The End of Capitalism and the Second Law of Production

The End of Capitalism and the Second Law of Production

(Excerpts from, Free Money for All)

 

Thomas Picketty’s recent and much discussed, Capital in the Twenty-first Century, deserves some sort of prize for its misleading title. From the title, one might think the book was mostly forward-looking into the prospects of capital and capitalism in the twenty-first century; however, the book is mostly historical. Picketty does a marvelous job tracing the ebb and flow of the accumulation of capital over the past two centuries. He argues on the basis of historical enquiry that income and capital inequalities are the most important economic problems facing us in the twenty-first century. Although he is correct that these are important concerns, he is wrong to think they are the most pressing issues. Picketty mentions, and quickly dismisses, the possibility of advanced robotics radically altering the trajectory of capitalism.

I am of the opinion that Picketty is mistaken about robotics. It is not simply that technology will cause some technological unemployment. Technology threatens capitalism as we know it. The threat comes from the combination of two forces. The first is the common observation that the amount of human labor per unit of economic production goes down every year:

First Law of Production: with technological progress, the amount of human labor necessary to create a widget decreases over time.

Widgets are, of course, a catchall for economic goods. For example, we see the First Law in operation in the observation that farm productivity has risen dramatically in the last two centuries, that is, it takes far fewer hours of human labor to produce a bushel of corn today than it did a hundred or two hundred years ago.

The second law is not as widely recognized; the law states that the capital-intensive means of production at one stage of technological development become consumer goods at another stage:

Second Law of Production: with technological progress, the means of production transform from capital goods to consumer goods over time.

To explain the second law, it will help to clarify terminology. The means of production (MOP) refers to the tools, equipment, machinery, factories, and so on, that are used to produce goods. In capitalist economies, capitalists own the MOP and workers make use of the MOP to create goods. The term “consumer goods” is sometimes defined in terms of items that are ready for consumption and are not used in any further production. Other times, the term “consumer goods” is used to refer to the sorts of things consumers might buy at retail locations. As is perhaps evident, these two definitions are not equivalent. If I buy an oven at a large retail store, the second definition suggests that ovens are consumer goods. However, ovens are used to produce goods, like baked goods or meals, which suggests that they are not consumer goods, since ovens are used to produce other goods. To avoid this confusion, we will think of consumer goods as goods that are not used to produce something for resale (at least in the typical case). Thus, although my home oven produces some further produce, the product (dinner, baked goods, etc.) is not intended for resale. That is, the products of my oven are not sold on the open market, so ovens count as consumer goods.

The most important contrast for “consumer goods” is the term “capital goods”: goods used to produce other goods in the production of other goods. For example, suppose you start a business making ovens. You will need equipment for your oven-producing factory, for example, metal-fabricating machines, trucks to transport the ovens, computers and desks for office workers to coordinate the sales and distribution of the ovens, and so on. All the tools, machinery, and equipment you buy to set up your factory counts as capital goods. These good are used in the production of consumer goods, the ovens your factory produces, which you hope to sell.

As an example of the second law, think of ice making. At one time, there was a huge industry in North America selling ice to people with iceboxes, and for industrial purposes like making beer and meat packing. Ice was harvested from frozen lakes and stored for the following summer in insulated “ice houses.” Some capitalists became very rich off this industry as they owned the MOP that produced ice for consumers; for example, the ice houses where the ice is stored and distributed from. The “ice-man” traveled around neighborhoods selling ice door-to-door. The ice was used then just as we use ice now, in a cooler taken to the beach, directly in drinks (as ice cubes), or to keep foods fresh. Today, most citizens of the United States and other rich nations have a little ice-producing MOP in their own homes, known as a “freezer.”

It may seem like a stretch to call a home freezer a MOP. At least part of the reason why we might balk is that we typically think of MOP as a means for producing consumer goods for resale. It would take pretty special circumstances so that I could persuade anyone to buy ice from my freezer. My neighbors have their own freezers. It does not make sense for them to buy ice from me when they can make it at home themselves cheaper (assuming I am trying to make a profit, then I will have no cost advantage over my neighbors). If, through the assistance of a time machine, I could go back to the turn of the nineteenth century carrying with me several freezers (and a generator), I could have made a small fortune selling ice. In this instance, I would be the only one with ice MOP. I would have a cost advantage over my competitors who have to cut, store, and transport ice. However, although we may think in the typical case that MOPs are used to create goods for resale, this is not part of the definition of the MOP. So, there is no contradiction in saying that we live in a time when icemaking MOP (freezers) are consumer goods.

We can see how these two laws often work together. As noted, the amount of human effort to produce a single ice cube has dropped dramatically throughout history. In the days of the ice-man, there was a huge amount of manual labor involved: cutting a frozen lake or stream to harvest blocks of ice, packing the ice in straw, transporting the ice blocks to be stored in ice-houses, and loading ice into wagons to be sold door-to-door. All this labor has been replaced by automated freezers. True, there is still some residual human labor in creating home freezers and maintaining the power grid, but this is a small fraction of the labor that was previously required. However, the two laws are logically independent. Consider, for example, an imaginary world where it is impossible to make ice except by using giant factories the size of football fields. We can suppose the gigantic factory is fully automated and ice is delivered by robotic drivers, but still consumers would be forced to buy from the owner of the MOP. In this case, the law of diminishing labor applies, but not the law of MOP becoming consumer goods.

Another historical example where the MOP becomes a consumer good is in the travel industry. We are witnessing the demise of travel agencies or “travel factories.” The value of a travel agency lies primarily in knowledge: knowledge of travel arrangements, destinations, discounts, and so on. At one time, almost all travel arrangements were made through travel agencies, now their share of the market has dwindled to approximately a third (by revenue). Those who owned travel factories, the stored knowledge of the travel agency, were able to make a profit. With the advent of the Internet, the cost of owning a travel factory has drastically dropped. It is possible to look up online prices of different hotels, airlines, cruises, and so on, and also see reviews from customers and others, from the comfort of one’s home without paying others for the knowledge. The fact that the knowledge base is now freely available also explains why I will have a hard time trying to make a commission buying airplane tickets for my neighbors. They can just as easily go online and look up the information as I can, so there is little prospect of making a profit.

The printing industry is another example of the second law. Once upon a time, printing was done at a printing shop or “printing factory.” Print shop proprietors owned the means of production: printing machines and photocopiers. Formerly, if you lost your dog and wanted to put up flyers featuring a picture of your best friend, you took the original to a printer. Now, of course, almost every home has a printer and a photocopier. The price of printers and photocopiers has plummeted to the point where everyone can be his or her own “printing factory” through the ownership of a printer. This also explains why it would be only under very special circumstances that I could make a profit photocopying or printing something for my neighbors. By and large, there is little incentive for them to pay me to do something that they can do just as easily in their own home with their printing MOP.

As we look to the future, we can see that the same force applies to other aspects of the economy. Consider that until very recently it was nearly impossible to obtain electricity in a cost competitive manner except from a large scale producer: one’s local utility. We are approaching the crossover point where installing solar panels is more cost advantageous for many homeowners: the MOP (electricity generation equipment) is being commoditized by huge robotic solar panel factories building cheap solar panels. The process is not complete, since most home solar installations simply feed into the central grid. However, the price of batteries continues to drop, so before too long, consumers will be able to go “off grid”—producing all their own electrical energy needs. Individual home owners will own the MOP to produce their own electricity. That is, we will see the rise of millions of “energy factory owners”: people producing their own energy from their solar MOP. Again, my neighbors will have little incentive to buy electricity from me when they can buy cheap solar cells and produce their own electricity.

We can foresee too the demise of many fast-food restaurants. Fast-food robots are on the verge of replacing many fast-food workers. Consider that as fast-food robots get better and cheaper, they will soon be as affordable as today’s robotic vacuums and kitchen stoves. At some point, we will be able to have our own fast-food robot right in our own homes. It will merely be a matter of saying “make a cheeseburger and fries for me,” and the home fast-food robot will take care of the rest. Again, when a fast-food robot is present in every home, it will be hard for any individual to make a profit selling fast food. If it costs me 30 cents to make a hamburger at home with my fast-food robot, my neighbor is not going to pay me (say) 40 cents for a hamburger when he can make the same hamburger for 30 cents.

We noted that the two laws are not logically related. It is possible that the first law is true and the second law false. However, history bears out the fact that the two laws go hand in glove. The first law of diminishing human labor is specified in terms of the production of widgets. Widgets can be either capital goods or consumer goods. The first law is indiscriminate, it tells us that the amount of labor to produce all goods, consumer and capital, falls over time. Other things being equal, reduced human labor leads to a prediction of lower cost. Given this, it is inevitable that the price of capital goods will fall to the point where the average consumer can afford them, in which case they will no longer be capital goods but consumer goods. Take the ice-making example again. The end of the “ice-man” industry did not happen immediately with the invention of freezers. Early freezers were too expensive for most consumers. Early freezers were capital goods, and capitalists owned them as part of the MOP. For example, restaurants and brewers were early adopters of the technology. They owned freezers as part of their MOP to produce consumer goods, restaurant meals and brew. As they dropped in price, freezers turned from capital goods to consumer goods. However, freezers are MOP in our sense of the term, since they are used to produce a product, ice.

The first law and second law, then, spell trouble for capitalism. Individual capitalists are forced to take advantage of the first law or not survive in the market. As noted, the business of collecting frozen ice from lakes and rivers was relatively labor intensive. The development of freezers reduced the labor and cost of ice. Think about the early days when commercial freezers first became available. Imagine Company X is the old established company that collects ice and stores it in ice-houses. The young upstart, Company Y, uses freezers to make ice. Since Company Y’s costs are lower, it sells its ice cheaper and starts to take away market share from Company X. Company X in turn invests in new capital equipment, freezers, and now is able to compete once again with Company Y. Of course, this means that more freezers are now being sold. As the cost of freezers comes down, it becomes possible within a few decades for most people in industrially advanced nations to buy their own ice MOP, and the ice industry suffers a massive die off. (There is a small industry for bagged ice but the glory days of the ice industry are over.)

Therefore, in any particular industry, capitalists are in a bind. On one hand, they must take advantage of the first law or face extinction. That is, they must look for more efficient ways to buy and run their MOP or be out-competed in the market. On the other, they want to avoid the cost of the MOP getting too low, or they face extinction when their MOP becomes consumer goods. A good situation for icemaking capitalists would have been when it was always too expensive to make freezers for the home market. And for print shops, the ideal would have been when it was always too expensive to buy a printer for home use. Of course, the first law tells us that this will not happen. So, as capitalists attempt to reduce the cost of the MOP as a means to stay ahead of their competition, they are hastening the ultimate demise of their particular industry.

If we take this line of thought to its logical conclusion, it seems that we must imagine a world where all the MOP are consumer goods. If this comes to pass, then the free market as we know it will disappear. I’ll discuss this possibility, and its relation to capitalism and communism, in a future post.