Capital

The title of the book is World after Capital. One of my fundamental claims is that capital is no longer scarce. There is enough capital in the world to meet everyone's basic needs. That means meeting the individual needs of 7 billion or more people and the collective needs of the societies they live in. Using the language introduced earlier, capital is sufficient. And because population growth is decelerating, while technological progress is accelerating (due to digital technology), capital will no longer be the binding constraint for humanity.

It is tempting to look at this in terms of financial capital, but that again would be succumbing to the veil of of money, as was the case with the definition of scarcity. Dollar bills don't feed people. Gold bars can't be used as smart phones. The capital that matters is productive physical capital, such as machines and buildings.

Financial capital is not irrelevant. It is required both for the initial construction of physical capital and to meet the ongoing working capital needs of the economy. If I want to build a factory or a school, I need to pay the construction workers, the suppliers of machines, etc. before I can start collecting money. And in many businesses I pay some ongoing expenses every month before collecting revenues from customers. Cash outflows preceding cash inflows means a financing mechanism is required. To get the proper accumulation of physical capital, we therefore need to have effective ways of accumulating and allocating financial capital.

In the history of financial capital there have been many important innovations, such as corporations with limited liability, debt and equity issuance and trading, bank lending and more recently market place lending. The allocation of financial capital to projects through markets has been enormously successful, compared to attempts at various forms of centralized planning. It is the very success of the market-based approach that has now given us a physical capital base in the world that is large enough to meet our basic needs.

More recent innovations in finance have not contributed meaningfully to the proper creation and allocation of physical capital. Quite the opposite. They have contributed to the “financialization” of the economy: a growth in financial sector activities that is decoupled from or even harms the formation of physical capital. For instance, many derivatives and structured securities have resulted in severe misallocations by shifting risk. One example is the housing bubble that resulted in part as mortgage backed securities and CDOs appeared to remove all risk from capital flooding into construction.

What is the role of “human capital” in all of this? Human capital is the subset of all knowledge that embodied in a group of humans. So the question is better asked differently: what is the role of knowledge? The answer is that advances in knowledge are essential for making capital more effective. Even more fundamentally, knowledge is necessary for having physical capital in the first place.

You can theoretically have physical capital without financial capital but you cannot have physical capital without knowledge. You cannot build a machine, say an MRI, without a lot of knowledge in physics and engineering. In a world where everyone's basic needs are taken care of it would, however, be possible to build the same MRI without the need for financial capital. This is another example of the primacy of knowledge and one we will come back to later.

Interestingly, you can also have financial capital without physical capital and without meaningful knowledge accumulation. For instance, you can develop financial capital through trade or war or simply by convention as in the case of the island of Yap [40].

All of this is to say that we should never lose sight of the fact that financial capital ultimately serves no purpose in and of itself, other than possibly the gratification of ego. As great illustration of that imagine a Spanish Galleon full of raided gold sinking in a storm. The sailors aboard had ample access to financial capital, but what they really needed was more knowledge and better physical capital.

So now we will go ahead and examine whether physical capital is still a binding constraint when it comes to meeting basic needs. The approach I am taking is split in two pieces: Here in the main text I applying logic based on observations. The Appendix contains data and calculations to back up the arguments.

[NOTE: I have substantially rewritten the following section and moved many of the numbers to an Appendix. Still requires a lot more work.]

Individual Needs

The claim is that capital is no longer the biding constraint for meeting individual needs, not just for one individual but for everyone. This is especially true for the developed economies but increasingly true globally.

The primary strategies for meeting our power needs are breathing air, drinking water and eating farmed food.

There is plenty of air to breathe (one time reminder: please see the Appendix for backup on this and the following assertions), the key challenge today is having clean, breathable air. China and India are both struggling with that at the moment, but this is due to rapid development using outdated energy sources. The clean air achieved in industrialized countries shows that this is a temporary development stage.

Similarly there is plenty of water in the world for everyone to drink. There are distribution and access problems, including right here in the United States (e.g., the polluted water in Flint, Michigan). Again though, physical capital is not a binding constraint. We can even build new desalination plants in record time. [Example]

We have also made dramatic progress in farming. In fact, globally the amount of land required for farming has started to decline as a result of higher per acre productivity. We have made recent breakthroughs in vertical and automated farming. For instance, the world's larges vertical farm is currently under construction in Jersey City. The Japanese indoor farming company Spread is working on a fully automated facility that will be able to produce 30,000 heads of lettuce per day [47].

The discharge need is primarily addressed through modern sewage technology. Here too capital is no longer a binding constraint per se, but again there is a global distribution problem. To see how quickly this has the potential to change, consider the migration that has taken place in China from the country side into cities.

The Chinese construction boom also illustrates how quickly we can build shelter as a strategy to address the need for a controlled physical environment. In the US too we had a prior construction boom which was powered by artificially cheap mortgage credit. While a lot of housing was built in the wrong places it powerfully demonstrated our construction capacity.

Clothing is another strategy for addressing this need. The price of clothing has been falling in the United States and in many other parts of the world. Capital is not a constraint here and we can clothe everyone in the world many times over.

Similarly we have become very good at providing light. There is a great study that shows how the hours of light one can earn with 60 hours of labor have exploded in the United States from about 10 in 1800 to over 100,000 by 1990. We have made further progress since with LED lighting. That progress has also come to other parts of the world, for instance in the form of off grid solar powered lamps.

Now we come to a more difficult need, the one for healing. We read all the time how expensive healthcare has become and how it consumes an ever larger fraction of the economy, at least here in the United States. We have to ask though whether capital really is a binding constraint here. Again in industrialized countries this does no longer appear to be the case. We have plenty of hospital space and doctor's offices. We have extensive diagnostic facilities and can produce large quantities of medicine. The binding constraint instead is one of insufficient knowledge.

In learning we are also no longer capital constrained. This is rapidly true not just in industrialized nations but also globally due to the buildout of wireless networks and the increasing affordability of smartphones. We are not far away from a point in time when we have enough capital for anyone in the world to learn anything. The binding constraint here is not capital but the availability of affordable content and the time to learn (and to teach).

The final individual need, the one for meaning, is not and has never been constrained by capital.

Collective Needs

At first it might seem difficult to see how capital even relates to our collective needs as defined in the earlier chapter. How could capital have anything to do with such abstract concepts as motivation and coordination? Was capital ever a binding constraint here?

Capital clearly was not a binding constraint for reproduction, which societies thankfully accomplished a long time ago or we would not be here today.

But when it comes to allocation, capital was the crucial binding constraint during the Industrial Age. Not only were we terribly bad at making stuff at first but we also lacked the communications and transportation infrastructure to easily get goods to where they were needed.

Motivation was historically not capital constrained as we had many other solutions for the motivation need, including rewards and punishments. Nonetheless though capital provided a critical motivation breakthrough as we developed extensive markets with the ability to disseminate prices widely.

Coordination, on the other hand, was capital constrained for a long time due to limitations on communications. We can see this by considering that until fairly recently it was not possible to have a globally coordinated event. Today on the other hand we not only have a global nearly instantaneous communication network but also the ability to precisely position people or machines using GPS and other location services.

Finally our collective need for knowledge was capital constrained for a long time. Making books for instance was expensive and time consuming. Copies of books had to be made by humans introducing errors. The spread of knowledge was constrained by the need to create and move physical copies. We have now left all of those capital constraints on knowledge behind.

Enablers

[Note: this section to be expanded to indicate more clearly how dramatic these expansions have been]

Our progress on enablers is another way to understand why capital is no longer the binding constraint. We have had massive breakthroughs on all four during the Industrial Age: energy, resources, transformation, and transportation.

The biggest breakthrough in energy was the development of electricity. It allowed us to apply energy in highly precise fashion. Our remaining challenges are all related to the production, storage and distribution of electricity. Further improvements in energy will let us solve needs in new ways, but we are not fundamentally energy constrained today.

Resources were also completely transformed during the Industrial Age through mining, which in turn was enabled by progress with transportation (rail) and energy (steam power).

Our ability to transform improved radically during the Industrial Age. For instance, chemistry allowed us to make rubber synthetically which previously had to be harvested from trees.

Transportation went from human powered to machine powered dramatically changing our capabilities. We went from walking to traveling to space in rockets. We can fly across continents and oceans on commercial flights and reach any major city by air in just a day (or two at most).

As an important reminder before moving on. I am not claiming that everyone's basic needs are being met today. Far from it. Nor am I arguing anywhere that governments should be using central planning or meeting people's basic needs through government run programs such as food stamps or subsidized housing (in fact quite the opposite, as I will argue later when writing about economic freedom).

The point of this chapter is simply to argue that physical capital is no longer the constraint in meeting everyone's basic needs. We are not dealing with a problem of capital scarcity (in my foundational sense) but with one of allocation and distribution.

Capital is no longer scarce but sufficient. We should consider that the great success of capitalism.

We now face a new scarcity, however, that of attention, and capitalism will not solve it for us without changes in regulation and in self-regulation. Before we can examining the scarcity of attention though we need to understand how digital technologies are changing the role of labor.

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