Post-2008 Capitalism: A Guide

From n+1 magazine, After Capitalism:

HOW WILL IT END? For centuries even the most sanguine of capitalism’s theorists have thought it not long for this world. Smith, Ricardo, and Mill pointed to a “falling rate of profit” linked to inevitable declines in agricultural productivity. Marx applied the same concept to industrial production, suggesting that the tendency to replace workers with machines would lead to a chronic and insurmountable lack of demand.

The only thing that has as good of track record as capitalism are predictions of capitalism’s demise.

Fiscal austerity is general, taxes remain low, and debt levels continue to rise—which means that Western countries, by selling treasury bonds to the rich through capital markets, are actually paying their elites in bond yields to avoid having to go through the politically impossible process of taxing them. Absent any political recourse to countercyclical fiscal policy, central banks in the US, the Eurozone, and Japan have kept interest rates low and pumped trillions of dollars of fiat money into the financial system, keeping banks and dot-com companies liquid and driving the rich to put their money into the condos now flooding Manhattan, all while leaving median wages pleasantly low.

That is similar to the process I describe in an earlier article, Post-Labor Capitalism. But instead of post-capitalism, it’s more like post-labor capitalism; capitalism remains intact. As well as other factors like the petrodollar, the ‘flight to safety‘ is keeping yields low and the dollar high. The author seems cynical about how money is flowing into tech companies, but tech companies offer among the best growth prospects of all sectors. * Amazon stock, up 200% in the past few years, has been a great place to put your money; Diamond Offshore, a drilling company whose stock is down 50% this year, has not, because of weakness in emerging markets, depressing commodity prices. In a post-2008 era of slow growth, Web 2.0 is where the growth is.

Getting less work seems unlikely to come about without the fight for solidarity, the chief intellectual achievement of the workers’ movement, and one that none of the accelerationists see fit to mention as an ideal worth preserving or even renovating. This is despite the fact that automation—or, more broadly, the increasing precariousness of labor through technologically assisted means—has always been dialectically connected with it.

The Luddite Fallacy will likely remain a fallacy, but the composition of the labor force is changing to one of more lower-paying service sector jobs, as well as the rise of gig, freelancer, and temp jobs. The result is a bifurcated workforce: lots of low-paying jobs and a handful of good-paying jobs occupied by the cognitive elite and creative class. This is an example of how technology and automation provides a deflationary force through lower wages.

But overall, when pundits proclaim ‘capitalism is dead/dying’, they may be referring to an antiquated meaning or idealization of capitalism that does not take into account how capitalism is changing, but this does not mean capitalism is dead -hardly by any stretch of the imagination – instead, it’s evolving to a more efficient, technological, network-driven, ad-based, winner-take-all version of capitalism that we have now. Capitalism, like much of the post-2008 economy, has become bifurcated, with winners being high-IQ capitalists and ‘high-IQ’ capitalist endeavors, and less intelligent people and ‘low-IQ’ businesses are struggling.

Perhaps post-2008 capitalism is characterized by the following ‘themes’:

1. high-IQ favoritism – both in the business/investing world and individually, with smarter people and smarter businesses succeeding over their less intelligent peers

2. winner-take-all/bigger-is-better (small business failure at record highs, expensive real estate regions keep getting more expensive, web 2.0 valuations at record highs for a handful of companies, etc)

3. flight to quality (similar to #2) – observed in the investing world, venture capitalism, Bay Area real estate, and strength of the treasury bond market & US dollar vs. weakness of foreign peers

4. capitalism is getting smarter, choosier and pickier (** *) Lending standards are more stringent than ever, despite profits & earnings for multinationals at record highs, whereas in the pre-2008 era it was much easier to obtain financing for home or business. This is good because it reduces the likelihood of a crisis like in 2008, but perhaps frustrating for many who are unable to get financing at competitive rates. But this should not be confused for total risk aversion. Valuations for Silicon Valley tech firms keep going up, so money is flowing into the sectors and regions where the quality is perceived to be the highest, resulting in a bifurcation of very high valuations for quality and very low valuations for everything else.

5. capitalism is confusing, partly due to the new rules and trends that many don’t understand. That’s why I wrote this guide to help readers better understand how the landscape of capitalism has changed.

This high-IQ favoritism is also evident in the stock market since 2008, with the best performing sectors being information technolgy, pharma/bio/healthcare, payment processing, investment banking, and consumer discretionary. The biggest losers, have been ‘blue collar’ sectors like mining, shipping, commodities, energy, etc. The only ‘blue collar’ sector that has thrived since 2008 is …auto parts, because consumers, squeezed by a weak labor market and other lingering effects of the recession, are not replacing their cars as often. Maybe also housing, catering, daycare, and landscaping in the Bay Area to cater to the new tech rich.

Besides IQ, the ‘bigger is better‘ theme also dominates in our post-2008 world. The failure rate for small business is higher than ever, party due to low interest rates and plunging treasury yields, making it easier for large companies with access to cheap capital to expand, thus crowding out small businesses. The most valuable web 2.0 companies keep going up in value. In late 2013 Uber and Snapchat were worth $30 billion combined. Now it’s over $100 billion or so, depending on the source.

This bigger is better/IQ favoritism trend is also observed in Bay Area real estate, which keeps going up long after other regions have stagnated. Bay Area home prices are well-above the 2006-2007 highs, yet the national average still well-below the old highs. Expensive homes in high-IQ regions keep getting more expensive, year after year, with calamitous events such as the 2006 housing bubble resembling merely speedbumps in an otherwise uninterrupted trajectory of higher prices.

San Jose home prices, which were already expensive, are higher than their 2006 highs, while the less-expensive national average is still 10% below the old highs.

This is all part of America’s meritocracy, which while intact, is harder to understand. A lot of people are finding themselves left behind, either because they are not smart enough or because they don’t understand how the post-2008 economy works, they don’t understand how to get rich in our new era:

That’s the way you get rich in the smartist era – with stocks, Bay Area real estate, web 2.0…stuff like that. Overpaid, low-IQ, redundant salaried jobs are becoming obsolete, replaced by automation, temp-workers, outsourcing, or eliminated altogether. Due to the supply of labor vastly exceeding demand, employers not only have the luxury of choosing the cream of the crop out of a huge pool of applicants, but to save money and avoid bad PR, employers are becoming increasingly trigger-happy, thus no one’s job is safe.

The rug has been pulled…but all too many people are stuck in a pre-2008 mindset, thinking that the old rules of business and life still apply. They don’t.

The fact 20 and 30-somethings are becoming millionaires or even billionaires in Silicon Valley, with apps and other technologies, while coders strait out of college are making six-figure salaries – is evidence capitalism is thriving, or at least thriving in high-IQ sectors and regions. Anyone with some coding and a good idea can become rich, almost overnight, and if that is not the epitome of capitalism, what is? Some call it a bubble, but assuming it is one (I don’t think it is), technologies are borne out of boom bust cycles, examples being the 90′s dotcom boom and the 80′s personal computer & video game console boom. After the dust settles, what was considered speculative becomes commonplace.

Since 2008, trillions of dollars of wealth has been created in stocks, real estate, and tech. The mobile and video advertising market, linking advertisers with social media platforms, is projected to be worth $100 billion by 2016. The new Star Wars movie is projected to earn over $2 billion, setting a box office record. That is capitalism. You can’t tell me capitalism is dead when you have all this activity going on – but – Capitalism may seem dead if you’re doing it wrong ** or if you’re looking at it through an old lens.

* Capitalism is getting smarter, as part of the post-2008 ‘flight to quality’ trend. In the pre-2008 world, money flow was careless (such as to subprime borrowers, energy companies with poor prospects, emerging markets, etc), but now it’s much more focused, and that’s why the most successful and valuable web 2.0 companies like Snapchat, Air BNB, Uber, and Dropbox keep getting more valuable with every passing year. The same ‘flight to quality’ trend observed in the stock market, which is why only a handful of companies (Microsoft, Google, Facebook, Amazon) accounted for all of the gains of the S&P 500 in 2015. As explained earlier in the article, a similar flight to quality/’winner take all’ pattern is observed in the real estate market. After many decades of trial and error, boom and busts, capitalism may have reached the pinnacle of refinement.

** The types of business endeavors that seem to be succeeding in the post-2008 era harness network effects or act as a middlemen, are scalable, have market dominance, and have low operating costs. Some examples include Uber and AirBNB, neither of which cost much to operate, are readily scalable, and act as middlemen by linking people with rooms or people with cars. There are millions of rooms and millions of routes for Air BNB and Uber, respectively. Facebook and Snapchat are scalable and harness network effects to generate billions of impressions for advertisers, making these companies very valuable even if they don’t produce any content. Facebook, LinkedIn, and Google’s profit margins are among the highest on Wall St. All these companies do is host a social media platform and an ad platform, and just sit back and watch the money flow in. None of these companies have viable competitors; over a decade later, despite many efforts, no one has been unable to unseat the dominance of Facebook and Google, and I predict nothing will.

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