Of course, that claim has been made by many others, including Karl Marx. Rifkin’s argument, however, is quite different from Marx’s. Of the two, I am more sympathetic to Marx because he was unaware of the many subsequent advances in economic understanding that undermined his ideas. Rifkin has no such excuse. He should have noticed the bright red warning signals those advances were flashing at him as he blissfully made his case that technological progress is relegating market-based capitalism to a minor economic role.
For example, he believes marginal cost provides such strong support for his argument that he includes it in his title. Yet he overstates the prevalence of “near zero marginal costs,” while making an argument about marginal costs that is undermined by both theory and experience. He completely fails to notice that the technological progress he highlights is increasing the advantage and extending the range of markets.
Coase knew better / In Rifkin’s view, technological advances are rapidly increasing the number of goods that can be produced at very low marginal cost. Further, “when near zero marginal cost is reached, goods and services become nearly free, profit margins evaporate, and private property exchanged in markets loses it reason for existing. The market mechanism becomes increasingly unnecessary in a world of nearly free goods…, and capitalism shrinks to a niche economic realm.”
But never fear, in the “Collaborative Commons” that he says is replacing markets, “[t]he new spirit is less … concerned with the pursuit of pecuniary interests and more committed to promoting quality of life; less concerned with accumulating market capital and more with accumulating social capital; less preoccupied with owning and having and more desirous of accessing and sharing.… [T]he new social entrepreneurs [are] less driven by the invisible hand and more by the helping hand.”
Rifkin is correct in observing that technology has increased the number of goods and services that can be provided at nearly zero marginal cost. How large that number is is another matter, as are some of his examples such as health care and energy, although I shall largely ignore those matters. I will also give him a pass for leaving the impression that nearly zero marginal cost makes a good nearly free. He clearly recognizes throughout the book that there are significant fixed costs that typically have to be incurred to produce goods at nearly zero marginal cost. Indeed, he uses that fact to explain why he believes profits vanish for nearly zero marginal cost goods because efficiency requires nearly zero prices for them.
However, goods produced at nearly zero marginal cost have long been supplied profitably and rationed through markets more efficiently than they could have been without markets. Rifkin forgets that the marginal cost of consuming a good can be high even though that consumption does not add much, if anything, to production costs. A price high enough to equal the marginal production and consumption costs can be high enough to cover a large fixed cost of production.
Consider Rifkin’s discussion of the debate between economists Harold Hotelling and Ronald Coase over how to finance bridges and provide and distribute broadcast spectrum and hydroelectricity. Hotelling argued that once the investment was made to build the bridge, provide and allocate broadcast spectrum, or furnish the equipment necessary to generate and distribute hydroelectricity, market competition would result in the price to consumers being only enough to cover marginal cost, and government would ultimately have to cover the large fixed cost. Coase, on the other hand, realized that though the marginal cost of such goods would often be nearly zero, firms likely would find ways to cover the fixed costs, and the resulting efficiency meant it was still better to use market mechanisms.
Eclipse of capitalism? / Rifken ignores at least two reasons why providing and rationing high-fixed-cost and low-marginal-cost goods and services is best done through market prices, as Coase argued. First, using the example of a bridge, the marginal cost of using a bridge is effectively zero only until some capacity constraint is reached. And building a bridge so large that its capacity constraint is never reached would be wasteful. Once that constraint is reached, each additional user imposes cost on other users, but that marginal cost does little to discourage use because the cost created by each driver is spread almost entirely on other drivers. During rush hour that cost can become very high, as reflected by long delays. Fortunately, technological advances Rifkin sees as undermining the price system make peak-load pricing schemes possible. The price of bridge use could be easily adjusted to closely match the changing marginal cost of use. There is, of course, no guarantee that those prices will be enough to cover the bridge’s fixed costs. But if that cost is not covered, a monthly or yearly access charge could be levied on regular users that, along with the marginal charges, would cover all of the bridge’s fixed and variable costs.
Second, private pricing arrangements also provide suppliers with information on how large high-fixed-cost facilities providing relatively low-marginal-cost goods should be, and how much to expand the size and number of such facilities when the social value of doing so exceeds the social costs. Further, the information comes in the form of anticipated revenues that motivate suppliers to respond appropriately to it.
Not surprisingly, many high-fixed-cost and low-marginal-cost goods and services, such as electricity, exercise facilities, education, book publishing, hotels, airline travel, software, amusement parks, country clubs, moving pictures, television broadcasts, and rock concerts, are being provided privately, profitably, and efficiently through markets. There is no evidence that the private firms and organizations providing those goods and services are an economic Titanic that has hit the technological iceberg Rifkin believes is leading to “the eclipse of capitalism.” In contrast, it is when government is financing and often providing services such as education, passenger rail service, postal delivery, or infrastructure maintenance that we find the best examples of excessive costs, poor service, and general disregard for the interests of those paying the bill.
Renting or ‘sharing’? / Interestingly, Rifkin never discusses the work for which Coase is best known, which is his study of transaction costs. According to Rifkin, “Coase’s singular achievement, which helped secure him the Nobel Prize in economics, came … when he penned his treatise on privatizing the [broadcast] spectrum.” That work was certainly an important contribution, but first and foremost, the Nobel Committee recognized Coase “for his discovery and clarification of transaction costs and property rights for the institutional structure and functioning of the economy.”
Perhaps Rifkin ignores Coase’s work on transaction costs because it explains why markets—which have always been the best means for realizing the sharing and social cooperation that he applauds—are achieving those goals better than ever because of technological advances that Rifkin claims are undermining markets. Coase recognized that there are transaction costs associated with all exchanges and they prevent some exchanges that would otherwise be beneficial. By reducing transaction costs, technological advances are increasing the advantages markets provide.
Yet Rifkin sees near zero marginal cost as the critical factor in what he describes as the birth of a “sharing economy…, a different kind of economy—one far more dependent on social capital than market capital…, an economy that lives more on social trust rather than on anonymous market forces.” What distinguishes this new and different kind of trusting and sharing economy from the old, soon-to-be-eclipsed capitalism based on markets? His answer: more renting!
Of course, Rifkin introduces his new economy in more grandiose terms, seeing it as a “powerful new economic movement [that] took off overnight, in large part because a younger generation had a tool [i.e., the Internet] at its disposal that enabled it to scale quickly and effectively and share its personal bounty on a global Commons.” But what is being shared? He lists automobiles, bicycles, homes, clothes, tools, toys, and skills as some of the things that millions of people are now sharing. Interestingly, not one of those items has a near zero marginal cost of production. (Earlier, Rifkin does mention people freely sharing zero-marginal-cost music obtained through Napster, which could temporarily be done at no personal cost.)
Most of the items he discusses are not shared primarily as gifts, but are commercially available through new or improved rental markets made possible because of reduced transaction costs. As he discusses under the heading “Sharing Everything,” Internet services are—for a price—allowing more people to conveniently rent out rooms in their homes, exchange their children’s toys through rental or barter arrangements, and expand the rental market for men’s, women’s and children’s clothing. Earlier in the chapter he applauds car and bike sharing arrangements that result in more people making more productive use of those items than in the past. But again, the explanation for such practices is not near zero marginal production costs for cars and bikes or a more generous younger generation; instead, recent reductions in transaction costs make it commercially feasible to move cars and bikes, and an increasing number of other goods, to people who can make the most valuable use of them, even if only for a short period of time. Markets are being improved and expanded, not eclipsed, by such technology advances.
Conclusion / Even if Rifkin were convinced that his analysis is wrong and markets are improving, I suspect he would continue hoping his “Collaborative Age” renders them obsolete. His arguments and hope for this age ultimately depend not on economic considerations, but on his desire for “an expansion of empathy to include the whole of the human race as our family” and the quick elimination of “the remaining ideological, cultural, and commercial boundaries that have long separated ‘mine’ from ‘thine’ in a capitalist system mediated by property relations, market exchanges, and national borders.” In other words, he is trying to convince readers that we will soon dispense with private property and market exchanges, as men and women (motivated by empathy alone) somehow acquire the information to coordinate their actions with “hundreds of millions of human beings—I suspect even several billion—” to better serve the interests of all by “tearing down the walls that have long divided people by gender, class, race, ethnicity, and sexual orientation.”
Transaction costs prevent some exchanges. By reducing those costs, technological advances are increasing the advantages that markets provide.
Rifkin’s book has sold a lot of copies. (Interestingly, the Kindle edition sells for almost $13, despite the near-zero marginal cost.) I suspect those sales reflect the emotional appeal of a morality based on intentional sharing and cooperating. That morality blinds large numbers of people to the benefits we all realize from the extended market order. Rifkin is so hopeful that the morality of good intentions (appropriate in families and small groups) is also one on which the global economy can be based that he fails to see the widespread sharing and cooperation already being achieved through markets. Billions of people are sharing a multitude of goods with each other every day in response to market prices that are constantly motivating some to decrease their consumption of particular goods so those who value them more can increase their consumption. This is a far more effective way of sharing than is remotely possible without the information communicated through market prices, no matter how much empathy and caring we feel for the billions of members of our “global family.” Of course, Rifkin—along with many others who yearn for an economic order based on people intentionally caring for each other—finds it difficult to accept responding to market prices as sharing. And sharing on a global scale is a special case of the global cooperation that can be achieved only through the motivation and information communicated through markets anchored in the morality of obeying general rules that promote the general interest.
Rifkin’s book provides economists a window on the difficulty we face in communicating to the public our understanding of the virtues of markets. Explaining the desirable consequences of markets is necessary if a strong case is to be made for them, but it is not sufficient. We have to also recognize the powerful appeal and importance of morality based on intentions and explain how it is consistent with, and complementary to, the rule-based morality of global markets.
