The class struggle between the bourgeois capitalist and the proletariat—classified by Karl Marx as two distinct but interdependent social classes—is arguably Capitalism’s most famous “internal contradiction.” Marx argued 150 years ago that the constant competition for “surplus value” (whose definition is based on Marx’s misguided “Labor Theory of Value”) between capitalists and workers would result in ever-larger cycles and crises—ultimately bringing about the demise of the capitalist system.
Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself … Centralization of the means of production and socialization of labour at last reach a point where they become incompatible with their capitalist integument. This integument bursts asunder. The knell of capitalist private property sounds. The expropriators are expropriated.
Karl Marx gave a fine gift to those seeking only to dissect and disprove his arguments, and better understand the essence of capitalism. Political leaders who adopted Marxist thought in any practical manner would destroy their own countries and the lives of millions of people (Hugo Chavez also gave us a fine gift: the basket case that is Venezuela, despite $100 oil, provides ready ammunition for any dinner debate on the virtues of capitalism). In fact, Joseph Schumpeter would devote over 50 pages to discrediting Marxian thought in his seminal work “Capitalism, Socialism and Democracy.”
Counter-arguments to silly notions such as the Labor Theory of Value, distinct social classes such as the bourgeois capitalist and the proletariat, the proletariats’ overrated organizational skills, and the inevitable result of revolution are common everywhere in the 21st century global economy. The quintessential example is Apple’s iPhone (Disclosure: I went long AAPL at $401.07 on April 23rd). The iPhone’s design—along with the organizational/marketing skills required to manufacture/sell such a product on a global scale—reigns supreme. Virtually all the “surplus value” accrue to the design, marketing, and organizational team at Apple—and rightly so—while the Chinese manufacturers and their laborers accrue little, if any. Furthermore, the sense of high drama required for any revolution—one sufficient to overthrow the bourgeois—is missing. The poetic sense of Revolution as conveyed by the likes of Thomas Jefferson and James Madison is simply not attractive in a society where the Forbes 400 list turns over once every 20 years, and where kids of all ages are addicted to video games. Capitalism, over time, naturally overthrows each and every bourgeois capitalist through the process of “creative destruction” and the lack of hereditary titles. In addition, the PC and internet revolutions—accompanied by the rise of global networks/corporations such as Amazon, eBay, and Google—have allowed all those that dare to become a capitalist and entrepreneur. In fact, recent trends suggest that the global capitalist/entrepreneurial spirit is growing stronger than ever. For example, employee compensation as a percentage of U.S. GDP has declined to a new 58-year low (as shown on the following chart). Yes, U.S. corporations and businesses are squeezing more out of its workers, even as economic growth recovers. At the same time, this also suggests that more Americans are becoming entrepreneurs and starting their own businesses.
With the further advent of automation, 3-D printing, and globalization (including the democratization of education, communications, and labor mobility), U.S. labor will continue to be squeezed in the long run. Consider this: I know folks being paid six-figures by pressing buttons to optimize an investment portfolio and to make/reconcile trades. They have little understanding behind the quantitative investment/optimization process; and certainly cannot replicate or design a new system on their own. These folks are what Ayn Rand would call “the second-handers” who are simply feeding off the scraps of the creative class—and thus do not deserve six-figures. The market will recognize this over time.
Make no mistake: The capitalists will continue to rise and become ever more important as the 21st century progresses. French economist Charles Gave (of GaveKal) coined the term “Platform Company” to describe high ROC companies focused on design, marketing, and organization, while spinning off their manufacturing responsibilities (again, the quintessential example is Apple Computer). Of course, such a business model only works in a world that abides by the rules of free trade. In the first decade of the 21st century, the platform company model was the Holy Grail for capitalists: Design and market; outsource manufacturing and produce everywhere. A platform company’s capital (the denominator in “ROC”) is mainly the people it hires. In most cases, the company did not have to invest in such capital; their parents and alma maters did most of the work. The success of the platform company model is exemplified by Apple’s extremely high margins (making up just 2.0% of total S&P 500’s sales; but 5.6% of all profits), along with its high growth rates in recent years (following table courtesy Goldman Sachs).
In the second decade of the 21st century, the platform company model itself is being turned on its head. The first inkling came with the creation of Wikipedia in 2001—giving volunteers from all over the world to create value and compete with private interests through mass collaboration. Termed “Wikinomics,” this trend of creating value through mass voluntary collaboration would result in efforts such as the Amazon Review System, the YouTube video sharing platform, and social networking. Corporations would seek to monetize the value of such mass voluntary collaboration. As long as the volunteers are happy (many of them are—either because they are only seeking to find their voice, or an audience for their future work), companies like Amazon, eBay, and Facebook could keep their competitive advantages by maintaining their strong network effects. The ROC of such business models is extremely high—as unlike say, Apple, YouTube has no need to pay salaries to content creators.
In other words, Marx’s prediction that—one day—the proletariat will overthrow the bourgeois capitalist has been turned on its head. Far from overthrowing the capitalists, the proletariat (I use this term very loosely) is happy to contribute to the capitalists’ success on a voluntary basis. Writing an Amazon review or producing a YouTube video is far from the backbreaking work of the 19th century; more important, such activities allows each of us to express our individuality—or as a first step to monetize our creativity. The success of the platform company and the Wikinomics models is now leading into something else—which I call the “Veronica Mars” model. The Veronica Mars Movie Project was the first Kickstarter effort to revive a cult classic through its fan base. To the surprise of many (including its creator Rob Thomas, and the franchise owner, Warner Brothers), the Kickstarter effort reached its fund-raising goal of $2 million in less than 10 hours. By the end of the 30-day fund-raising period, it has raised over $5.7 million through 91,000 fans. The Veronica Mars Movie Project set a precedent (good or bad—you decide); and subsequently actor/director Zach Braff has jumped on the Kickstarter bandwagon. His project “Wish I Was Here” reached his fund-raising goal of $2 million after only three days.
Yes, both the movie studios and the creators have spent enormous amounts of capital on such franchises. Nevertheless, on a stand-alone basis, the ROCs (which mostly accrue to Warner Brothers and other publicly owned studios) of these fan-funded projects are literally infinity. So yes, Mr. Byron Wein, while there are practical limits, the ROCs of U.S. corporations can continue to rise. Capitalists—through strong creative, marketing, organizational, and outreach efforts to customers/fans—can now have our cake and eat it too. Business school textbooks and HBS cases alike are being revised as we speak. To paraphrase former President Richard Nixon (with a slight twist)—like it or not—we are all capitalists now. Either become one; or die.