5 August 2015

The information economy isn’t killing capitalism – it’s driving it

By Julian Adorney

People who believe that capitalism only refers to large, powerful multinational corporations are missing some of the key elements of free markets.

In a surprisingly influential article in the Guardian, Paul Mason argues that the system-wide changes occurring in the economy are early symptoms of “postcapitalism.” But the changes he describes—the open-source movement and a spread of information—show the world is more capitalist than ever.

Mason claims that we’re shifting from a price-based economy to something more collaborative, with the emergence of open-source coding and Wikipedia. In fact, these systems are capitalist by nature. Capitalism is a system where individuals trade for things they don’t have, helping others in order to help themselves. It is fundamentally about people trading value for value (whether monetary or not) in order to enrich themselves. In open source coding, there are millions of trades happening every day. What prevents some people from seeing these is that the ‘price’ of each trade is typically not monetary. Instead, they’re examples of what Austrian economist Ludwig von Mises termed “psychic profit”–the personal gain someone gets from an action, even if the action yields no monetary profit.

Spontaneous collaborations like open source software are full of psychic profit. A coder applies a patch to a piece of software so that he can list it on his resume. On Reddit, another example of supposedly “free” spontaneous collaboration, you must often spend time contributing to the community before community users will follow a link that you post to your website. The time spent contributing is a price you pay for the benefit of visitors to your website. So long as people have wants and are willing to work to satisfy them—whether to gain prestige in a community, or to obtain web traffic—prices will be a part of humanity. The fact that the monetary price has fallen to $0 simply means that capitalism is evolving.

Many will claim that these collaborations aren’t capitalist because the end result isn’t a private product. But the profit is still private: if an engineer contributes to an open-source project and builds prestige in the community, that prestige is his. This represents a shift in capitalism, but not something completely different.

Mason claims that the information age heralds the end of capitalism, but capitalism thrives on information. Most Economics 101 textbooks assume that consumers possess perfect information, which enables them to make rational choices in (for instance) what firm to patronize. Greater dissemination of information allows producers and consumers in a capitalist economy to make more informed choices. The Internet proved to be a game-changer for consumers by allowing them to rate products online for others to see. Online review sites like Yelp enable consumers to send signals to each other about a firm’s level of service and caliber of products, enabling better market regulation of quality. Rather than spelling the end of capitalism, this flow of information is essential to a well-functioning market economy.

Mason also claims that the age of information is killing capitalism by driving prices to $0: “Information is a machine for grinding the price of things lower and slashing the work time needed to support life on the planet.” Replace “information” with “capitalism” and you have an accurate description of the past two hundred years. Between 1830 and 1870, in the absence of any labor legislation, the number of hours worked by Americans in the manufacturing industry fell from 69.1 to 61.1. Real prices, measured in terms of how much time a person has to work in order to buy a certain good, have fallen steadily as well. In 1959 it took an average worker 100.5 hours to earn enough money to buy a washing machine. By 2013, that number was only 23.3 hours. While there are isolated exceptions (health care, housing), prices across the board have decreased for decades.

Capitalism has even driven many prices to $0. Humans who could calculate large sums, for instance, once provided a valuable (and paid) service. But now I can use Excel to quickly sum and multiply numbers. There’s a small up-front fee for the software but no marginal cost: performing each additional calculation is free. The market, well before the age of information, was pushing the prices of certain goods to $0.

Mason’s argument is based upon a fundamental misunderstanding of capitalism. Capitalism is not a system of giant firms and monopolies. Instead, capitalism is about human action, and how people trade to gain a profit and improve their lot in life. This profit can be monetary or “psychic. Entrepreneurship, typified by the small startups that disrupt existing industries, is capitalist. Non-profits, which work to provide a valuable product and serve their customers, are also capitalist. Only by seeing capitalism through a very narrow lens can one conclude, as Mason has, that capitalism is on its last legs. The reality is that recent innovations are making markets more prevalent than ever.

Julian Adorney is a Young Voices Advocate and economic historian. His work has appeared in FEE, The Hill, Townhall, and Lawrence Read’s latest anthology Excuse Me, Professor.