Icarus and the Economic System

Imagining Capitalism’s Next Act

Is capitalism headed in the right direction?

From elementary school through the end of my formal education, I was taught that highly competitive capitalism was some kind of natural law. It was juxtaposed — everywhere from childish notions of ‘The American Dream’ to college-level economic proofs — against the “failed experiments” of communism, and other “less developed” alternatives. Capitalism was more efficient, more practical, more meritocratic. The evidence presented both a logically superior system and a morally elevated ideology.

I remember one of my economics professors breaking down in tears as he described opposition to free trade agreements, which he believed would improve living conditions for billions of the world’s poor. Another of my professors, renowned for his expertise in financial markets, loved to mock the impractical ideals of socialism, which had resulted in locked refrigerators on the Israeli Kibbutz where he lived as a young man (moral: even cooperative living devotees could not trust each other).

From both a macro and micro perspective, capitalism often feels like a unified theory of social organization and human nature.

Indeed, for many of the world’s most educated and privileged, some version of free-market-dominated capitalism is assumed as a lynchpin of modern civilization. Capitalism helped drive unparalleled material gains over the last few centuries, so we instinctively believe that it is the best path towards continued progress and social mobility.

But something isn’t quite right.

‘Pareto optimal’ or not, global inequality is on the rise. In 2015, the 62 richest billionaires controlled the same wealth as the bottom half of all humanity. And many of those 3.5 billion humans in the bottom 50% are still truly impoverished. Quite a few still lack secure access to basic necessities. Economist Richard Wolff compares the wealth of today’s billionaires to that of the pharaohs in ancient Egypt.

If capitalism cannot reliably do better than this, isn’t it irresponsible to stop questioning its basic assumptions?

Two (Very) Fundamental Questions

The dramatic and unparalleled material gains of the last 200 hundred years raise two fundamental questions for me:

1. How instrumental was capitalism in the material progress of the last 200 years (the industrial age)?
2. Is capitalism the ‘best’ means to continue developing and distributing economic opportunity today?
World economic history. Incomes rose sharply in many countries after 1800 but declined in others. (From: “A Farewell to Alms: A Brief Economic History of the World”: Clark, 2008)

On the first question: I would argue that capitalism was at least a direct enabler of industrial age growth. Firstly, corporate legal entities and the development of financial markets facilitated investment in technological breakthroughs. At the same time, increased trade allowed focus on comparative advantages and raised overall productive capacity. Competition also drove down costs, accelerated iteration and allowed vastly increased consumption. Would we have experienced great material gains in the twentieth century, even without capitalism? Maybe. But capitalism was largely responsible for generating the sheer magnitude of overall material gains.

Unfortunately, though capitalism proved effective at generating material gains, it wasn’t as good at distributing them to increase overall welfare. The most cited economic study in recent history, Thomas Pikkety’s Capital in the Twenty-First Century, examines the runaway accrual of wealth and power at the top of the economic pyramid. According the Pikkety, in the absence of extraordinary shocks (like a World War) or government intervention (to ‘tame’ the powerful and redistribute gains), wealth tends to accrue faster than overall economic growth.

Since finance now mints more billionaires than manufacturing, and automation is reducing the need for basic human labor, this seems like it could continue to grow more pronounced. Our focus on competition and consumption distracts us from larger systemic problems with capitalism.

So in 2016, the more interesting question is whether we can do better.

A New Openness to Alternatives

Over the past year, I’ve heard everyone from Marxist scholars to Silicon Valley entrepreneurs express remarkably similar concerns about the current dynamics of capitalism. Beyond income inequality, capitalism has recreated many of the same oppressive power structures and persistent social inequities that characterized feudalism and state-run communism.

Thankfully, I think people are waking up.

Bernie Sanders and Donald Trump — symbolically opposite candidates in almost every way — have both built campaigns on populist desires to restore some semblance of ‘The American Dream’. Though one criticizes inequality, and one embodies it, the two candidates are striking nerves at a time when many Americans feel that their economic mobility and progress are threatened. Precarious circumstances and real struggle are a powerful catalyst for change.

These deep and growing concerns mean renewed openness to what might come after industrial capitalism — at least among the ideologically progressive. Can we accept the merits of some principles of capitalism, like voluntary exchange and market-generated prices, while simultaneously rethinking its other basic assumptions?

I believe that we should — as individuals and as a society — pursue what sociologist Erik Olin Wright calls “more diverse ecologies” in our economic system. Wright argues that rather than trying to “smash” capitalism (which historical evidence suggests is quite difficult), we should instead focus on “eroding” capitalism. That is, we should start exploring the relative advantages and limitations of alternative economic models alongside today’s dominant modes of capitalism.

Eroding ‘Pure’ Capitalism

Over the past year, I’ve met and been inspired by a variety of bold and creative groups who are testing the limits of some of the most fundamental tenets of capitalism.

Reducing the Corporate Form:

Corporate entities are incentivized and even legally bound to maximize ‘shareholder value’. While this can motivate growth, true innovation is often more difficult than externalizing costs (e.g. polluting) or cutting costs (e.g. squeezing workers) as means of increasing shareholder value. How can we restructure our entities to instead maximize societal benefit?

FactoryX Future of Work Lecture by Tom Chi
  • Alternatives to the C-Corp: In addition to well-known options like B-Corps, a whole host of hybrid ownership and operating structures look to balance competitive demands with the needs of various stakeholders. Some online platforms are structuring as cooperatives, and others are giving more equity to their lowest paid workers.
  • More inclusive legal documents: FactoryX is an accelerator helping found companies on legal concepts like shared intellectual property (between workers and companies) and patents that revert to public domain if unused for 5 years (to stymie patent trolls and increase usage of innovations). Inventions thereby become the property of inventors and society, rather than just the corporate shell they were created within.
  • Open source operating models: The two-factor authentication company Clef has open-sourced their HR handbook and operating documents—including fully public compensation details for their entire team. Transparency makes it harder to arbitrage people for corporate gain and gives employees a louder voice in improving their organizations.

Localizing Trade Networks:

Industrial specialization maximizes output, but can result in vulnerable communities reliant on global markets and trends. Profitable exports and cheap imports may not be worth the human cost of repeated booms and busts in local economies. Movements for local production and ‘Commons’ are converging with new technological possibilities like peer-to-peer trade and asset sharing. Can we reestablish some local self-reliance without sacrificing our quality of life?

  • Asset sharing: The dream of ‘two cars and a white picket fence’ is quickly fading. Instead, with Getaround and Airbnb, a customer can rent a car or a house that meets her needs for a weekend or an afternoon. Though large assets (and digital files) are natural starting points, peer-to-peer currencies, combined with reputation and transactional tools will make ‘micro-trade’ with neighbors possible for an increasing range of goods and services. This type of local trade is far more efficient than individual ownership.
  • Recreating ‘the Commons’: Looking at ways to share real estate among a variety of activities (not just purely ‘residential or commercial’) opens up huge potential for increased self-reliance . Growing Power uses urban land trusts to enable local communities to grow their own food. Communal live/work spaces like the Embassy Network share resources to work on projects and pool opportunities and services for their members.
  • Employing community capital: Beyond Kickstarter, an emerging range of niche crowdfunding platforms like Patreon (for artistic patronage) and Barnraiser (for food business) are reducing the need for institutional capital. Investors who are emotionally tied to their investments are less likely to exclusively prioritize ‘shareholder value’.

Rethinking the Basis of Competition:

Capitalist competition — to produce and sell more, better, cheaper — often motivates incremental change and marketing, rather than true innovation. Entrepreneur and investor Peter Thiel argues, “Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival.” Over the last two hundred years, capitalism has induced a myopic fixation on competition. What do we really care about competing for in 2016?

  • New definitions of quality: As more products and services are automated and commoditized, traditional market dynamics will shift. Companies targeting millennials will realize that they need to compete on experiential and emotional value as much as on price and convenience. Hence the story of “Belong Anywhere”, the mantra of the most valuable ‘hotel business’ in the world: Airbnb.
  • Alternate investment theses: Investors like Kapor Capital are starting to track new metrics like team diversity and community engagement, rather than pure profit. Beyond social impact, these investments are strategic because service businesses need to understand the communities they serve, and creative businesses need to compete in the reputation economy to recruit and retain employees.
  • Collaborative networks: Groups like the Sustainable Economies Law Center are helping empower worker “participation in cooperative enterprises, micro-enterprises, social enterprises, nonprofit enterprise, low-profit enterprises, and gift-economy enterprises.”

And there’s so much more beginning.

Whether or not these developments are ‘anti-capitalist’ depends on our definition of capitalism. All of the groups noted above rely on prices and exchange, and many are motivated by some level of profit. But they are still carving out distinct alternatives to today’s dominant version of capitalism.

We undoubtedly live in an age — like the 1960s and other eras of radical change — where ‘more diverse ecologies’ are taking root. Economic and sociopolitical activism often go hand-in-hand, and the backlash to traditional capitalism feels like a natural corollary to anti-oppression social movements. Occupy Wall Street, Black Lives Matter and the LGBTQ Rights movement are natural allies. We need to organize work for the benefit of a diverse set of workers and societal needs. We should try to empower expression and activity that isn’t always completely market-driven.

Call it anti-capitalism or excitement about capitalism’s next act —it’s time to think boldly about how our system itself can be better.

Recent influences:

  • We Can Do Better than Capitalism (lecture) — Economist Richard Wolff
  • Growing Power: Urban Ag (lecture)— Former NBA-player Will Allen
  • Requiem for an American Dream (film) — Philosopher Noam Chomsky
  • New Confessions of an Economic Hitman (lecture) — Author John Perkins
  • The Future of Work + Factory X (lecture + workshop) — Google X co-founder and Google Glass inventor Tom Chi
  • How to be a Modern Anti-Capitalist (lecture) and Envisioning Real Utopias (book) — Sociologist Erik Olin Wright
  • Capital in the Twenty-First Century (book) — Thomas Pikkety
  • Practicing Law in the Sharing Economy (book)— Janelle Orsi
  • Zero to One (book)— Peter Thiel