Late Capitalism?

Marx and Engels' prophecy about the inevitable collapse of capitalism remains a failure

"Late Capitalism" by planeta is licensed under CC BY-SA 2.0.

This column is dedicated to the memory of Gordon Moore, who died recently. May he rest in peace!

Over the last few years, you have probably seen slightly smug leftists using the term “late capitalism” on social media. The basic idea is that future historians will look back on the 2020s as one of the last periods before capitalism collapses.

The idea that a market-based economy is on the brink of permament failure seems a little unlikely, to put it mildly. The people who use the term “late capitalism” rarely say what will replace a system based on entrepreneurs engaging in permissionless innovation and using markets to offer the results of their work.

In most cases, the belief is probably based on the assumption that the current economic order will be replaced by some kind of state-run economy with bureaucrats acting on behalf of the population. Why removing the feedback loops embedded in markets will finally work after so many previous failures is nearly always left unsaid. This might be fine on April Fools’ Day, but not so much during the rest of the year.

The idea that capitalism’s days are numbered has deep roots. Karl Marx and Friedrich Engels first called on working people of all countries to unite to overthrow capitalism in the Communist Manifesto in 1848. Marx died in 1883, but in 1894 Engels published Volume III of Das Kapital, based on notes from his late collaborator. The authors predicted that capitalism would inevitably collapse under its own contradictions to be replaced by state-directed communism, with the state allegedly withering on the vine afterwards.

Marx and Engels’ prediction is famously one of the worst bets in the history of the social sciences. There are three inter-related reasons why they were so wrong. One was the development of the welfare state, beginning with the introduction of pensions and health insurance by Otto von Bismark in Germany from 1870. Ideas about the need to protect the working and middle classes from the ups and downs of capitalism spread and deepened throughout the West over the next 80 years or so.

The welfare state has made it possible for societies to cope with the inevitable failures, bankruptcies and job losses generated by capitalism. New entrepreneurs will always find new ways of creating value, which will often put a previous set of entrepreneurs and their employees out of business*. A safety net can help workers cope with these uncertainties. Funnily enough, this process of competitive disruption is the exact opposite of how conspiracy theorists imagine the world to be run.

Sociologists put their finger on the second reason from the 1920s as they developed the idea of reflexivity, or circular relationships between beliefs and events. Some early conservatives and liberals realized that Mark and Engels might just be right about industrial capitalism unleashing the spectre of communism. This led them to modify their own behaviour, for example, by supporting the creation of a welfare state. This in turn reduced the likelihood of a worldwide communist revolution.

The third reason for the failure of the prophecy involved the evolution of the institutions of liberal democracy, which gave citizens a way of defending their interests by getting rid of political leaders who have overstayed their welcome. Modern democracy came surprisingly late - New Zealand was the first country to give the vote to all adult women in 1893, the year before the publication of Volume III of Das Kapital.

Meanwhile, the Universal Declaration of Human Rights was only adopted by the United Nations in 1948. It is perhaps the most important of the three legs of liberal democracy, alongside the rule of law and rule-based elections. Articles 4, 17, 22, 23, 24, 25 and 26 deal directly with issues related to work, property and the welfare state.

Marxist theorists who have bought into Marx and Engels’ prophecy have been struggling with the exquisite cognitive dissonance generated by its failure for nearly 130 years. One of them was economist Ernest Mandel, who developed the concept of “late capitalism” between 1902 and 1927. His doctoral thesis was published in 1972 and in 1975 it was translated into English with the title Late Capitalism. The term gradually became used by Marxist economists from the 1970s, particularly to refer to trends like globalization and fianancialization.

The credit crunch of 2007/2008 and the subsequent recession led to the term “late capitalism” becoming popular on the internet as some people (quite understandably) struggled to cope with the creative destruction that drives capitalism, particularly during recessions. The phrase became increasingly common on Twitter and Tumblr from the mid-2010s. Even so, capitalism resolutely failed to collapse.

Regular readers of Sharpen Your Axe will know there is a better way of dealing with failed predictions than doubling down on them. If you lose a bet, it provides you with some much-needed contact with reality. Why not sit down and reconsider your assumptions? Why not consider an alternative mental model? Why not assign your beliefs a percentage chance and move the dial as you receive more evidence?

American entrepreneur Gordon Moore, who died recently, provides a great contrast with Marx and Engels. In the 1960s, he noticed that the number of components on a semiconductor chip made of silicon was doubling every year. He predicted this would continue. In 1975, he lowered this prediction to the rate doubling every two years. Moore’s law has yielded results year after year. As Chris Miller writes in Chip War, it is probably the greatest technological prediction of all time. The prediction was helped by reflexivity, as entrepreneurs saw it as an aspirational goal and competed to drive down costs.

The exponential growth predicted by Moore’s observation has made the modern world possible, including everything from smartphones to streaming services to internet newsletters like this one. Semiconductor chips had just four transistors on them as recently as 1961. Miller says that the chip industry in 2021 produced more transistors than the combined quantity of goods produced over the whole of human history up to then. “Nothing else comes close.” If you are reading this on an iPhone 12, its A14 chip has 11.8 billion tiny transistors, all of which are carved onto silicon using advanced techniques.

Any future historians looking back on our times might well call this the early digital age instead of late capitalism. Transistors have on/off currents, which computers can read as 1s and 0s. Digitalization is a key theme to all our lives. The fact that you are reading these words on your phone or computer instead of getting inky fingers by reading it in a newspaper is a small case in point.

Some people in Silicon Valley think that Moore’s law might finally be coming to an end. That might or might not be true. However, quantum computers are waiting in the wings. Future historians might well look back as the 1960s to the 2020s as a brief prelude to the quantum age; or maybe the early silicon age (quantum computers also use chips). We might also be living in the early software age.

Of course, it is quite possible that future historians will refer to this as the early electric age. Scientist William Gilbert made the first serious study of electricity and magnetism in 1600. Many scientists and engineers have contributed to the development of electricity since then. An important milestone came in 1821 when Michael Faraday invented the electric motor.

Nuclear power has the potential to make the cost of electricity too cheap to meter, while innovative energy storage solutions will make solar and wind power more dependable. Electrification lies at the heart of many decarbonization programmes, which are slowly changing society even if they rarely make the evening news. By November 2022, investors had put a cumulative $260 billion into climate tech since 2018; and the number has been increasing. Electric vehicles are the tip of the iceburg.

Of course, it always possible that future historians will name our era after a black swan event - a highly improbable event that is extremely difficult or impossible to predict based on our current information. Whether or not that is the case, betting on more electrification and increasing computing power in the years ahead remains a sensible starting position.

Both electrification and increasing computer power depend on entrepreneurs driving down prices of key components through healthy competition. There are no signs of this abating. If anyone tells you that capitalism will die in our lifetimes, my advice would be to take the bet! The comments are open. See you next week!

*This constant process of competition, innovation and failure explains why index funds can be such a good investment. Any index will inevitably include the shares of a number of companies that will fail to adapt to changing circumstances. These companies will either get taken over by more virile competitors or shrink so much that they drop out of the index. If the index is large enough, the free slot will probably be taken by a dynamic newcomer that is changing the world… at least for the time being. The total net returns - including dividends from winners, losers and survivors - should give respectable rates of return, particularly if you hold the index for a seriously long period of time.

Further Reading

Noah Smith on why flamboyant pessimism is usually a bad idea

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