The Absence of Systemic Competition

Capitalism is now the only game in town. Photo credit: Dick Elbers, Wikimedia Commons.

The prime mover of technological and social progress — just as for biological evolution — is variation. Different cultures rubbing up against each other, trading with each other, invading each other; different political orders, wrestling for mastery and searching for some source of economic or military advantage; different companies, competing for consumer dollars and striving to cut costs.

Variation in investment projects through decentralization of investment decision-making is the essential ingredient of capitalist innovation. As Nathan Rosenberg and L. E. Birdzell, Jr. explain in their classic account How the West Grew Rich, what might constitute a useful innovation is shrouded in uncertainties – over technical feasibility, cost, and consumer acceptance. Capitalism surmounts these difficulties by letting a hundred flowers bloom:

The Western method of dealing with these uncertainties is basically statistical. Western economies authorize a large number of enterprises, as well as individuals who might form new enterprises, to make decisions to accept or reject proposals for innovation, their own or others…. The advantage of having proposals for innovations considered by many decision centers is illustrated by the microcomputer, which was not undertaken by any of the leading American computer manufacturers, nor by the Soviet Union, nor by the French Commissariat du Plan, nor by MITI in Japan, but which nevertheless has proved widely useful.

Over the longer sweep of history, variation across social orders has been a major driver of human progress. Societies more exposed and open to foreign influences, whether through trade or war, were able to leap ahead by adopting new ideas and new ways of doing things.

As far back as Montesquieu and Hume, Europe’s advantages in freedom and power were attributed to its political fragmentation. In Asia, Montesquieu wrote, large and powerful countries dominate their regions, but in Europe “strong nations are opposed to the strong; and those who join each other have nearly the same courage. This is the reason of the weakness of Asia and of the strength of Europe; of the liberty of Europe, and of the slavery of Asia.” Hume, meanwhile, emphasized the impact of European heterogeneity on scientific, technological, and economic development. “Nothing is more favorable to the rise of politeness and learning, than a number of neighboring and independent states, connected together by commerce and policy,” he wrote. “The emulation, which naturally arises among those neighboring states, is an obvious source of improvement.”

Recent scholarship confirms the connection between modern capitalism’s emergence in western Europe and the continent’s fractured political geography. Two excellent new books on the origins of modern economic growth were published just this year: The Journey of Humanity by Oded Galor and How the World Became Rich by Mark Koyama and Jared Rubin. Both stress the importance of European political diversity and competition in explaining why Europe, and not China, was the locus of humanity’s economic takeoff. Koyama and Rubin, for their part, emphasize the role of political geography in driving the institutional innovations upon which modern growth depends:

Political fragmentation explains several important institutional developments that were unique to medieval Europe. These include the rise of representative institutions such as self-governing city-states and parliaments, public debt, and the notion of separation between religion and the state.

Galor, meanwhile, focuses on how political competition favored the development and spread of good ideas by multiplying the chances that those ideas would find somewhere they were sponsored or at least tolerated:

Competition in Europe contributed to a culture of innovation and institutional adaptation, the Protestant Reformation being a prime example. Entrepreneurs pitched their initiatives across borders, and engineers, physicists, architects and skilled craftsmen migrated across the European continent in search of economic opportunities. While the Muslim caliphates … and China … experienced periods of innovation,… these trends ultimately did not last.

But as it has spread around the planet, capitalism has been reducing the external sources of the cultural and institutional variety out of which it emerged. Yes, the system’s growing complexity of specialization and exchange has produced astonishing internal variety — in the number of different occupations, different organizations producing goods and services, different goods and services available for sale, and different subcultures and “consumption communities.” But this is variety within a particular kind of social order. And that particular kind of social order is now the only game in town.

Since the fall of communism 30 years ago, capitalism for the first time in its existence lacks any competition from a rival system. Yes, the capitalist system currently comes in many flavors: democratic and authoritarian, advanced and underdeveloped, inclusive and extractive, with public sectors ranging from lean to expansive. But in broader historical context, these differences are much less striking than the unprecedented degree of world-spanning uniformity. Virtually the entire inhabitable surface of the globe has been claimed by territorially exclusive states using the same basic forms of governance. Some two-thirds of working-age people worldwide work for money income, most as wage employees of private business enterprises. The majority of people now live in cities constructed from the same building materials and shaped by the same architectural styles. Everywhere you can find people wearing the same kinds of clothing, eating the same food, driving the same cars, watching the same movies, and obsessing about the same media celebrities.

For all of its history until recently, though, capitalism had to contend with actually existing alternatives. Capitalism emerged against the backdrop of aristocratic agrarianism, the legacy system that it gradually displaced and toppled. And well before the agrarian order breathed its last, a new rival arose in the form of the socialist movement. While World War I finally toppled the old agrarian power structures, it simultaneously brought socialism to power in Russia. From there, socialist revolutions would spread over the course of decades until a third of the world’s population lived under Marxist-Leninist regimes. Only with the collapse of those regimes, or their conversion to capitalism in all but name, has systemic competition come to an end.

Capitalism’s coexistence with rival systems afforded it opportunities, and subjected it to pressures, that enhanced its powers as an engine of social progress. When industrialization was first taking off, capitalists took advantage of the huge “reserve army of labor” in the peasantry to keep wages hovering at subsistence levels. And when industrializing economies were beset with periodic crises and slumps, the capitalist system could avoid chaos because the countryside acted as a kind of informal social welfare system, absorbing displaced workers temporarily until demand for their services recovered.

While the background agrarian order gave capitalist activity the flexibility to expand and contract as needed during industrialization’s bumpy ride, capitalism’s competition with socialism forced the adoption of major institutional innovations that made it possible for the system to survive that bumpy ride intact. Specifically, the advanced capitalist economies were able to avoid socialist revolution only by absorbing significant amounts of the socialist program into their institutional makeup. Capitalism’s social-democratic makeover preserved the fundamental market order while introducing unionization to strengthen workers’ bargaining power and social insurance to soften the market’s downsides. This partial co-optation of socialism rejected the doctrine’s fundamental error (i.e., radical hostility to markets) while internalizing its key insight — namely, that the existing rules of economic life, far from being natural and necessary, are conventions that can be altered to improve society’s overall functioning.

Success often brings new difficulties in its wake, and it seems to me that capitalism’s elimination of all rivals presents a genuine problem. The market order has lost an important source of variation that could redirect its growth onto more promising pathways. It’s not just a coincidence that the end of actually existing socialism has been accompanied in the capitalist democracies by declining leverage and status and political marginalization for ordinary people. Competition with socialism boosted the social significance and political power of workers, inclining capitalist political economy toward more egalitarian institutions and outcomes. Meanwhile, the collapse of socialism helped to foster “end of history” complacency throughout the capitalist world and especially in the United States. The whole idea of radical alternatives to the status quo was now discredited; the modest goal of future progress was to ensure that the winning model in the competition of systems was extended from the global center to the still-benighted periphery.

Of course we still do have political fragmentation, and with it one source of policy and institutional variation. And with the recent deterioration in U.S.-China relations, it appears that something resembling systemic competition — competition between variants of capitalism — is now heating up. Yet the implications of this gathering conflict for renewed innovation are decidedly ambivalent. On the one hand, U.S.-China rivalry is likely to spur innovation along militarily applicable lines; on the other, it is likely to undermine international cooperation on which, in particular, clean energy innovation depends. Meanwhile, the larger worldwide authoritarian turn in which this conflict has arisen is decidedly bad news for present wellbeing and prospects for improvement. And the disastrous possibility that this conflict could lead to the return of great-power warfare is unnervingly real.

Meanwhile, “socialism with Chinese characteristics” poses a far less profound competitive challenge than that presented by the original article. China is only slightly less unequal economically (as measured by Gini coefficient) than the United States, and rather more unequal than the other capitalist democracies. The Chinese alternative is about who controls at the top, not about who benefits at the bottom. Chinese culture now is even more money-hungry than the home markets where consumerism originated; and while the nouveaux riche may dream of taking the place of old money, they are generally uninterested in toppling the hierarchy that privileges them both. In short, there is nothing in the Chinese system that can be counted on to spur any dramatic institutional change.

Beyond the specifics of the United States and China, it needs to be pointed out that political fragmentation means much, much less than it used to. Previously, political divisions added one additional layer to humanity’s teeming cultural and institutional diversity. Today that underlying diversity is in freefall. Modern science, the ultimate source of capitalist dynamism, is a global enterprise; there are no rival national schools of this or that discipline. With the spread of multinational business enterprises, corporate best practices have been globalized. In increasingly global product markets, convergence in regulatory policies is the dominant trend. There’s still a great deal of linguistic and religious diversity, but the most powerful cultural force shaping day-to-day human conduct regardless of country is the globally triumphant culture of consumerism.

Capitalism’s global supremacy has delivered clear and important benefits in the here and now: the three decades of globalization since the collapse of communism have witnessed the most dramatic improvement in humanity’s material welfare since the dawn of the species. But something has been lost, with potentially fateful implications for the longer term. Think of it in terms of the tradeoff between static and dynamic efficiency. Economic institutions exhibit static efficiency when they conduce toward the optimal output mix of existing goods and services. Dynamic efficiency, by contrast, is the property of institutions that can foster the evolutionary process of variation and selection and thereby improve the output mix over time with the addition of new goods and services.

The global capitalist system delivers enormous static efficiencies by integrating the entire world into a single system of specialization and exchange. And its dynamic efficiency, if increasingly labored, is still considerable. But the absence of any truly systemic competition — and with it, the shrinking of our collective capacity to imagine radically different and radically better social arrangements — removes a vital source of variation at the macro level, and thus of dynamic efficiency over the long run.

An analogy from sports may be helpful here. Teams often face a choice between short-term and long-term prospects. If they feel that a championship is within their grasp, they will often trade away draft picks to add the star free agents they need now to put them over the top. In other words, they sacrifice their chances to improve performance over the long term in order to maximize the odds of present success. Likewise, the absence of systemic competition today allows capitalism to more fully realize the productive potential of its existing institutions, but at the cost of foreclosing possibilities for developing new institutions in the future. Like a star-studded championship contender, capitalism is currently “all in” on winning now — a state of affairs that inevitably complicates rebuilding efforts down the road.

It’s important to recognize how formidable the barriers to institutional and systemic innovation now are. In the past, at least for Europeans and people of European ancestry during the half-millennium of the “Great Frontier,” when a group of people wanted to break away and try something new — build a new community, a new society — they possessed two huge advantages not presently available today.

First, the opportunity costs of independence from the surrounding society were far lower. Most people in the default social order supported themselves by farming; if you wanted to hive off and start something new, you could support yourself by farming as well. Independence therefore wasn’t that economically costly; indeed, with the promise of free land on the frontier, people could see independence as a way to get ahead and prosper.

By contrast, contemporary affluent interdependence is extremely sticky. Because the system is so productive, and because it’s the only game in town, trying to live outside of it means a huge comedown in living standards. Think the Amish, or the Unabomber. In the 1960s a major social movement — the counterculture — filled young people with dreams of radically different institutions and radically different ways of living. In the late 60s and early 70s, as many as a million of them tried their hand at living in thousands of different communes and “intentional communities.” After a decade or so, though, this burst of experimentation had fizzled. There were many reasons for the failure, not the least of which was that the Aquarian allergy to authority of any kind made it difficult to actually get productive work done. But one main reason was that life in rural poverty turned out to be a boring, laborious bummer. The immensely superior productivity of capitalism relative to all known alternatives creates a daunting barrier to exit.

It's not just that economic barriers to exit were lower in the past; legal barriers were lower as well. Today’s elaborate regulatory state had not yet been constructed; and out on the frontier, there wasn’t much of a state of any kind. “Permissionless innovation” was the rule across the board. But now, when the entire world has been sewn up by territorially exclusive states, trying to start a new community with new laws will run afoul of some jurisdiction’s existing statutory and regulatory codes.

In view of the above, we can conclude the following. First, the absence of actually existing alternative social orders imposes real constraints on our society’s ability to evolve in novel and healthy directions. Second, if we are ever to live in a world where experimentation with new social orders is possible, it will be necessary to lower both the economic and legal barriers to life outside the current system.