BASIC CAPITALISM - Still the only Economic System with any hope of Success

BASIC CAPITALISM

Still the only Economic System with any Hope of Success

How to make it work 
 Social-Capitalism

Stes de Necker

Introduction

Capitalism is an economic system in which trade, industry, and the means of production are privately owned and operated via profit and loss calculation (price signals) through the price system. Central characteristics of capitalism include private property, capital accumulation, wage labour and, in some situations, fully competitive markets. 

In a capitalist economy, the parties to a transaction typically determine the prices at which they exchange assets, goods, and services.

The degree of competition, the role of intervention and regulation, and the scope of state ownership vary across different models of capitalism. Economists, political economists, and historians have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free market capitalism, welfare capitalism, crony capitalism, corporatism, "third way" social democracy and state capitalism.

Each model has employed varying degrees of dependency on free markets, public ownership, obstacles to free competition, and inclusion of state-sanctioned social policies.

The extent to which different markets are free, as well as the rules defining private property, become matters of politics and of policy. Many states have a mixed economy, which combines elements of both capitalism and centrally planned economics.

Capitalism has existed under many forms of government, in many different times, places, and cultures. Following the decline of mercantilism, mixed capitalist systems became dominant in the Western world and continue to spread.

History of Capitalism

Capitalism was carried across the world by broader processes of globalization such as imperialism and, by the end of the nineteenth century, became the dominant global economic system, in turn intensifying processes of economic and other globalization. Later, in the 20th century, capitalism overcame a challenge by centrally-planned economies and is now the encompassing system worldwide, with the mixed economy being its dominant form in the industrialized Western world.

Industrialization allowed cheap production of household items using economies of scale, while rapid population growth created sustained demand for commodities. Globalization in this period was decisively shaped by nineteenth-century imperialism.

After the First and Second Opium Wars and the completion of British conquest of India, vast populations of these regions became ready consumers of European exports. It was in this period that areas of sub-Saharan Africa and the Pacific islands were incorporated into the world system.

 Meanwhile, the conquest of new parts of the globe, notably sub-Saharan Africa, by Europeans yielded valuable natural resources such as rubber, diamonds and coal and helped fuel trade and investment between the European imperial powers, their colonies, and the United States.

The inhabitant of London could order by telephone, sipping his morning tea, the various products of the whole earth, and reasonably expect their early delivery upon his doorstep. Militarism and imperialism of racial and cultural rivalries were little more than the amusements of his daily newspaper.

What an extraordinary episode in the economic progress of man was that age which came to an end in August 1914.

The global financial system was mainly tied to the gold standard in this period. The United Kingdom first formally adopted this standard in 1821. Soon to follow was Canada in 1853, Newfoundland in 1865, and the United States and Germany (de jure) in 1873. New technologies, such as the telegraph, the transatlantic cable, the Radiotelephone, the steamship and railway allowed goods and information to move around the world at an unprecedented degree.

In the period following the global depression of the 1930s, the state played an increasingly prominent role in the capitalistic system throughout much of the world. The post-war boom ended in the late 1960s and early 1970s, and the situation was worsened by the rise of stagflation. 

Monetarism, a modification of Keynesianism that is more compatible with laissez-faire, gained increasing prominence in the capitalist world, especially under the leadership of Ronald Reagan in the US and Margaret Thatcher in the UK in the 1980s. Public and political interest began shifting away from the so-called collectivist concerns of Keynes's managed capitalism to a focus on individual choice, called "remarketized capitalism".

Modern Capitalism

In capitalist economic structures, supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium for price and quantity.

The four basic laws of supply and demand are:

If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.

If demand decreases (demand curve shifts to the left) and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price.

If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.

The price (P) of a product is determined by a balance between production at each price (supply, S) and the desires of those with purchasing power at each price (demand, D).

This results in a market equilibrium, with a given quantity (Q) sold of the product. A rise in demand would result in an increase in price and an increase in output.

The initial usage of the term capitalism in its modern sense has been attributed to Louis Blanc in 1850 ("..what i call 'capitalism' that is to say the appropriation of capital by some to the exclusion of others.") and Pierre-Joseph Proudhon in 1861 ("Economic and social regime in which capital, the source of income, does not generally belong to those who make it work through their labour."). 

The use of the word "capitalism" in reference to an economic system appears twice in Volume I of Das Kapital, p. 124 (German edition), and in Theories of Surplus Value, tome II, p. 493 (German edition). Marx did not extensively use the form capitalism, but instead those of capitalist and capitalist mode of production, which appear more than 2600 times in the trilogy Das Kapital.

Democracy and Capitalism

The relationship between democracy and capitalism is a contentious area in theory and in popular political movements.

The extension of universal adult male suffrage in 19th century Britain occurred along with the development of industrial capitalism, and democracy became widespread at the same time as capitalism, leading capitalists to posit a causal or mutual relationship between them. 

However, in the 20th century, according to some authors, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, absolute monarchies, and single-party states. Democratic peace theory asserts that democracies seldom fight other democracies, but critics of that theory suggest that this may be because of political similarity or stability rather than because they are democratic or capitalist.

Moderate critics argue that though economic growth under capitalism has led to democracy in the past, it may not do so in the future, as authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.

States with capitalistic economic systems have thrived under authoritarian or oppressive political regimes.

Singapore has an open market economy and attracts a great deal of foreign investment, but does not protect civil liberties such as freedom of speech and expression.

The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. 

Augusto Pinochet's rule in Chile led to economic growth and high levels of inequality by using authoritarian means to create a safe environment for investment and capitalism. In the Twenty-First Century, Thomas Piketty of the Paris School of Economics asserts that inequality is the inevitable consequence of economic growth in a capitalist economy and the resulting concentration of wealth can destabilize democratic societies and undermine the ideals of social justice upon which they are built. 

Marxists, anarchists (except for an archo-capitalists), and other leftists argue that capitalism is incompatible with democracy since capitalism according to Marx entails "dictatorship of the bourgeoisie" (owners of the means of production) while democracy entails rule by the people.

Short Definition of Capitalism

Capitalism is "production for exchange" driven by the desire for personal accumulation of money receipts in such exchanges, mediated by free markets.

The markets themselves are driven by the needs and wants of consumers and those of society as a whole. If these wants and needs were (in the socialist or communist society envisioned by Marx, Engels and others) the driving force, it would be "production for use".

Contemporary mainstream economics, particularly that associated with the right, holds that an "invisible hand", through little more than the freedom of the market, is able to match social production to these needs and desires.

In general, capitalism as an economic system and mode of production can be summarised by the following:

Capital accumulation: 

Production for profit and accumulation as the implicit purpose of all or most of production, constriction or elimination of production formerly carried out on a common social or private household basis.

Commodity production:

Production for exchange on a market; to maximise exchange-value instead of use-value.

Private ownership of the means of production: 

Ownership of the means of production by a class of capital owners, either individually, collectively or through a state that serves the interests of the capitalist class.

High levels of wage labour.

The investment of money to make a profit.

The use of the price mechanism to allocate resources between competing uses.

The Profit Motive

The profit motive is a theory in capitalism which posits that the ultimate goal of a business is to make money.

Stated differently, the reason for a business’s existence is to turn a profit.

The profit motive functions on the rational choice theory, or the theory that individuals tend to pursue what is in their own best interests. Accordingly, businesses seek to benefit themselves and/or their shareholders by maximising profits.

In capitalist theoretics, the profit motive is said to ensure that resources are being allocated efficiently. For instance, Austrian economist Henry Hazlitt explains, “If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself." In other words, profits let companies know whether an item is worth producing. Theoretically in free and competitive markets, maximising profits ensures that resources are not wasted.

Labour

In a Marxist analysis of the capitalist economy, the reserve army of labour refers to the unemployed and under-employed. It is synonymous with "industrial reserve army" or "relative surplus population", except that the unemployed can be defined as those actually looking for work and that the relative surplus population also includes people unable to work.

The use of the word "army" refers to the workers being conscripted and regimented in the workplace in a hierarchy, under the commanding heights of the economy.

Prior to the start of the capitalist era in human history (i.e. before the 1500s), structural unemployment on a mass scale rarely existed, other than that caused by natural disasters and wars. In ancient societies, all people who could work necessarily had to work, otherwise they would starve; a slave or a serf by definition could not become "unemployed".

There was normally very little possibility of "earning a crust" without working at all, and the usual attitude toward beggars and idlers were harsh. 

Children began to work already at a very early age. Indeed, the word "employment" is linguistically a product of the capitalist era.

A permanent level of unemployment presupposes a working population which is to a large extent dependent on a wage or salary for a living, without having other means of livelihood, as well as the right of enterprises to hire and fire employees in accordance with commercial or economic conditions. The expression "unemployed" in English, in the sense of "temporarily out of work", dates back to the 1660s; reference to "the unemployed" as a group was first made in 1782; and reference to "unemployment" as a general condition is first attested in 1888.

The first recorded discussion of the reserve army of labour is in a manuscript written by Karl Marx:

"Big industry constantly requires a reserve army of unemployed workers for times of overproduction. The main purpose of the bourgeois in relation to the worker is, of course, to have the commodity labour as cheaply as possible, which is only possible when the supply of this commodity is as large as possible in relation to the demand for it, i.e., when the overpopulation is the greatest. Overpopulation is therefore in the interest of the bourgeoisie, and it gives the workers good advice which it knows to be impossible to carry out. Since capital only increases when it employs workers, the increase of capital involves an increase of the proletariat, and, as we have seen, according to the nature of the relation of capital and labour, the increase of the proletariat must proceed relatively even faster. The... theory... which is also expressed as a law of nature, that population grows faster than the means of subsistence, is the more welcome to the bourgeois as it silences his conscience, makes hard-heartedness into a moral duty and the consequences of society into the consequences of nature, and finally gives him the opportunity to watch the destruction of the proletariat by starvation as calmly as other natural event without bestirring himself, and, on the other hand, to regard the misery of the proletariat as its own fault and to punish it. To be sure, the proletarian can restrain his natural instinct by reason, and so, by moral supervision, halt the law of nature in its injurious course of development." - Karl Marx, Wages, December 1847

Marx discusses the army of labour and the reserve army in Capital, Ch. 25, Section IV. The Army of Labour consists in those working-class people employed in average or better than average jobs. Not every one in the working class gets one of these jobs. There are then four other categories where members of the working class might find themselves: the "stagnant pool", the floating reserves, the latent reserve, and pauperdom. Finally, people may leave the army and the reserve army by turning to criminality, and Marx refers to such people as "lumpen-proletariat."

The stagnant part consists of marginalised people with "extremely irregular employment". Stagnant pool jobs are characterized by below average pay, dangerous working conditions, they may be temporary. Those caught in the stagnant pool have jobs, so the modern definition of the employed would include both the army of labour plus the stagnant pool. However, they are constantly on the lookout for something better.

The modern unemployed would refer primarily to the floating reserve, people who used to have good jobs, but are now out of work. They certainly hope that their unemployment is temporary ("conjunctural unemployment"), but they are well- aware that they could fall into the stagnant pool or the pauper class.

The latent part consists of that segment of the population not yet fully integrated into capitalist production.

In Marx's day, he was referring to people living off of subsistence agriculture who were looking for monetary employment in industry. In modern times, people coming from slums in developing countries where they survive largely by non-monetary means, to developed cities where they work for pay might form the latent. Housewives who move from unpaid to paid employment for a business could also form a part of the latent reserve. They are not unemployed, because they are not necessarily actively looking for a job; but if capital needs extra workers, it can pull them out of the latent reserve. In this sense, the latent forms a reservoir of potential workers for industries.

Pauperdom is where one might end up. The homeless is the modern term for paupers. Marx calls them people who cannot adapt to capital's never ending change. For Marx, "the sphere of pauperism", including those still able to work, orphans and pauper children, and the "demoralised and ragged" or "unable to work".

Under the system of wage labour, the workers sell their labour power under a formal or informal employment contract to a member of the capitalist class. These transactions usually occur in a labour market where wages are market determined. In exchange for the wages paid, the work product generally becomes the undifferentiated property of the employer, except for special cases such as the vesting of intellectual property patents in the United States where patent rights are usually vested in the employee personally responsible for the invention. A wage labourer is a person whose primary means of income is from the selling of his or her labour in this way.

Wage labour has often been compared to slavery. As a result, the term 'wage slavery' is often utilised as a pejorative for wage labour. 

Similarly, advocates of slavery looked upon the "comparative evils of Slave Society and of Free Society, of slavery to human Masters and slavery to Capital," and proceeded to argue persuasively that wage slavery was actually worse than chattel slavery. Slavery apologists like George Fitzhugh contended that workers only accepted wage labour with the passage of time, as they became "familiarised and inattentive to the infected social atmosphere they continually inhale."

Adam Smith noted that employers often conspire together to keep wages low:

The interest of the dealers... in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public… [They] have generally an interest to deceive and even to oppress the public… We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate… It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.

The eternal wage struggle

·        

      Workers demand the highest wages (cost) for the least amount of output (work)

·        Employers demand the highest output (work) for the least amount of cost (wages)

Aristotle made the statement "...the citizens must not live a mechanic or a mercantile life (for such a life is ignoble and inimical to virtue), nor yet must those who are to be citizens in the best state be tillers of the soil (for leisure is needed both for the development of virtue and for active participation in politics)", often paraphrased as "all paid jobs absorb and degrade the mind."

 Cicero wrote in 44 BC that "…vulgar are the means of livelihood of all hired workmen whom we pay for mere manual labour, not for artistic skill; for in their case the very wage they receive is a pledge of their slavery." 

Somewhat similar criticisms have also been expressed by some proponents of liberalism, like Henry George, Silvio Gesell and Thomas Paine, as well as the Distributist school of thought within the Roman Catholic Church

The majority of criticisms against the profit motive centre on the idea that profits should not supersede the needs of people. Michael Moore’s film Sicko, for example, attacks the healthcare industry for its alleged emphasis on profits at the expense of patients. 

Moore explains:

“We should have no talk of profit when it comes to helping people who are sick. The profit motive should be nowhere involved in this. And you know what? It’s not fair to the insurance companies either because they have a fiduciary responsibility to make as much money as they can for their shareholders. Well, the way they make more money is to deny claims or to kick people off the rolls or to not even let people on the rolls because they have a pre-existing condition. You know, all of that is wrong.”

Another common criticism of the profit motive is that it is believed to encourage selfishness and greed. Critics of the profit motive contend that companies disregard morals or public safety in the pursuit of profits.

Free-market economists counter that the profit motive, coupled with competition, actually reduces the final price of an item for consumption, rather than raising it. They argue that businesses profit by selling a good at a lower price and at a greater volume than the competition. Economist Thomas Sowell uses supermarkets as an example to illustrate this point: “It has been estimated that a supermarket makes a clear profit of about a penny on a dollar of sales. If that sounds pretty skimpy, remember that it is collecting that penny on every dollar at several cash registers simultaneously and, in many cases, around the clock.”

Economist Milton Friedman has argued that greed and self-interest are universal human traits. On a 1979 episode of The Phil Donahue Show, Friedman states, “The world runs on individuals pursuing their separate interests.” He continues by explaining that only in capitalist countries, where individuals can pursue their own self-interest, people have been able to escape from “grinding poverty.”

Capitalism and Economic Growth

Many theorists and policymakers in predominantly capitalist nations have emphasised capitalism's ability to promote economic growth, as measured by Gross Domestic Product (GDP), capacity utilization or standard of living.

This argument was central, for example, to Adam Smith's advocacy of letting a free market control production and price, and allocate resources. Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system.

Between 1000 and 1820, the world economy grew six fold, a faster rate than the population growth, so each individual enjoyed, on the average, a 50% increase in wealth. Between 1820 and 1998, world economy grew 50-fold, a much faster rate than the population growth, so each individual enjoyed, on the average, a 9-fold increase in wealth. In most capitalist economic regions such as Europe, the United States, Canada, Australia and New Zealand, the economy grew 19-fold per person, even though these countries already had a higher starting level, and in Japan, which was poor in 1820, the increase per person was 31-fold. In the third world there was an increase, but only 5-fold per person.

Proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better availability of food, housing, clothing, and health care. The decrease in the number of hours worked per week and the decreased participation of children and the elderly in the workforce have been attributed to capitalism.

In his book The Road to Serfdom, Freidrich Hayek asserts that the economic freedom of capitalism is a requisite of political freedom. He argues that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion.

Milton Friedman, Andrew Brennan and Ronald Reagan also promoted this view. Friedman claimed that centralized economic operations are always accompanied by political repression.

In his view, transactions in a market economy are voluntary, and that the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminish their power to coerce. Some of Friedman's views were shared by John Maynard Keynes, who believed that capitalism is vital for freedom to survive and thrive. 

Freedom House, an American think tank that conducts international research on, and advocates for, democracy, political freedom, and human rights, has argued "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey."

Many economic and political theories advocate for an economy without the profit system and thus the profit motive, but all of these have ended in authoritarianism as in the case of Communism, Marxism and Socialism.

Communism

Economic and social system in which all (or nearly all) property and resources are collectively owned by a classless society and not by individual citizens.

Based on the 1848 publication 'Communist Manifesto' by two German political philosophers, Karl Marx (1818-1883) and his close associate Friedrich Engels (1820-1895), it envisaged common ownership of all land and capital and withering away of the coercive power of the state.

In such a society, social relations were to be regulated on the fairest of all principles: from each according to his ability, to each according to his needs.

Differences between manual and intellectual labor and between rural and urban life were to disappear, opening up the way for unlimited development of human potential.

In view of the above, there has never been a truly communist state although the Soviet Union of the past and China, Cuba, and North Korea of today stake their claims

Marxism

A system of economic, social, and political philosophy based on ideas that view social change in terms of economic factors. A central tenet is that the means of production is the economic base that influences or determines the political life.

Under Marxism, outdated class structures were supposed to be overthrown with force (revolution) instead of being replaced through patient modification. It held that as capitalism has succeeded feudalism, it too will be removed by a dictatorship of the workers (proletariat) called socialism, followed quickly and inevitably by a classless society which governs itself without a governing class or structure. 

Developed in the 19th century jointly by two lifelong German friends living in London - Karl Marx (1818-1883) and Friedrich Engels (1820-1895) - it forms the foundation of communism.

Socialism

An economic system in which goods and services are provided through a central system of cooperative and/or government ownership rather than through competition and a free market system.

Make Capitalism work

There is a widespread belief that free markets do not benefit the common person, let alone the poor: they are only an instrument for the rich to get richer. Not only is this belief false, but in fact the opposite is true. Free markets are the single most important tools to eliminate poverty and spread opportunity.

The problem is that people do not distinguish enough between true free market capitalism, which implies competition and equal access, and the failed version experienced in many countries where powerful elites protect their position by denying fair access to markets. Particularly in developing countries, ordinary people never see the benefits of properly working capitalism.

To make them work for all, markets need political support to provide the right amount of rules and regulations that will allow them to flourish; a government that is not too interventionist and not too laissez-faire.

While there is no single proposal that will preserve the system of free enterprise, the following three mutually reinforcing broad policy objectives must be maintained:

1. keep borders open to the flow of goods and capital;

2. encourage the transfer of productive assets into efficient hands;

and 

3. maintain safety nets focused on individuals.

In 2014 the Nobel Prize for Economics was awarded to the French economist Jean Tirole of the University of Toulouse. Tirole was awarded the Nobel Prize for his contribution on how states could regulate big industries.

As the financial news agency Bloomberg’s news report put it: “Regulators can use Tirole’s research to encourage powerful companies to become more productive, while preventing them from harming competitors and customers.”

And Robert Litan of the Brookings Institute in Washington DC added: “He believes that markets don’t always work and worries how to fix them.”

Capitalism can work properly only when the market is truly free, when the playing field is as level as you can get it.

Monopolies, in other words, are bad for capitalism. They work against affordability and efficiency.

An example: when a single airline flies between two cities, it has an effective monopoly. And therefore the company could charge passengers an arm and a leg.

Now another airline enters the market, with cheaper air fares. You can bet anything that the first airline will not only improve its service, but that its fares will tumble as well.


Inequality is a scourge

In a report published by the Credit Suisse Bank, about 48% of global wealth is owned by 1% of the world population and the gap is getting bigger. 

It also confirms the conclusions by British development agency Oxfam, according to which the richest 85 individuals in the world own about the same as the poorest 3.5 billion of the world’s population.

For several reasons, this is not a healthy situation. It is devastating for societies’ internal cohesion. It deprives economies of millions of middle-class consumers and depresses growth.

It certainly is not a level playing field. It is not a free market, but a skewed one. And that is not healthy capitalism.

The question is: what do we do about it

Certainly not what the ruling ANC in South Africa is doing; shout about poverty and allow the playing field to get ever more uneven. 

About 18 million poor people receive state allowances and it did not solve the problem. It brought relief to people, because those people do not go to sleep hungry any more, but it created dependency.

Hand-outs don't alleviate poverty

Small peasants do not grow crops anymore, because they know the state will pay a few hundred Rand out every month. The ANC hasn’t developed a culture of entrepreneurship, on the contrary, they have destroyed that culture.

Basically the same message can be read into a report by the Fraser Institute of Canada. For the last 20 years, this institute has analysed the extent to which 151 states’ economies are free against an index consisting of 42 distinct variables. These are grouped in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business.

Studies based on the report have shown that, virtually without exception, countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates”.

The report shows that the poorest in economically free countries make much more money than those in un-free countries.

Not surprisingly, Venezuela – the country with which both the ANC and the EFF flirt so happily – is regarded as the world’s most un-free economy. And as it happens, the Venezuelan economy has just about collapsed during the past few years.

As for South Africa, in 2012 the country was placed 93rd with a rating of 6.73 out of 10. This contrasts badly with its ranking of 57th in 1990, before the ANC came to power.  

To summarise  

Create what I will call  Social-Capitalism  

    

Firstly, tackle the big players and their monopolies.

Secondly, inequality that is too severe is bad in every respect.

Thirdly, do not try to alleviate poverty by hand-outs. You may address the immediate problem, but in the long run you create even more problems than you solve.

Fourthly, integrate those social practices that can be integrated into the capitalist structure meaningfully (like health and education for instance) responsibly, without creating a socialist economy.

And lastly, take the long view: free the economy.

Be truly capitalist.