Transformation of Capitalism

Today there is much said about the rise of “State Capitalism” given the recent economic successes in China, Brazil and Singapore. In essence, over the next several decades traditional Free Market Capitalism will be competing with the new version for world dominance. The hope for the West is that the predictions of the disadvantages of government involvement will start to show once the novelty has abated. My own feeling is that some transformed version of traditional Capitalism, other than State Capitalism will evolve and endure through the twenty first century.

Over the last several millennia the proceeds of enterprises have gone to different segment of a society depending on the technologies, major contributing factors to the success of enterprises and the sources of power at the time. During the medieval era with city-states and baronets fighting each other for wealth and power, the excess output of a society went to heads of armies. They were the ones providing the key element, protection from other warlords. In time the feudal system faded and city-states were replaced by national governments. Farmers no longer needed protection from the neighboring lord and the value of protection declined. The Free Market expanded and the industrial revolution matured. Countries produced beyond their needs and trade between far corners of the world flourished. The key element for a successful venture now, instead of protection, became capital. There was an overabundance of labor and skills required of factory workers were low, the population was growing and markets were expanding. If you could find money for plant and inventory, if a manufacturer, or for a ship and crew you were in business. Without capital, no matter what your skill you would have a hard time getting things off the ground.

Over time two primary economic systems evolved, the Free Market and more recently the Socialist System with Communism at its extreme. The free market, as it churns, building and destroying, leaves in its wake a segment of the population in poverty. To ensure the markets continued viability, governments with functioning market systems developed “safety nets” in the form of assistance for the impoverished. Therefore today there are no truly Free Market States but in reality Free Market Capitalist Welfare States. Each of the market system practices some degree of Socialism. It varies in degree from that of the United States at one end to the European countries at the other. In both the Capitalist and Socialist systems the main ingredient is still capitol and proceeds go to the providers of the capital, however the sources of capital differ. In the Free Market System capital is provided by individuals, whereas in the Socialist System, by the entire population through the states. The proceeds in one case go to individuals and in the other to the population as a whole. From the standpoint of the workers inside an enterprise it looks pretty much the same since the result of their efforts go to others. (As a practical matter the statement that things look the same is an obvious exaggeration because the management styles employed by the two are vastly different. Though in both cases the workers are paid to work for someone else’s benefit.)

The biggest difference between the two, and it is a big one, is that the market system counts on market feedback for business decision whereas the other counts on governmental central planning. All of the interdependencies affecting business decisions are too complex to try to plan. If you think about what is involved in putting a simple thing like a chicken on a dinner table, it is astounding. A large component of chicken feed consists of anchovies that come from the Pacific. So when there is a period of an active El Nino, waters warm, plankton disappears, anchovies move and the price of chicken goes up. If you add to this the farm implements requiring various materials and technologies not to mention the mining to extract the materials and what goes into the boats catching the anchovies and the trucks and trains transporting, not only the chickens and the feed but, all the other stuff. The argument that the market, giving its feedback mechanism and ability to respond quickly to establish how much of what is needed, and at what price is much more affective than a human plan, has great merit. However, with today’s great advances in computer science, I am not sure for how much longer the argument will be valid. A couple of decades ago it was thought that, given the complexity of variables in the game of chess, no computer will ever beat a true chess master. Big Blue proved that assumption wrong.

In the competition between the Free Market System and the Communism of the Soviet Union, the markets won though there are still pockets of Communism remaining, they are fading fast. Over the last several decades a new system is evolving, State Capitalism. Here basically the state is a primary investor in an enterprise but instead of relying on central planning and being the only provider of capital, it opens the enterprise up to market forces. In countries practicing State Capitalism, though private enterprises may be allowed, they must compete with the much larger government supported ones. Time will tell.

As discussed above, over time the proceeds of the enterprise have gone to provider of the most important element, protection during feudal times and capital during more recent industrial times. If there is merit to that reasoning, than what is the next precious element to supersede capital? Toward the end of the last century there came to be what was called the Dot-Comm bubble. Large numbers of enterprises erupted, many of which have since faded. The driver of the exuberance was technology. Intellect started to seriously compete with capital. Though capital still remained a requirement, an enterprise was not expected to get off the ground without the brainpower of creative “nerds”. There were a number of reasons the bubble burst. The fact that the structure necessary to support the rapidly evolving technologies was not yet in place certainly was one. Another was that as with any revolutionary development more players jump into the game than it can sustain and a number fall by the wayside. There are also a number of conspiracy theories that I don’t subscribe to and won’t get into here.

There is another piece of evidence that intellect is not only competing with, but starting to surpass capital in value. Several decades ago the average pay of a CEO was about 25 times that of the average worker. Today it is 250 times higher. Part of the contribution to the rise in the cost of healthcare and education is a similar rise in income for doctors and educators. The income of professional athletes and entertainers has grown much more rapidly than the factory and service workers. This all is a result of capital yielding to individual talent.

A move needs to start somewhere and here it has started at the highest level of skill and I believe that this transfer of power is going to continue and expand to include the individuals working in factories and in service positions. As capital starts losing to intellect and is surpassed as the more important element to the success of an enterprise, with it will come a shift in the beneficiaries from the providers of capital to providers of skill. Innovation will continue as the driver for differentiation and thus profits and already I see signs of recognition that a significant portion of innovation comes from the workers on the floor. I have noticed in a few discussions about keeping jobs in the US where the proponents argue that having manufacturing done overseas allows workers there to learn the processes and their experience will leads to innovation. In the Wealth of Nations written in the seventeen hundreds, Adam Smith also talks about many of the ideas leading to technological improvements originating with the workers. A couple of years ago I saw Jack Welch on a cable news show where he talked about the necessity of shifting the priority of an enterprise from the stockholders to customers and workers.

In the immediate future, I believe Free Market Capitalism will coexist and continue competing with State Capitalism and in time both will evolve to a system that primarily values and rewards skills. This is not the Socialist system where the proceeds go to the state or the Capitalist system where again the proceeds go to individual owners. (In both cases proceeds go to the providers of capital.) In the newly transformed Capitalism, the benefit will be shared between providers of capital and those of skill with capital taking the back seat.