Limits of Capitalism

Capitalism has been so successful that even communist countries like China have embraced it. But it cannot solve the scarcity of attention without significant changes in regulation, as a result of three important limitations. First, prices will always be missing for things that we should be paying attention to. Second, capitalism has limited ways of dealing with the concentration in wealth and market power arising from digital technologies. Third, capitalism acts to preserve the interests of capital over knowledge. We need to make changes now, precisely because capitalism has been so successful – the problems that are left are the ones it cannot solve.

Missing Prices

Capitalism won’t help us allocate attention because it relies on prices that are determined in markets. Prices are powerful because they efficiently aggregate information about consumer preferences and producer capabilities, but not everything can be priced. And increasingly, the things that cannot be priced are becoming more important than those that can – for example, the benefits of space exploration, the cost of the climate crisis or an individual’s sense of purpose.

The lack of prices for many things is not just a question of a missing market that can be created through regulation. The first foundational issue is the zero marginal cost of copies and distribution in the digital realm. From a social perspective, we should make all the world’s knowledge, including services such as medical diagnoses, available for free at the margin. As long as we rely on the price mechanism, we will under-produce digital resources. Just as the Industrial Age was full of negative externalities such as pollution, resulting in overproduction, the Knowledge Age is full of positive externalities, such as learning, which implies underproduction. If we rely on the market mechanism, we will not pay nearly enough attention to the creation of free educational resources.

The second foundational issue is uncertainty. Because prices aggregate information, they fail when no such information exists. When events are either incredibly rare or have never occurred, we have no information on their frequency or severity; the price mechanism cannot work when forecast error is infinite. For instance, large asteroid impacts on Earth occur millions of years apart, and as a result there is no price that can help us allocate attention to detecting them and building systems for deflecting them. As a result, we pay a trivial amount of attention to such problems relative to the potential damage they would cause.

The third foundational issue is new knowledge. The further removed such knowledge is from creating a product or service that can be sold, the less use the price mechanism is. Consider early aviation pioneers, for example. They pursued flight because they were fascinated by solving a challenge rather than because there was an obvious market for air travel. Or take the early days of quantum computing; actual machines were still decades away, so the price mechanism would not at that time have allocated attention to the discipline.

The fourth foundational issue is that in order for markets and prices to exist, there have to be multiple buyers (demand) and sellers (supply). There is no demand and supply for you to spend time with your children or to figure out your purpose in life – capitalism cannot help us allocate attention to anything that is deeply personal.

Power Laws

When it comes to the distribution of income and wealth, many different outcomes are possible and what is realized depends on the underlying production functions. Consider a manual production function that was common before industrialization. If you were a cobbler making shoes by hand, for instance, there was a limit to the number of shoes you could produce.

Then along came industrialization and economies of scale. If you made more cars, say, you could make them more cheaply. That is why, over time, there were relatively few car manufacturers around the world and the owners of the surviving ones had large fortunes. Still, these manufacturing businesses stayed fairly competitive with each other even as they grew large, which limited their market power and the amount of wealth that was created. Many service businesses have relatively small economies of scale, which has allowed a great many of them to exist and markets such as nail salons have remained competitive. The financial industry is one clear exception to this among services businesses – a few large banks, insurance companies and brokerage firms tend to dominate and that has accelerated in recent years, largely because financial services have already been heavily impacted by digital technology.

With digital technology we are seeing a shift to ever higher market power and wealth concentration. When you plot the outcomes, such as companies by revenue, the resulting curves reveal so-called ‘power laws’ – the biggest firm is a lot bigger than the next biggest firm, which in turn is a lot bigger than the third largest firm. This pattern is pervasive throughout digital technology and the industries in which it plays a major role. For instance, the most watched video on YouTube has been watched billions of times, while the vast majority of videos have been watched just a few times. Or in e-commerce, Amazon is an order of magnitude larger than its biggest competitor and several orders of magnitude larger than most e-commerce companies. The same goes for apps – the leading ones have hundreds of millions of users, but the vast majority have just a few.

Digital technologies are driving these power laws not only due zero marginal cost, as explained earlier, but also as a result of network effects. Network effects mean that a service gets better for all participants as it adds more participants — for example as Facebook grew, both the new users and the early users had more people they could connect with. This means that once a company grows to a certain size it becomes harder and harder for new entrants to compete as their initially smaller networks offer less benefit to participants. In the absence of some kind of regulation, the combination of zero marginal cost with network effects results in extremely lopsided outcomes. So far, we have seen one social network – Facebook – and one search company – Google – dominate all others. This shift to power laws is driving a huge increase of wealth and income inequality to levels that are even beyond the previous peak of the early 1900s. Inequality beyond a certain level is socially corrosive, as people start to live in a world that is disconnected from the problems faced by large parts of the population.

Beyond the social implications of such inequality, the largest digital companies also wield undue political and market power. When Amazon acquired a relatively small online pharmacy, signaling its intent to compete in that market, there was a dramatic drop in the market capitalization of pharmacy chains. Historically, market power produced inefficient allocations due to excessive rents as prices were kept artificially high; in digital markets, powerful companies have often pushed prices down or even made products free. While this appears positive at first, the harm to customers comes via reduced innovation, as companies and investors stop trying to bring better alternative products to market.

Joseph Schumpeter coined the term ‘creative destruction’ to describe the way in which markets create new products to replace old ones. Indeed, if you look at the dominant companies today, they are quite different from those of the Industrial Age. However, such innovation is now more difficult, if not impossible. During the Industrial Age, machines served a specific purpose, which meant that when a new product or manufacturing technology became available, the installed base of machines became essentially worthless. Today, general-purpose computers can easily implement a new product, add a feature to an existing one or adopt a new algorithm. Production functions with information as a key input have a property known as ‘supermodularity’: the more information you have, the higher the marginal benefit of additional information. This gives the incumbent companies tremendous sustained power – they gain more marginal value from a new product or service than a new technology does.


Toward the end of the Agrarian Age, when land was scarce, the political elites came from the landowning classes, and their influence wasn’t substantially diminished until after the Second World War. Now, though we have reached the end of the period in which capital was scarce, the political elites largely represent the interests of capital. In some countries such as China, senior political leaders and their families own large parts of industry outright. In other countries such as the United States, politicians are influenced by the owners of capital because of the need to fundraise.

A study conducted at Princeton University has analyzed to what extent public support for a policy influences the likelihood of that policy being enacted [47] in the United States; for the bottom 90 per cent of the population, their preferences have no influence. Only the preferences of the wealthiest 10 per cent of the population matter. And even within the wealthiest 10 per cent, there is a huge concentration of influence among a small number of individuals. For instance, over a five-year period, the 200 most politically active companies spent nearly $6 billion on lobbying.

Individual and corporate lobbying results in policies that are favorable to owners of capital, such as low rates of capital gains tax. Low corporate tax rates, with loopholes that allow the accumulation of corporate cash in countries where taxes are low, are also favorable to owners of capital. So in 2020 we have some of the lowest effective tax rates for corporations and wealthy individuals and families in US history (‘effective’ means what is paid after exemptions and other ways to reduce or avoid tax payments).

In addition to preserving and creating benefits for owners of capital, they have also attacked the creation and sharing of knowledge. Corporations have lobbied heavily to lengthen terms of copyright and strengthen copyright protection. Scientific publishers have made access to knowledge so expensive that libraries and universities struggle to afford the subscriptions. [48]

A key limit of capitalism thus is that without meaningful change it will keep us trapped in the Industrial Age. As long as that is the case, we will continue to over-allocate attention to work and consumption and under-allocate it to areas such as the individual need for meaning and the collective need for the growth of knowledge. Parts Four and Five of The World After Capital will examine how we can get out of the Industrial Age, but first we will take a closer look at the power of knowledge and the promise of the digital knowledge loop.