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Marxists love to talk about the ‘contradictions of capitalism’ – and in the last few years they’ve had plenty of examples to seize upon. Yet, despite everything, the capitalist order is still very much with us. Any hopes that the left might have had of a new economic system emerging from the financial ashes have been dashed.

It would seem that capitalism is capable of surviving its greatest failures. Altogether more deadly, though, may be capitalism’s greatest success – its proven ability to reduce the marginal cost of production. The issue is explained in the pages of Prospect, in which Jonathan Derbyshire interviews Jeremy Rifkind about his new book The Zero Marginal Cost Society.

Rifkind identifies a contradiction of capitalism that Marx completely missed:

“Here’s the paradox: in a capitalist market, sellers are always trying to find new technologies to increase their productivity and reduce their marginal costs—the cost of each additional unit. If they can reduce the marginal cost, they can put out a cheaper product and then, with vertical integration, they can make it on volume, beat out their competitors, get market share and then bring some nice profits back to their investors.”

So far, so good. For all its ups and downs, capitalism has delivered on this fundamental objective. The cost of just about everything we consume has come tumbling down as a result of successive waves of innovation.

But here’s the catch:

“It’s just that nobody—economists, businesspeople—ever anticipated in their wildest imaginings that there could be a technology revolution, a new general purpose technological platform for society, that could take their marginal costs to near zero and therefore end profits, creating nearly free goods that are abundant.”

It’s a pretty good point. What does happen to capitalism once marginal costs fall to the point at which its products can be given away for free?

We don’t have to imagine – we can look to industries where this is already happening. The newspaper business is a prime example. Profits are evaporating, jobs are disappearing and business models have been overturned. And the reason why is that you can get all the news and comment that’s fit to print (and much else besides) free of charge from the internet.

A great achievement for capitalism? Yes and no. Profit-making enterprise can take us up to the point at which the marginal cost of production falls to zero, but it’s unable to take us any further. Several Fleet Street newspapers are now sustained as permanent loss-making enterprises. The owners have various motives for doing so, but the profit-motive is clearly not one of them.

So far, the industries most effected are those that deal with products that can be made available online – news is one example, music is another. However, the real transformation will come when the power of the internet extends from virtual products to physical ones:

“We are now on the cusp of the third Industrial Revolution. What’s interesting about this is that when the communications platform, the internet, comes together with an energy internet and the logistics internet to create this super ‘internet of things’, it’s the beginning of a nervous system, an intelligence, a brain, if you will.”

Consider the car. At any one time, there are countless millions of cars doing absolutely nothing apart from occupying potentially valuable space. This is an enormous waste of resources. But if cars were to be automated and intelligently networked, then the allocation of the resources they currently require (and provide) would become hugely more efficient. This isn’t science fiction. Companies like Google are investing heavily in driverless vehicle technology – and you can see the first prototypes in action here.

Information technology certainly has the power to reduce the marginal cost of production. Whether it can bring it all the way down to zero is another matter. No matter how efficiently we use them, physical products like cars still require substantial amounts of energy and raw materials – natural resources that are getting more, not less, expensive.

On the other hand, this makes their efficient use all the more important. Indeed, for most countries, resource productivity (i.e. the productivity with which we employ rather than extract resources) is now the key to economic growth. And in order to achieve this we need the capacity for innovation that only a competitive capitalist system can deliver.

5 comments for: Capitalism won’t be destroyed by its failures, but its greatest success is another matter

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