The Transformation of Capitalism
In response to challenges of Inequality and the Global Environment
Stanford CA, June 2015
Capitalism is the leading force in the world economy. Its extraordinary success during the last half century led to ebullient and sustained economic growth that improved the lives of many. At the same time the global expansion of capitalism exposed physical limits in the use of natural resources, and led to unprecedented levels of inequality throughout the world. These two critical topics – inequality and the global environment – dominate the global discourse today. The intensity and the scope of the debate anticipate a transformation. Faced with its own limits, capitalism is now changing in front of our eyes. Can capitalism overcome widespread poverty and inequality? Can it satisfy the basic needs of the masses? Can markets become sustainable?
The book documents the trends that drive the transformation of capitalism and provides a vision of its future. It aims to help us navigate a bewildering period of change and to provide a step by step approach to how we got here, the forces underlying the world’s extreme levels of inequality and the environmental challenges of our times. We view inequality and the environmental crisis as two symptoms of the same problem. The connection between the two is real and is critical to overcome them both. The book anticipates emerging solutions and provides an overall vision of how capitalism is transforming itself to accommodate the need for change.
In a way capitalism is always transforming itself. The key to today’s transformation lies in its ability to adapt to a world-wide change in the main inputs of production. Inputs of production play a key role in human economic development. During the course of human history the key inputs of production were always private goods such as land in the agricultural society and capital in the industrial society. In this century however the most important inputs of production are radically different: they are public goods such as knowledge, the atmosphere, the oceans, and biodiversity. Knowledge and environmental assets acquired increasing importance as inputs of production when the overuse of natural resources limited their availability and increased their value thus encouraging the creation of knowledge or technology that could substitute for scarce and costly resources. Today capital is no longer the main input of production: the input that gave its name to capitalism is now on the wane. In our century the main inputs of production are not even private goods like capital or land that are rival in consumption: your land cannot be mine, your capital cannot be mine. Today’s inputs are different, they are naturally shared and are not rival in consumption. They are global public goods such as knowledge and the global environmental resources on which our species depends to survive. Knowledge is a public good because it can be shared without losing it; the planet’s atmosphere, its water bodies and its biodiversity are one and the same for us all.
As a result of this monumental shift, we are no longer captive to the logic of who owns capital or land, nor to the standard political notions of “left” vs “right”. The Marxist question of “who owns capital” is interesting but has lost its edge. The separation between socialism and capitalism is blurred and no longer the critical issue in the agenda. The critical issue for the human species now is how to survive.
The book reviews the main issues arising from the process of transformation of capitalism: how it adapts to a new type of input in the 21st century, and the attendant changes in its core institution, namely the market. The main inputs today are unusual public goods that are produced privately: they are not produced by governments, like bridges and the army.
In any case, the difference between private and public inputs is profound and changes everything. Today’s markets trade knowledge goods as their most important merchandise, for example software is India’s most important export, consumer electronics led China’s rise and financial services are the US and the UK most important exports. The global scarcity of water and the challenges to the atmosphere write a new chapter in human development. This trend is leading to the creation of new global markets for the use of the atmosphere and for water, and and we predict also markets for the use of biodiversity. These new markets trade public rather than private goods: for example, the carbon market of the Kyoto Protocol (EUETS) trades a public good, the right to use the planet’s atmosphere to emit carbon. Similarly, water markets are emerging across the globe in response to water scarcity. Markets that trade public goods have a different structure and a different behavior than the classic markets for private goods. The new markets have unusual features that did not exist before. For example traditional markets have always been “zero sum games” where the gains of one trader are the losses of others. This is not so in markets involving public goods. In the new markets the situation is different. For example in economies with knowledge, which is a public good, one often finds free goods such as email services, “apps”, and free access to music or to videos. Both the user and the seller gain from offering goods for free while, in traditional markets, there is no room for free goods and they never existed. As a result of the current change from private to public inputs of production, capitalism is evolving in a more cooperative direction, and the zero sum game or “dog eats dog” market mentality is slowly being replaced by cooperative solutions where free goods and the attendant redistribution of wealth can redress inequality.
Similarly the introduction of limits on the use of global public goods such as the planet’s atmosphere, its bodies of water, and its biodiversity lead to new markets that mimic the carbon market and extend it into new areas such as water and biodiversity. Cooperation between the traders is now possible and even desirable. The book covers this transformation and provides a vision of the future of the world economy. It offers a realistic view of the current state of development of capitalism and points towards its future transformation. The change is driven by the need to arrest the overuse and destruction of natural resources that are critically needed for human survival, and by the closely connected issue of inequality in the use of the world’s resources.
The book starts from a brief historical perspective that sets the scene. During its short life on earth, the human species evolved rapidly becoming today the dominant geological force in the planet, and leading to a period known by archeologists as the Anthropocene. This period emerged in 1945 at the end of World War II and replaced the Holocene. During the new geological period humans came to dominate the geology of the planet: its atmosphere, bodies of water and the complex web of species that makes life on earth. During this period capitalism emerged as the world’s leading economic force propelling and reorganizing international trade and the global economy, and leading to what we now call globalization. The first global financial institutions, known as the Bretton Woods institutions, were created when the war ended to reorganize world finance, succeeding beyond anyone’s imagination: The International Monetary Fund, The World Bank, The World Trade Organization, and the Bank for Reconstruction and Development. With the destruction of Germany and Japan, USA became 50% of the world economy after the war, naturally making the USA the leader within these global institutions. This confluence of historic events created a dollar-denominated world and a pattern of economic development that imitated the USA as a frontier society with intensive and extensive use of natural resources. During this period colonialism ended, but the Bretton Woods institutions encouraged and presided over a world where market colonialism took its place. Natural resources exported under unfavorable conditions by poor nations were avidly consumed in rich nations, a form of development that was advocated by the Bretton Woods institutions and prevented poor nations from developing. It led to an extravagant overuse of natural resources across the world – prominently fossil fuels, and to climate change. This is the genesis of the global environmental crisis of our times. Asian nations escaped market colonialism by specializing in consumer electronics and industrial goods and were able to grow, 2. Inequality and poverty are exacerbated in nations that export of raw materials, and poverty in turn weakens the bargaining position of poor nations who export raw materials. It is a vicious cycle that trapped South America and Africa which remain mostly resource exporters and did not grow: 70% of the exports from South America are raw materials today and 90% of the exports from Africa are too. In this process global poverty and inequality go hand in hand with the overuse of natural resources, they are both two sides of the same coin. Overcoming one requires overcoming the other. In simple terms, global inequality and the environmental crisis of our times are creatures of market colonialism and globalization that the Bretton Woods institutions encouraged since WWII. The transformation of capitalism is a response to the limits that this global process created. Faced with its own limits, capitalism is now changing in front of our eyes. The book tells the story of how we got here, how capitalism is now transforming itself to adapt to the changes it unleashed and to overcome unsustainable inequality and the global environmental crisis of our times. These are challenges to human survival and two faces of the same coin. Green capitalism can overcome both.