Capitalism is Communism

The horseshoe theory of ideology posits that the far-left and the far-right, rather than being at opposite and opposing ends of a linear political continuum, closely resemble one another, analogous to the way that the opposite ends of a horseshoe are close together.

In a manner akin to the horseshoe theory, there is one way in which capitalism has converged with communism.

Consider the coronavirus: COVID-19 has obviously been bad for the economy and COVID-19 vaccines would obviously be good for the economy. Capitalism’s solution is for companies to turn a profit by making COVID-19 vaccines, because they can presumably patent it and sell it at a price exceeding costs.

But trying to make money on life-saving vaccines is a bad look—even Bill Gates said Covid-19 medication and future vaccines should be distributed to people who need them the most and not to the highest bidder.

Fortunately, stakeholder capitalism coupled with the rise in passive investing promises to save the day. In 2019, index funds that passively invest in stocks have exceeded active funds for the first time in the US. As a result, there are basically a handful of institutional investment firms whose jobs are to hold onto a diversified portfolio of stocks that represent “the market”. This portfolio of stocks includes publicly traded pharmaceutical companies like Pfizer Inc.

If Pfizer discovers the vaccine, there is a great asymmetry in the potential upsides to these passive funds as shareholders of Pfizer vs as shareholders of stocks representing “the market” generally. As Matt Levine writes:

BlackRock, for instance, owns about $16 billion of Pfizer stock. If Pfizer went to zero—if it bankrupted itself, selflessly producing and distributing vaccines—BlackRock (really its clients) would lose $16 billion. BlackRock owns about $2.9 trillion of other stocks; if a coronavirus vaccine allowed businesses to reopen and normal economic life to resume, and as a result those other stocks went up by 1 percent, that would more than make up for bankrupting Pfizer.

As such, government interventions to nationalize drug companies or impose price caps or suspend patent laws are unnecessary. Pfizer’s own large diversified shareholders are already incentivized to ensure COVID-19 vaccines are distributed in a way to ensure the economy experiences a broad recovery. (The exact mechanics, e.g. restructuring the payment package of Pfizers’s executives, can be abstracted away.)

This is of a piece with my earlier essay on the distinction between value creation and value capture. Here, COVID-19 vaccines would obviously create far greater value than can be captured by the pharmaceutical companies. Under Econ 101, such positive externalities are regrettable because self-interested actors will devote insufficient resources to such activities.1

However, thanks to the rise of passive investing, institutional investment firms like BlackRock are well-placed to “internalize the externality” and play a state-like role in solving this coordination problem. (The converse of internalizing negative externalities applies with equal force: BlackRock’s move towards avoiding investments in companies that “present a high sustainability-related risk” could be seen in this light.)

Of course, the eagle-eyed reader will readily poke holes in this story.

As Levine notes in the context of COVID-19 vaccines, out of the drug companies contending to produce COVID-19 vaccines, “Moderna has more concentrated owners than the bigger companies” and “[i]f you don’t like drug profits maybe you have to regulate them or nationalize them or whatever, that’s not my problem, that’s Congress’s problem.”

This point could be generalized. Clay Christensen’s theory of disruption argues that incumbent businesses are structurally suited to pursuing sustaining innovation, but this comes at the cost of being institutionally incapable of producing disruptive innovation. More generally, economic dynamism depends on the formation of new companies to solve new problems. The “problem” is newly formed companies will have concentrated ownership, are not publicly traded, and thus are not within the warm embrace of passive index funds.

I’m sorry, I lied: capitalism is not really communism after all. But this also means BlackRock can’t quite fill in the role of the state just yet.

  1. To continue a line of thought from that earlier essay, civilization is literally built on people free-riding on the positive externalities of ideas and information created by those who came before them.[]