Last year I attended a multi-disciplinary workshop on sustainability. In a room full of experts representing a wide range of backgrounds, I was met with crickets when when I brought up the role of capital markets in combatting climate change. You see, at these events, capitalism is a dirty word. It is regarded as the preeminent cause of climate change; and so whenever someone brings it up, the audience shudders with collective anger.
Without anyone to represent capitalism, however, you cannot have an honest discussion about the alternatives. While it’s hard to disagree with capitalism’s contributions to climate change, capitalism is 1) primarily the only system within which our global economies currently operate and 2) it has also done some good. The idea that we can solve climate change without addressing, restructuring, and re-deploying capitalism is naive. So what do we do?
We first need to understand how it works. Capitalism is an economic and political system in which a country’s trade and industry are controlled by private owners for profit, as opposed to being controlled by the state. Core to this definition is the idea that goods and services are sold freely, and it is up to the market to determine the outcome. If you make high-quality widgets at the right price, the market will reward you with profit. But if you overprice your widgets, demand for them will fall, and you will lose money. You are therefore punished by the market for trying to charge too much. Capitalism exists wherever there is a private market for goods. Yes, even in China.
Capitalism has been the gold standard for economists for centuries. In fact, in 1930, of the world’s most prominent economists, John Maynard Keynes, wrote an essay on how capitalism itself would eventually rid the world of its dependence on — wait for it — capital.
Keynes believed that capitalism would last until 2030, when, society would reach peak capital accumulation and finally be liberated from the need to work, as well as from the “disgusting morbidity” of our love of money. Yep.
This article provides some theories as to how Keynes’s prediction went off course, but the underlying contradiction to such predictions is that economics is a social science. Economic models assume markets are self-regulating and that humans are capable of making rational decisions; that is, they will make the best decision available to them at all times. But we all know that humans are inherently irrational and markets don’t exist without regulators.
The main tool that economists use to measure capitalism — Gross Domestic Product— is also flawed. GDP is an equation that measures the total value of goods and services in the economy. It was developed in 1937 in response to the Great Depression, as a way to measure a society’s progress. It doesn’t take an economist to understand that today’s global, interconnected, and technology-enhanced economy is very different that of almost a century ago. Furthermore, GDP does not include measurement of the environment, education, quality of life, or the surplus of information and knowledge.
In his essay, Keynes was correct in pointing out that the painful rise of automation (“technical unemployment”) would lead to economic dislocation. He hints at the concept of what we now call the knowledge economy, an economy in which knowledge (not mechanical production) is used to create goods and services. A knowledge economy redeploys many of the frameworks developed under capitalism, but seeking a different, more equitable, outcome.Why are we not there yet?
Keynes’s biographer Robert Skidelsky and his son, Edward Skidelsky, a moral philosopher, tackle this question in their book How Much is Enough? Writing in 2012 they acknowledge that Keynes’s prediction had not come true because of humanity’s insatiable need for capital. They take pains to demonstrate how, after a certain point, wealth does not correlate with happiness, but people keep accumulating it anyway because capitalism provides no guidance on what to do in the case of excess capital. Their proposals for a priority-overhaul results in a list of policy recommendations, including universal basic income (UBI).
The concept of UBI has experienced a resurgence thanks to ex-presidential candidate Andrew Yang, who aptly campaigned for it as a solution to combat the loss of jobs to automation in the United States. The Skidelskys note that a true universal basic income would give people the option not to work, driving us closer to a knowledge economy. A knowledge economy could potentially rescue us from the boom-bust business cycle we currently find ourselves stuck in. Today, when spending on goods goes down, GDP shrinks, which triggers all sorts of concerns about economic growth and wellbeing. It doesn’t have to be like that.
UBI is a way to get us closer to Keynes’s idea of freeing humanity from the from idea having to work → to make money →to survive. Humans should be able to profit off of the fact that we have created machines to handle most of our work (everything from driving to manufacturing to data). We should instead be spending our time maximizing the one thing that makes us unique as a species: our brainpower. A knowledge economy would showcase our analysis and critical thinking capabilities; it would prioritize knowledge over capital.
Any sort of big economic transition will inevitably require government intervention, at which point champions of capitalism will complain loudly that the government is not an efficient re-distributor of wealth. But they have no explanation when asked why capitalism itself has proven to be highly inefficient at this as well. Not only are most private sectors ruled by monopolies, but wealth inequality is at an all-time high: the average wealth of the bottom 90% of families in the US was equal to $80,000 in 2012 — the same as it was in 1986. In contrast, the average wealth for the top 1% more than tripled between 1980 and 2012. The top ten percent of families in the US own 70% of all wealth. Capitalism as we know it is just not working anymore.
The rapid global expansion of COVID-19 — and subsequent shutdown of economic activity — has furthermore revealed just how fragile capitalism is. Global supply chains, and as a result, markets, are being disrupted, and they will potentially remain as such for months. The go-to solution (used by governments in 2008, and yes, a brainchild of Keynes) has been to inject capital into these failing markets, propping them up until normal economic activity returns. But, with hundreds of thousands of human lives on the line, a solution that involves injecting trillions into a stock market, or subsidizing extractive industries (oil & gas) and the airlines, comes across as peripheral. Why can’t the government trillions go towards healthcare, or to supporting people who can’t go to work? Why are we worried about corporations going bankrupt in a crisis while people are worried they won’t be able to feed their families? The economic systems we have long taken for granted are failing us. The reality no one wants to admit is that markets were never designed to support us in the first place. Capitalism was always intended to privilege profit over human life.
Which brings us back to climate change. Man’s quest for capital has indeed come at the expense of our planet. We must build new systems that take into account the environmental cost of doing business. We must harness the capital that has been accumulated in the name of profit, and redistribute it to those who have not benefitted from a rise in living standards. We must re-allocate the trillions of dollars in the global financial system from purely financial investments to those that are solution-building. The inability of our economies to prepare for COVID-19 is minute compared to the threat posed by climate change.
I, for one, am hopeful. Throughout history, humans have only truly responded with structural change after times of great crisis. We have finally reached that time for our generation. We are indeed ready for change.
Update 3/20/2020: Andrew Yang on “humanizing our economy”