Capitalism 3.0: Chapter 2
A Short History of Capitalism
They hang the man and flog the woman
That steal the goose from off the common,
But let the greater villain loose
That steals the common from the goose.
—English folk poem, ca.1750
Before we consider how to upgrade our economic operating system, it’s worth contemplating how it came to be. Two parallel threads emerge: the decline of the commons and the ascent of private corporations.
The Decline of the Commons
In the beginning, the commons was everywhere. Humans and other animals roamed around it, hunting and gathering. Like other species, we had territories, but these were tribal, not individual.
About ten thousand years ago, human agriculture and permanent settlements arose, and with them came private property. Rulers granted ownership of land to heads of families (usually males). Often, military conquerors distributed land to their lieutenants. Titles could then be passed to heirs—typically, oldest sons got everything. In Europe, Roman law codified many of these practices.
Despite the growth in private property, much land in Europe remained part of the commons. In Roman times, bodies of water, shorelines, wildlife, and air were explicitly classified as res communes, resources available to all. During the Middle Ages, kings and feudal lords often claimed title to rivers, forests, and wild animals, only to have such claims periodically rebuked. The Magna Carta, which King John of England was forced to sign in 1215, established forests and fisheries as res communes. Given that forests were sources of game, firewood, building materials, medicinal herbs, and grazing for livestock, this was no small shift.
In the seventeenth century, John Locke sought to balance the commons and private property. Like others of his era, he saw that private property doesn’t exist in a vacuum; it exists in relationship to a commons, vis-à-vis which there are takings and leavings. The rationale for private property is that it boosts economic production, but the commons has a rationale, too: it provides sustenance for all. Both sides must be respected.
Locke believed that God gave the earth to “mankind in common,” but that private property is justified because it spurs humans to work. Whenever a person mixes his labor with nature, he “joins to it something that is his own, and thereby makes it his property.” But here Locke added an important proviso: “For this labor being the unquestionable property of the laborer,” he wrote, “no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others.” In other words, a person can acquire property, but there’s a limit to how much he or she can rightfully appropriate. That limit is set by two considerations: first, it should be no more than he can join his labor to, and second, it has to leave “enough and as good” in common for others. This was consistent with English common law at the time, which held, for example, that a riparian landowner could withdraw water for his own use, but couldn’t diminish the supply available to others.
Despite Locke’s quest for balance, the English commons didn’t last. In the eighteenth and nineteenth centuries, the movement to enclose and privatize it accelerated greatly. According to historian Karl Polanyi, this enclosure was the great transformation that launched the modern era. Local gentry, backed by Parliament, fenced off village lands and converted them to private holdings. Impoverished peasants then drifted to cities and became industrial workers. Landlords invested their agricultural profits in manufacturing, and modern times, economically speaking, began.
One observer of this transformation was Thomas Paine, America’s pro-independence pamphleteer. Seeing how enclosure of the commons benefited a few and disinherited many others, Paine proposed a remedy—not a reversal of enclosure, which he considered necessary for economic reasons, but compensation for it.
Like Locke, Paine believed nature was a gift of God to all. “There are two kinds of property,” he wrote. “Firstly, natural property, or that which comes to us from the Creator of the universe—such as the earth, air, water. Secondly, artificial or acquired property—the invention of men.” In the latter, he went on, equality is impossible, but in the former, “all individuals have legitimate birthrights.” Since such birthrights were diminished by enclosure, there ought to be an “indemnification for that loss.”
Paine therefore proposed a “national fund” that would do two things:
[Pay] to every person, when arrived at the age of twenty-one years, the sum of fifteen pounds sterling, as a compensation in part, for the loss of his or her natural inheritance, by the introduction of the system of landed property: And also, the sum of ten pounds per annum, during life, to every person now living, of the age of fifty years, and to all others as they shall arrive at that age.
A century and a half later, America created a national fund to do part of what Paine recommended—we call it Social Security. We’ve yet to adopt the other part, but its basic principle—that enclosure of a commons requires compensation—is as sound in our time as it was in Paine’s.
In the years since European settlement, America developed its own relationship with the commons, which in our case included the vast unfenced lands we took from native people and Mexico. Some Americans saw our commons as the soil from which to build a nation of educated small proprietors. They passed laws such as the Land Ordinance of 1785, the Homestead Act, the Morrill Land Grant College Act, and the Reclamation Act, which allocated family-size plots to settlers and financed schools to educate them. Many also cherished these lands for their wildness and beauty; they created national parks and wilderness areas.
At the same time, others in America lured Congress into endless giveaways, acquired huge chunks of the commons for themselves, and made fortunes. Two vignettes, occurring more than a century apart, illustrate this continuing process.
In 1877, Congress passed the Desert Land Act, which removed several hundred square miles from settlement under the Homestead Act. The lands were said to be worthless, and were to be sold for 25 cents an acre to anyone promising to irrigate them. In fact, much of the land was far from worthless. A chunk of it eyed by James Haggin and Lloyd Tevis—two cronies of California Senator Aaron Sargent—was located near the Kern River, and was partially settled already. By hiring vagabonds to enter phony claims, and then transferring those claims to themselves, Haggin and Tevis acquired 150 square miles before anybody else in California had even heard of the Desert Land Act. Oil was later found beneath the land, conferring a huge windfall on the heirs of the two land-grabbers.
In 1995, Congress decided it was time for Americans to shift from analog to digital television. This required a new set of broadcast frequencies, and Congress obligingly gave them—free of charge—to the same media companies to which it had previously given analog frequencies free of charge. Senator Bob Dole, the Republican leader, declared: “It makes no sense that Congress would create a giant corporate welfare program. . . . The bottom line is that the spectrum is just as much a national resource as our national forests. That means it belongs to every American equally.” But, as they had before, the media companies got their free airwaves anyway.
If an accounting could be made, private appropriations of the commons in America alone would be worth trillions of dollars. The plot is almost always the same: when a commons acquires commercial value, someone tries to grab it. In the old days, that meant politically connected individuals; nowadays, it means politically powerful corporations. What’s astonishing about these takings isn’t that they occur, but how unaware of them the average citizen is. As former Secretary of the Interior Walter Hickel said, “If you steal $10 from a man’s wallet, you’re likely to get into a fight, but if you steal billions from the commons, co-owned by him and his descendants, he may not even notice.”
Enclosure, in which property rights are literally taken or given away, is half the reason for the commons’ decline; the other half is a form of trespass called externalizing—that is, shifting costs to the commons. Externalizing is as relentless as enclosure, yet much less noticed, since it requires no active aid from politicians. It occurs quietly and continuously as corporations add illth to the commons without permission or payment.
The one-two punch of enclosure and externalizing is especially potent. With one hand, corporations take valuable stuff from the commons and privatize it. With the other hand, they dump bad stuff into the commons and pay nothing. The result is profits for corporations but a steady loss of value for the commons.
The Ascent of Corporations
When I speak in this book of corporations, I’m speaking of a very special institution: the publicly traded stock corporation. This is an institution with a board of directors, a set of executive officers, and a fluctuating set of shareholders to whom the directors and officers are legally accountable. These corporations have an explicit mission: to maximize return to stock owners.
When Adam Smith wrote The Wealth of Nations in 1776, there were barely a handful of corporations in Britain or America. The dominant business form was the partnership, in which small groups of people known to each other ran businesses they co-owned. In the public’s mind—as in Smith’s—the corporate form, in which managers sold stock to strangers, was inherently prone to fraud. Numerous scandals supported this view. Yet as the scale of enterprise grew, partnerships proved unable to aggregate enough capital. The great advantage of corporations was that they could raise capital from strangers. In this, they were aided by laws limiting stockholders’ liability to the amounts they had invested.
In early America, state legislatures retained some control over corporations by granting charters to them one at a time. Typically, the charter specified a business—such as building a canal and then charging tolls—that a corporation was authorized to conduct. The corporation could do nothing else, and after a certain number of
years, its charter expired.
These limitations didn’t last long. By the mid-nineteenth century, corporations could live forever, engage in any legal activity, and merge with or acquire other corporations. In 1886, the U.S. Supreme Court declared that corporations were “persons” entitled under the Fourteenth Amendment to the same protections as living citizens. In effect, a corporate franchise became a perpetual grant of sovereignty, with the sovereign powers consisting of immortality, self-government, and limited liability.
These changes not only gave corporations great economic power; they conferred political power as well. Unlike average citizens, corporations have large flows of money at their disposal. With this money they can hire lobbyists, sway public opinion, and donate copiously to politicians. They can also sue, or threaten to sue, whenever it serves their needs. The one thing they can’t do is vote, but with all their extra powers, voting is hardly necessary.
By the end of the twentieth century, corporate power—both economic and political—stretched worldwide. International agreements, promoted by the United States, not only lowered tariffs but extended corporate property rights and reduced the ability of sovereign nations to regulate corporations differently. In short, what corporations have wanted and largely won is a homogeneous global playing field around which they can freely move raw materials, labor, capital, finished products, tax-paying obligations, and profits.
All of this might be well and good, were it not for two things. First, despite the Supreme Court’s holding, the modern corporation isn’t a real person. Instead, it’s an automaton designed to maximize profit for stockholders. It externalizes as many costs as it possibly can, not because it wants to, but because it has to. It never sleeps or slows down. And it never reaches a level of profitability at which it decides, “This is enough. Let’s stop here.” The second difficulty is that these automatons keep getting bigger and more powerful. In 1955, sales of the Fortune 500 accounted for one-third of U.S. gross domestic product; by 2004 they commanded two-thirds. These few hundred corporations, in other words, enveloped not only the commons but also millions of smaller firms organized as partnerships or proprietorships (see figure 2.1).
From Shortage to Surplus Capitalism
Sometime around 1950, capitalism entered a new phase. Until then, poverty was a widely shared American experience. Wages were low, hours were long, and unemployment was a wolf at almost every door. In the 1930s, it reached 25 percent.
This changed in the period following World War II. In 1958, economist John Kenneth Galbraith wrote a best-seller called The Affluent Society in which he noted that scarcity of goods was now a thing of the past for a majority of Americans. “The ordinary individual has access to amenities—foods, entertainment, personal transportation and plumbing—in which not even the rich rejoiced a century ago,” Galbraith observed. “So great has been the change that many of the desires of the individual are no longer even evident to him. They become so only as they are synthesized, elaborated, and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions.”
This was a major phase change for capitalism. Before, people wanted more goods than the economy could provide. Demand, in other words, exceeded supply, and we lived in what might be called shortage capitalism. We could also call it Capitalism 1.0.
After the change, we shifted into surplus capitalism, or what I call Capitalism 2.0. In this version, there’s no limit to what corporations can produce; their problem is finding buyers. A sizeable chunk of GDP is spent to make people want this unneeded output. And credit is lavishly extended so they can buy it.
This historic shift can be described another way. A century ago, our chief scarcity was goods. It thus made sense to sacrifice other things in pursuit of goods, and capitalism was masterful at doing this. Today we’re waist-deep in thneeds, and our scarcities are different. Among the middle classes, the top scarcities, I’d say, are time, companionship, and community (see figure 2.2). Among the poor, there remains a lack of goods, but that lack isn’t due to a shortage of production capacity—it’s due to the poor’s inability to pay. The critical scarcity here, in other words, is income.
Similarly, in the early capitalist era, land, resources, and places to dump wastes were abundant; aggregated capital was the scarcest factor. That’s why rules and practices developed that put capital above all else. In the twenty-first century, however, this is no longer the case. As economist Joshua Farley has noted, “If we want more fish on our dinner plates, the scarce factor isn’t fishing boats, it’s fish. If we want more timber, the scarce factor isn’t sawmills, it’s trees.”
As a businessman and investor, I’ve benefited personally from the primacy of capital and am not keen to end it. But as a citizen, I have to recognize that times have changed. The world is awash with capital, most of it devoted to speculation. By contrast, healthy ecosystems are increasingly scarce. If anything deserves priority, it’s nature’s capital, yet capitalism rolls on with financial capital as its king.
I should note that my numbering of capitalism’s stages isn’t meant to be definitive. I’ve heard some people say that capitalism has had three stages, and others that it’s had four. Such counts are inevitably arbitrary. The point I wish to make is that capitalism changes. It’s rigid in the sense that those who are privileged have plenty of power with which to protect their privileges, but it’s not immutable. We’ve had at least two versions, and we can have another.
Three Pathologies of Capitalism
The anachronistic software that governs capitalism today leads, willy-nilly, to three pathologies: the destruction of nature, the widening of inequality, and the failure to promote happiness despite the pretense of doing so. Let’s look at these pathologies separately, then explore how they’re linked.
Destruction of Nature
Humans began ravaging nature long before capitalism was a gleam in Adam Smith’s eye. Surplus capitalism, however, has exponentially enlarged the scale of that ravaging.
I promised no grim numbers, but I’ll cite just one. In 2005, a United Nations–sponsored research team reported that roughly 60 percent of the ecosystems that support life on earth are being used unsustainably. Such overuse, reported the Millennium Ecosystem Assessment, increases the likelihood that abrupt, nonlinear changes will seriously affect human well-being. The potential consequences include floods, droughts, heat waves, fishery collapse, dead zones along coasts, sea level rises, and new diseases.
Thoughtful people can debate whether population or technology is more responsible than capitalism for our loss of ecosystems and biodiversity. No doubt all play a role. But most of the damage isn’t done by the numerous poor; it’s done by the far fewer rich. The United States, for example, with 5 percent of the world’s people, has dumped nearly 30 percent of our species’ cumulative carbon dioxide wastes into the atmosphere. It’s our excess consumption, rather than the poor’s meager gleanings, that’s the larger problem, and surplus capitalism is the handmaiden of that excess.
Technology, of course, greatly magnifies our impact on the planet, but technology by itself is mere know-how. It’s the choice of technologies, and the scale at which they’re deployed, that affects the planet. Electricity, for example, can be generated in many ways. When corporations choose among them, however, their choice is driven not by “least harm to nature,” but by “most bang for the buck.” And, in doing their calculations, they count the cost of nature as zero. Hence we have lots of fossil-fuel burning and little use of solar, wind, and tidal energy.
The same calculus drives corporations’ approach to agriculture, logging, and many other activities. The result is at once humbling and chilling: capitalism as we know it is devouring creation. It’s living off nature’s capital and calling it growth.
Widening of the Gap
Most Europeans who settled North America hoped to leave feudal inequities behind. They envisioned a competitive meritocracy rather than a permanent aristocracy. Unfortunately, it was not to be. Slavery was the first anomaly; it took a civil war to end that. Then came the epic grabs of land and robber barons, neither of which we’ve undone.
Fast-forward to my generation’s watch. If ever there was a time when a rising tide should have lifted all boats, this was it. After World War II, America went on an almost uninterrupted growth binge. Per capita economic output, adjusted for inflation, tripled between 1950 and the end of the century. The stock market rose about fortyfold. Mutual funds and tax-sheltered retirement accounts spread stock ownership to the masses. In the 1960s, the federal government launched an all-out War on Poverty. And yet, at the end of the century, the distribution of private wealth was more unequal than it had been in 1950. In cold numbers, the top 5 percent owned more than the bottom 95 percent (see figure 2.3).
Why did this happen? There are many explanations. One is that welfare kept the poor poor; this was argued by Charles Murray in his 1984 book Losing Ground. Welfare, he contended, encouraged single mothers to remain unmarried, increased the incidence of out-of-wedlock births, and created a parasitic underclass. In other words, Murray (and others) blamed victims or particular policies for perpetuating poverty, but paid scant attention to why poverty exists in the first place.
There are, of course, many roots, but my own hypothesis is this: much of what we label private wealth is taken from, or co-produced with, the commons. However, these takings from the commons are far from equal. To put it bluntly, the rich are rich because (through corporations) they get the lion’s share of common wealth; the poor are poor because they get very little.
Another way to say this is that, just as water flows downhill to the sea, so money flows uphill to property. Capitalism by its very design maximizes returns to existing wealth owners. It benefits, in particular, those who own stock when a successful company is young; they can receive hundreds, even thousands of times their initial investments when the company matures. Moreover, once such stockholders accumulate wealth, they can increase it through reinvestment, pass it on to their heirs, and use their inevitable influence over politicians to gain extra advantages—witness the steady lowering of taxes on capital gains, dividends, and inheritances. On top of this, in the last few decades, has been the phenomenon called globalization.The whole point of globalization is to increase the return to capital by enabling its owners to find the lowest costs on the planet. Hence the stagnation at the bottom alongside the surging wealth at the top.
A critical piece of this analysis is that very few new shares of corporate stock are issued. As author Marjorie Kelly has pointed out, most established corporations finance growth through retained earnings and debt. They’re just as likely to buy back outstanding shares as to issue new ones. Consequently, old wealth is rarely diluted. When new money flows into the stock market, its main effect is to increase the wealth of existing stockholders and their fortunate heirs. Thus, of the total gain in marketable wealth that occurred in the United States between 1983 and 1998, more than half went to the top 1 percent.
The companies that do issue new stock are the young ones—the Microsofts, Apples, and Googles. Entertainers and athletes aside, most new multimillionaires are early stockholders in corporations like these. In these cases, however, the distribution of gains is so tilted in favor of these early stockholders that the skewed pattern of wealth distribution is replicated. New wealth joins old wealth, but the concentration remains the same. There’s no mechanism for dispensing wealth—even new wealth—more evenhandedly.
Why Aren't Americans Happy yet?
If thneeds were the path to happiness, most Americans would be delirious by now. But the accumulation of goods is only one means among many in the pursuit of human satisfaction. Everyone except economists seems to know this.
Economists take as a given that consuming more goods makes people happier, not just when they’re poor, but at all times. Yet this assumption is not only illogical, it’s contradicted by numerous surveys. Logically, the law of diminishing returns should apply here as elsewhere; as people acquire more goods, the marginal benefit of each additional good should decline toward zero. And research confirms this is so.
Since the early 1970s, the General Social Survey has asked Americans the same question: Taken all together, how would you say things are these days—would you say you are very happy, pretty happy, or not too happy? Though we’ve gotten considerably more accessorized since the question was first asked, our answers have barely changed. In 1972, 31 percent of Americans considered themselves very happy; in 2004, it was 33 percent (see figure 2.4). A noneconomist might conclude that, if happiness is our goal, we’ve wasted trillions of dollars.
Why isn’t economic growth making us happier? There are many possibilities, and they’re additive rather than exclusive. One is that, once material needs are met, happiness is based on comparative rather than absolute conditions. If your neighbors have bigger houses than you do, the fact that yours is smaller diminishes your happiness, even though your house by itself meets your needs. In the same way, more income wouldn’t make you happier if other people got even more. That’s why an affluent country can get richer without its citizens getting happier.
A second reason is that surplus capitalism foments anxiety. Millions live one paycheck, or one illness, away from disaster. When disaster strikes, the safety nets beneath them are thin. And everyone sees jobs vanishing as capital scours the planet for cheap labor.
Another reason is that surplus capitalism speeds up life and creates great stress. Humans didn’t evolve to multitask, sit in traffic jams, or work, shop, and pay bills 24/7. We need rest, relaxation, and time for companionship and creativity. Surplus capitalism can’t give us enough of those things.
Similarly, its nonstop marketing message—you’re no good without Brand X—breeds the opposites of gratitude and contentment, two widely acknowledged precursors of happiness. According to the Union of Concerned Scientists, the average American encounters about three thousand such messages each day. No wonder we experience envy, greed, and dissatisfaction.
Waiting for 3.0
Let’s summarize the history of capitalism thus far. Since arising in the eighteenth century, capitalism has changed the face and chemistry of the earth. It keeps doing so, despite signals of planetary peril, like a runaway steam engine without a governor. It has built mountains of private wealth, but much of that wealth was taken from the commons, and a great deal of it adds little to our happiness. Its main actors, profit-maximizing corporations, are essentially out of control, and the fruits of their exertions are dispensed in a highly unequal way.
Why does surplus capitalism behave this way? It’s possible that we consistently hire bad CEOs, but I think otherwise. I think it’s the operating system that causes most CEOs to act not with the next generation, but with the next quarterly statement, foremost in mind. This suggests that, if we want to change the outcomes of Capitalism
2.0, we have to upgrade its operating system.
In Part 2 I’ll describe what a new operating system could look like. But first, in the next two chapters, I’ll explain why other remedies, such as more regulation or more privatization, won’t fix our current system’s flaws.
- “For this labor . . .”: John Locke, Second Treatise of Government (Indianapolis: Hackett, 1980 [originally published 1690]), chapter 5, section 27.
- Privatization, the great transformation: Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 1960 [originally published 1944]).
- “[Pay] to every person”: Thomas Paine, Agrarian Justice [originally published 1797]), sections i04, i05, 22 and 23.
- “It makes no sense . . .”: Bob Dole’s statement on the spectrum giveaway. See also Ralph Kinney Bennett, “The Great Airwaves Giveaway,” Reader’s Digest, June 1996.
- “If you steal $10 . . .”: Walter Hickel, Crisis in the Commons: The Alaska Solution (Oakland, Calif.: ICS Press, 2002), p. 217.
- a handful of corporations: Adam Smith, The Wealth of Nations (London: Penguin Books, 1982 [originally published 1776]).
- corporations were persons”: The Supreme Court decision that established corporate personhood was Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886).
- Fortune 500 sales: I computed the annual sales of Fortune 500 corporations from data available (for a fee) on Fortune magazine’s website.
- “So great has been the change . . .”: John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1958), p. 2.
- scarce factor is trees: See WorldChanging.
- capitalism’s stages: I’m pleased to note that ecological economist Herman Daly has a two-stage schema similar to mine. Daly’s focus is on the world in which the human economy resides. His dividing line is between an “empty world” and a “full world.” In the former, nature is abundant; in the latter, it’s scarce.
- consequences of ecosystem overuse: Millennium Ecosystem Assessment, Ecosystems and Human Well-Being: Synthesis Report (Washington, D.C.: Island Press, 2005), p. 1.
- U.S. ecosystem damage figures: Total CO2 emissions from fossil fuel use and cement production since 1451 equal 290 billion tons. U.S. historical emissions have been 84 billion tons since 1800. Thus, the proportion attributable to U.S. use is 29 percent.
- welfare keeps the poor poor: Charles Murray, Losing Ground: American Social Policy, 1950–1980 (New York: Basic Books, 1984).
- how corporations finance growth: Marjorie Kelly, The Divine Right of Capital (San Francisco: Berrett-Koehler, 2001), p. 33.
- marketable wealth gain in U.S. between 1983 and 1998: Edward N. Wolff, “The Rich Get Richer,” American Prospect, Feb. 12, 2001.
- General Social Survey: Richard Layard, “Happiness: Has Social Science a Clue?” Lionel Robbins Memorial Lecture, Mar. 3–5, 2003, London School of Economics.
- marketing messages: Michael Brower and Warren Leon, The Consumer’s Guide to Effective Environmental Choices: Practical Advice from the Union of Concerned Scientists. (New York: Three Rivers Press, 1999).
This is a chapter from Capitalism 3.0: A Guide to Reclaiming the Commons (e-book).
Previous: Chapter 1. Time to Upgrade | Table of Contents | Next: Chapter 3. The Limits of Government