Everything is changing quickly. Those who care about the future of life on this planet and who understand the scientific warnings are seeking radical change.
We’re looking for a new socioeconomic design, one that doesn’t require viral capital growth beyond the carrying capacity of the planet Earth, one that doesn’t require the systemic exploitation of certain groups of people.
What does a blueprint look like of a peaceful transition to a new kind of economics, a new kind of politics, a revaluation of value, and a new understanding of what will benefit our interconnected global human civilization?
Can we move beyond capitalism, socialism, communism, libertarianism, environmentalism, and design a new way of living on the planet that learns from the best parts of all of those world frames, and is in true harmony with the Earth? If the answer is yes, then we need to begin learning from natural systems, unlocking some of their secrets, and begin designing a system for human survival and thriving that mimics those natural systems, while aspiring to the highest virtues of human culture.
Your house is an open system. You can transfer things from the grocery store to your house, and you can take your trash outside of your house to the curb where it disappears from your worries. In other words you export (externalize) your waste streams and you import (purchase) your energy and material inputs.
The planet Earth is for the most part (and with one very important exception) a closed system. It has a finite barrier (the ionosphere) beyond which not much leaves (other than one-way rockets and reflected radiation) and not much enters, except asteroids, some tired old space junk, cosmic radiation energy, and solar photons. This last one, solar energy, is the important exception because it is the massive amounts of energy the sun injects that makes life on this blue green marble possible. The Earth cannot externalize her waste streams or purchase additional energy or raw materials beyond that which the sun provides. If the Earth runs out of something—say a species of life for example—she doesn’t have a neighbor she can go and “borrow” from.
Inside an open system, rapid change can be adapted to rather easily through feedback loops. The indoor air temperature rises and you can open some windows or turn on the air conditioner. In a closed system, however, there are strict limits to how rapidly change can be adapted to and to how quickly materials and energy can be consumed. We can’t just open the windows on the planet.
We have discovered that the Earth’s has a thermostat. As the dial is turned up on the quantity of carbon dioxide, methane, and other greenhouse gases, the temperature of the atmosphere and oceans increases. The problem is that the feedback time is delayed. Imagine turning the dial on your living room thermostat and waiting two hundred years for the room to adjust.
As we continue to pump CO2 emissions into our thin and finite atmosphere, we are quickly learning that exponential growth within a closed system is not something that can go on forever. Before you realize it is happening, it may already be too late. We have already multiplied the quantity of CO2 in the atmosphere by 150% and the impacts of that rapid shock to balance of Earth’s closed system will ripple over centuries.
It is difficult for the human mind to appreciate exponential growth in a closed system. A glass cylinder with single-cell organism that doubles in population every minute will be half full at 59 minutes and full at 60 minutes at which point it quickly dies. At 55 minutes it will be only 3% full.
Capitalism that relies on exponential growth in productivity and consumption is akin to the single-cell organism, and the Earth is our glass cylinder. Today our clock is past minute 59.
We have unfortunately designed our socioeconomic structures and rules as if the Earth was an open system, as if her ability to provide us with combustible fuels and her ability to absorb our waste was infinite.
We have also designed our economic system to starve its most important and productive contributors—human labor and ingenuity—to reinforce tribal power and class structures. The result is a system in decline and at risk of collapse.
There is urgency to action from the perspective of economics, public health, social justice, and the environment, but what exactly can we do? How can we succeed at addressing so many problems all at once?
If we look at our social contract as a system, study its inputs and outputs, watch at a granular level at how social wealth flows through the economy like energy flows through a life form, watch whose hands hold power over its emergence, the properties of its flow. We can compare these flows to the natural flows of energy within thriving ecosystems.
One of the first things we will notice at the bioregional scale is that new wealths of energy (i.e. rain and sunshine) are distributed evenly (democratically) across landscapes and time. Energy wealth is not monopolized or concentrated in its first instance by an elite species before being redistributed to all others. This democratic influx of new wealth from the sky into the landscape first glances equally upon each tiny leaf in the canopy where photosynthesis produces the complex carbohydrates (chemical energy) that flow through a system of regeneration through hundreds of levels of reuse, where one species’ waste streams becomes other species’ feedstocks, where the actions taken by each species are in harmony with those of the others, where healthy boundaries to exponential growth are reinforced by natural feedback loops. There are many parallels between the flows of energy in nature and the circular flow of income and wealth in economies. The difference is that ours is not an evolved system with healthy feedback loops. Rather it is a contrived system with flow gates open and shut for political reasons to benefit particular groups as a reflection of entrenched social power structures. This artificial constrictions of the flow of income and wealth are what are what have placed our global economy on an unsustainable trajectory.
Perhaps by looking for lessons in nature we can pry open the incentive feedback loops of power and wealth and design a new socioeconomic system, a new social contract that establishes institutional equalizing forces to counter inequality and injustice.
[I’d like to expand this section with an information graphic that is a true Sankey diagram of wealth flows and storage systems akin to that for quads of energy that can be found in the chapter on the National Year of Regeneration. Anyone interested in collaborating on this? Please let me know.]
What does success look like?
Success is a 100% renewable energy powered global economy that does not generate toxic waste, but rather regenerates 100% of its materials. Healthy natural ecosystems accomplish but ever since the industrial revolution humans have been throwing the balance. We need to learn from nature and right the ship.
Success is a political system that gets as close as possible to pure democracy, with the checks and balances and incentive structures to make corruption and oligarchy nearly impossible, and that will naturally result in a healthy check on corporate power and consolidation, freedom of speech within the bounds of public safety, and a generous public support system that helps everyone achieve their dreams.
Success is an economic system—unencumbered by systemic racism—that fulfills the needs of everyone, provides free education, healthcare, and guarantees housing, while properly rewarding the risk that leads to innovation and entrepreneurship. Success is a system designed to value most highly the thing that all humans most desire—the time to live free of stress, enjoy and explore the world with the people you love.
Our system does not work this way today, and it’s not because such a dream is impossible. Certainly from a technical perspective, these goals are all feasible, and we know enough about human behavior and social science to make it happen. If we make the incremental changes in the proper order, it is possible to complete the transformation before it’s too late, before change comes violently.
I’m sure that we can make it. And when we get there, we will may have a hard time recognizing ourselves living in the system that we live in today. Perhaps the ideas in this project are too radical. But things have been changing rather rapidly lately. The coronavirus pandemic and the renewed attention to systemic racism in the wake of the video recorded murder of George Floyd has added a sense of urgency to the issues we face.
What I propose here is a highly resilient economic system under which civilization will continue to create wealth and advance prosperity during future pandemics and other exogenous shocks that today unnecessarily bring on economic recession and mass unemployment. This system will do so in a way that strives to right the injustices of the past and provide an abundance of new opportunity for all Americans.
Are you talking about a revolution?
We must remember that our governing documents are living documents. They all have built-in mechanisms for radical change, and the founders of those documents intended for us to use them when necessary to save lives and ensure the survival of our species. That time is now. Revolution can be democratic and peaceful.
None of the ideas on this site are incremental in their ambition, but I’d like to work with others to identify the political and persuasive steps to organizing around them. It is especially critical that groups who have been marginalized and disenfranchised when decisions have been made throughout history are given not just a “sense of agency,” but true decision making power in the process.
The COVID-19 pandemic has hit the world at the same time as a crisis of capitalism, which, in addition to managing its own shortcomings of inequity, is in conflict with the carrying capacity of planet earth. The value of fossil fuels is being rapidly diminished in the face of exponentially falling prices for clean electrons from solar and wind and a major carbon bubble is on the verge of collapsing, bringing down the investors who get caught holding the bag.
How do we avoid the consequence of the major disruption to the global economy that will most likely come from the societal transition necessitated by the feedback of the biosphere? Reform ideas around social justice and equity have been branded “left-wing fascism” by one certain former President of the United States, and the divisive rhetoric at the highest echelons of power threatens to spark civil unrest. The fabric of democracy is wearing thin.
It is time we open our eyes to the illusory provenance of wealth in our current system.
Today wealth is injected into the economy, by design, in a centralized fashion through the Federal Reserve Bank, only sometimes reaching the savings accounts of the fortunate few through the winner-take-all game of the free market. What if new wealth were injected into the economy democratically, by design, the way that sunlight and rain fall upon the landscape?
We often hear that something went badly because of a failure of imagination. This project is an attempt to expand our imagination and paint a picture of a world that sits on the other side of a new revolution, the next turning of the page, the next throwing off a class oppression mythology.
This time we are throwing off the idea of liberal meritocracy and its neoliberal tendencies, which took the place of aristocracy and monarchy, which took the place of divine right of kings, which took the place of empires, which took the place of high priests, shamans, and alpha warriors. We carry with us the shadow of all of those other mythological tools of class and gender oppression today and we will certainly carry with us the the shadow of liberal meritocracy when we have been released from its yoke. It will no doubt live on as a hollow shell of its former self, like a puppet monarch, an atavistic vestige of circumstance without political power. It will be taboo to speak well of it.
We will look back in shock at the way that incentives towards sociopathy and sadistic injustice were intentionally designed, sewn in golden thread into the systems that governed our society.
We will be horrified at the Faustian terms of the social contract we once struck. We will cringe at how we pitted poor against poor with dehumanizing stories of “they are taking your job” and “welfare fraud is rampant,” while the financial sector, corporate executives, and investment capital (collectively known as the 1%) picked the pockets of everyone else. How we favored socialism for the already well-off and social Darwinism for those at or near poverty. How we locked up our fellow citizens (each one a potential Einstein, Du Bois, or Mozart of their generation) for committing petty and victimless crimes after we drove our poor fellow citizens to animal-like hunger by taking away access to food and shelter in the name of austerity, refused to treat their mental illnesses, neglected and forgot about them as they poisoned themselves with lead water, looked away as we walked past them in the streets, posted pictures of them from our Nest Hello on Nextdoor, called the police on them for living while Black.
What if we could just design it?
If we were to score the most common of the socio-economic systems throughout history based on a set of twenty selection criteria, what would that look like? Below is my version of this. Yours will no doubt be different. You might add another system that I’ve forgotten to include. You might include different decision criteria that we might like to add when deciding which system could possibly meet the ideals of liberty, justice, and freedom enshrined in the United States constitution. The exercise is in a way asking the question anew, “what is the State for, and whom does it serve?”
The systems meander across the spectrum of the standard left-right political debate because they are measured against review criteria that are non-binary in their aggregate effect. This matrix can however be read temporally from left to right. The systems we have left behind are on the left side, and the newer forms are on the right. On display is the arc of progress bending toward justice. At the far right side is democratic terrametrism, the system that is designed to meet the highest standard of all of the decision criteria. In this series of writings I will attempt to explain this new hybrid system.
There are four key system design tools that might be used. They come into play within the 20 decision criteria as can be seen in the far right of the matrix.
This new system’s feasibility and its ability to deliver on its promise will be key to its successful implementation, but also important will be its public image and its embrace by popular culture. The new system is therefore intended to be predesigned, simulated under various scenarios, and balanced before it is set into motion. This simulation period will last approximately five years and can be thought of as a beta program or a commissioning period during which there are no systemic changes in the real world.
The new system’s resilience will be tested, and its experience observed under scenarios of calm and scenarios of random exogenous shocks. We will experience stories about life within this new system. We will tease apart its weaknesses in order to iterate the details, while also vicariously enjoying its benefits. It is the hope that by immersing themselves within a model of the new world we are about to create for ourselves, even the 1% who will be asked to “sacrifice” in the old way of thinking will have a desire to experience the freedom offered by the new system because their lives too will be demonstrably improved.
After five years of watching and longing, and when a consensus of action is in place, it all comes into effect quickly.
First comes a distributive mechanism under the EQUITY equation, a new income tax structure that attempts to solve the problems of maximum wage policies, wealth taxes, and other redistributive systems under capitalism. It is extremely simple, and takes the place of all federal income taxes (goodbye 1040, and all your complicated schedules!). It also provides built-in incentives for self-actualization and education that recognize the innovations and breakthroughs in productivity that come from the chasing of “the American dream” and the Platonic ideal of “meritocracy.” Great advancements in technologies have been achieved because of entrepreneurial spirit and the gamification of rewards, and we do not want to block that flow of energy. If the EQUITY system is too radical, there is a much simpler solution that will not be as forceful in its progressive distribution, but easier to imagine being implemented: the simple curve tax.
Unfortunately, the ideals of liberal meritocracy have increasingly failed by their own standards. Raj Chetty, et. al. have studied social mobility since 1940 and have found that the American dream has faded into myth as intergenerational social mobility steadily diminishes. I am fortunate that, as a gen-xer (and a white male one at that), my parents made it under the wire in the socioeconomic system of the 1960s and 1970s where they were able to take advantage of a generous social safety net, scholarships and pensions from the United States Army, and with hard work and dedication—and some intergenerational wealth transfer from family—they were able to build wealth and help put me and my siblings through college as they themselves rose from lower to upper middle class. Unfortunately, the newly minted parents of my own generation and those of my younger siblings are finding it increasingly difficult to offer a better life for their kids than their parents had. For many people, especially People of Color, the path has been almost completely shut off.
Within the new system of democratic terrametrism, the promise of the American dream can again meet its greatest potential, as income inequality will be reduced to a level that rewards creative and innovative capital, while ensuring no one is driven to necessitousness.
Shortly after the implementation of the new income tax structure, a debt jubilee will cancel student loan debts and any debts with predatory interest rates (above 15%) that existed at least 12 months prior. A federal civil works project will guarantee employment and ramp up the infrastructure in preparation for the new wealth generation mechanism under terrametrism. The Truth, Reparations, and Reconciliations Act (TRRA) will provide wealth-building opportunities for Black Americans in a long-overdue legislative acknowledgement and functional atonement for slavery. A year of service requirement will go into effect with options to dedicate twelve months of early adulthood to one of three programs to benefit a healthy public commons. Citizenship is open to anyone who completes the service requirement, which can be accomplished part-time over a five-year period.
Reforms will be made to the charter of corporations along the lines of those proposed by Senator Elizabeth Warren in the Accountable Capitalism Act, and reforms to public sector accountability along the lines of her Anti-Corruption and Public Integrity Act. Additional barriers to corruption could be made to the primary process, including a pre-primary sortition system for a public option candidate within each major party.
The final step is to shift the US Dollar from a fiat currency to a terrametric standard currency. Throughout history the United States dollar was backed by physical gold, which turned out to be unsustainable. But the precedent has been well established for currency being denominated on a measurement of something real in the world. The gold standard proved problematic for many reasons, including the fact that new deposits can cause periods of rapid inflation, and that it makes it nearly impossible to stimulate the economy in response to shocks, such as a global pandemic. Under a strict gold standard, governments can’t “print” more dollars than they have gold in reserve.
If we look back at the monetary transformations that took place as a response to the Great Depression, it shows us that during times of crisis, revaluation of the monetary standard can be a tool for designing a more sustainable system. From The History of the Gold Standard by Kimberly Amadeo:
On March 6, 1933, the newly-elected President Franklin D. Roosevelt closed the banks in response to a run on the gold reserves at the Federal Reserve Bank of New York. By the time banks re-opened on March 13, they had turned in all their gold to the Federal Reserve. They could no longer redeem dollars for gold, and no one could export gold.https://www.thebalance.com/what-is-the-history-of-the-gold-standard-3306136
On April 20, FDR ordered Americans to turn in their gold in exchange for dollars to prohibit the hoarding of gold and the redemption of gold by other countries. This created the gold reserves at Fort Knox. The United States soon held the world’s largest supply of gold.
On January 30, 1934, the Gold Reserve Act prohibited the private ownership of gold except under license. It allowed the government to pay its debts in dollars, not gold, and authorized FDR to increase the price of gold from $20.67 per ounce to $35 per ounce (which consequently devalued the dollar).
We definitely do not want to go back to the gold standard. This new standard—the terrametric standard—is not measured against how many bars of gold are in Fort Knox, but rather it is based on the health of the Earth’s ecosystems and levels of informed civic engagement within society. These are real things in the world, just as gold is a real thing in the world. We can measure these things when we listen to nature and when we listen to social feedback. The sum of these measurements is terrametrics. It can provide an objective measure of value for a new economy. As I will show, we have the technology today to accurately make the measurements and we can put in place a system of checks and balances that will ensure accuracy and transparency in the accounting.
According to a set of terrametrics, new wealth is created and distributed to society directly to individuals rather than through a central bank. We will eventually wean ourselves (by statute) away from certain limits on deficit spending by the central bank, effectively synchronizing our economic system into harmony with stewardship of earth’s natural systems.
The terrametric standard monetary system is based on real-time monitoring of earth system variables (I’ll discuss the details of how this is accomplished in the chapter on terrametrism). The only thing that can create new social wealth is when terrametric variables improve. Reporting is done continuously, and much of the other norms and traditions of capitalism are maintained within the new system. The substantial difference is that wealth is no longer created by wage labor—the fatal flaw of modern capitalism. Under terrametrism, new wealth is brought into being by human labor, but the labor itself is not what bestows the value.
In the beginning, small acts of verified remediation and incremental improvement are worth a great deal. The variables will be set so that the new wealth generated each year is consistent with the new wealth that had been generated on average over the previous years. Much like the relationship between interest and principal on a mortgage, over time the marginal value of remediative acts falls on an asymptotic relationship to zero where we effectively reach a steady state economy. The theory rests on the assumption that the cultural norms that are established over generations of this new monetary standard will allow us to peacefully detach growth from prosperity when the steady state is reached.
In his 2019 book, This Life, Martin Hägglund makes a compelling case for a new kind of democratic socialism as an alternative to capitalism. Hägglund provides a definition of spiritual freedom that sets a moral standard for how we should rightly determine what we value in society. Capitalism, which derives social wealth from wage labor, will always be shackled to a fundamental limitation on freedom in society. In order for some to enjoy the benefits of new social wealth there will be others (the “essential workers” if you like) whose free time is exploited to make that wealth possible. A revaluation of value is necessary to bring about a truer spiritual freedom, and to fully recognize the American dream of life, liberty, and the pursuit of happiness for all people.
As Naomi Klein argues in This Changes Everything, capitalism is also not very compatible with climate action. Exponential growth of corporate profits will eventually come into a head-on collision with the limits of natural resources and the carrying capacity of the world’s ecosystem services, natural resources, and regenerative capacity. We can’t keep externalizing forever within a closed system. And there is a limit on how much we can switch wage labor time to non-resource-intensive service sector economy functions that also continue to expand exponentially.
There are also structural limits on the power of the free market to affect real change on climate. Some market-based solutions for carbon credits tied to projects like forest conservation efforts have been unmasked as carbon shell games, merely commodifications of carbon financial products.
As Hägglund puts it so clearly in This Life on the subject of capitalism:
The more we exploit and commodify our lives as well as our environment, the more wealth we have to distribute; the less we exploit and commodify our lives as well as our environment, the less wealth we have to distribute.Martin Hägglund, This Life
Greta Thunberg put the idea more simply to the United Nations summit on climate change on September 23, 2019: “People are suffering. People are dying. Entire ecosystems are collapsing. We are in the beginning of a mass extinction and all you can talk about is money and fairytales of eternal economic growth. How dare you!”
At the end of This Life Hägglund comes to the conclusion that we must go so far as to collectively own the means of production if we are to free ourselves completely from wage labor as the measure of social wealth. He references Marx’s idiom “to each according to her needs; from each according to her abilities” more than once in the book. Unfortunately, we will have far too long to wait until a time when state ownership of the means of production will be a palatable political message in America.
On the “markets are good” side of the spectrum we can find efforts to protect capitalism from itself in leaders like Elizabeth Warren who would require large corporations to obtain a federal charter that imposes stricter conditions intended to counteract the current model of “maximizing shareholder value” at all costs to society and the environment.
If we stand any chance of pulling ourselves back from the worst impacts of the perfect storm of late stage capitalism colliding with climate change and mass extinction, we would be politically wise to maintain as much of the norms and traditions of free-market capitalism as we can. While we recognize the root cause of capitalism’s failures, we should also recognize the strengths of capitalism and celebrate its prowess.
There are real problems that come from the collective ownership of all the means of production. We can recognize that the evidence of socialist experiments in the 20th century often devolved into one-party states for reasons that are intrinsic to central planning of that scale. There is too much of a concentration of power in the bureaucracy and institutional checks and balances tend to fall prey to corruption over time.
There are also real benefits from the healthy competition that free-market capitalism incentivizes. The innovation of technology can be accelerated when there are fortunes to be made in brilliance. The incentive structures of the market have functioned over time to raise the average standard of living on the planet. But the wealth that was generated has been at the cost of so many forgotten people. The extractive industries and the fossil fuels that powered development have wrought havoc on the natural world to the point where it threatens the balance of society.
Within terrametrism, the nationalization of certain critical infrastructures is recommended but not a requirement of the new system’s success. It makes sense that certain socially-oriented sectors, like education, healthcare, infrastructure, civil defense, public housing, military defense, and others do not benefit from market signals the way that commercially-oriented sectors do.
The best way to understand if an economic sector will function best if nationalized or privatized is to interrogate it using Jane Jacobs’s moral precepts from her 1992 book, Systems of Survival.
In the book she describes two moral precepts that have evolved within human culture: the guardian syndrome and the commercial syndrome. “The Guardian syndrome arose primarily to satisfy the needs of organizing and managing territories. It became the code for warriors, governments, religions, and some private organizations. The commercial syndrome came into being to support human activities around trade and the production of goods.”
- Guardian Syndrome
- shun trading
- exert prowess
- be obedient and disciplined
- respect hierarchy
- be loyal
- dispense largesse
- treasure honor
- respect tradition
- Commercial Syndrome
- shun force
- be efficient
- use initiative and enterprise
- come to voluntary agreements
- respect contracts
- be thrifty
- be open to inventiveness and novelty
We can think about healthcare in this context. It works well for the greatest number of people when it dispenses largesse, exerts prowess, and puts the health of patients above making money or efficiency. Its purpose aligns more closely with a guardian moral syndrome and it should rely on the public sector for its operation and oversight. It will not be improved by responding market signals (people suffering a heart attack don’t have the luxury of shopping around for the cheapest ambulance ride). When people must come before profit during an emergency there will not be any conflicted moral decisions to be made. There is empirical evidence that makes this case when we look at the per capita spending on healthcare in relation to the outcomes for states with and without socialized medicine. Pharmaceuticals and medical research is a grey zone where it makes sense to maintain privatization but with strong regulatory oversight.
On the other hand a company that makes electronics more closely aligns with the commercial moral syndrome. It will work best when it is able to compete with efficiency, innovate quickly, and operate within a system that respects commercial agreements as sacrosanct above all else. This business should therefore be allowed to remain in the private sector to benefit from the synergies of the marketplace.
Much of the public debate in the United States about socialism versus capitalism is unproductive because it fails to recognize Jacobs’s distinction between economic sectors and the moral precepts that form their DNA. Those on each side will talk past each other as mutual strawman assumptions are made that capitalism wants everything to be privatized and socialism wants everything to be nationalized.
The consequences of failing to understand the distinction between these moral precepts was on display during the COVID-19 pandemic when the President of the United States pit the 50 states against one another in competition to purchase the critical infrastructure (e.g. personal protective equipment and testing kits) that should have been centrally coordinated under a federal emergency response. A guardian moral syndrome (public health administration) was operated from a commercial perspective that favored competition and thrift. This is why it does not necessarily make the most sense for a government to be run like a business. The same actions that might create efficiencies in a business will end up creating inefficiencies in the provision of government services. The purpose of a business is to make money. But a federal government can print money. Its purpose is to protect its people.
Similarly, enterprises that are commercial in nature should refrain from taking on the responsibilities for largess or guardian activities. Corporate foundations have long been an arm of marketing and public relations investments made by companies from the same budget as is used for direct advertising, often with more impactful results. A ready example is the announcements by high net worth individuals to fund coronavirus testing in the vacuum created by a slow government response. We should also look critically at the 1.5 million unit donation of Remdesivir by the pharmaceutical company Gilead Sciences. While this feels like a generous gesture and is celebrated by the President and the press, underlying the gesture is a self-interested commercial motivation on the part of the company. It places them in a position of power in the public eye and influences in this way potential future legislation that could regulate the industry, which has been notorious for price gouging on patented products. In a world in which we properly evaluated the commercial and guardian moral precepts of enterprises, we would not allow 100,000 children under the age of five to die each year in India because Pfizer sets the price of their vaccine for pneumonia too high.
This series of writings is an attempt to design a new economic system that can keep all of the good parts of capitalism and respect its ceremony and traditions, but bring about an equitable society by swapping out one of the component parts that we’ve discovered to be the root cause of our social problems: our valuation of value. Instead of placing underlying value on wage labor as the metric of economic fitness, we can place structural incentives on the things that we truly value: a healthy environment, free time with our loved ones, and a thriving democratic system of governance and consensus building.
Democratic terrametrism is informed by previous critiques of capitalism. The greatest minds of political economy over time—from Adam Smith, Karl Marx, John Maynard Keynes, and more recently Thomas Picketty and Martin Hägglund, theorize about the tendency of the rate of profit to fall under capitalism. The theory holds that cycles of boom and bust are a feature of capitalism because it produces for the sake of profit rather than for the sake of human thriving. Large amounts of capital must be periodically lost through asset devaluation or physical destruction in order to allow for a rebuilding period during which living labor time can be efficiently be used to generate profit. As Hägglund explains in This Life:
The law of the tendential fall in the rate of profit is not a prediction but a structural dynamic that renders intelligible the counteracting tendencies under capitalism. It is because the rate of profit tends to fall that capitalist employers must intensify the exploitation of living labor and/or export the production facilities to locations where labor is cheaper to buy. Given the reduction of the socially necessary labor time, the only way to increase the extraction of relative surplus value—on which profit depends—is to intensify the exploitation of workers by lowering the relative value of their wages. Unemployment and the exportation of jobs are not something that can be removed under capitalism, but a necessary condition for the production of capital wealth. Lowering the relative value of wages and sustaining a rate of profit depends on a surplus population of the unemployed who are willing to work for less, either domestically or in poorer countries to which production is moved.Martin Hägglund
We have witnessed since the 1960s the advent of an era of counteracting tendencies to that tendency. Economists throughout history have speculated about counteracting tendencies. The sets of policies and norms commonly referred to as classical liberalism or neoliberalism—domestic austerity, globalization of labor markets, deregulation of financial markets and derivatives, dismantling of unions, increasing use of contract employees and adjuncts who receive no benefits, planned obsolescence in design (our plastic, single-use culture), overseas manufacturing, and a boom and bust cycle that creates periods of high unemployment—have led to stagnant wage growth, externalized environmental costs, and massive increases in income and wealth inequality.
Look at the magenta layer in the combined chart above. It is taken from the Federal Reserve Bank of St. Louis. It shows that profits have continued to go up over time, and the rate of profit increase has not fallen. But if you look at the blue layer, taken from a McKinsey study of the labor share of total compensation, you’ll see that continued profit increase seems to be dependent upon an almost exact mirror depression in the share of income given to wage labor. The numbers McKinsey uses are US labor wages and so this does not even account for the shifting of jobs to low-wage countries. This graph compares only one of the countervailing tendencies. I suspect if we overlay graphs of offshored jobs, deregulation, and union membership, we would see similar corollaries.
During an era of unprecedented productivity and automation, no benefits were remunerated to the essential workers whose wage labor made it possible. In fact they suffered greatly with stagnant wages (or falling wages when adjusted for the consumer price index), while most of the new wealth created over the past 30 years has gone to the top 1%. This more intense exploitation of labor is one of the counteracting tendencies that was predicted by Marx and others.
We are likely witnessing a late-stage systemic failure of capitalism at exactly the same time as we are witnessing the unsustainable nature of perpetual economic growth when that growth is measured using wage labor and the extraction of natural resources as the fundamental feedstock for that growth. In short, we can’t keep increasing the number of Earths we need to sustain ourselves. We only have the one. And we can’t keep dumping climate warming gases into our thin and delicate atmosphere. And we can’t keep depressing wages and finding new “developing” economies in which to manufacture our things. On top of all that, the year 2020 has brought us a pandemic coronavirus that has brought the global economy to its knees.
The way to get us out of this perfect storm is to make some surgical changes to the way that our economy operates. We can start to stimulate the economy, save capitalism from devouring itself, and heal the planet as soon as the system incentives of all these goals are aligned. Presently they are not.