What Jeremy Rifkin gets wrong about capitalism, communism, and the Internet of Things

By Tim Worstall , written on April 1, 2014

From The News Desk

I've often wondered what Jeremy Rifkin is for and I'm afraid that I still haven't come up with a satisfactory solution. What he actually does is almost as puzzling: release a book every few years telling us that the entire planet's about to change in some gloriously unfathomable way, do the book tour then go off to write another one. The last I recall he was telling us that it was going to be the hydrogen economy that ushered in some form of nirvana for us all. The latest campaign appears to be about how the internet of things will do so. That Rifkin thinks this is going to be important makes me bearish on Google's acquisition of Nest.

But that's not all that worries me: it's not just the way in which the mechanism of that future tends to bring to mind the Underpants Gnomes (New Technology! .... Glorious New Future!) it's that the analysis that leads up to it seems rather lacking as well. Try this latest outing in The Guardian:

In a capitalist market, governed by the invisible hand of supply and demand, sellers are constantly searching for new technologies to increase productivity, allowing them to reduce the costs of producing their goods and services so they can sell them cheaper than their competitors, win over consumers and secure sufficient profit for their investors. Marx never asked what might happen if intense global competition some time in the future forced entrepreneurs to introduce ever more efficient technologies, accelerating productivity to the point where the marginal cost of production approached zero, making goods and services "priceless" and potentially free, putting an end to profit and rendering the market exchange economy obsolete. But that's now beginning to happen.
That's really extremely odd. For Marx didn't just think about what would happen in such circumstances, he predicted that it would happen. And he even provided us with a name for it when it did happen: true communism.

Yes, as I've mentioned here before that post-scarcity society is the essential precondition for true communism to arrive. So far from Karl not considering what would happen he rather thought that this was the entire purpose of this whole capitalism thing: to advance productivity until we were in a post-scarcity world and we could actually have communism.

Rifkin's also a bit odd when describing the analysis of Larry Summers and Brad Delong:

They began by acknowledging that "the most basic condition for economic efficiency: [is] that price equal marginal cost", and further conceded that "with information goods the social marginal cost of distribution is close to zero". They then went to the crux of the problem. "If information goods are to be distributed at their marginal cost of production – zero – they cannot be created and produced by entrepreneurial firms that use revenues obtained from sales to consumers to cover their [fixed set-up] costs … [companies] must be able to anticipate selling their products at a profit to someone."

Summers and DeLong opposed government subsidies to cover up-front costs, arguing that they destroy the entrepreneurial spirit. Instead they supported short-term monopolies to ensure profits, declaring that this is "the reward needed to spur private enterprise to engage in such innovation". They realised the trap this put them in, recognising that "natural monopoly does not meet the most basic condition for economic efficiency: that price equal marginal cost" but nonetheless concluded that in the new economic era, this might be the only practical way to proceed. That pair did indeed so argue. But to describe their argument as anything other than entirely mainstream would be very odd indeed. For their argument actually boils down to "public goods are difficult, that's why we have copyright and patents". And that's all Rifkin's argument is boiling down to as well, that given the replicability of any digital good then the creation of the original one off a new one is akin to a public good. We can't stop people from copying (the non-excludability part of a public good) and their copying doesn't reduce the amount of whatever it is that can be enjoyed by other people (the non-rivalrous part of a public good). However, we also acknowledge that people who cannot earn from designing new stuff for us might end up designing less new stuff than we'd like. So we create artificial monopolies, as Delong and Summers suggest, through the things that we call copyrights and patents.

Shrug, this is hardly news to anyone, is it?

The pair had come up against the catch-22 of capitalism that was already freeing a growing amount of economic activity from the market, and threw up their hands, favouring monopolies to artificially keep prices above marginal cost, thwarting the ultimate triumph of the invisible hand. This final victory, if allowed, would signal not only capitalism's greatest accomplishment but also its death knell.
Apparently it was a surprise to Rifkin. The standard economic solution to the problem of public goods comes as a surprise to him. This doesn't bode well for his ability as an economic prognosticator I'm afraid.
An increasingly streamlined and savvy capitalist system will continue to operate at the edges of the new economy, finding sufficient vulnerabilities to exploit, primarily as an aggregator of network services and solutions, allowing it to flourish as a powerful niche player. But it will no longer reign. Hundreds of millions of people are already transferring bits and pieces of their lives from capitalist markets to the emerging global collaborative commons, operating on a ubiquitous internet-of-things platform. The great economic paradigm shift has begun.
Umm, yeah, this is where the Underpants Gnomes start shouting "Profit!" isn't it?

By the way, yes, I did check. Rifkin's new book where he explains all of this is indeed covered by copyright. Even though it's very easy to copy the electronic version of it. It was also published on April 1st....