February 10, 2012

Long Term Trends for Capitalism

In the past few years, as the economy faltered, the capitalism-socialism discourse has come out in high relief in American politics. Fiscal conservatives (republican and libertarian alike) decry many government programs as “entitlements” and often equate social welfare with “socialism”. Progressive taxes, and ending tax breaks for the rich are met with the catch-all term “wealth redistribution”, something that is a slippery slope to be avoided. I have described only the conservative views here, largely because they seem to me to be quite ideological, ironically enough like the communists in USSR with their intense distrust of capitalism, with its seductive excesses, corrupting the moral character and turning the proletariat into slaves. I am not trying to say that government programs are a paragon of efficiency, but that the discourse — often framed in terms of individual freedom vs the tyranny of the collective — has been used to attack everything from taxes to government investment in alternative energy (with Solyndra proving to be quite a tasty target).

Courageous and forward-thinking libertarians like Ron Paul follow the idea to its logical conclusion. They decry the “quantitative easing” by the fed (claiming its meddling causes malinvestment by those eager to find alternatives to government bonds), the crony-capitalism (as a result of lobbying and government favoritism), and the increased borrowing by the government (causing long term inflation), in an effort to correct the current perceived problems. The solution, they say, is taken from the pages of oft-overlooked Austrian economics. Trust in the invisible hand of the market — allowing cycles of booms and busts — is preferable to government regulations attempting to solve collective action problems — even the ones that seek to outlaw insider trading, front-running, excessive “vulture” speculation, and so forth. And for the most part, they could very well be right.

However, I want to talk about something else. Something deeper, that has to do with long term trends. The conclusions below are taken from what I wrote to my friends lately, and represent what I’ve come to think on the matter.

The challenge is automation

A lot of our problems today — unemployment, high cost of education, medicine, etc. — can be traced back to automation and increased efficiency by employers. They are problems today, but it is better to frame them as challenges. Since I will speak about long term trends — 10 to 30 years out, what I say below might sound a bit far fetched today.

Socialism in some form is inevitable as automation progresses. The Luddites were right, but they were a few hundred years off. As things become more automated, we will not require people’s services in more and more areas. Robots will become cheaper and more efficient even than workers in China. So, eventually the “jobs” will return to the USA, but in the form of robots.

Capitalism makes sense when things aren’t automated, when the employer honestly needs his workers and the value of their labor is above their cost of living. However, things change with time, as more and more things become automated. The less people are needed to run a company, the more supply there is of available workers, the more wage repression there is for the majority of people (workers). You can try to inject life into their economic lives by borrowing from the future (credit cards, coincidentally taking off in the 80s, gave regular consumers debt instruments to mitigate their situation), but at the end of the day their wages will simply go down, and there will be an ever growing divide between the rich and the poor. This plutocracy will happen because there won’t be enough jobs for average people, and only jobs for highly qualified people. So the average people will have to be supported in a different way than wages.

As usual, stuff has to find its way to the people, to satisfy their needs: air, water, food, shelter, sex, fun, etc. Some people have a very small economic footprint, and these people need a welfare economy to get their needs met. Just because you are not in that group right now, you might think, “out of sight, out of mind”. But as more jobs get automated, a lot of people (especially uneducated people) will become completely redundant in the workforce and they will have a very small economic footprint (not producing or earning much). So inevitably, social programs will grow as technology improves. That doesn’t mean you can’t have capitalism on top of the safety net. It just means no one will die in the street from a preventable disease as a result of not being able to find a job.

We can see some of it today

People who lose their jobs, or don’t have a college degree, find it harder and harder to get new jobs. They just aren’t qualified enough for the new marketplace and its demands. But college education is now too expensive. If only they could learn on the internet (like they increasingly can in many technical fields), and get qualified enough to enter job sectors in which there is a lot of demand… but the universities are currently the gatekeepers for the degrees in many non-software fields, and companies look for these degrees, so I would say the main blame right now can be put on the lack of reform in education.

Do you notice that the cost of everything is becoming ridiculously high in the USA? Take two high-profile professions:

isn’t it a mystery?

Education is tremendously more expensive than before, and some unconventional libertarians have been pointing it out for years. I think it mainly has to do with wage repression, and it’s only going to get worse. Here is an illustrative example:

An average middle-class family sends their kid to med school or law school or whatever. They get student loans they can never even discharge in bankruptcy. So then when they become doctors or lawyers, they start out trying to charge a lot to cover their loans. And the places compete to offer them these positions. Their salaries just go up and up, even though there are tons of unemployed lawyers now.

This feeds a bubble of education, as people try to get those high salaries and go into law school. But it’s unsustainable … there are too many people trying to become lawyers now, who may not have jobs when they graduate. Not only that but automation will make the manual work that lawyers do less and less necessary, so you will have even less jobs for lawyers.

So where will these out-of-work lawyers go? They will live with their middle class parents or do something else. Their services are not required at the moment. They might move out, take a low-paying position and defer their loans as far as they can. At the end, though, something’s gotta give. They will probably pass a new law allowing you to discharge your student loan in bankruptcy and lose your law degree as a result. The lenders will stop lending. And the education bubble will burst. Either that, or middle-class families will realize that the job prospects for a law school graduate aren’t as great as they used to be, and the bubble will gradually fizzle out that way. But it will leave less jobs in that sector, and the question will again arise … where are the jobs?

Long term basically (10-30 years), automation WILL make wage repression so high that more people will have to switch to an economy that will support the majority of the population in some other way, besides wages.


In a society where the value of individual human labor is not that high compared to the work automatic systems perform, people will have to sustain their costs of living with something other than work in redundant positions. They can become entrepreneurs, they can sell products for the entertainment of others. Capitalism will always be alive and well. But below, it a social safety net will grow, one that supports the unemployed and gives them access to increasingly cheaper (or free) medical care (by robots), food, education and information (internet), and who knows (sexbots?), we will move closer to “socialism”, an economy where every can enjoy a minimum standard of living without having to work. This will usher in true social freedom. Not having to work to survive, people can focus on enjoying a healthy lifestyle, getting enough sleep, traveling, spending time with each other, great entertainment, and bettering themselves by getting a much more in-depty education, even if it is for free via a vastly superior education system. Women won’t have to choose between career and children.

But, as experience in ghettos has shown, it may also lead to more restlessness and a feeling of uselessness in society, and more violence. People want to feel needed. Perhaps some will satisfy it with entrepreneurism or space explorations. But most will have to be content with raising their family and bringing up the next generation with love. Men will no longer need to serve society as most men’s services will literally not be required. I wonder what will happen then. In ancient times, men went to war, and not all came home, and that’s how polygamy made sense. Perhaps sex selection through genetic engineering would once again bring that about. (I will stop going off into left field now.)

The Freedom to Innovate

As technology accelerates innovation in various fields, the elements of an economy built for an older time will start getting in the way — as they already are in the software industry. Patents will become an increasing burden, a tool wielded by companies relying on old business models to protect their profits, something that is already happening with the powerful copyright lobby. Patents have been a great tool and contributed to the success of society over the last couple hundred years, but as an industry accelerates, free access to knowledge becomes more and more important. The watershed moment in an industry comes when a group realizes how to outperform systems built in “proprietary” silos, such as WebKit vs Internet Explorer, Wikipedia vs conventional encyclopedias, or eventually Linux vs Windows. They haven’t figured it out yet, but once this happens, the group will become a formidable force for innovation. At that point, patents only serve to slow everyone down and impose an innovation tax on the industry and the public. Perhaps “individualism” and “greed” will not always provide the most fertile soil for innovation, as they admittedly have been up until recently. With greater connectedness, people will have great education. With better tools, they will be able to accomplish more together. Movements built on free innovation through patentleft will give the proprietary silos a run for their money. And then, we will have to re-evaluate our economy.