In a previous post, I offered a simple and flexible definition of capitalism:
Capitalism is the idea that ownership, in and of itself, entitles the owner to the work of others, combined with the idea that ownership can be bought and sold.
I then noted that capitalism expects sustained exponential economic growth, which cannot be supported in nature. This unrealistic expectation is disguised by ignoring or denying the following principle:
Wealth is never created or destroyed. It is only moved and transformed.
Capitalism’s success over the last five centuries has been based, not on creating wealth, but on transforming natural wealth — usually irreversibly on any human time-scale — into human wealth.
Economists have long dismissed the entire natural economy, the source of all human wealth, as an unquantifiable “externality.” Economists don’t even think about what happens when our exponential appetites come up against the finite boundaries of the physical world.
So I’d like to talk for a moment about yeasts.
Yeasts are fascinating little beasts, with two distinct metabolisms; they can switch between these metabolisms depending on their environmental conditions.
The aerobic metabolism is used when the yeasts have plenty of oxygen in their environment. They eat sugars and oxygen, excrete CO2 and a small amount of complex organic chemicals, and produce more yeast cells.
The anaerobic metabolism is used when the yeasts become oxygen-starved, but still have food to eat and space to expand into. In this case, they continue to eat sugars, excrete CO2 and large amounts of ethanol as a waste product, and the yeasts stop reproducing.
Capitalism likewise has its aerobic and anaerobic metabolisms.
Aerobic capitalism occurs when capitalist enterprises have access to plenty of resources, and demand for the goods or services is strong. Growth potential in an aerobic business is exponential.
Anaerobic capitalism occurs when access to resources, or demand, or both, are restricted. Growth potential is now limited to sub-exponential growth, or no growth at all.
Every successful business goes through aerobic and anaerobic stages.
My first job out of school was with the Gates Corporation R&D division.
Gates was founded in 1911, and the Gates Story is told as a typical Horatio Alger story. Charles Gates Sr. drifted into Denver, Colorado in 1911 with a mere $3500 in his pocket (actually, quite a lot of money in 1911, but let’s ignore that), bought the Colorado Tire and Leather Company, started selling a single, innovative product for the newfangled horseless carriage, and created a billion-dollar multi-national corporate behemoth within his lifetime.
By 1982, when I started working, Gates’ growth had slowed to 1% annually, and in Ronald Reagan’s Morning In America, this was deemed an unacceptably low return. Gates expanded its profits by purchasing other companies, notably the Uniroyal Power Transmission Company, and by closing the Denver manufacturing facility to reduce costs.
In 1996, Gates was purchased by the British firm, Tomkins, and in 2014 it was sold to The Blackstone Group, which (basically) buys companies and sells them off in pieces for salvage profit. There is still a “Gates” brand of product out there, manufactured somewhere by someone — a brand-name is one of the more profitable items of salvage from company — but the exponentially-growing company that Charles Gates Senior founded is gone.
This is a very normal progression for capitalist businesses.
Let’s look a this process in a little more detail.
When a new demand appears in the marketplace, lots of companies compete to satisfy that demand. These businesses are all aerobic, and they expand rapidly. If the demand is huge — say, for cars — and they run out of natural wealth — say, steel — then they create a voracious market for steel that funds new technologies and legal excuses and even military excursions to transform more natural wealth into steel, faster, more cheaply, and (usually) more destructively. So long as the businesses all remain aerobic, there will be a lot of competition, technological innovation, and exponential economic growth.
Then the businesses saturate their market, meaning they’ve essentially satisfied all of the paying customers: I’ve already got a car, you talked me into buying two more, but dangit, I really don’t want a fourth one — I’ve got no place to park it. It’s also possible to reach a hard limit on natural resources, in which case the dynamics are a bit different, but that doesn’t happen much in the modern world. It is almost always the demand that tops out.
What happens next is called “the shake-out,” where smaller competitors are forced out of business. The larger companies — the ones that will eventually survive the shake-out — start to invest in targeted marketing, service plans, and economies of scale that allow them to lower production costs. They pass all of these benefits to their customers.
These strategies are not intended for the good of their customers — they are intended for the destruction of their competitors. More specifically, the big companies are trying to exponentially expand their slowing demand, and the only way to do that is to take out their competition, and eat their slice of the demand-pie.
The business has started to go into its anaerobic metabolism.
The shake-out eventually takes the entire industry down to a small handful of major companies that service all of the demand. Think the Big Three automakers in Detroit, Coke and Pepsi, Microsoft and Apple. Sometimes geography or government regulation will partition the markets, such as for airlines, allowing a larger absolute number of competitors to co-exist. But within any “free” segment of that market, you end up with an effective monopoly or duopoly. These can vie for “market share” with advertising, marketing gimmicks, or enhanced services, but they are essentially all fighting for a fixed pool of consumers, and any gain by one company is a loss for the others.
At this point, pretty much the only way for the dominant companies to expand further is to diversify, by buying other companies, which may or may not have anything to do with their core business. Most of the largest multi-national companies today are merely holding companies that take profit from all of their holdings, in a very pure exercise of capitalism: they have bought the ownership rights, so they are entitled to a cut of the profits. Whether they provide any real benefits to the businesses they suck profit from is at best arguable; but as I’ve pointed out before, capitalism has nothing to do with merit, and everything to do with ownership.
Here are a few stark contrasts between aerobic and anaerobic businesses.
Aerobic businesses create jobs. Anaerobic businesses eliminate jobs.
During the aerobic phase of a business, the quickest way to expand your business is to employ human labor. You can even offer travel expenses, signing bonuses, a company car, or free lodging and whiskey — the contribution of each person more than pays for such trivial expenses. You are always looking for more people.
Once the business becomes anaerobic, companies turn to cost-cutting, automation, outsourcing, offshoring, layoffs, and budget cutbacks to maintain growing profits.
It’s worth noting that people — employees — are considered financial liabilities for any business; it’s a universal accounting practice. Let this sink in: employees are liabilities. A company always improves its financial standing by reducing liabilities, such as by laying off workers.
The only way to change this — the only way to make employees into assets — would be to allow the company the right to buy and sell their employees as capital assets, just as they would buy and sell their office furniture. Last time I checked, this was called slavery.
Aerobic businesses grow by expanding to meet demand. Anaerobic businesses grow by cannibalizing other businesses.
A business that buys another business in a merger shows paper growth: it’s a simple matter of paying less for the acquired company than it is worth (on paper), resulting in immediate profits. You also get a new set of customers, a new stream of income, and a new source of ongoing profits. If those profits aren’t as high as you’d like, you can cut the least profitable portions of the new business, and sell those off for salvage, which is additional short-term profit. In the worst case, you sell off the entire acquisition for salvage and force all its old customers to use your product instead.
This is a great strategy for eliminating competition. Very large companies can even purchase another company at a loss, simply to capture their competitor’s customers and eliminate the cost of competing with them.
Most employees in a merger are kept for a short period of time, during which they are assured and reassured that their jobs are safe, after which they are let go. Mergers are job-killers. It’s just business.
Vulture capitalism and mergers became one of the main sources of “economic growth” in the 1980’s, but it was not actual economic growth at all: one company grew, another company disappeared. Stockholders profit, but the economy as a whole remains the same, or even shrinks a little because of the inevitable layoffs, which destroys demand across a wide range of businesses.
Aerobic businesses represent a tide that lifts all boats. Anaerobic businesses represent a wave that beaches all but the largest yachts.
Aerobic capitalism views a “rising tide” of capital growth as a bunch of tiny toy boats in a bathtub, where the “magic of wealth creation” is the spigot that keeps pouring more financial syrup into the tub. This syrup forms a growing heap right under the spigot, where the ownership class moors its boats, and provides a smaller but still-growing puddle even at the far end of the tub where the non-owners (the scum) live. Aerobic capitalism doesn’t expend much thought on where the money comes from: it presumes that the spigot is simply “creating wealth” through “the magic of the marketplace,” and will continue to do so forever.
In anaerobic capitalism, the spigot is shut off, and the “rising tide” is produced by pumping the financial syrup from one end of the tub to the other: it lifts some boats while forcing others to beach themselves on the bare porcelain. The art of being an anaerobic capitalist is being far enough from low end of the tub that you stay afloat, even as the pile of syrup grows higher and narrower, and the expanse of bare porcelain broader.
This last contrast — the “rising tide” contrast — is particularly important at this moment in history.
Capitalism goes into anaerobic behavior when faced with the need for growth, without adequate opportunity for growth. Successful capitalists switch from exploiting natural wealth, to exploiting human wealth. We see corporate acquisitions instead of business expansion, corporate reduction of head-count, benefits, and pay rather than increased production, increased use of debt to finance operations, and outright fraud. The overall result is that the fiction of economic progress through wealth creation becomes straightforward wealth concentration, leading to an increasingly stratified society based on growing extremes of wealth and poverty, based in turn on the principle of the rich stealing from everyone else.
This kind of runaway wealth-gap is not isolated to capitalism: it’s common in human societies, and it is typically a precursor to some kind of dramatic social readjustment. The immensely wealthy who live at the top of the pyramid are incapable of sustaining their wealth without the support of the rest of society; the rest of society cannot support itself, because it is trapped in maintaining and increasing the wealth of the few at the top. The poor eventually break under the burden of maintaining the wealthy, and then the whole system collapses.
What’s notable about this is that the wealthy almost always remain clueless right up to the end. As far as they are concerned, everything is working just fine: their portfolios are increasing right on schedule. The rising grumble they hear from the lower classes is dismissed as the work of rabble-rousers, general laziness, and moral decay among the poor: nothing that a few lashes, jail terms, hangings, or a bit of real hunger won’t cure, and right bloody quick. Why in my day, we worked thirty-hour days, and we liked it….
It doesn’t matter whether I’m talking about Mitt Romney carping about the 47%, Marie Antoinette advising the poor to “eat cake,” or Nero enjoying music in his garden while the poor parts of Rome burned. It’s the same pattern.
Our global capitalist economy is following that pattern faithfully.
Of course, predicting exactly when and how capitalism will end is a fool’s game. Accurate data is mixed with lies and fraudulent accounting. More importantly, we have seven billion people trying to fix, break, and game the system, all at the same time. Even if we had perfect data, we could not predict the precise unfolding of events.
This is one of the reasons I try to stick to the overall process, such as the collision between exponential growth and a finite world. It’s obvious that capitalism will end. It’s not obvious when it will end, or exactly how. In fact, I could argue that capitalism has already died, and been revived, several times.
Karl Marx predicted the end of capitalism in the mid-1800’s, and any one of the banking collapses in the late 1890’s could have spelled the end of capitalism.
But capitalism didn’t die. Various financial fixes kept the system going, and led to the vast speculative financial bubble of the 1920’s, the “Roaring Twenties,” taken as evidence of the triumph of capitalism.
It was easy to see the final, bitter end of US capitalism in the bread-lines and homeless migrations of the early 1930’s — a little later than Marx thought it would happen, but the Stock Market Crash of 1929 was a suitably catastrophic ending, even by Marxist standards.
But capitalism didn’t quite die. The democratic socialism that followed the Great Depression of the 1930’s did not outlaw capitalism, as the Soviet model of Communism did — instead, the New Deal allowed a heavily-taxed, heavily-regulated form of capitalism to survive. The massive government spending on infrastructure through the CCC and WPA programs, heavy expenditures in science and technology, and (of course) continuing to expand the US military under Cold War justifications, combined with the complete disappearance of competition from war-ravaged Europe, allowed US capitalism to draw new breath on its deathbed. As a bonus, this government spending spree created an entirely unexpected new market: a vastly-expanded middle class, which created the consumer mass-market.
By the 1970’s, even regulated capitalism was in trouble again after having completely saturated the US consumer market, despite the invention of television advertising, suburban envy, and the throwaway society. It was easy to see the end of capitalism in the runaway inflation of the late 1970’s.
But capitalism didn’t quite die. Capitalists turned to creative accounting, corporate mergers, and debt to keep the system running. None of that actually helped the economy, any more than the financial tinkering had done in the late 1800’s. So it would have been easy to predict the demise of capitalism by the early 1990’s.
But capitalism didn’t die. The entirely unexpected computer boom brought a giddy decade of capitalist profits — Moore’s Law combined with a slightly elevated tax rate and Al Gore’s public funding of the national (public) Internet backbone, plus a lot of creative government accounting to hide the effects of inflation. That boom came to a sudden end in the tech bubble collapse of 2001. It would have been easy to write the epitaph for capitalism, right there.
But capitalism didn’t quite die. Aggressive deregulation, financial speculation, and massive fraud through the first decade of the 2000’s supplied a way to keep the corpse inhaling and exhaling a little longer.
We’re currently in a cycle of enriching the ultra-wealthy by sucking money out of the poor through a combination of underreported inflation, outsourcing labor, personal debt (particularly educational debt), and outright financial fraud — a cycle which bounced hard in 2008, but is still in progress after a direct government bailout that further impoverished the poor by spending tax money to pay off bankers’ gambling debts, which are again accumulating. It would be very easy to predict the demise of capitalism in a flaming Wall Street catastrophe before 2020.
But then, we have renewable energy development right around the corner, and the potential magic silver bullet of LENR, either of which could afford capitalism the burst of pure oxygen needed to extend its life yet again. Or, should Bernie Sanders successfully kick off his political revolution and his movement transform government over the next decade, we just might see a revitalization of the consumer mass market through a kind of New Deal redistribution of wealth.
So predicting the precise end of capitalism is, as I said, a fool’s game.
However, it’s worth noting that when capitalism died in the 1930’s, the natural world was in, at most, mild danger from human activity — something easily handled by creating a few national parks and wildlife refuges. When capitalism went back into the hospital in the late 1970’s, we had nuclear armageddon hanging over our heads, acid rain, DDT, and superfund cleanup sites. As we approach 2020, we have global CO2 buildup from human activity, sea level rise, widespread genetic tampering, and biodiversity depletion at a rate that’s being called the Sixth Great Extinction.
The natural economy we depend on — the fundamental economic externality that economists won’t even talk about, much less quantify — is growing increasingly fragile as capitalism continues to destructively convert natural wealth into human wealth. Capitalist enterprises on the whole are slipping into anaerobic behavior: almost all of the top companies on the Forbes lists are either in the financial sector, or are multinational holding companies. Given the degree and ubiquity of fraud already involved in keeping up the appearance of solvency, I suspect the true end of capitalism — with no subsequent zombie revivals — is pretty near.
In a future post, I will offer a few constructive thoughts on where we can go from here.