Limits of Capitalism

Capitalism has been extraordinarily successful. So much so that even communist countries like China, that had long sought a different path, have embraced it. But capitalism cannot solve the scarcity of attention without significant changes in regulation and self-regulation. That's due to three important limitations. First, there are prices that will always be missing for things that we should be paying attention to. Second, capitalism to date has limited mechanisms for dealing with the power laws arising from digital technologies. Third, capitalism acts to preserve the interests of capital over those of knowledge. Put differently: we need to make changes now, precisely because capitalism has been so successful. The important problems that are left over are the ones it cannot solve.

Missing Prices

Why won't capitalism help us allocate attention? Because the great strength and the great weakness of capitalism is that it relies on prices determined in markets. Prices are amazingly powerful because they efficiently aggregate information on consumer preferences, producer needs, etc. But not everything can be priced. And increasingly the things that cannot be priced are becoming much more important than those that can—think of the benefits from space travel, the cost of climate change, or even an individual's sense of purpose and meaning.

There are foundational issues that prevent the existence of prices for many things. This is not just a question of a missing market that can magically be created by assigning property rights.

The first foundational issue is zero marginal cost for copies and distribution in the digital realm. From a social perspective, we should make all the world's knowledge, including all the existing music, videos, educational materials available for free at the margin. That's not just true for content but also for services that can be provided at essentially zero marginal cost, such as medical diagnoses. As long as we are relying on the price mechanism, we will—by definition—under-produce free resources. Another way to think about this is as follows: the Industrial Age was full of negative externalities, such as pollution, which resulted in over production; the Knowledge Age is full of positive externalities, such as learning, which implies under production. So for instance, relying on the market mechanism we will not pay nearly enough attention to the creation of free educational resources.

The second foundational issue is extreme uncertainty. Because prices aggregate information, they fail when no such information can exist. There are events that are so rare or have not occurred at all yet that we have essentially no information on their frequency or severity. This is especially true around the kind of societal event horizon that we are currently dealing with. Nassim Taleb's work on tail risk is highly relevant here. The price mechanism cannot work when forecast error is infinite. For instance, large asteroid impacts on Earth occur millions of years apart. There is no price that can help us allocate attention to detecting such asteroids and building systems for deflecting them. As a result we are currently paying a trivial amount of attention to this problem relative to the potential damage to humanity from an impact.

The third foundational issue is new knowledge itself. The further removed the knowledge is from creating a product or service that can be sold, the less the price mechanism is of use. That is quite obvious for basic research, but is even true in applied settings. Consider early aviation pioneers, for example. They did not pursue flight because there was an obvious market with clear prices for air travel. Instead, they were fascinated by solving the challenge of heavier-than-air flight. Take the early days of quantum computing when any actual machine was still decades away. The price mechanism would not allocate attention to quantum computing at that time.

The fourth foundational issue is the deeply personal. For markets and prices to exist there have to be multiple buyers and sellers. So there is no market and hence no price for you to spend time with your children. Or for you to figure out your purpose in life. Ironically, it has been an ad campaign for a commercial product that got this idea right: Master Card's long running series of “Priceless” ads. In the first of these from 1997 a father takes his son to the ballpark. The text reads “Two tickets, $28; Two hotdogs, two popcorns, two sodas, $18; autographed baseball, $45; real conversation with 11-year old son: priceless, there are some things money can't buy.” Capitalism and the market mechanism cannot help us allocate attention to anything that is deeply personal.

Power Laws

Economics is not normative when it comes to the distribution of income and wealth. Many different outcomes are possible and what is realized depends a lot on the underlying production functions. Consider first a fairly manual production function such as was common pre-industrialization. If you were a cobbler making shoes by hand, there were only so many shoes you could produce. I don't know if such data is available, but the output of cobblers likely formed a normal distribution, with even the most productive cobbler making only a small multiple of the number of shoes of the average cobbler.

Then along came industrialization and with it economies of scale. If you made more cars you could make them more cheaply and that was true until you got to a fairly large number of cars relative to total demand. That's why, over time, we wound up with relatively few car manufacturers around the world and the owners of the surviving largest ones wound up with large fortunes (e.g., the Ford or the Piech families). It turned out that many service businesses have relatively small economies of scale (e.g., a hair salon). That has allowed a great many service businesses to exist. The biggest exception to this has been financial services in which a few large banks, insurance companies, and brokerage firms tend to dominate.

Now, however, with digital technologies we are seeing a shift to power laws for many more situations. For instance, on YouTube the most watched video has been watched billions of times compared to the vast majority of videos which have been watched just a few times. Or in ecommerce, Amazon is an order of magnitude larger than the next biggest competitor and several orders of magnitude larger than most ecommerce companies. The same goes for apps in the appstore. The leading apps have hundreds of millions (and some even billions) of users. But the vast majority of apps has just a few users.

Digital technologies are driving these power laws because of network effects combined with zero marginal cost. As I explained in the chapter on digital technology this means that in principle we need only one medical diagnosis systems to serve the entire world (in practice we would want several). So far we have seen one social network by far dominate all others. We have one search company dominate all others. Protected markets, such as Russia and China, have their own search and social network companies, but their size also follows a power law distribution.

This shift to power laws everywhere is driving a huge increase of wealth and income inequality to levels that are now beyond the peak of the early 1900s. At that time it was undone by two world wars, which destroyed much of the accumulated existing wealth as well documented in Thomas Piketty's book “Capital in the Twenty-First Century.” Inequality beyond a certain level is socially corrosive, as people effectively start to live in a different world that is disconnected from the problems faced by large parts of the population. There is no self-corrective to this kind of excessive, power-law driven, inequality built into capitalism.

Beyond the social implications of such inequality, the largest digital companies also wield undue political and market power. A recent example of that was the dramatic drop in the market capitalization of pharmacy chains when Amazon acquired a relatively small online pharmacy, such signaling its intent to compete in that market. Historically market power was bad because it produced inefficient allocations due to excessive rents (and such artificially low quantity). In digital markets powerful companies have often pushed prices down or made products free entirely thus causing seemingly no harm to consumers. The harm here comes via reduced innovation as companies and investors stop allocating capital to trying to bring better alternative products to market.

The purported self-corrective in capitalism for market power is “creative destruction” as first described by Joseph Schumpeter. And indeed if you look at the dominant companies today they are quite different from those of the Industrial Age. But going forward this may be quite a bit harder, if not impossible. Why? During the Industrial Age machines served a specific purpose. This meant when a new product or a new manufacturing technology became available, the installed base of machines became essentially worthless and was a weight on the incumbents. Today, however, the new incumbents operate general purpose computers, which take information as one of their key inputs. They can easily implement a new product, or 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 super-modularity: the marginal benefit of additional information is higher the more information you already have. This gives the digital incumbents tremendous sustained power as they get more marginal value from a new product or service than a new entrant.


Toward the end of the Agrarian Age, when land was scarce, the political elites came from land ownership. Their influence really wasn't substantially diminished until after World War II. Now we are at the end of the scarcity of capital, but the political elites largely represent the interests of capital. In some countries, such as China, this is the case outright. Senior political leaders and their families own large parts of industry. In other countries, such as the United States, politicians are influenced by the owners of capital because of the constant need to fundraise.

A study conducted at Princeton analyzes how much public support for a policy influences the likelihood of that policy being enacted [47] in the United States. It turns out that for the bottom 90% of the population their preferences have no influence on outcomes. Only the preferences of the wealthiest 10% of the population matter. Even within the 10% whose preferences matter, there is a huge concentration. For instance, over a 5 year period the 200 most politically active companies alone spent nearly $6 Billion on lobbying.

Individual and corporate lobbying results in policies favorable to owners of capital, such as low capital gains tax rates (or in the case of venture capital and buyout funds the taxation of General Partner profits as capital gains instead of income). Low corporate tax rates with lots of loopholes, including the accumulation of corporate cash in low tax countries is also favorable to owners of capital. So in 2018 we are finding ourselves with some of the lowest corporate tax rates, the highest stock prices and the highest share of profits in national income.

In addition to preserving and creating benefits for owners of capital there are also outright attacks on the sharing and creation of knowledge. I have written more about these in the chapter on Informational Freedom, but want to give one example now. Corporations lobbied heavily over the years to lengthen copyright and strengthen copyright protections. Scientific publishers such as Elsevier have used these protections to make access to knowledge so expensive that even universities as wealthy as Harvard can no longer afford the subscriptions. [48]​

The existing political and economic system thus acts to conserve the scarcity of capital past its expiration date. As long as that is the case we will not be able to solve the attention allocation problem outlined above. We will heavily over-allocate attention to the job loop (work and consumption) and under-allocate attention to the individual need for purpose and the collective growth of knowledge.

How then do we overcome these limitations? That is the subject of Parts Three and Four of World After Capital. But first we will take closer look at the power of knowledge and the promise of the digital knowledge loop.