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Saturday, 22 October 2011

Capital, Capitalism and Humanity

No economy can function without capital: buildings, utilities, transport facilities, machinery and the cash float that is necessary for any household or firm to operate. This fact was recognised early in human history, and by 1800 it had become part of a systematic theory of Political Economy as one of the 'Factors of Production': Land, Labour and Capital.

The young Doctor Karl Marx absorbed Political Economy and combined that with a voracious acquisition of facts, and believed that he had found a more profound truth. This was his perception that a class had emerged in the modern economy who were not any part of the ancient classes of people as they had become segregated by economic role and circumstances over the centuries: farmers, handicraft workers, landlords, soldiers, priests and civil servants. This class was the capitalists. Marx reckoned that this group collectively aimed to seize control of capital and use it for their own purposes rather than for the general good of humanity. He assumed that the capitalists would use the capital that they brought under their control to expand industrial production [including ultimately production on factory farms] and that this would be taken to extreme lengths. As industry expanded and machinery improved, output would increase; but then would occur a crisis. The  capitalists would have expanded productive capacity  to a point where there was not enough demand to meet the output. So the capitalists would cut costs and, as their priority was to carry on buying more more-intensive machinery, the obvious economy that they could make would be to reduce the cost of labour. Some workers would be sacked and the others offered lower wages: there would be plenty of unemployed available to take the jobs if the remaining workers would not accept the lowering of wages. Meanwhile the natural increase of population would produce large numbers of relatively healthy young people looking for work on any terms.

Marx presented capitalism as a machine that would inevitably generate excess production, lower living standards and create a growing 'reserve army of the unemployed'. This did not happen.

For a century and a half after Marx's death economic growth produced a diversification of products and a rising general living standard in the relatively free economies of Europe and the Americas.  Owners of businesses accepted being known as capitalists, and there was a consensual acceptance of the term 'capitalism' to mean 'an economic order in which a least a major portion of industry and commerce belongs to companies and to individuals'. Meanwhile the Russian Empire was captured by revolutionaries who claimed to be Marxists [and whose dogmas spread to central Europe and China after the Second World War] and those people made a disastrous mess of managing their economy by authoritarian means that were asserted to be leading towards the blissful condition of 'communism' that Marx had envisaged. Largely because Marxism failed, the people in the [relatively] free countries accepted their environment being described as 'capitalist'. But the term capitalism has no clear meaning, other than the pejorative term that Marx coined .

The fact that the members of a 'capitalist' society have no clear understanding of what they mean by the term has had disastrous consequences. If there had been acceptance of a definition of 'good' capitalism as an economic system that recognises the importance of managing capital investment effectively the present economic crisis could not possibly have arisen. Individuals in their various roles as politicians, business leaders, investors, voters, workers, pensioners and consumers would have seen that the crazy combination of de-industrialisation with untrammelled credit-creation and house-price inflation that built up after 1980 was preventing a rational allocation of capital from taking place. The survivability of the economy was being undermined in an orgy of imported consumption funded by borrowed money. Financial phenomena - mostly invisible in the internet - absolutely dominated the economy: and the creators and managers of those phenomena included many of the brightest graduates in maths, science and engineering who could have used capital to lead into new worlds of physical output, energy generation and medical science.

It is precisely because politics and society allowed the economy not to be capitalist in any rational sense that the crisis now exists. It is not a 'crisis of capitalism': it is the consequence of the economy ceasing to be capitalist.

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