A century ago in 1916, after decades of deadly protests, union railroad workers won the right to an eight-hour a day, six-day work week. Other workers would not earn the same rights until 1933.
The latest trend in corporate management today is unlimited vacation time. Employees at Netflix, where the concept was made famous, take on average almost five weeks a year. The world is changing.
Capitalism evolves. That evolution is beginning to take us in some strange directions. A vastly freer, wealthier, and better informed world is putting new pressures on governments and businesses. As governments struggle to adapt, corporations are taking on a social role that few would have imagined for them in the past.
A new era of capitalism may see businesses behaving less like rapacious machines and more like other social institutions. Our continuing devolution of power away from traditional institutions is creating an odd and awkward market pressure on businesses to operate under a broader, smarter balance sheet. We may be entering an era of social capitalism, in which ruthless, narrow-minded profit-optimization simply fails to compete successfully in the marketplace.
Defining the characteristics of an era is an imprecise business, like trying to attach a personality to a generation. Looking back at the interactions between business and politics over time, it is possible to see an outline of changing interests. Those changes are often punctuated by wider historical forces, making it possible to describe fairly discreet periods in which one set of traits were particularly dominant. Using this approach we can roughly describe three historical eras of capitalism and perhaps perceive the emergence today of a fourth.
War Capitalism
War capitalism was an economic order built on the violent expropriation of land and labor to secure newly valuable commodities. This economic order fed the development of the next by tearing down the pillars of feudalism and creating conditions in which mechanical production methods could begin to emerge. By disrupting a long-established political and economic order that had squashed previous efforts at technological development, war capitalism opened a door to the industrial age.
Industrial Capitalism
Out of the new commodity surpluses and political upheaval rendered by war capitalism emerged industrial capitalism. This is the form of capitalism we most associate with the term “capitalism” itself, as industrial capitalism produced Karl Marx and the academic field of Economics.
Industrial capitalism is defined by the use of machines on a mass scale to convert raw materials into products. Where the most valuable output under war capitalism was still commodities, the most valuable capital was still land, and the labor force was mostly enslaved, industrial capitalism changed the equation in ways that had serious political impact.
Under industrial capitalism the most valuable outputs were consumer goods and, eventually, other machines. The most valuable capital was machinery. Labor was not bound to any particular producer, and we began to see the emergence not only of skilled labor, but of a very small tier of engineering labor with the rare potential to become capital owners in their own right.
For our purposes the most important factor distinguishing the industrial age from the brutality of war capitalism is the demand for a relatively more skilled, disciplined work force, and the need to divorce capital owners from a requirement to permanently support and maintain that labor force. Our memories of that era are marked by reference to cruel working conditions, but that only becomes apparent with a backward-looking view. Compared to war capitalism, common laborers experienced a degree a power that had never before been seen.
Industrial demands fed the growth of the activist nation-state. Trade protections, education, transportation infrastructure and other demands necessary for the growth of large business enterprises could only be delivered by a strong state. That demand fed the central conflict of the industrial age, a power struggle between laborers and capital owners over control of that state.
Building a political entity with the requisite size and power to meet industrial demands strained the legitimacy of hereditary states. Delivering the broader legitimacy needed to maintain the strong state that capital owners wanted, simultaneously eroded the political power of capital owners. This cycle set up near-constant internal conflict between an increasingly powerful labor pool and capital owners.
Most of US history, and in fact the US Constitution itself, is shaped by the need to maintain both of the earliest forms of capitalism inside the same political union. By the end of the 18th century Northern states had already begun their industrial development while the South remained committed to war capitalism. Political distortions that rose from that complex collection of tensions have never been fully reconciled.
Knowledge Capitalism
Rising demand for skilled labor, and especially skilled engineers led capital owners to sponsor the development of mass education and technological advance. By the second half of the 20th century in the US an entirely new category of capital enterprise had emerged in which the firm’s most valuable capital was information.
Perhaps the earliest example, born deep in the Industrial Age, was General Electric. By the 1950’s companies like IBM, HP, Walt Disney, Texas Instruments and Hughes Aviation had upended the older labor/capital relationship. These new firms enjoyed massive profit margins by leveraging creative capital.
Sometimes their products were tangible, but their capital pool was based largely on human talent. Labor working in these firms enjoyed material rewards beyond anything workers had earned before. With that wealth and importance came mass political power, exercised with a quality and information level that had never before been achieved. Though democracies had existed in the past, real political power had never been so broadly distributed in previous civilizations.
More importantly, these new firms would finally sever the ancient relationship between wealth and land. By doing so, firms engaged in knowledge capitalism became uniquely global in a way that had been impossible before. Where capital had helped to build the nation state in previous eras, now it was beginning to dismantle state power. With a new working class more powerful and wealthy than any that had previously existed, the mass demand for powerful nation-states began to weaken.
The regulatory state, set up to satisfy the needs of an industrial labor force, is at constant tension with the disruptive tendencies of capitalism, accelerated to a blur by the growth of technology. Those with sunken investments in old, antiquated capital often leverage the regulatory state which they once so loathed to protect their ability to collect rents from capital whose value would otherwise be depleted by competition with technology. In knowledge capitalism a large portion of the former working class is now fiercely at odds with the big government infrastructure their parents and grandparents helped to create.
While knowledge capitalism, which continues to dominate life in the US today, introduces better working conditions than industrial laborers dared imagine, it suffers from a disturbing flaw. A global trade in creative capital has a bent toward fantastically unequal outcomes. While rhetoric has focused on the 1%, the real disruption in knowledge capitalism is the way it has sheared away the old middle class political consensus achieved in the industrial era.
There’s nothing new about a few hundred families achieving extraordinary wealth. The political problem undermining knowledge capitalism is the way it has massively enriched the top quarter or so of the former middle class, aligning their lifestyles and interests much more closely with the traditional rich rather than the remaining working class. It was a middle class ideology that brought stability to industrial capitalism. That ideology no longer makes sense under knowledge capitalism, but it has not been replaced. Tensions rising from an anachronistic understanding of the role of the state are perhaps giving rise to a new era of capitalism.
Social Capitalism?
We may be experiencing a new era in business and capital development. Over the past thirty years, how many of the most pressing social problems in our world have been solved by political action? How many have been solved by corporations?
What has been the role of corporations in responding to climate change, AIDS, racial injustice, women’s rights, mass education, access to water, food, housing or health care? America’s largest ever reduction in greenhouse gas emissions was achieved thanks to the fracking boom of the past decade. Our next great step in carbon reduction is coming from solar technology and electric vehicles developed by Silicon Valley firms.
An older stereotype of the corporate bully seemed to be confirmed recently when a wealthy hedge fund manager bought the rights to a critical AIDS drugs and hiked its price. Within a week a competitor emerged charging $1 per dose.
Social capitalism is an economic order in which social and political forces come together to cause market transactions to more competently incorporate formerly “external” costs. Industrial capitalists paid no price for polluting a river or destroying a forest. Under social capitalism, an increasingly equal distribution of power across a society provides methods to force those costs to be factored into market mechanisms. Under social capitalism, the division between labor and capital blurs to near-irrelevance. Meanwhile, an expanded commercialization of nearly every valuable resource leads to a sort of “commodification of everything.”
A strange thing happened earlier this year when the State of Indiana tried to legitimize anti-gay discrimination in the marketplace. One big tech company, Salesforce.com, immediately stood up against the move, triggering a cascade of similar actions from other tech companies. Indiana’s political leadership was so blindsided by this unprecedented move that it reversed course within weeks. Understanding why a tech company would do this while industrial companies were mostly silent helps explain the meaning and importance of social capitalism.
Salesforce had nothing to gain from this move in terms of its appeal to customers, access to capital, or direct profit impact. Here’s what Salesforce’s CEO said about the move:
Today we are canceling all programs that require our customers/employees to travel to Indiana to face discrimination.
That statement identifies the hinge on which social capitalism turns – the power of employees. Understanding what drives the relatively more humane and responsible behavior of corporations under social capitalism means recognizing the massive devolution of power from capital owners to employees.
Salesforce took that move because it could not tolerate a situation in which its employees might be mistreated on the job. They could not tolerate that situation, because they cannot afford to lose an employee. Under war capitalism, labor was performed by slaves. Under industrial capitalism labor was performed by barely skilled, poorly paid, largely interchangeable individuals who could be disposed of and replaced by a broken cog. Under knowledge capitalism employees began to emerge as a resource in their own right, with their contributions converted into capital which they might accumulate on their own. Under social capitalism that increased economic heft is converted into political influence. That political influence finally begins to reshape the economic climate so that formerly external costs in form of pollution, violence, discrimination, and resource destruction finally find their way onto the corporate balance sheet, making businesses begin to function like political partners rather than rivals of labor.
What will be the greatest weakness of social capitalism? A relentless libertarian ethic may demolish critical social institutions. Social capitalism places a remarkable new premium on creativity, but it dangerously devalues every other value from family to religion to public service. It is early, but it appears that by splitting up the middle class more or less finally, it threatens to create a dangerous social disruption.
Social capitalism is in some ways fairer than previous forms of capitalism. However, in driving inequality much deeper into our society, it is tearing away many of the older social bonds we once relied on to soften economic outcomes. Not everyone gets to participate in social capitalism. Its benefits flow disproportionately toward those who actually work for information-driven firms. That’s a large minority, but still a minority. As technology breeds advanced automation, that minority is likely to shrink.
The destruction of older forms of social capital is weakening communities and ultimately shaking the foundations of the democratic nation-state. The ultimately question seems to be this: will the emergence of the social capital business model alleviate enough of the previous order’s injustices to justify its own flaw. Alternatively, will the political systems of the old Western democracies adapt fast enough to recognize and minimize the destruction brought by this exciting new development?
Evolution is relentless. Each new development is paired with new demands. There is no Nirvana, no Utopia. Happy outcomes depend on aggressive, intelligent adaptation. Are we ready to adapt to a new age of capitalism? Someone will. Some won’t.
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