that the owners of the engine don’t have to run it at full speed to keep their power, nor do they have to maintain it regularly, or improve it. This begs the question, is the contemporary disdain for capitalism caused by the neglected, outmoded commercial and financial machinery, and people don’t even realize it?
Opponents of capitalism blame the political system associated with it, of freedom and free markets. The Schumpeterian beauty behind capitalism is its ability to shape and improve lives through beneficial economic incentives. Its critics demand that harsh and forceful politics must intervene in its place. They argue that economic forces aren’t sufficient to keep up with society’s needs.
One new approach which freedom lovers could take in addressing the political and economic challenges of today would be to discuss the engine of capitalism itself, ignoring for a moment the politics. Can the engine be improved? Is there a technological solution to capitalism’s woes?
Calling capitalism an engine is certainly a metaphor, yet is it not also literally true? Market capitalism can credibly be called a social technology. It is a systematized process for organizing resources and human activity. It utilizes other social technologies: contracts, money, etc. It is very much a technological system, which interacts with other technological subsystems. It is an engine. With this in mind, what is the engine doing? What’s at its heart?
Something went right with industrial capitalism in the nineteenth century, to the point of it becoming economically and socially revolutionary. Something about it changed in the twentieth century. It still worked but was far less revolutionary. Prospective engineers of capitalism need to know what capitalism’s key factor is, to make it work again for the twenty-first century.
The key factor at the heart of capitalism is no mystery. It’s knowledge. Market capitalism is a social machine that discovers and uses knowledge. When knowledge feeds back into the machine, fueling it to go farther, capitalism becomes revolutionary.
The engine of capitalism needs to accomplish two things. First, it needs to be sensitive to valuable knowledge discovery. Capital needs to flow toward the most central and effective improvements in technology, but it also needs to flow toward widespread marginal improvements. Second, capitalism needs to realize long-term value from discovery. Valuable knowledge might benefit many people, but in order for the “engine” to really thrive, the discoverers and therefore the discovery process needs to see returns on investment into discovery.
In the nineteenth century, this process worked like a charm. Most innovation occurred in the realm of management practices. Better logistics, efficient processes, better accounting, better sales channels. This led to market share directly, so improvements in the social technology of management saw direct returns to capital.
In the twentieth century, the engine slowed down because most of the basic management practices had been discovered. Improvements to product became the source of competitive advantage, and this was a far less reliable source of profitability. Research and development gains were unpredictable, and imitation also threatened them. The engine of capitalism would often sputter and stall. To compensate, corporations began to rely on market barriers, monopolistic competition and semi-oligopolistic market structures. By creating barriers, businesses could guarantee that their investments into research and development would at least capture some profitability. The engine stuttered along.
Unfortunately, the market barriers of twenieth century capitalism also induced waste. Everything worked better with the government involved. More notably, the capitalist elite sought to create institutions in tandem with government to regularize society to make the consumer and labor class as uniform as possible. This is a major reason for the long, slow social collapse we see in American society, with single-parent homes and drug overdoses as notable symptoms. This is also the reason why it’s so hard to vote this system out. The New Deal capitalist elites of the twentieth century turned society into a ship and forced us all on board under threat of law. For the average person, it’s ride or die with the state capitalist system, or else sink.
It’s easy to see how the twentieth century model of capitalism is full of problems. It creates an economic hostage situation where neither the right nor the left of politics can really get it to budge, leaving us stuck with the uniparty. Consistent with Schumpeter’s vision, this elite class was less interested in maintaining capitalism and more interested in maintaining the barriers which protected their business interests. This led to war and economic imperialism.
The benefits of twentieth century capitalism must also be noted. Short of another solution, monopolistic competition was the only way for the engine to keep creating new technology. Within the uniformity of public schools and suburbs, standards of living skyrocketed. Yet, by the 1970s, the system had reached its limits. The fiat dollar was introduced, and globalization was used to skim the cream off the top of the massive wealth coming from developing the world’s underdeveloped economies. By 2022, we are seeing that this process too is coming to an end.
Instead of joining the refrain celebrating, or lamenting, the death of capitalism, freedom lovers should start thinking like engineers. What is it that capitalism needs to be doing, that it isn’t?
The problem can be split, by considering production and consumption separately. The problem with production is that the discoverers of value are unable to consistent profit from it. In business strategy, this is described as the difference between value creation and value capture (or realization). The solution lies in linking the two, understanding that the competitive environment seeks to split them. How can this be done?
In cutting edge business strategy theory, there is a concept called value-based strategy. This concept considers that whatever value any individual business adds to a product, that value is only realized in aggregate. Only when the product is consumed will the value be realized, so all businesses which contributed to it in a supply chain need to think at least semi-cooperatively about the end goal. A great example would be if a business pays its supplier more than they need to. It contradicts classic business strategy to do so, but this action might price out lateral rivals while helping the supplier maintain quality, let alone establishing a good relationship with them.
The trend for major corporations and financial orgs is to follow increasingly centralized, politicized command and control. Soon, smaller businesses will not be able to rely on their services. They may need new concepts to thrive. I recommend that all small businessmen at least read up on mixed games and value-based strategy. (Co-opetition by Adam Brandenburger and Barry Nalebuff is a good starting point).
The semi-cooperative strategy also speaks to the consumption side of capitalism. One major complaint that the left has made about twentieth century capitalism has been its failure to even distribute wealth. If businesses recognize that their profits are only a share of some aggregated, cooperatively realized value, then couldn’t the same logic apply to private property ownership? This is not an endorsement of equity-based, equal, or collective ownership of property. It is not an embrace of labor theory of value. Instead, it is a bargaining concept for labor, in a free market.
If private property produces value, and an organization of humans makes use of it, then it’s not a question of ownership so much as it’s a question of share. When a capitalist is investing in a very high-risk industry, then it makes sense for their share of value to be very high. What if risks are much lower?
One flaw of financialized capitalism is the absolute need for high-risk, high-return investments. Look at the inflation, dropped standards of living, and environmental degradation it produces. Maybe the real economy needs a balance between high-risk investing and stable, relatively low-risk investing that preserves a healthy social environment. By tying labor compensation to the value of shares of private property, business managers might focus more on getting rich through good business, rather than squeezing every last dime out of labor cost cuts. Labor has a market right to try and bargain for arrangements like this, but they have to understand semi-cooperative game theory.
I don’t agree that capitalism is dead. I do think that the engine we’ve been using is probably outdated and needs an update. While everyone else is going mad, proposing AI based UBI techno-tyranny, neotraditional primitivism, or whatever other nonsense, freedom lovers might try a different approach. I don’t think rolling back the state, alone, will meet the needs of the twenty-first century. However, with the iron grip the state has had on capitalism since the nineteenth century now threatened, perhaps it’s finally time to open up capitalism’s hood and take another look inside. There might be a whole new revolution for entrepreneurs to unleash with just a little tinkering.
