The Coming Collapse of Capitalism

Over the next one hundred years, capitalism will come to an end. It will do so not because of a competitive system, but because its own internal logic will cause its end and require a different system to arise. In fact, two recent books make this case rather cogently—Naomi Klein’s This Changes Everything: Capitalism vs. the Climate, and Paul Mason’s Post-Capitalism: A Guide to Our Future. Klein’s book focuses on what climate change shows us about capitalism and how its logic is approaching an environmental end game, whereas Mason outlines how markets are ceasing to function and capitalism’s traditional escape mechanisms can no longer save it. My argument is not that, as Klein argues, we need to fight capitalistic powers, nor is it that, as Mason argues, some new or revised brand of socialism will be the inevitable replacement for capitalism. The true power of both writers is in the insight that capitalism is nearing its demise because the conditions for its success no longer exist.

To understand the causes of its demise, we must understand the four key assumptions that simultaneously support and renew capitalism in its own terms. While these assumptions have constituted capitalism’s foundation for centuries, they are now becoming the focal points of its internal contradictions.

What are those assumptions? And how are they becoming contradictions? The four assumptions are as follows:

  • Markets effectively and efficiently set prices due to the opposing forces of supply and demand.
  • When necessary (usually because prices and profits are trending downward) capitalism can be revitalized by discovering or creating new markets.
  • Externalities remain economically external and irrelevant.
  • Private property and the rule of law are sacrosanct.

These assumptions sustain capitalism so long as they hold true. But in these waning days of the capitalistic period, the four assumptions are beginning to fail. Markets are losing their ability to price goods and services; new markets are scarce; externalities can no longer be avoided; and private property is gradually giving way to a collaborative commons. These changes are not the result of an external threat, but rather of the natural, inevitable outcome of capitalism following its own necessary, inevitable development.

The two forces driving the failure of capitalistic assumptions are globalization and digitalization. Both are inextricably linked, but we will consider them separately to illustrate how they operate. Then, we will explore the growing decay of the four assumptions and what that decay means.

Globalized Capitalism

Capitalism could not help but go global. It is always expanding and has been ever since its inception. Many people would say that capitalism started in 18th century England with Adam Smith and the industrial revolution, but its core principles such as private property and rule of law predate that by at least a century, and were part of the breakdown of capitalism’s immediate predecessor, aristocratic feudalism. Both ideas contributed to the erosion of feudalism—private property replaced the rights of nobility and rule of law destroyed the power of nobility. As feudalism fell, capitalism created markets, then expanded into new markets, and continues expanding to this day. While expansion appears necessary for capitalism to survive, why is it necessary to survive?

It is inherent in capitalism that pricing power, and therefore the ability to generate profit, decays over time. Products are invented that are unique (or they are introduced to a new market where they are unique), and therefore of high value. Over time, those same products are increasingly produced at higher productivity and with increasing efficiency. As that occurs, two outcomes can be expected: First, the marginal cost of production decreases. Capitalists love this because if they can maintain the perceived value while production costs decrease, profits explode.

Second, with increasing profits, capitalists produce more and more until the product becomes ubiquitous, loses its novelty, and prices begin to decline. This begins the capitalist’s nightmare. Supply outstrips demand, competitors enter the market and produce even more, and prices decline toward the marginal cost of production—that is, toward the unit cost of producing one more widget. In business terms, the product becomes commoditized and profit margins shrink.

For centuries, capitalism’s response to this inherent logic has been to find or create new markets. Colonize a place, and you can control the market there. That was one way to do it. Use distribution and transportation of goods to serve markets that are not being served was a second strategy. The third was to create a new market by creating demand, largely through advertising and mass media, but also by innovation. In the twentieth century especially, mass media created widely accepted social “norms” that people believed they should meet, whether personal or business related, and in this way, new demand was created. Innovative new products could also create new needs, and therefore new markets, and this accounts for the relentless drive of capitalism to create new products. A standard for large consumer driven businesses is that eighty percent of sales and profits come from products invented within the last 3-5 years. In some businesses, the obsolescence cycle is so short that their profits come from products made only within the previous six months.

Capitalism grew new markets broadly across the globe; it also grew deeply into nations, communities, and individual lives. It had to because market expansion is the only way to maintain profits. Yet just as capitalism has infiltrated everywhere, it is running up against global limitations. With the expansion of capitalism since the fall of the Berlin wall in 1989, there is almost nowhere on earth that capitalism is not the dominant economic force. Geographically speaking, there are no new markets to penetrate. As pricing power gives way to commoditization, corporate leaders can no longer look to expand into new geographies because there aren’t any. Capitalism is everywhere already, and every place is already a market.[1]

Likewise, the global market has reduced the cost of transportation of goods and services to practically zero, thereby creating a nearly true global market. Digital goods and services in particular—including monetized capital—may now be transported around the globe in no time and at zero cost. But most other goods can also be transported and delivered at little or no cost to almost anywhere, and those costs are coming down. In other words, the idea of underserved markets is essentially disappearing—everyone has service everywhere, or will have it, as capitalism continues on its global march.

When conquest and colonization become less effective, capitalists turned to mass media to create new markets. In an era when big cities had one or two newspapers, three TV channels, several AM radio stations, FM only played music, and no one ever heard of the Internet, everyone was watching the same thing, so a few well placed ads could swing an entire market to perceive differently. That perception created demand—in essence, a new market.

But in today’s world of hundreds of TV channels, unlimited digital radio, infinite websites and blogs, and an untold number of communities of interest organized through the Internet, the ability of capitalism to efficiently create a mass market has waned. Social media still demonstrates that perceptions can be changed, but not in a cost efficient manner from the capitalist perception. After all, social means relationships, not mass media. And building markets one relationship at a time is a costly proposition.

Finally, there is innovation—the creation of new products or services that generate new demand for things people didn’t know they needed. For hundreds of years, such innovation has driven the capitalistic economy, and it still does today. Today, however, innovation has taken a novel direction: Most of it is digital. As we will see, digital products  are creating their own problems for capitalist expansion of markets. They are stopping it in its tracks.

Here is the point: capitalism thrives by expanding into new markets when pricing pressure requires it to do so to maintain profits. But today, there are no new markets to expand into. Globalism means it is everywhere. The disintegration of mass media gives it no effective power to create mass markets. While digital innovation can produce demand, it cannot create a functioning market. Capitalism is global; there is nowhere new to go.

The End of Externalities

Just as capitalism stayed lively by expanding constantly into new markets over the centuries, it has maintained its power and profit by steadfastly refusing to account for externalities. The classic example of externality is pollution from a smokestack or effluent pipe that dumps into a river. When smoke goes into the air or poison into a river, capitalism has no method to account for that, so it is treated as an “externality” or a kind of unfortunate unintended consequence. There is no cost to the factory owner—hence no accounting for it. The result included the infamous days in 19th Century London when people couldn’t see in front of themselves due to smoke and smog, the photos of Pittsburgh during the heyday of its steel mills, or the Cayahuga River that actually caught fire in 1969.

When the externalities became noxious enough, people required government to do something about it, and regulation of industries is primarily driven to confront these externalities. The economic issue, however, is never resolved—it is simply turned into a political issue in which laws and regulations are imposed on capitalism to try to force proper accounting.

Ideological capitalists argue that the issues of externalities can all be sorted out by the market, so let’s let the market decide. This ideological position, however, is a deception—externalities, by definition, are external; they are not in the system and the market system cannot account for them. The ideology pretends that you can solve an externality with the market, when you actually cannot.

One example of a famous contrived market is the cap-and-trade schemes claimed to be solutions to the atmospheric carbon problem that is driving climate change. Set a cap and grant permits, and the market will price those permits according to demand. Increased costs will force producers to limit their production—or so the theory goes. As Naomi Klein documents, however, the 2009 economic crisis drove down economic activity.[2] Since there was so little economic activity, fossil fuel burning declined, and everyone wanted to unload their carbon credits. Guess what happened to the market? The bottom fell out on carbon permits. Suddenly, there was almost zero cost to emitting carbon, so there was no incentive to eliminate emissions—exactly the wrong incentive. A similar market, the UN Clean Development Mechanism, underwent a similar collapse. “Weak emissions targets and the economic downturn in wealthy nations resulted in a 99 percent decline in carbon prices between 2008 and 2013,” according to Oscar Reyes from the Institute for Policy Studies.[3] The volatility of carbon markets destabilizes solar and wind markets, where long term investment and consistency is the name of the game.

Here’s the deal for capitalism: the game is up. Externalities are no longer external. The impacts can no longer be escaped by class or power. The great leveler is global climate change.

Climate change shows two inescapable truths: First, scale matters, and second, externalities will force an accounting. The globalization of capitalism has moved the externalized impact of capitalism from local centers of production to a global phenomenon. Production is everywhere, everyone is part of a market, and the externalities affect everyone. We are operating a global economic system to serve numbers of people completely unprecedented, and the impact of that activity is also affecting everyone and everything. It is as if you put a great cone over black London or steel mill Pittsburgh, but the cone is over the earth. London and Pittsburgh could be cleaned up by removing the cone and letting the wind blow, but on earth’s scale, the externality does not blow away.

That we would come to this point in capitalism is inherent in its logic. Critics saw these limitations decades ago,[4] but they were only critics at the time, and the engines of capitalism were not to be stopped or even stalled. The capitalists themselves could not stop it. Now that capitalism’s scale is global, we are on the verge of the externalities stopping capitalism in its tracks, most likely through catastrophic events tied to climate change.

Markets Aren’t Working Because of Digitalization

Capitalism’s logic calls for it to create or expand into new markets, as we have seen, and innovation is a big part of that expansion. Since the 1980s, most of the new innovation has gone into the digital economy—information, knowledge, data, data manipulation, collection, and reporting. We have created digital systems, digital products, and digital features in non-digital products. Digitalization enables robots to take over work, and we can print objects directly from their digital plans. All of this is amazing; it is the natural output of capitalism, and it is highly problematic for capitalism.

The challenge to capitalism derives from a unique quality of digital products—they can be reproduced at zero marginal cost. Consider the digital song. An artist makes and records the music, which is saved and recorded in digital form. There is substantial cost in creating that digital code, and the artist would hope to get a return on it by selling a certain number to cover the cost, and then more to make a profit.

In the days of vinyl LPs, the musical recording was purchased in a store after having been manufactured, fitted with a cover, and shipped to the store. All those activities created cost on a per-album basis, and the total of those costs is what economists would call the marginal cost of production. In theory, the marginal cost of production creates a floor in the selling price of the product. Efficiencies and productivity may help reduce costs to make it more profitable, but there will always be competitors to drive the price toward that floor.

The old scenario works because there is a floor below which prices cannot go, and in such an environment, markets function effectively to set prices through supply and demand. Supply is constrained by the marginal cost of production. Demand may be bigger or smaller, and the ratio sets the price at any given point in time. Properly operating markets calibrate demand and supply through the pricing mechanism.

Here’s the problem for capitalism: With digital products, supply is infinite and the marginal cost of reproduction is essentially zero. Music can sit on a server somewhere and be downloaded with no cost of transportation, no cost for packaging, and no cost for producing a product. It doesn’t matter if customers download one or one million copies—there is no change in cost. There is still the investment to create the product, but there is no marginal cost to reproduce. In other words, cost is zero while supply is infinite, so the supply side of the supply/demand ratio cannot be calculated. Hence, markets can no longer price things, and markets can no longer function. Without markets, capitalism cannot operate.[5]

The Decay of Private Property

Finally, perhaps the single most stalwart principle that holds capitalism together is the principle of private property. Private property creates the notion of ownership, which is central to the notion of capital itself. Only when you have private property can a capitalist own the means of production, including land, buildings, and equipment. In a capitalist society, government establishes law and rules for protecting and trading privately owned capital. You could say it is in the DNA of capitalist economic and political structures. Indeed, capitalist systems have worked best where the laws are efficient, effective, and reinforced throughout society.

Capitalism’s notion of private property is being undermined and destroyed by the digital economy. What is arising are small, large, and massive collaborations among people who know and don’t know each other, participating without being paid to create something of value. Collaborations such as Wikipedia, Linux, WordPress, Drupal, and Sugar CRM are examples of massive collaborations. Social movements around the world are lived and shared through online communities. Artists are creating collectives with people in different cities to collaborate to bring their work to audiences.

In fact, artists, activists, and Internet marketers continue to “push the free line.” Pushing the free line means opening more and more Internet content to free distribution. Their goal is to make as much information, knowledge, and product free to Internet users as possible, at once diminishing the value of asserting property rights, and undermining the market mechanism.

These early collaborationists assert rights to protect free collaborative products from capitalist appropriation. These “creative commons” rights are often used to protect the collaborative effort and preserve its ability to be used and accessed by anyone. But it is not hard to see that these nascent efforts are precursors to a new logic. Private property will become a quaint old idea, and people will collaborate based on skill and desire, contributing to a greater good as a part of the emerging new world.

Capitalism cannot operate without a system of private property rights. The whole logic of investment, production, sales and marketing, return on investment, and pooling of capital relies on the notion of private property. “I invest in this, so I can produce it, sell it, make a profit, and go buy something else.” None of those phrases make any sense if you cannot own what you invest in, create, sell, or buy. The accumulation of capital requires the ability to own that capital.

Here’s what is remarkable: This change occurs as a result of digitalization, which is a natural creation of capitalism. It is not a progressive political reaction against abuse or oppression. I doubt the people collaborating on Wikipedia do so primarily as a social action against corporate capitalism. Rather, it seems to be a spontaneous activity—people working for free to add to a common good—knowledge—simply because that’s what they want to do. This kind of activity is going on in droves among young people creating online communities primarily because they are interested. They create communities with structures, key roles, and the ability to contribute, all creating the community for free, while no one really owns it.

* * *

Trends can be profound liars, and in this analysis, I certainly do not want to imply that capitalism is currently on its last throes. It is not. And yet, capitalism’s ongoing development appears to be eroding its own foundation. Where anti-capitalist movements have failed to actually change the system, capitalism’s own intrinsic logic seems to be succeeding. Capitalism is poised to erode itself into non-being over time.

As this process unfolds, capitalism will go to great lengths to preserve the status quo. It will assert property rights more vigorously to protect ownership. It will develop pricing mechanisms to create a sense of scarcity and ensure profits. It will attempt to create new markets through free trade, more commercial intrusiveness, and relentless innovation. And, it will try to solve the global externality challenge through market mechanisms. However, what it cannot do is stop its own internal logic—relentless digitalization will continue and social collaboration will expand. As they do, capitalism will gradually lose its hegemonic hold on the collective economic imagination, and eventually give way to very different world.

[1] This drive to new markets is what drove imperialism and colonization during the capitalist era. Mature capitalist economies largely abandoned this strategy in recent decades, but new participants, notably Russia and China—still use this approach. It will soon appear as futile to them as it does to most capitalist nations. Developed capitalist economies discovered that free trade agreements were even more effective at finding and opening new markets.
[2] Klein, Naomi. This Changes Everything: Capitalism vs. the Climate
[3] Quote from the same Klein book
[4] See Lester Thurow’s Limits to Growth. (is that the right one?)
[5] Capitalists marketing ebooks admitted as much when they colluded to create a floor in the price of an ebook.
Posted in Capitalism, Postcapitalism and tagged , , , .

Anthony Signorelli is the author of Speculations on Postcapitalism, and other books. They are available as Ebooks on Amazon:

The Postcapitalist Manifesto
Speculations on Postcapitalism Ebook
How to Find Your Purpose, Passion, and Bliss: A Mythological Guide for Young Men