Capitalism is the economic expression of humans’ greatest strength – adaptability. This economic system has allowed human civilization to become increasingly prosperous, connected, and peaceful over the centuries.
It is only natural to think that investors and entrepreneurs acting within a capitalistic system would direct their genius to attacking the biggest, most intractable, and potentially most rewarding problems. Certainly, in the last few months, we have seen capitalist systems respond with breathtaking rapidity to the threat posed by the SARS-CoV-2 virus, and reports suggest a vaccine for the disease it causes, Covid-19, will be developed in record time.
While Covid-19 represents an enormous shock and an imminent threat to economies around the world, to the extent that it is transitory and – in relative terms – easily soluble, it is not the greatest issue facing human society at this time. By any objective measure of likelihood of occurrence, severity of impact, and implications for human health and well-being, the greatest issue facing humanity is certainly climate change.
People around the world – even those in the US – appreciate the seriousness of climate change and are willing to expend their human and monetary capital to find a solution to it. Silicon Valley should be all-hands-on-deck working to solve the problem and firms like Andreesen Horowitz should be sifting through thousands of climate change-related start-ups in a year.
Instead, the Valley is all-hands-on-deck coding up new mobile apps, designing algorithms to better track and profile American consumers (to more efficiently pick their pockets), automating society’s way into an even more extreme labor crisis (shout out to Andrew Yang!), and evading responsibility for its role in the breakdown of civil discourse.
Yes, there is a lot of money flowing to solar arrays and wind farms. Yes, people are working hard on battery technology. But if you look at the enormous reductions of greenhouse gases necessary to prevent even moderately terrible climate scenarios, it’s clear relying only on these improvements will offer us too little and the effects will kick in too late.
Capitalism’s present failure to respond to a foreseeable crisis relates to structural biases related to the economic incentives offered to agents representing current incumbents.
In the words of Warren Buffett’s investing partner, Charlie Munger, “Never, ever, think about something else when you should be thinking about the power of incentives.”
All employees of a modern multi-national corporation are incentivized to do one thing and one thing only – figure out how to meet the quarterly and annual financial goals on which the careers and fortunes of their C-level managers are dependent.
No matter how important individuals working at a large company might believe climate change to be, swimming against the stream sets them up for exposure to career risk that might cause them and their families and significant financial hardship.
The name of the game is for everyone to work as hard as possible to maximize resource efficiency within the current economic paradigm rather than to redirect resources to prepare for a perfectly predictable future state. This exposes the entire system to the risk of being wholly unprepared for a paradigm shift.
The issue of incentives extends through an entire network of relationships that defines the vital infrastructure of our economy.
Venture capitalists – most of whom made fortunes in supplying the world’s thirst for disposable hardware running cool software – have a hard time conceiving of a project that might not “scale” in two years and which might require significant capital expenditures before it makes its first dollar in revenues. Khosla Venture’s experience with biofuel start-up KiOR is a perfect case study.
These VCs understand software, so their attention primarily ends up being drawn to opportunities they can easily assess and whose outcomes they can easily conceive.
Investment bankers earning base salaries that are 10 times US median incomes before even receiving incentive bonuses are loath to commit their own names and reputations to finding funding for projects that might take years to work out. After spending their lives working hard to jump through hoops at Groton, Harvard, and Goldman SachsGSGSBD, it’s nearly impossible for them to stick their necks out. Again, career risk raises its ugly head.
Capitalism, the perfect expression of human ingenuity, problem-solving capacity, and adaptability is failing us when we need it most. We must find a new way to incentivize the agents of our current system if we are to thrive and survive the difficult century ahead.