Communism by Index Fund?
Contemporary capitalism is ever more tightly integrated through the financial system. What do we mean by integration? Well, for instance, the chance that any two firms in the broad S&P 1500 index of the US stock market have a common owner that holds at least 5 percent of shares in both is today a stunning 90 percent. Just twenty years ago, the chance of finding this kind of common ownership was around 20 percent. And index funds (which invest money passively), pension funds, sovereign wealth funds, and other gargantuan pools of capital all bind economic actors still closer together via their enormous pools of money. Passive management of such funds is a relatively novel investment strategy, involving retention of a broad swath of assets that replicates an existing index, which itself aims to replicate an entire market; in this model, limiting buying and selling still offers robust diversification, but with limited transaction costs and low management fees. Passive management is increasingly dominant, not just within equity markets, but among other investment types, and it is displacing the historic but more expensive norm of active management strategies, which use fund managers and brokers to buy and sell stocks and other investment vehicles, deploying their research and knowledge to attempt to outperform the market.
This shift in recent years from active to passive investing is not news. But the implications are systemic and profound for the very notion of a competitive market.
An investor who has holdings in one airline or telecom wants it to outperform the others: to increase its profits, even if only temporarily, at others’ expense. But an investor who owns a piece of every airline or telecom, as occurs in a passively managed index fund, has drastically different goals. Competition no longer matters; the overriding interest now is squeezing the most out of customers and workers across an entire industry—no matter which firm does it. In principle, capitalist competition should unremittingly steer the total profits across a sector down, ultimately to zero. This is because even though every firm individually aims for the highest possible profit, doing so means finding ways to undercut competitors and thus reduce profit opportunities sector-wide. Big institutional investors and passive investment funds, on the other hand, move entire sectors toward concentration that looks much more like monopoly—with handy profits, as firms have less reason to undercut one another. The result is a very capitalist sort of planning.
This unseemly situation led Bloomberg business columnist Matt Levine to ask, in the title of a remarkable 2016 article, “Are Index Funds Communist?” Levine imagines a slow transition from today’s index funds, which use simple investing strategies, through a future where investing algorithms become better and better, until “in the long run, financial markets will tend toward perfect knowledge, a sort of central planning—by the Best Capital Allocating Robot.” For him, capitalism may end up creating its own gravediggers—except they will be algorithms, not workers.
This idea—that finance itself will socialize production—may read like clickbait provocateurism, but it isn’t actually that new. The point has been made frequently by writers on the left for over a century, most prominently by the Marxist economist Rudolf Hilferding, whose Das Finanzkapital, published in 1910, already postulated a shift from the competitive capitalism Marx had analyzed to something far more centralized, tending toward monopoly driven by finance and a state under its control. The same debate has resurfaced many times since then: from the school of “monopoly capital” led by Marxist economists Paul Baran and Paul Sweezy in the 1950s, influential among some sections of the Left for some time, to the more obscure bank control debates in the 1970s and ’80s. The notion reemerged with left-wing economist Doug Henwood’s Wall Street, which dissects the US financial system and its role in organizing economic activity. Published in 1997, at the height of the Clinton-era boom in the United States, the book is remarkably prescient, foreshadowing today’s toxic mix of rising inequality, stagnant incomes for the working class and crises driven by speculation, much of it based in financial engineering—not a rosy picture of finance eating itself, but rather one of it slowly digesting the rest of us.
While in terms of mechanics, it may be easier to transfer into common ownership a real estate income trust that owns the title to hundreds of homes than it is to seize hundreds of homes outright—or to take over a single index fund that owns millions of shares than it is to take over hundreds of factories—politically, the task is no less difficult. Moving ones and zeros around on an electronic exchange requires class power just as much as storming barricades does. The agents of progressive change—those who might push for and carry out a sweeping socialization of investment—are far removed from the centers of financial capitalism. On its own, an investment algorithm can no more dig capitalism’s grave today than a power loom could in the nineteenth century. Both are inanimate tools created by capitalism that open up new possibilities for socialists who hope to transform the world in the interests of the many, but these tools are nothing without organized political forces ready to put them to more useful ends.
What kinds of transitional demands could such forces make to hasten future socialization? There are relatively small, but meaningful, steps such as creating a public payments system—to ensure that every time you tap your credit or debit card, it is not a private company getting a cut and setting the terms—or a public credit rating agency—to displace the likes of Moody’s or Standard & Poor’s, which play a key role in determining how investment is distributed among competing projects, most recently helping divert a sizeable chunk of it into junk mortgages that nearly crashed the world economy. Then there are bigger public sector projects, like a massive increase in public housing construction—which places land into common ownership, takes housing off the market and ends its role as an investment asset—and its corollary, expanded public pensions. As for those who hold financial power themselves, what better way to disempower them than directly, through proposals to tax away large concentrations of wealth or diminish the role of shareholders and the stock market over the corporate sector—ultimately empowering the workers that produce the goods and services, and the communities that use them. All of these reforms serve to make planning explicit and public, rather than hidden and private as it is today. To quote J. W. Mason once more,
A society that truly subjected itself to the logic of market exchange would tear itself to pieces, but the conscious planning that confines market outcomes within tolerable bounds has to be hidden from view because if the role of planning was acknowledged, it would undermine the idea of markets as natural and spontaneous and demonstrate the possibility of conscious planning toward other ends.
The question is not whether the economy will be planned as a whole, or not at all. Instead, it is whether the present money managers will continue as the capitalist planners of the twenty-first century, or whether we ordinary people will start to remake our economic institutions, introduce democracy into their hearts, and bring the planning that already exists out into the open.
Incentivize This!
At this point, defenders of the market are likely to retreat to another line of defense: incentives. Even if capitalists already plan here and there (or even nearly everywhere, as we have shown), only markets can guarantee the efficiencies that come from having the right incentives. Socialist managers will simply waste investment funds as a result of “soft budget constraints”—the notion that managers can ultimately always get more resources—creating vicious cycles of excessive risk taking and false reporting.
Incentives are, however, simply another way of answering the question, “How do we make people do things without telling them directly?” The biggest incentive under capitalism is that without a job, a worker will lose their home, their belongings and ultimately starve. This is the cat-o’-nine-tails that disciplines “free labor,” the terror that forces a worker to doff her cap before every foreman or manager. This despotism lies at the very heart of the system, yet it goes unmentioned in any call to “get the
incentives right” from business journalists or neoliberal reformers.
The list of socially harmful incentives is much longer. There are incentives to pay poverty wages, to maintain unsafe working conditions, to push poor people out of their neighborhoods, to produce bombs and to use them. Even stock prices, those supposedly most price-like prices, in large part reflect gambles rather than economic fundamentals. The flip side is all manner of nonmarket sanctions that exist and have existed throughout human history. Markets are not the only, or even remotely, the best way to pursue common projects that require people and resources committed across time and space. What defenders of capitalism are afraid of is not planning, but its democratization.
Friedrich von Hayek—perhaps the most honest defender of the market, an honesty that led him to see through the equilibrium and efficiency fairy tales of mainstream theoreticians and to openly support right-wing dictators like Pinochet—framed the incentive function of markets and prices in two ways. First, he posited that prices collect dispersed information, connecting it to decisions over concrete resources, especially their future use. Even ignoring that the price system is inevitably bound up in producing inequalities and exploitation, Hayek’s thesis that only prices can facilitate social “action at a distance” is less and less plausible today. Networks of cables, towers and radio waves crisscross the Earth with the sole purpose of delivering ever more abundant streams of information. There are trillions upon trillions of pieces of data—on everything from how we use things, to what we think of them, to what resources went into making them—that could form the information foundation of nonmarket decisions about future uses of resources.
Hayek’s second argument, that prices are also indispensable to the discovery of new information, has recently been unpacked by Greek socialist economists John Milios, Dimitrios Sotiropoulos and Spyros Lapatsioras. The trio writes:
With the establishment of central planning, there will not be a “discovery process” on the part of managers, hence no proper capitalist behavior and therefore no efficiency in capitalist terms. In the end, every serious restriction of capital markets threatens the reproduction of the capitalist spirit … The unleashing of finance not only channels savings to investment in a particular way, but it also sets up a particular form of organization in capitalist society.
In short, Hayek may be right that prices aid in discovery under capitalism; however, that insight cannot be generalized to every socioeconomic system, including that which might supersede capitalism.
Capitalist institutions affect our behavior in multiple ways, from what we do today to what we want—or have—to do tomorrow. Capitalism is not just a means for dividing up goods and services—though it is that too; it is a way of structuring society. The planning that happens is still embedded in and hidden under a facade of markets. In a way, then, it is crucially important to “get the incentives right” in order to maintain these social and economic institutions. The threat of disinvestment is a disciplining force for capital and its managers, just as much as unemployment is a disciplining force for workers. Projects will be taken up if and only if they are thought to be profitable—a criterion that has produced a litany of technological wonders alongside an equally long litany of human misery.
If democratic planning has the capacity to transform the economy, it is likely to transform us as well. We’re very malleable creatures—biological systems constrained and shaped by our environment and by each other. We create society, but society also creates us; one of the successes of capitalism, and especially its most recent, neoliberal variant, has been to instill competition into more and more aspects of life. The reverse has also happened here and there: for instance, a few short decades of Nordic social democracy managed to produce more cooperatively predisposed citizens. Social scientists have long understood that building different institutions will also make us into different people. Will we still need incentives? In the broadest sense of being motivated to do things, of course we will. But it is a poor theory of social life that says creation or innovation can only take place with the prospect of personal monetary gain.
As we argued in chapter 2, the set of all goods and services that are profitable may overlap with, but is not coincident with, the set of all goods and services that are useful to society. If something is not profitable, such as we have seen with new classes of antibiotic, no matter how beneficial, it will not be produced. Meanwhile, so long as something is profitable, no matter how detrimental, such as fossil fuels, it will continue to be produced. The problem is generalizing behavior under capitalism to all human behavior. Investments—decision making over how we divide our resources between our present and future needs—could be planned such that they are responsive to human needs rather than investors’ need for profit.
The Innovative State
But even if investment—diverting resources for future-oriented use—can be planned, what about innovation, the very discovery of those new uses? At first glance, innovation does not seem like something you can plan. But like investment, which is already subject to copious conscious planning, much, if not most, innovation today happens outside the market. The common story gives far too much credit to individuals, to the inventor’s flash of insight. But most innovation is social. It proceeds in small steps, and most of it is done not because of a price signal but in spite of it: innumerable improvements are made every day by workers on assembly lines or at computer desks who get no credit, just as great discoveries are produced in research laboratories that are not only financed but often directed by the state. Steve Jobs didn’t invent the iPhone; as Italian American economist Mariana Mazzucato brilliantly points out, almost every major component is the product of state-directed innovation.
In her book The Entrepreneurial State, Mazzucato laments that while the myriad examples of private sector entrepreneurial activity cannot be denied, this is not the only story of innovation and dynamism. She asks: “How many people know that the algorithm that led to Google’s success was funded by a public sector National Science Foundation grant? Or that molecular antibodies, which provided the foundation for biotechnology before venture capital moved into the sector, were discovered in public Medical Research Council labs in the UK?” Far from the slander of the state as slow-moving and bureaucratic, and the myth of the nimble private sector, she argues that businesses are in fact ineluctably risk averse, due to the need for a relatively short-term return on investment. Instead, the reality is that the state, from the internet and personal computers to mobile telephones and nanotechnology, has instead proactively shepherded new sectors out of their most uncertain, unforeseeable periods—and in many cases even through to commercialization. And this is not a case of the state filling the gaps of the private sector, correcting market failures. The state was central: “None of these technological revolutions would have occurred without the leading role of the state. It is about admitting that in many cases, it has in fact been the state, not the private sector, that has had the vision for strategic change, daring to think—against all odds—about the ‘impossible.’”
In the United States, ostensibly the most capitalist of states, this process has largely been hidden because so much of it has occurred under the direction of the Pentagon, that part of government where even the most ardent Republican free marketeer allows him or herself to discover the joys of central planning. In fact, war and economic planning have a long history together, and the conflict-ridden twentieth century necessitated public-driven planning and innovation on vast scales.
World War II—a new, fiercer form of total war—gave rise to a comprehensive wartime planning regime, even in the capitalist heartland. In the United States, the War Production Board (WPB) was created in 1942. Its mandate was widely ranging, encompassing everything from fixing production quotas to resource distribution and price setting. The WPB, America’s grand national experiment in economic planning, was responsible for converting peacetime industries to war production, allocating and
prioritizing material distribution, rationing essential items such as gas, rubber and paper, and suppressing nonessential production. It had its successes—the war was ultimately won by the Allied camp—but its short existence was compromised by infighting between civilian and military personnel, and undermined by business that was always looking out for its own interests, jockeying to exit the war stronger.
But wartime planning sprouted up beyond just the WPB. A smaller agency called the Defense Plant Corporation was responsible for over a quarter of total wartime investment in new plant and equipment; with it, the government ended up building and controlling some of the most modern manufacturing facilities in the United States at the time. Beyond the immediate war effort, government funded and planned basic research that led to major breakthroughs. The Manhattan Project, which ultimately developed the atomic bomb, is well known, but there were other advances from such efforts that were indisputably socially good, including the mass production of the first antibiotic, penicillin.
Prior to the advent of antibiotics, unless you had surgery, mortality from pneumonia was 30 percent, and from appendicitis or a ruptured bowel, 100 percent. Before Alexander Fleming’s serendipitous discovery of penicillin, patients with blood poisoning contracted from a mere cut or scratch filled hospitals, although doctors could do next to nothing for them. The first recipient of penicillin, forty-three-year-old Oxford police constable Albert Alexander, had scratched the side of his mouth while pruning roses. The scratches developed into a life-threatening infection, with large abscesses covering his head and affecting his lungs. One of his eyes had to be removed. The discovery of penicillin may have been made by a Scotsman, but in 1941, with much of the British chemical industry tilted toward the war effort and London’s defeat at the hands of Hitler a real possibility, it was clear that large-scale production of penicillin would have to be moved to the United States.
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