Fredrik Erixon / Feb 2016
Is this the end? Karl Marx anticipated that moment. Joseph Schumpeter also saw it coming. And just like they predicted, we’re now led to believe, capitalism is getting caught in “the perennial gale of creative destruction”, Schumpeter’s definition of innvoation. For Marx, capitalism was a system of economic oppression, but like Schumpeter he had an admiration for its irrepressible force of coming up with new technology and ideas. They would destroy jobs and capital – and all that are solid would melt into air. But capitalism could boost innovation like no other system. In the end, however, capitalism would become a casualty of its own success: it would innovate itself to death.
Techno angst is certainly spreading in the Western world and we are daily fed with scare-stories about robots, 3D printing, supercomputers, artificial intelligence and how all that will make us all unemployable in future. As post-crisis unemployment remains stubbornly high in most parts of Europe and the United States, a lot of people seem to think the technological blitz against employment already has started.
This new form of techno-dystopianism also gets respectable academic support from scholars like Erik Brynjolfsson and Andrew McAffe, author of bestselling Rage Against the Machine. In their view, it is just a matter of time until computer algorithms are so powerful that they’ll run the economy. The tech aristocracy has also weighed in. Eric Schmidt, the chairman of Google, recently sent a shiver down the spine of business executives at Davos by prophesising new computer technology to do away with all these jobs that automation could not reach. A McKinsey study suggests 250 million jobs in the world are about to be destroyed in the next ten years due to robots. A group of Oxford economists have given a more modest figure in a paper from last year, yet still claimed that almost one half of all current jobs in the United States is at “high risk” of being squeezed out by computerisation.
So the vast majority of us are travelling on a one-way ticket to the economic Netherworld, forever demoted to the dispossessed proletariat and poor economic expectations.
The problem though is that these modern techno-dystopians get it wrong. And – yes – it is a problem. Western economies should worry about innovation famine rather than innovation feast. Innovation is not about what happens in science labs. Innovation happens on markets, and the real economic power of innovation is how it forces everyone to behave smarter and better. And for the past forty years, the contribution made by innovation to productivity and economic growth in the West has steadily shrunk. Our capacity to generate more wealth on the heels of general adaptation has weakened. Western economies experiment less than before. Churning rates of entrepreneurs in the U.S. has gone done. There is less job creation and destruction now than in the past. In many Western countries, people hold their jobs for a longer time than before. We have less creation and destruction.
Capitalism seems to have lost its zeitgeist of dynamism and experimentation. Governments are certainly to blame for that. Western regulations have not just expanded and become more restrictive – they have also become more complex, creating acute forms of regulatory uncertainty in many technology-based sectors. Just ask a biopharmaceutical innovator with a powerful new drug in the pipeline how difficult it is to get your product to pass the regulators. Or think about the regulatory and political battles that Uber has had to fight – and how many time they have lost. You’d think Uber would be a welcome competitor in over-priced and under-serviced taxi markets in Europe. But governments across Europe have cut them out of the market by arcane new licenses and regulations, designed to protect incumbent taxi oligopolies. And what happened to that magnificent drone, potentially revolutionising the transport market, that Amazon’s Jeff Bezos unveiled two years ago? The U.S. government decided it can’t be used until the government has designed new regulations.
However, private companies share a good part of the blame, too. In the past decades, the economic system we call capitalism has become dry, bureaucratic and risk-averse. Multinationals shun uncertainty, which is a pre-condition for innovation, and have cut down on genuine spending on innovation. Generally, capital expenditures have been shrinking and the investments necessary to get new innovations to ripple through entire economies are simply not made to the same extent a before.
Under the pressure of institutional investors, corporate leaders favour strategies that give small but stable returns to their funders. All these conservative money-holders – pension funds, sovereign wealth funds (SWFs) and more – are draining capitalism of its energy. They want higher dividends and larger programmes of share buybacks rather than retaining earnings in companies to finance investment and innovation. Those investors that manage pension savings are under increased pressure to plug liquidity gaps in pension plans, and therefore favour that companies age their asset bases because that frees up liquidity. The radical change in corporate ownership over the past 40 years have diluted ownership and impaired the corporate instinct for innovation. Remarkably, the corporate sector is now a net-lender, not a net-borrower, in the economy.
The future of capitalism is not a techno-dystopia. Western economies certainly need an innovation revival to raise productivity and economic growth. Nor is current capitalism a utopia. It’s ability to foster and diffuse innovation has weakened. It is shackled by risk averse bureaucrats in governments and companies. Under their reign, jobs will be destroyed – but because of innovation inertia, not innovation enthusiasm.