Francis Fukuyama’s book “The End of History and the Last Man” identifies liberal democracy in combination with capitalism as the winning way to organize society. Fukuyama wrote in 1992 at a time when the data seemed to support that conclusion. The book also presents a historical framework based largely on Hegel to argue why this has to be so and why it represents an end state. All of this now looks like a premature victory march. For reasons that will become clearer in future posts, I will refer to the “industrial system” instead of using Fukuyama’s terms.
The industrial system has a bunch of interlocking (complementary) components. Financial markets that support the direction of capital to productive opportunities. Firms that put together the capital assets required for production. Employees who are earning wages and spending them on goods. Markets with competition and properly determined prices. Elected politicians who pass laws to enable a civil society. These laws are enforced by unbiased regulators, police and courts. Schools that educate people to participate in the labor market and the democratic process. This is certainly not meant to be an exhaustive list but it’s a good start.
This is a system has worked at some level miraculously well. I am typing this on a MacBook Air that is beautiful, powerful, connected to the rest of the planet. I have a high live expectancy. I don’t need to worry about marauders. And so on. I will have more to say about the measurement of progress which is a whole can of worms unto itself, but suffice it to say that I personally have been a big beneficiary of all the system has to offer and am happy to be alive today rather than at an earlier time period.
When I say these are complementary components I mean that having one makes the others more valuable (on the margin – this is captured mathematically by supermodularity). For instance, having competitive product markets means that the additional dollar of salary your earn goes a longer way as prices come down and product innovation gives you larger choice. Or having companies that gather up productive assets works better in the presence of well developed financial markets. Because of complementarities systems are hard to change and have a lot of inertia. You can’t just change one part as it won’t fit with the rest. And small cracks in a part will tend to get patched so as to preserve the system as whole.
Now, however, multiple components and their interactions are breaking down simultaneously and the patches we have applied are no longer good enough. Our financial markets have been allocating capital into vast asset bubbles instead of into productive investments. Firms themselves are hoarding capital and moving it around the globe. Earnings are highly concentrated among fewer employees with many others using debt to finance expenses (credit cards, student debt). Markets have fewer and larger companies that exert market power (sometimes in quite subtle forms such as planned obsolescence). Rich individuals and incumbent corporations exert undue influence on politics. Regulators are captured by their industries. Higher education is leaving students deeply in debt.
But there is more. At the same time that the system is slowly breaking down we are facing both threats and opportunities that it is not designed to address. The most prominent threat is environmental impact in general and climate change in particular. The existing system doesn’t address it because we are largely dealing with externalities that are unpriced, such as pollution of the air or overfishing of the oceans. The biggest opportunity comes from the increasing importance of non-rival digital goods. Wikipedia, Khan Academy, etc have the potential to help educate everyone on the planet at virtually no cost. The existing system underproduces such goods as it is more driven by profit than by consumer surplus.
Over the coming days I am planning to push deeper into all of these components — both how they fit together and how they are now falling apart. I am likely going to start with a bit more about the importance of complementarities both for understanding societies and history but also as a tool for thinking about strategy.
