Capital

As implied by the title of this book, one of my fundamental claims is that there is enough capital in the world to meet everyone’s needs. That means meeting the individual needs of at least 7.7 billion people, as well as the collective needs of the societies they live in. If there is plenty of slack today, capital will no longer be the binding constraint for humanity going forward, as population growth is decelerating while technological progress is accelerating.

It is tempting to look at this in terms of financial capital, but that would be giving in to the illusion of money. Dollar bills don’t feed people and gold bars can’t be used as smartphones. The capital that fundamentally matters is productive physical capital, such as machines and buildings.

Financial capital is not irrelevant, of course – it is required for the initial construction of physical capital and to meet the ongoing needs of economic activity. If I want to build a factory or a store, I need to pay the construction workers and the suppliers of machines before I can start making money. And many businesses have ongoing expenses to pay each month before they can collect revenues from customers. When cash outflows precede cash inflows, a financing mechanism is required. To accumulate physical capital, we need to be able to accumulate financial capital.

In the history of financial capital there have been many important innovations, and the introduction of marketplace lending has been an important recent one. The allocation of financial capital to projects through markets has been enormously successful, and it is the success of the market-based approach that has given us a large enough physical capital base to meet our basic needs. I should be quick to point out, as I have done elsewhere in the book, that the market-based approach relies on plenty of governmental activity, such as pro-competition regulation and the funding of education and research.

Many recent innovations in finance, however, rather than contributing to the creation and allocation of physical capital, have had the opposite effect, instead leading to the excessive ‘financialization’ of the economy. This refers to growth in financial activities that help generate personal wealth for some but that are decoupled from, or even harm, the formation of physical capital. One example of excess financialization is companies borrowing money to buy back shares instead of investing in innovation. The derivatives and structured securities, such as collateralized debt obligations (CDOs), that powered the housing bubble are another example. This is not to say that there are no potentially legitimate uses of these tools – it is just that they have grown far beyond what is needed for physical capital formation and taken on a life of their own. This can be seen both in the increased size of the financial sector as a proportion of the overall economy [32] and in the wealth generated by making money from money instead of from productive capital [33].

What is the role of “human capital” in all of this? I put this phrase in scare quotes because it is a fundamental misnomer. Humans provide labor, and machines are capital. We saw earlier that, as Malthus had predicted, there was an exponential population explosion. As a result labor has not been a constraint on meeting our needs. That does not mean that we have not had labor shortages from time-to-time, but these have largely been the result of policy choices, such as restrictions on immigration or discriminatory access to education, rather than reflecting fundamentally scarce labor.

The better question to ask is: what is the role of knowledge? The answer is that advances in knowledge are essential for making capital more effective. Even more fundamentally, physical capital cannot exist in the first place without knowledge. Take an MRI scanner, for example: you can’t build one without a great deal of knowledge of physics and engineering. However, in a world where everyone’s needs are taken care of, it might be possible to build the same machine without the need for financial capital, as you might not have to pay people in advance. And with enough knowledge, in the form of advanced robots, it will even be possible to build one without any “human capital” – labor – at all.

In conclusion here, we should realize that the accumulation of financial capital does not contribute to meeting our needs in and of itself. Imagine a Spanish galleon full of gold caught in a storm. Although the sailors aboard had ample access to financial capital, what they really needed to survive was either more knowledge or better physical capital. For example, if they had more knowledge of the weather, they could have circumnavigated the storm. Or if they had a stronger boat, they could have simply ridden it out. If anything, the gold is a hindrance to their survival – throwing it overboard might help the boat get away from the storm more quickly.

We will now examine whether physical capital is sufficient to meet our needs.

Individual Needs

My claim is that capital is no longer the binding constraint on our ability to meet our individual needs. This is especially true for the developed economies, but it is increasingly true globally. Let’s start by considering the needs emanating from keeping our bodies powered (see the Appendix for additional supporting information).

Oxygen: There’s plenty of air for us to breathe; the key challenge is to make sure it is clean and safely breathable. China and India are both currently struggling with this, but they developed rapidly and are reliant on outdated energy sources. What is needed here are improvements to capital, such as switching to electric cars from internal combustion engine ones.

Water: There’s plenty of water for everyone in the world to drink (the oceans are full of it). Though there are distribution and access problems, including right here in the United States (for example, the crisis of polluted drinking water in Flint, Michigan), physical capital is not a binding constraint. We are even able to build new desalination plants in record time.

Calories: We have made dramatic progress in farming: as a result of increased productivity, the rate of increase in the amount of land used globally to produce has plummeted [34], and the amount of land used worldwide for agriculture may have already peaked [27]. There have been significant recent breakthroughs in vertical farming, the practice of growing plants under controlled conditions, and in automated farming. For instance, one of the world’s largest vertical farms operates in Jersey City, and the Japanese indoor farming company Spread’s automated facility will soon be able to produce 30,000 heads of lettuce per day [35].

Nutrients: This is primarily a question of knowledge, as we still don’t fully understand which nutrients the body really needs to ingest in what quantities. We obtain most of them from food, but depending on our diet we may need to add some supplements. The remaining amounts tend to be small, and we can produce plenty of them already (as a result, in developed countries, entire industries have sprung up trying to convince people to buy and consume food supplements that they do not need).

Discharge: This is primarily addressed through modern sewage technology. Here too, capital is no longer a binding constraint, though its uneven distribution around the world is a problem.

Now let’s consider the needs relating to the operating environment for humans.

Temperature: The Chinese construction boom of the early 2000s illustrates how quickly we can build shelter, which, together with heating and air conditioning, is one crucial solution to our temperature needs. In the US, in the opening years of the 21st century, a construction boom was powered by artificially cheap mortgage credit. Though a lot of housing was built speculatively and remained empty, it powerfully demonstrated our construction capacity. Clothing is another strategy for meeting our temperature needs. The price of clothing has been falling in many parts of the world, including the United States. Capital is not a constraint here – indeed, we have the ability to clothe the world’s population many times over.

Pressure: Thankfully, we have nothing to do here, as we have plenty of space for humans to live in the right pressure range. This is a great example of a need that we do not consider much at all, but that would loom very large if land were to cease to be habitable and we had to go underwater or into space.

Light: We have become very good at providing light. One study shows how the hours of light provided by 60 hours of labor in the United States exploded from around 10 in 1800 to over 100,000 by 1990 [36], [37]. Since then, we have made considerable further progress with LED lighting. That progress has also come to other parts of the world, for instance in the form of off-grid, solar-powered lamps.

Finally we come to the more abstract individual needs.

Healing: We often read that healthcare consumes an increasingly large fraction of the economy, especially in the United States, but that does not imply that capital is scarce. In industrialized countries we have plenty of hospital space and doctor’s offices. But, you may ask, didn’t the COVID-19 pandemic show that we didn’t have enough ICU beds? The answer is no: countries that reacted to the virus in good time stayed well within their capacity. Overall capital is sufficient for healing. We have extensive diagnostic facilities and are able to produce large quantities of medicine.

Learning: Nor are we constrained by capital when it comes to learning. This is increasingly true not just in industrialized nations but also globally, due to the expansion of wireless networks and the increasing affordability of smartphones. We are not far away from reaching a point where we have enough capital for anyone in the world to learn anything that can be transmitted over the Internet; the binding constraint is the availability of affordable content and the time it takes to learn and teach.

Meaning: The final individual need, that of meaning, is not and has never been constrained by capital. Capital plays no role in meeting our need for it.

Collective Needs

At first it might seem difficult to see how capital relates to our collective needs. How could it have anything to do with such abstract concepts as motivation and coordination? In discussing why capital is already sufficient today to meet our collective needs, I will also briefly point out how it was scarce with regard to these needs in the past.

Reproduction: Available capital has always been sufficient for reproduction – otherwise, we wouldn’t be here today.

Allocation: During the Industrial Age the allocation of capital, such as where to build a factory and what it should produce, was the central allocation problem, and it was the scarcity of capital that made it difficult to meet this need. When there were few roads and other means of transportation, there were few places a factory could be built. Getting the place just right and building the right factory was thus a much harder problem than today where we can ship products around the world. As a result, the allocation problem for capital is no longer constrained by capital. And because capital is no longer scarce, it is also no longer the dominant allocation problem. As we will see in the next section, it has been replaced by the allocation of attention, for which capital is largely irrelevant.

Motivation: Again, it might at first seem as if capital never played a role here. But consider what it was like to work in an early factory, when the outputs were generally not affordable for the workers. Workers at the time had to more or less be forced into factory work, a situation that still persists in some parts of the world for certain industries (e.g., clothing and hardware assembly). Contrast this with much of the period following the Second World War, when more advanced economies already had a fair bit of capital, making possible the mass production of goods that workers could afford. Motivation can of course come from many sources other than what wages can buy, such as wanting to help others (e.g. in healthcare) or facing an enemy (e.g. wartime production). The key point is that today motivation is no longer constrained by capital in principle.

Coordination: One of the primary ways to meet the need for coordination is through communication, which was heavily constrained by capital for the longest time. Today, however, we can hold a real-time video conference with nearly anybody in the world. And some of the big coverage gaps, such as parts of Africa, are rapidly being filled in.

Knowledge: Finally, our collective need for knowledge was long constrained by capital. Making books, for instance, was expensive and time-consuming, and copies could only be made by humans, which introduced errors. The spread of knowledge was limited by the need to create and supply physical copies, constraints that we have now left behind. There were also other ways in which capital was scarce as far as knowledge was concerned. For instance, we had insufficient scientific instruments for inspecting matter, such as microscopes. Today, by contrast, we are able to build massive undertakings to support science, such as the Large Hadron Collider.

Enablers

Our progress on the four foundational enablers – energy, resources, transformation and transportation – is another way to understand why capital is no longer scarce. There have been massive breakthroughs on all four during the Industrial Age.

Energy: The biggest breakthrough in energy was the development of electricity, which allowed us to apply energy precisely. Our remaining challenges relate to the production, storage and distribution of electricity. Further improvements will let us meet different needs in new ways, but we are not fundamentally energy-constrained. For instance, at current efficiency rates, covering less than 0.1% of the Earth’s surface with solar panels could meet all of today’s energy needs. [38]

Resources: The availability of resources was completely transformed during the Industrial Age through mining, which was enabled by innovation in transportation (railways) and energy (steam power). People who have concerns about sustainability sometimes point to the scarcity of resources as the primary constraint, but there are three sources that we can tap in the future: recycling, asteroid mining, and eventually transmutation (turning one element into another, as in the alchemists’ quest to turn lead into gold). For instance, a lot of electronics currently end up in landfill instead of being recycled, we achieved the first soft landing on an asteroid as far back as 2001, and we can already turn lithium into tritium (a form of hydrogen).

Transformation: Our ability to transform materials also improved radically during the Industrial Age. For instance, chemistry enabled the synthetic production of rubber, which previously had to be harvested from trees. Machine tools enabled the rapid transformation of wood and metals. We later added transformation technologies such as injection molding and additive manufacturing technologies (often referred to as “3D printing”).

Transportation: Here we went from human-, animal- and wind-powered movement to machine-powered movement, dramatically increasing our capabilities. We can now fly across continents and oceans on commercial flights, reaching any major city in a single day, and there has been extraordinary progress in flight safety. While some have complained about a recent lack of progress, pointing to the lack of commercial supersonic options following the retirement of Concorde, work has recently resumed on developing new options for commercial supersonic flight. We have also made tremendous progress on reusable rockets and autonomous vehicles (for instance, with drones and the robots that are used in warehouses).

The progress made on all these enablers has allowed us to produce more physical capital, to do so more rapidly and cheaply, and to transport it anywhere in the world. One illustration of how far we have come is the fact that smartphones only became available in 2000, but by 2017 there were over 2 billion smartphone users in the world.

I am not claiming that everyone’s needs are being met today, nor am I arguing that governments should be meeting people’s needs through government-run programs such as food stamps or subsidized housing – quite the opposite. My point is that physical capital is no longer the constraint when it comes to meeting our individual and collective needs.

The great success of capitalism is that capital is no longer scarce. However, we now face a scarcity of attention, and as we will see capitalism cannot and will not solve it without changes in how we regulate our society and ourselves.