Thinking about Kapital and Y2K Jude Wanniski December 16, 1999

On Sunday, November 30, the NYTimes ran an op-ed by novelist Kurt Anderson, "The Next Big Dialectic," which quotes Karl Marx more than a century ago warning about "globalization." As I have been advising our clients for several years that Marx understood globalization long before MIT's Paul Krugman discovered the inter-connectedness of world markets, I was delighted to see the NYTimes catch up with Dr. Marx. The quotes Anderson selected from Das Kapital were especially good for those of us thinking about the action on Wall Street surrounding the Internet stocks. I've been mulling them ever since. Marx wrote that "improved communications" had been the key to increased prosperity and productivity, and the "last 50 years have brought about a revolution in this field... the entire globe is being girdled by telegraph wires... the time of circulation of a shipment of commodities to East Asia, at least 12 months in 1847, has now been reduced to almost as many weeks... and the efficacy of the capital involved in it has been more than doubled or trebled."

To begin to understand the dynamics of the Internet, it is helpful to remember what "capital" is all about. It is not about pieces of paper called dollars or dollar bonds or dollar stocks. It is about the surplus time, energy or talent of an individual human being. A child, who has no such surplus, uses capital. A senior citizen also uses capital. Between youth and retirement, individuals can produce more than they can consume in a working day, and it is in their interest to find someone who can use that surplus who is a good credit risk, so the surplus can be paid back when needed. In the earliest days of civilization, a capital surplus had to find its match with a capital deficit within a radius of a mile or two. When the wheel was invented and people figured out how to use animals for trading caravans, surplus capital could reach further than a mile or two in finding a deficit mate with collateral. The objective, remember, was not a trade in the spot market, because the producer already was consuming at his limit. He needed to get surplus off his hands in exchange for a promise to pay back the surplus at a future time when it would be needed. By the time of the birth of Jesus two thousand years ago, a communications limit had been reached which was not to be exceeded for 1800 years. That is, it took Napoleon just as long to travel to London from Rome as it did Julius Caesar. Note Marx said "the last 50 years," which was the beginning of the industrial revolution.

We normally think of the industrial revolution as a time when machines were being invented that increased the standard of living of mankind (except for those machines that enabled men to slaughter each other at a faster rate). It was Marx who saw more clearly that it was "finance" that made it all possible. Surplus capital could take in a much wider geographic area in search of worthy deficit mates, which could be relied upon to provide a positive ROI. China's civilization was superior to Europe's going into the 15th century, but then the "invention" of modern banking in Italy enabled capital to be more efficient -- even though communication and travel still were held back by the same barriers that Caesar confronted. It was only in the 1830s and 1840s that it began to dawn on philosophers that civilization could "speed up," or evolve to higher planes. After 1800 years of stagnation, it is no wonder nobody thought of "evolution" of the biological species (Darwin) or the political species (Marx) until this new area of global shrinkage -- "globalization."

The 20th Century that is about to end is marked by greater change at a greater pace than has ever been experienced. Again, it has been "finance" that has driven this change. A man who has the ability to produce ten times as much with his potential as he needs, but that surplus cannot be financed for want of a deficit mate, is trapped where he is because of a deficiency in the available pool of deficit mates. The Internet changes all that. Surplus time, energy and talent of an individual now can find a home outside of his community, his state, his nation. If we think of the Internet as a place where people can buy books cheaper and easier than they can at the local bookstore, we are understanding only the tiniest part of what it means. (E-Bay is the equivalent of a global flea market or garage sale. Last week I bought something I wanted from a fellow in Estonia, who didn't want it anymore.) What it does at its limits is to make capital incredibly more efficient. Surplus time, energy and talent need not be wasted, but can be put to productive use. The U.S. population of 275 million still can produce much more than it does, but for the constraints of government tax, monetary and regulatory barriers. It is the world population of six billion, though, that is really wasting human potential.

Vice President Al Gore, inventor of the Internet and our Malthusian-in-chief, in one way would halt development of that human potential, with his worry about global warming and 1.2 billion Chinese driving cars that emit carbon dioxide. The Internet, though, gradually will solve the problems of traffic jams and "overpopulation" of crowded areas. As Karl Marx understood a century and a half ago, the pace of change is the greater problem, as machines learn how to create machines. Marx's partner, Friedrich Engels: "A new machine invented in England deprives millions of Chinese workers of their livelihood within a year's time. In this way, big industry has brought all the people of the earth into contact with each other, has merged all local markets into one world market, has spread civilization and progress everywhere and has thus ensured that whatever happens in civilized countries will have repercussions in all other countries."

This was the point of the Anderson op-ed, about a "New Dialectic." He foresees "Cyber-capitalism" igniting a new class struggle, with a new Marx sure to follow. That need not be, although we got a whiff of this at the recent Seattle Tea Party. Demonstrations against the World Trade Organization were not against cyber-capitalism, but against the financial and industrial multinationals who are hell bent on globalizing faster than ordinary citizens can manage. They are forcing the folks who are being sent into early retirement to look for political ways to slow things down, for the world to catch its breath. If Marx were around, he would not hesitate to advise a return to an international gold standard, to eliminate the monetary roller-coaster that has six billion people guessing from one month to the next whether they will have to dump goods on their neighbors, or will have their neighbors goods dumped on them. Of all the candidates for President, only Steve Forbes understands this, but his advisors have persuaded him to talk about abortion instead.

Where has all this thinking about Kapital and the Internet led me? I haven't the slightest doubt that because it cannot be un-invented, it will fulfill all the promises of its greatest boosters. The best Internet stocks will sell for double and triple and quadruple sooner or later. But first, my guess is that we will all hit a speed bump at Y2K, dot.coms included.