Could Coronavirus Cure Capitalism?

Image courtesy of dreamstime.com

The Great Depression of 1929, the Oil Crisis of 1973 or the Financial Crash in 2008 were events that created sudden, economic shocks requiring government intervention. Coronavirus is the first event where governmental intervention has deliberately created a sudden economic shock.

Before Corona (BC), a government’s first obligation was to protect its citizens against foreign invasion. Its second obligation was economic, creating the conditions for economic growth and full employment. Coronavirus has caused a mutation of the first where an invisible invader rather than a foreign hoard is the new battlefield. The second has been entirely sacrificed to the first. My interest in this story is to touch on how coronavirus offers an opportunity to re-imagine our present economic system of capitalism and introducing some of the ideas for a new economic system whose foundation breaks the zero-sum game of growth vs sustainability to achieve a seemingly impossible triumvirate; economic growth, environmental sustainability and physical/mental wellbeing.

Capitalism is the best economic system ever devised to create economic wealth. The countries, manufacturers and distributors that can efficiently organise themselves to produce and sell the most at the lowest possible price win. Those who can’t compete on price lose. The system also plays to our human instinct of competition too, so those who can buy the biggest house feel more worthy than their neighbour next door. Capitalism is extreme form of competition, globalised. Winner takes all. Only the fittest survive.

Capitalism has lifted billions out of poverty but at a cost. Capitalism’s greatest strength is also its greatest weakness. Is it any surprise that the system primarily designed to produce as much as possible at the lowest possible price is also the system where sustainability and quality/value are always secondary? Is it any surprise that the system designed primarily to fulfil my instant desire to buy anything at any time, is also the same system where we have become permanently de-sensitised to the social and environmental costs of making that luxury possible?

Until now, our response has been to address the worst excesses of capitalism, in the form of regulation, standards and safety nets. These address the problematic symptoms but never challenge the root cause. Capitalism has been the one sacred cow no one has been prepared to sacrifice. Until Coronavirus.

As economies are locked down and economic activity is restricted, whole industries (airlines, travel, real estate, non-essential retail) have ground to a halt. In my own country of Israel, the unemployment rate has increased from 4% to over 22% in just a few weeks and overnight millions are left with no job, no income and no prospects. Meanwhile, whilst our income has dropped overnight, our expenditure hasn’t. We still have mortgages to pay, school fees that are due, mouths to feed plus the instalments for anything we were seduced into buying on credit. The safety nets we have or are given are never going to be enough to meet the gap. We can’t extricate ourselves from the lifestyles we built on capitalism’s promise.

It may only be implicit, but at the heart of capitalism is an unspoken transfer of financial risk and liability. These transfers happen billions of times every single day without us ever thinking about it. When we buy a cheap product, the seller receives 100% of our money but we have to cover 100% of the replacement cost when it breaks (it’s actually galling when you stop to think that we then go out and buy the same thing again from the same supplier). When an employer hires someone, the employer takes 100% of the financial risk of a gross salary plus any future sickness/redundancy clauses in the hope the employee will add value at least equal to these costs. In return the employee only has to show up to work. When manufacturers pollute a nearby river they can do so at zero cost because they won’t be the ones getting ill or paying to clean-up. In capitalism, the focus is on ‘caveat emptor’ — buyer beware. It turns out that price doesn’t represent the true cost of manufacturing and distribution, and is just the cost of anything that wasn’t externalised onto someone else (knowingly or not).

The fact that the entire capitalist system is designed to shift risk entirely onto the end-user is peculiar since it is at odds with human needs. Generally I find people prefer to not take on risk. The only people that actually love risk are those that revel in capitalism and their ability to speculate to accumulate (at someone else’s cost :-)). The rest of us would much prefer the opposite. An economic model that like capitalism, values choice and flexibility but unlike capitalism doesn’t comes with the corresponding risk. That’s why employers inherently favour the gig economy/zero hours contracts or why consumers like pay-as-you-go. Both align actual valuable usage with cost.

Our current economic system has created goods so cheap that by default we take it for granted that we will buy, own and then accept the financial risk of either something breaking or no longer being needed, because we can either buy a replacement or throw it out. It’s so convenient. But we also recognise that often these items are then under-utilised and could generate economic value by renting them out (hence the sharing economy) or by giving them away (charity shops). Whilst this does some good, the system as a whole is producing too much, we own too much and it isn’t sustainable.

To predict the future, we often only have to look into the present and extend trends outwards. Because humans value flexibility and are risk-averse, we often elect to rent rather than buy where the opportunity exists. Renting enables us to discover, experience and change our minds without assuming all of the liability that goes with ownership. But whilst many of us choose to rent homes, furniture and digital content, we nevertheless still default to owning. This can either be because the object such as clothing is closely tied to our sense of identity. As our internal view changes on who we are and how we want to be perceived by the world, so too does the need for our external clothing. Which is why strategically no amount of gentle persuasion is likely to stop shoppers from making another impulse purchase. But we often default to owning because there is no viable alternative. The cost of renting a Nespresso machine will exceed the cost of buying one after a few months so I may as well just buy one and accept the risk of it breaking or risk the future realisation that I probably didn’t need it all, or needed something a little different. I can always store one more unloved machine in the kitchen somewhere in the big house I own.

Renting is an important pre-requisite for changing our broken economic system because it helps us shift from the need to own. Why buy furniture for a 1 year housing rental if Ikea have an option for me to rent whatever I need and then return it at the end of the year for a fraction of the ownership cost?

Renting alone however isn’t enough to change the needle. To change the system as a whole we need to make more structural change;

  1. ‘internalise’ the true cost of manufacturing (i.e calculate its true cost to society at point of production) plus the lifetime maintenance cost of the product and reflect this into the rental price

For example, the (‘internal’ manufacturing cost + ‘external’ societal costs of manufacture + the likelihood of the device breaking and being repaired+ cost of end of life disposal + a fair manufacturer’s profit margin), divided by the anticipated lifetime of the device = monthly rental cost.

Granted the rental cost now includes costs that weren’t currently being included in the price, but now the equation turns our current version of capitalism upside down. Apple now have an incentive not to manufacture and sell as many new phones as possible to existing phone users, but to maximise the quality and lifetime of the device on a profitable subscription model basis. Sustainability is built-in because if anything goes wrong it goes straight back to Apple to fix. Overnight, Apple would be compelled to create devices where parts (such as batteries) could be replaced rather needing to replace the device as a whole. Instead of slowing the operating system down, Apple would be incentivised to speed the performance up to keep up with new features. As customers, we would still have choice and flexibility. If I wanted to shift to a Samsung I could do so at any time either because I wanted to (my choice) or because I need the flexibility (I have no income). If everything I used could be rented instead of owned and replaced at any time without any minimum tie-ins, I would be much better able to flex my monthly expenditure with my monthly income (which helps solves the Corona income/expenditure gap).

The key to making this system work is that any new economic model has to create a ‘win-win’ for both producers and consumers. There is scope to make this work. Intuitively we know that paying a little bit more for a higher quality product that is guaranteed to last 20 years is always going to be cheaper than paying slightly less now and then replacing the item 4 times over the same period. The problem is that at the point of sale, we always sacrifice long-term value for short-term gain. I returned a John Lewis branded pan whose handle had come off the lid after 19 years of use. I wasn’t at all surprised that John Lewis agreed to replace the lid, but that they had said in all sincerity what a shame it was that my particular model had just been discontinued! I cannot tell you how much pride I take in both the longevity of the saucepans but also how they always manage to look brand new despite daily use for a family of 7.

There is therefore scope for consumers to achieve long-term value in exchange for a low rental cost but consumers have to be able to see that rental is no more expensive than buying outright. This is a far cry from Nespresso’s current rental offer of a coffee machine which is designed not with sustainability in mind, but by their desire to sell the same or even more machines on higher-margin subscription models.

Shifting the true economic cost and financial risk/liability may not seem significant but it has the potential to change the basis of our economic system for the better. It would enable us to move away from a capitalist world that produces too much, at too low a level of quality and at too high a cost to society, to an economic successor that manufactures only what is needed (not wanted) at the highest level of quality and at it’s true lifetime cost.

And perhaps as customers, our consumerism mentality would change too. We would move away from seeing things as disposable because they were cheap and we no longer fancy them, to instead focussing on long-term value, to take pride in what we have rather than crave what we don’t and to value what is old and looked after, as opposed to the new and shiny.

Who would have thought that Corona could cure capitalism as opposed to capitalism finding a cure for Corona?

My life’s work has been exploring how we re-evaluate our belief in how companies ought to work and start thinking “upside down” instead.

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