Karl Marx and the Digital Economy

    Etienne Goffin
    Etienne Goffin

    Karl Marx seems to be back in fashion, following the financial crisis of 2008 and the mutation towards the digital economy. The German philosopher haunts the upcoming British elections centered around the issues of digitization and globalization of the economy. Earlier this month John McDonnell, the shadow chancellor, declared that “there is a lot to learn from reading ‘Capital’”, and soon after, Jeremy Corbyn, the Labour Party leader, described Marx as “a great economist” (1). So, what can we learn from the author of the Communist Manifesto? Is Marxism still relevant to examine the digital transformation of capitalism?

    Accumulation of capital

    Marx defined capital as the economic asset value that is used by capitalists to obtain additional value (surplus-value). He added that “capital is not a thing, but a social relation between persons, established by the instrumentality of things” (2; p. 543). Property rights enable appropriation, ownership, and trade of these value-generating assets. Capital, usually expressed in money, is transformed through human labor into a larger value and extracted as profits.

    Capital accumulation is the process by which profits are reinvested into the economy, increasing productivity (3). The resulting increase of capital input to labor input ratio depresses employment and wages. Excess profits must be reinvested into new profitable investment opportunities. Marx predicted that a crisis of over-accumulation of capital would happen when the rate of profit gets greater than the rate of new profitable investments in the economy. He believed that this process would be the fundamental cause for the dissolution of capitalism and its replacement by socialism (4).-

    A quick look at the latest Financial Times’ global list of 500 companies by market capitalization shows that capital is indeed expanding in value (5). But the nature of capital is also changing over time. Indeed, the composition of the Fortune’s list of 500 companies by turnover is changing from year to year. Innovative companies emerge in order to satisfy new consumer needs. According to PWC (6), the technology sector has overtaken petroleum and banking to become the largest sector in terms of market capitalization ($2,993bn).

    Financial analysts believe that one of tech giants (e.g. Apple, Google, Tesla) could become the first company to reach a market capitalization of $1 trillion in the next 12 to 18 months. Shares of technology firms trade on their highest ratio to sales since the turn of the century. Five of the world’s most valuable firms are tech companies: Apple, Alphabet, Microsoft, Amazon and Facebook (7,8,9).

    Three broad types of tech companies should be distinguished. Some, such as Samsung and Apple, are mature and profitable. Other firms, including Alibaba, Tencent, and Facebook enjoy an annual sales growth rate of over 20% and high margins. The remaining “question mark” firms, such as Twitter, Uber and Snap are unprofitable but have explosive sales growth (10).

    Some analysts wonder whether investors are sensibly valuing each category. Snap, an insolvent company with $400m of sales and $700m of cash losses in 2016, was valued at around $24bn during its initial public offering (with price per share of $17). Snap stock quickly popped 44% before falling below the IPO price (11, 12). Similarly, Amazon is one of the most optimistically valued firms, with most of its market capitalization justified by a long-term payback period. Although part of the value is justified by its profitable cloud-computing arm (AWS), the rest of the firm, which includes e-commerce, entertainment and logistics, barely makes money and grows slowly (10). What can justify this kind of valuation?

    The theory of capital accumulation (13) can help to answer this question. It posits that here is a relationship between a company’s market value, its profits and the sums it has invested. Karl Marx made a clear distinction between “real capital” and “fictitious capital” (14). The former refers to capital actually invested in physical means of production. The latter is simply “money that is thrown into circulation as capital without any material basis in commodities or productive activity” (15). The market value of fictitious capital assets varies according to the expected yield of those assets in the future, which Marx felt was only indirectly related to the growth of real production. Consequently, fictitious capital represents accumulated claims to the income generated by future production (14, 15). In terms of mainstream financial economics, fictitious capital is the net present value of expected future cash flows.

    Profitable companies such as Samsung and Apple are not growing much but are low-risk as over 40% of their net present value corresponds to cash and short-term profits (9). Booming firms such as Alibaba and Facebook are rather safe as their net present value relates to future profits that are growing fast. “Question mark” firms, such as Tesla and Snap, are risky as they will only generate notable cash flows in the very long-term. These firms could well crash and burn before payback.

    Concentration of capital

    Although Marx assumed perfectly competitive markets with many small firms in each industry, he believed that capital tends to concentrate in the hands of richest. He predicted that larger firms would be able to achieve economies of scale and thus produce at lower average costs than smaller firms. Competition between the larger firms and the smaller firms would result in the elimination of the latter. While the size of the firms increases with the accumulation of capital, the degree of competition in the market diminishes (2).

    According to Marx, the self-destruction of competition is a clear illustration of the contradictions within capitalism that will lead to its ultimate end. His main argument against market power is that dominant firms can earn abnormal profits at the expense of economic efficiency and social welfare (16). With the large corporations would come a separation of ownership and control, triggering a number of undesirable social consequences such as speculation, intermediation, demand shortfall and gatekeeping. Therefore, the battle of competition is always fought by reducing the costs of production and thus increasing labor productivity (17).

    Possibly no other prediction of the future of capitalism advanced by Marx has been more prophetic than his principle of the centralization of capital. It seems that nearly every industry is concentrated into fewer and fewer hands. The new firms spawned by the digital revolution have quickly acquired monopoly power and strengthened US economic supremacy. Enormous monopolistic chains dominate formerly competitive sectors like retail and catering. Only a few mega-billionaires control vast economic empires and accumulate massive fortunes (17, 18).  In short, capital concentration is increasing as never before.

    Moreover, data shows that the rise of corporate profits that occurred in most developed countries over the last decade was coupled with a decline of listed companies and an increase of ownership concentration (18). US returns on capital are at near-record levels relative to GDP. American corporate profits are higher than they have been at any time since 1929. As they have become very profitable, American firms have recently engaged in one of the largest rounds of mergers (worth $10 trillion) in history (18). This burst of consolidation should boost the profits even more, allowing the merged companies to increase their market shares and cut their costs.

    As predicted by Marx, this rising concentration triggers a snowball effect. As firms gain more market power those elsewhere in the value chain consolidate in response. For instance, Google supremacy in internet searches for hotels has led the leading internet travel-agent, Expedia, to acquire two of its main rivals over the past three years. The consolidation of travel platforms has in turn led the hotel firms to consolidate, too, with Marriott buying Starwood (18, 19).

    Economic theory holds that monopoly power can only be temporary, as new entrants will try to get their share of the cake. Sharing economy firms such as Uber and Airbnb are exceptional sources of disruption in the economy, competing fiercely with incumbents. The huge amount of funding that they are able to raise can only be justified if they eventually dominate their markets and harvest monopoly profits (20). Similarly, firms such as Alphabet, Amazon and Facebook are valued as if their dominant market position, network effects and accumulation of data will allow them to enjoy a long-term monopoly power. But current dominant firms could be tomorrow’s Nokia or Blackberry. The world’s biggest company, Apple, now trades at just 11 times earnings, suggesting investors expect it to decline (20).

    Immiseration thesis

    Marx most famous prediction is that capitalism inevitably produces immiseration for the poor and enrichment for the wealthy: “pauperism forms a condition of capitalist production, and the capitalist development of wealth”. (2; p. 450). This derives from the assumption that the nature of capitalist production (e.g. capital accumulation, automation and reduced demand for labor) reduces wage growth relative to total value creation in the economy, thereby leading to worsening workers’ alienation (2).

    Marx believed that capitalist competition would imply the gradual replacement of workers with machines as technology develops, allowing an increase in productivity and a decrease in the relative importance of labor. Improvements in productivity push people out of work. While the proletariat face an increasing “insecurity of existence”, capitalists benefit from the availability of a large pool of job-seekers. Employers’ ability to take on and fire workers as they please relies on such pool, that Marx called the “reserve army” of workers (21).

    Marx also observed that capitalism creates situations where work controls the worker, not the other way around. The nature of the task dictates how the person performing it must live: “It is not the worker who employs the conditions of work, but rather the reverse, the conditions of work employ the worker” (21). Moreover, Marx was critical about the increase of casual work “because the workers’ power of resistance declines with their dispersal; because a whole series of plundering parasites insinuate themselves between the actual employer and the worker he employs; (…) because employment becomes more and more irregular; and, finally, because in these last places of refuge for the masses made ‘redundant’ by large-scale industry and agriculture, competition for work necessarily attains its maximum” (2; p.305).

    Marx was also a keen supporter of freelancing, but he believed that the price of capital was kept high enough to deprive laborers’ possibility to “work on their own account”. For instance he referred to Wakefield’s story of Mr. Peel, a wealthy colonist, whose servants had deserted in the early colonization of Western Australia because farming land was freely available (5). This convinced capitalists that the price of land should be kept high enough to ensure the availability of labor. Otherwise the laborers would leave to find their own piece of land. Marx concluded that the “expropriation of the mass of the people from the soil forms the basis of the capitalist mode of production” (22)

    Marx was right that the fall in the share of output going to workers is the main driver of the rise in corporate profits. Data shows that real wages started to stagnate or decrease in most countries following the financial crisis (23). Since 2008, most newly-created jobs in Britain have been on zero hour contracts, where workers have no guaranteed shifts and have to work at the whims of their employers (23). The rise of the sharing economy threatens to turn millions of people into casual workers who eat only what they can kill.

    The academic literature gives three explanations for this: automation has enabled firms to replace workers with robots; globalization has made it easier to shift production abroad; and casualization has convinced millions of workers to accept lower wages (24). A recent paper by Christian Fuchs on “Digital Labour and Karl Marx” examines how labor is changing in the age of computers and smartphones (25). He proposes a critical theorization of labor performed in the capitalist ICT industry. Relying on a range of global case studies, Fuchs sheds light on the labor costs of technology firms (25).

    Opponents of casual work say digital platforms like Uber, Deliveroo and Upwork are creating a virtual “human cloud” of “digital serfs” that leads to a global race to the bottom for wages and benefits. The contractual arrangements intend to avoid the labour laws covering minimum wages, working conditions and benefits. Casual workers have no job security. Employers can tell them without notice that they are no longer required. The nature and the conditions of their work can change at any point in time (26). These developments affect both unskilled and skilled work.

    Supporters of casual work, like Patrick Petitti (founder of Catalant) and Stephane Kasriel (CEO of Upwork) say that their platforms decrease the entry barriers of business and offer an unprecedented flexibility to both workers and employer. They build trust and relationships between people. Freelancers have the freedom to choose their own projects, time schedule and office location. They are engaged in rich and diverse work, gaining valuable independence and flexibility taking advantage of the network effect to get more and better work (27).

    Conclusion

    Marxist principles apply only to some extent to the digital economy. Although Marx’s analysis is sensible, the conclusions are dubious and the solutions far worse than the disease.
    Capital is indeed expanding in value, especially in the tech industry, in accordance with Marx’s predictions. The theory of capital accumulation can even help to understand the market valuation of tech giants. But the blossoming of a wide variety of tech startups contradict the assumption that capital accumulation would be detrimental to capitalism survival, corporate investment and technological innovation.

    The latest developments in the market and capital structures of the tech industry corroborate the idea of a capitalism tendency for concentration. However, this process is not only driven by the principles of capital accumulation and economies of scale. Strong market dominance arises when the value of a product or service is dependent on the number of users. This network effect plays a particularly important role in the digital economy.

    Marx was right that the rise in corporate profits is often at the expense of workers. But the recent transformation of digital labor is more nuanced. Some view the sharing-economy platforms as parasites enslaving workers while others consider them as match-makers emancipating freelancers. It still too early to see whether the digital economy will increase the control, flexibility and quality of work conditions.
    But, the best way to avoid being Marx’s next victim is to use technology to confront the imbalances he highlighted.

    Sources

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