Perhaps the critics of capitalism ought to look back on the unprecedented economic dynamic of the past two centuries. Has this record not demonstrated beyond doubt that, notwithstanding certain dark sides, Adam Smith’s “invisible hand” in the long run has functioned well—by establishing property rights, competition and free entrepreneurship, which channel people’s selfishness in a positive direction for society as a whole? There may be good reasons for a degree of redistribution, the alleviation of poverty, and the taxation of wealth. But transcend capitalism? Wouldn’t that be like throwing out the highly talented baby with the bathwater?
At first glance, capitalism’s record is indeed impressive. For our ancestors, accustomed to economic stagnation and at best minor innovations, it would sound like a fairy tale. Between 1700 and 2012, global per-capita income multiplied tenfold while world population, for centuries remaining below 1 billion, grew a factor of six. In the industrialized countries, the real income per person is more than twenty times what it was in the early eighteenth century. No one can deny that these numbers represent a significant improvement in the quality of life, even for the poorer section of the population. Compared to our ancestors in previous centuries, we live much longer lives and rarely have to see our children die. On average we work less, have a more diverse diet, are more mobile, are able to easily communicate with each other over long distances and can cure diseases that for thousands of years spelled certain death.
There is no other period in human history during which our capacity to produce material wealth would have increased so rapidly. Never before were technologies of production revolutionized in such a rapid and fundamental way. “The worlds of Goethe and Plato had more similarities with each other than the worlds of Goethe and people living today”, Walter Eucken, father of the ordoliberal Freiburg School of Economics, wrote at the beginning of his treatise on The Principles of Economic Policy. It is evident that this transformation was a result of the economic order emerging with the Industrial Revolution—or thanks to which an industrial revolution might have happened in the first place.
Upon further inspection, however, the picture becomes more nuanced. The capitalist era was certainly not an age of continuously growing mass prosperity, especially on a global scale, and not even in the richest countries. Periods of growth are always followed by periods in which past gains in the standard of living are lost. A bustling economy combined with growing poverty is not a new experience. In fact, this cocktail is typical for the entire first century of capitalism’s march to victory. The hellish factories of Manchester and Liverpool with their cruel labour conditions, their putrid air, poison-laced sewage, and absence of hygienic infrastructure forced upon the workers of that time more suffering and a significantly shorter life than that of their rural ancestors. Marx and Engels described this misery in vivid terms. After visiting Manchester, even the liberal Alexis de Toqueville recalled a “fetid sewer”, a “dirty pool”, in which “civilized people are returned to the beasts.”11
Even though capitalist industrialization in the nineteenth century produced an unprecedented increase in productivity and wealth, wages stagnated until the 1880s at a level so miserably low that physical degeneration ensued. This became evident, for example, in the ranks of the army. Between 1830 and 1860, the average height of English soldiers decreased by two centimetres, while their general state of health became measurably poorer, as the British military administration noted with some concern. Child mortality reached frightening proportions in all of Europe’s larger industrial cities. Not until 1880 did the wage level noticeably increase in England as well as on the continent. This period of an improving standard of living for the working population came to an end with the outbreak of World War I.
In the subsequent three decades, two world wars and a global economic crisis disrupted the economy to such an extent that the view that capitalism had become outdated was widely held among sectors of the population that traditionally had few sympathies for the ideas of the Left. In its 1947 program, the conservative German political party CDU (Christian Democratic Union) called for a non-private “shared economic order” instead of capitalism, since “the capitalist economic system has failed to live up to the political and social interests of the German people.”
It was not until the New Deal in the United States and the new social model in post-World War II Europe—which we tend to assume is the normal state of capitalism—that a period of rapid economic growth and increasing mass consumption started. For the first time the personal wealth curve pointed upward for all sectors of the population. Inequality as well as poverty declined, a broad middle class emerged, and for several decades it seemed there were no limits to production and consumption. However, this “golden period” is now history.
What is our current situation? Does capitalism continue to be as dynamic and innovative as its advocates would have us believe?
The urgent problems on the agenda today should be indisputable. A minimum goal is a global end to hunger. We need to solve the energy problem by drastically reducing CO2 emissions while avoiding other dangerous side effects and environmental destruction. We need mobility without particulate and noise pollution, a recycling economy instead of disposable products, early detection, healing and prevention of cancers and other serious diseases. Even more important would be to disable the economic driving forces behind wars and civil wars, which destroy the lives and livelihoods of millions of people. On all these issues of existential importance we have hardly made any progress over the past thirty years—in some respects we’ve even regressed.
“I’m missing the future. Nowadays we have such low expectations for the future”12, says internet pioneer and computer scientist Jaron Lanier. The founder of the digital financial service provider PayPal and Internet billionaire Peter Thiel holds a similar view: “The smartphones that distract us from our surroundings also distract us from the fact that our surroundings are strangely old: only computers and communications have improved dramatically since midcentury.”13
In many sectors we have reached dead ends. Our economy still largely rests on the combustion engine invented in the nineteenth century, even though its damaging effects on health, the climate, and the environment have long been known. Instead of research into minimizing poisonous emissions, Volkswagen and others prefer to invest in sophisticated software to dupe testing agencies. While electric cars are being produced, demand for them is weak, which is hardly surprising in light of their high cost and an underdeveloped infrastructure. And even the electric motor will not represent significant progress as long as we use primarily fossil fuels to produce our energy.
Why is it that alternatives to fossil fuels continue to be so underdeveloped? In only 88 minutes, the sun radiates 470 exajoule on the earth, equivalent to humanity’s energy consumption for a whole year. If we were able to capture just one-tenth of one percent of solar energy, this would yield six times the amount of energy the world economy needs today. But we are not moving forward. Solar cells are nowadays better than they were 20 years ago, but far from sufficient to solve the energy problem in countries of the north. Solar manufacturers are under pressure, many have gone bankrupt, and there is no room for large research budgets.
Wind power as well represents a huge potential source of energy. According to a Stanford University study, capturing 20 percent of wind power would be sufficient to produce the electricity that the world economy currently consumes. Nevertheless, we keep burning oil and coal. While enormous steel structures for wind turbines have come to dominate the landscape in Germany, they are not properly integrated into its energy grid. When the wind blows, the country gives away excess electricity to its neighbours, when it doesn’t, the oldest coal-fired power plants are reactivated because modern gas power plants are not economically competitive in this constellation.
We send space probes to Mars while the necessary storage capacity for green electricity is not available or extremely expensive—a clear sign for insufficient research activity and an absence of pressure for innovation. The particular energy mix in Germany today emits more CO2 into the atmosphere than was the case before the “green” energy revolution. Since the year 2000, increasing electricity prices have subsidized this foolishness with well over 100 billion euros. Instead of promoting the development of Green technologies, state subsidies have enriched eco-gamblers and landowners that lease land to the operators of wind turbines.
Consider how quickly, in the nineteenth century steam, power was replaced by electricity, how rapidly in the twentieth century assembly line production and later automatization were phased in, and the speed at which digitalization is advancing. Reading Keynes’s beautiful short essay on the “Economic Possibilities for our Grandchildren” published in 1928, you realize what hopes for the future even such sober analysts as Keynes harboured in view of the technological breakthroughs of the time.
Keynes firmly assumed that within a period of 100 years, humanity would have solved “its economic problem”. He anticipated that by the year 2028, all essential needs would be satisfied while working time would have been reduced to at most three hours per day. As he wrote optimistically, “for the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure which science and compound interest will have won for him, to live wisely and agreeably and well.” […] “The love of money as a possession—as distinguished from the love of money as a means to the enjoyments and realities of life—will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease.”14
How incredibly distant we seem to be from this future! Silicon Valley is considered the world’s most innovative workshop for ideas, but where are the ideas that can help us make progress on our truly most pressing problems? And where in Europe are such ideas developed? True, the computer and the Internet have revolutionized our lives, but even those two inventions originated in the middle of the last century and were widely adopted by the 1990s.
Where are the revolutionary inventions and innovations of the early twenty-first century? Is it the smartphone, which, for marketing purposes, appears each year in a new version without offering anything truly new? Is it the search engine Google, which has become an insatiable data monster that gobbles up everything it can about us? Or is it the various social networks that collect our most private feelings, analyze them, and commercialize them? Is that what the world has been waiting for? Or is it perhaps the latest app from Uber, which has the potential power to destroy the existing taxi industry, getting us more cheaply to our destination, except that our driver will have no retirement or health plan, and an even lower income than cab drivers do today?
Our airplanes are not flying any faster or with fewer emissions than they were 20 years ago. The only significant “innovation” in this sector has been the introduction of low-cost airlines with poorly paid crews, minimal service, and cramped seats. Low-income earners may now find some flights more affordable for themselves—if they book well in advance, sacrifice flexibility and travel with cabin luggage only. This innovation means that both the flight attendant and the pilot have to worry about their next rent increase. Is that really what we mean by progress?
Our industrially manufactured foods are for the most part unhealthy: too much fat, salt, and sugar. This is the case despite the fact that we have far greater knowledge about nutrition than only two or three decades ago. Some things have become cheaper over the past few years, but a lot of things are now of lower quality. There are food scandals all the time because of ingredients that make people sick and shouldn’t be in there in the first place. This almost always happens for reasons of pathological cost-cutting or dumping. International treaties such as TTIP and CETA threaten to undermine hard-fought environmental and consumer protection standards.
There may well be innovative ideas in many research labs. But those that actually make it to market include fracking, which poisons the soil in the process of extraction; genetically modified food, the long-term consequences of which for the environment and health are not known; genetically modified seeds that increase hunger and dependency globally; diet pills that cause disease rather than curing it; and potentially addictive Internet games. Even in the centre of Europe nuclear power plants continue to be built as if there was no tomorrow. The main application of rapidly growing digital storage capacity is spying on and recording our private lives—for the purpose of commercial exploitation for advertisers, insurers, creditors, or potential employers, or for the purpose of government surveillance and state security.
We’re all familiar with these products: cell phones, printers, refrigerators or washing machines that stop working properly once their warranty period expires. The trend is undeniable: appliances we purchase today may be technologically more sophisticated but at the same time break much more quickly than their precursors did twenty or thirty years ago.
Contrary to the requirements of recycling and extended durability, manufacturers intentionally devise products with a short life that are difficult or impossible to repair. Spare parts are either expensive or may not even be produced. This practice is not entirely new. The oldest known instance of manufacturers reducing product quality by design is the Phoebus light bulb cartel of 1924. At that time, the large international manufacturers agreed to reduce the lifespan of light bulbs from the technologically possible 2,500 hours to 1,000 hours in order to boost sales. Nowadays tricks like installing low-quality components that quickly wear down or the use of cheap materials with a short life are even more widespread than they were in the last century, especially in markets dominated by a small number of suppliers. A 2014 study on “planned obsolescence” lists an enormous number of concrete examples of such practices.15
On occasion the manipulators are exposed. In the early 2000s, Apple produced iPods with a non-replaceable battery with an apparently intentionally limited lifetime of 18 months. This led to a class action suit, with the corporation eventually agreeing to replace the device. However, in most cases these manipulations are difficult to prove and there is no legal action.
The former Vice President of the Technical University of Berlin, Wolfgang Neef, describes the turn from quality production to product dumping in vivid terms. He identifies two opposing approaches that have confronted each other from the beginning of capitalism. One is the approach of “engineers who are dealing with the natural laws of chemistry and physics”, the other approach is that of “economists who work according to socially constructed ”laws“ of the market, competition, and profit as a company’s sole criteria of success.” As long as both approaches have a place in companies, the first step is product development according to technological necessities, and only then will there be discussion of possible cost reductions. The result is products constructed according to professional principles with a relatively low price.
With the start of the neoliberal radicalization of capitalism since about 1985, Neef notes, this balance has shifted more and more in favour of the economics of cost cutting. “My students tell me that at Siemens [a large German multinational corporation], any time-consuming professional engineering work that does not use the cheapest inputs is vilified as ‘over-engineering’. Instead, the main objective should be ‘value engineering’ which is primarily oriented towards shareholder value and for this reason proceeds according to the precept ‘quick and dirty’.” He further quotes a top Siemens manager as saying, “don’t bother me with technology, I have better things to do.”16
In such corporations, the development of innovative technologies is championed only if it promises to satisfy high profit expectations. “A Siemens employee reported that a return of 16 percent has become the minimum standard for new product developments. He himself had developed an innovation in the area of renewable energy that would have yielded a 15 percent financial return. It was not approved because it fell short of the expected profit margin.”17
The models for this kind of corporate management originate in the Anglo-Saxon countries. For years, employees of IBM have accused management of driving up profits only by way of acquisitions and sell-offs as well as sophisticated financial manipulations, while investment has dropped off and few innovations are being developed. The German business daily Handelsblatt sees this as a general pattern: “Instead of inventing products, US firms massage the numbers … Instead of hiring scientists, setting up new labs or staking out new business fields, US corporations expand their finance departments.” Their main activity consists in developing new tricks for international tax arbitrage in order to increase net profits.18
This trend is confirmed by an interdisciplinary MIT study that looked at strengths and weaknesses of the American system of innovation and the reasons for the decline in industrial production. It examined why promising innovations often come to a halt or migrate abroad before they become marketable. According to the study, one of the reasons is that large internal departments of research and development are a thing of the past. Most corporations were no longer engaged in long-term basic research or applied research but rather focused spending on short-term goals. Accordingly, new gaps had developed in the industrial ecosystem.19 It is no longer only US corporations that act in this way—many large European and German companies have also adopted this model in recent decades.
Modern patent law, at the top-of-the-list of lobbying efforts by large corporations, contributes to paralyzing innovation. A 2003 study by the German Fraunhofer Institute which the authors tellingly published under the title “Inventions contra Patents”20 examines the discrepancy measurable since the early 1990s between the modest increase in companies’ R & D spending and the steep increase in their registration of patents doubling in number between 1990 and 2000. This gap has further widened in subsequent years.
The study concludes that a steadily growing share of patent registrations no longer aims to protect a company’s own inventions. Instead, the main goal is to block competitors from applying certain technologies. For this purpose, patenting is done in a much broader fashion than would be necessary for the protection of technological innovation, or processes are patented that are not based on any innovation. Increasingly patents are registered not for exclusive use in production, but rather to prevent the use of an innovation that poses a threat to the company’s own products.
According to the above-mentioned study by the Fraunhofer Institute, the lion’s share of patent registrations serves the purpose of blocking the use of innovations by competitors. This is the crucial cause of the rapid increase in the number of registered patents. By contrast, in small and medium-size companies, research and patent registrations diverge in the opposite way. According to studies by the European Patent Office, two-thirds of small and medium-sized firms actively involved in research fail to protect their innovations through patents because they are put off by the bureaucracy, costs, and time required.21
In addition, a patent is useless if the claims to which it entitles the holder cannot be legally defended internationally. The costs of such patent processes for smaller firms can quickly become ruinous. Accordingly, this sector has a steadily declining share in registered patents and is particularly hard hit by legal action on the part of large corporations with their enormous patent holdings. Unfortunately, no statistics are available that could tell us how many innovative small companies have been ruined as a result of such legal disputes—with all the negative consequences this has for the economy’s power to innovate.
According to the findings of the Fraunhofer Institute, particularly in markets with fewer competitors patents are being used today as effective tools to exclude new entrants from a market. Start-ups as a rule do not stand a chance in patent-intensive markets. Citing an engineer in automation technology, Neef confirms that the current patenting practice is paralyzing innovation and lowering quality standards: “Developments need to bypass the patents of competitors, and are therefore suboptimal. This is why we are forced to deal with legal tricks instead of producing good technology.”22
Thus a realistic survey of economic development over the past few decades demonstrates that even in the richer countries, capitalism is no longer as innovative as it claims to be, and where innovations do take place they serve the common good less and less often.
In the regions of the world outside the centres of wealth, economic depression is palpable. According to calculations of the World Bank, the average income per person in Africa is lower today than it was at the time the colonial system was dismantled. In many countries that used to have planned economies, the introduction of capitalism precipitated a collapse of economic performance from initial levels that were not particularly high. Mongolia, for instance, lost almost all its industry in this process. In the countries of the western Balkans, current production is 10 percent lower than it was in 1989. Twenty-five years of capitalism have not only failed to produce any growth, but have also resulted in a significant lowering of the standard of living. The same is true for many regions in Russia today.
Of course there are counterexamples of rapidly growing economic powers, such as China or South Korea, which in recent decades have experienced large gains in wealth. But is it capitalism that has made them rich? What is it they do differently from and better than the losers? And on what basis did the industrialized countries enjoy their many years of dynamic economic growth? Is there a chance of returning to this situation? Why has the “invisible hand” stopped working in so many countries? And what is so original about this principle we call capitalist? These are questions to be addressed in the coming chapters.