No Crisis of Capitalism

Fashionable babbling in the media and among politicians has now fixed on the vague idea that that there has been a crisis or even a failure of capitalism. So what is Capitalism?

By 1800 Political Economy taught that there were three factors of production without which economic activity could not occur:
land: which means both the site where production and/or trading takes place, and all the natural resources that are needed as direct and indirect components of the process;
labour is all the manpower and womanpower that has to be brought to bear to start and to maintain the production of the output and of all the components that go into making it, including the management of all stages of the process;
capital is the accumulated saving from the output of past times that is deployed to meet all the costs of running a business until an exchange of output for revenue to take place. The capital must cover rent for the site, the cost of the materials, and the wages of people who build and equip the factory and start production; it must also fund the original marketing of the output.

In a quest for transparency between 1800 and 1860 Political Economists developed the concept that there was a symmetrical means of computing the fair return to each factor:
Land was remunerated with rent which was the price that had to be paid for the use of the land for this purpose rather than for any alternate use. Landowners could chose to keep their estates undeveloped, for hunting; but they can optimise their income by farming it for crops [or leasing to tenant farments], or by letting sites for all sorts of purposes, including urban property which is most lucrative.

Labour was remunerated with wages that must be sufficient to attract the necessary labour, with the necessary skills and experience [where relevant]. The vast majority of people who are not peasants need to earn a living, and they learn that location, luck, experience, skill and physical fitness can attract differential wages. There are differing wage-rates for different jobs, and for the same job in different locations even within a small country. Intellectually able, fit, skilled people who are able and willing to migrate can maximise their earnings.

Capital was rewarded with profit which must be sufficient for the capital to be allocated by its owners for one selected purpose rather than for any possible alternative use. Instead of being invested in business, with all the risks that follow from such an investment, capital - in the form of cash - can be lent to the government [whose borrowing was believed to be absolutely guaranteed for the lenders]: so money will only be invested in trade and industry if it is at least likely to produce a return to investors that is greater than the rate that can be got from the government.

Political Economy earned the nickname 'the gloomy science' [or 'the dismal science'] because of the stark realities that it exposed [notably the Law of Diminishing Returns, the Iron Law of Wages and the Principle of Population]. Attempts to make aspects of the subject look more humane produced more confusion than clarity; and when clever concepts like the Labour Theory of Value were brought to bear in an attempt to explain wage differentials the oppotunities for reductionist quibbling became infinite.

After reading about these issues in depth, the young Dr Karl Marx declared that all the theorising masked one essential fact: that the system of production was not fair and was programmed constantly to become less fair. Progress in industry and in agriculture was derived from the application of ideas and of human ingenuity, but these natural resources - which brought about all the progress for mankind - could not be employed without capital and unless access was granted to land. Land was controlled by landlords, often aristocrats, who could demand increasing incomes for letting their land be used for factory and housing sites, and/or for growing crops more intensively, or for allowing quarrying and mining on and under their land. Even more outrageously unfair, to Marx's perception, was the fact that operators of factories and of rented modernised farms captured the surplus value that was generated in the process. The owner-managers of factories paid the lowest wages that could be forced on uneducated and anxious people, selected factory sites where they would pay as little in rent as possible [which is why so many works and mills were built in grim Pennine valleys] and bought raw materials from the cheapest sources: and then they sold the produce at the highest possible markup. The difference between what the output cost to make and to deliver and the price that was received at the point of delivery, was surplus value. The chap who took the money that represented the surplus value put the greatest possible amount of his takings into his firm as additional capital: which was used to expand the factory, increase the stock of raw materials and take on more labour. He squeezed costs as tightly as possible, and sold his produce for the highest possible price: so that he could invest even more in the next period and appropriate even more surplus value. The purpose was not to feed or clothe or otherwise benefit human beings: the sole objective of the new dominant class - the capitalists - was to accumulate more capital through the expansion of the system of production.

Marx constructed a political ideology based on the concept that the community must capture the control of economic activity from the capitalists: hence his system adopted the name communism: which had a special resonance with radicals after the experience of the Paris commune in 1870.

Transcending the Teutonic complexity of his formal writing, Marx and his associate Engels used journalism and pamphlets to popularise his message and to report on the obviously detrimental conditions in which many wage-earners lived, especially in the most industrialised areas of England. Anyone who combined Marx's explanation of the depredations of capitalism with the Laws of Political Economy was drawn to the conclusion that the outlook was bad. Capitalists controlled the system, and they faced diminishing returns; so they would demand even more surplus value proportional to the falling prices for which output could be sold. In an attempt to preserve their income they would reduce costs by cutting wages and demanding more work from their employees: the workers would have to take that, or become unemployed with a risk that they and their children could starve. The capitalists would also use their power vis-a-vis the landlords to reduce the prices they would pay for materials; and they would eventually dispossess the landlords either by buying them out or by the exercise of political power.

Capitalist and capitalism were created as terms of opprobrium, characterising a class and a mode of economic organisation that had emerged with modern industry and was perceived by the inventors of the concepts to be essentially inhumane. At the same time as Marxism became the ideology of the political 'left', between 1860  and 1900, successful businessmen in North America and Europe came to accept the term capitalist as a description of themselves. In the twentieth century as communism became more oppressive and inefficient after Lenin had grabbed power in Russia, the more businessmen and politicians in the 'free world' became proud of being 'capitalist'. The doctrine that a free market enabled investors of capital to maximise economic growth came to a shuddering check in the early nineteen thirties. Politicians and the few perceptive Economists [most notably Keynes] recognised that only government action could recalibrate the system. Capitalism - of a new kind - was able to survive in parallel with an interventionist state.

The resulting 'mixed economy' of the post Second World War era was very little like Marx's capitalism, but at its best it fostered the development of investor-funded businesses which provided employment, taxes and innovation that were the main contributors to economic growth. Even social democrat governments worked closely with 'civilised capitalism' and after 1970 they followed  right-wing parties in privatising nationalised and state-created industries. It became the fashion to argue that this variant of capitalism was the best form of economic organisation. But - unfortunately for the long terms health of the economy - this heavily regulated and highly-taxed market economy became less and less like Marx's capitalism. Far from being concerned obsessively to invest in the expansion of productive facilities, Thatcherite capitalism became a system from which spending power could be extracted for taxes, for dividends [returned to collective investment funds: investment and unit trusts in the 'sixties, then pension funds in the 'seventies, then venture capitalists in the 'eighties, now hedge funds] and for increasingly inflated remuneration packages for directors, managers and star traders. That system of chaotic and inflationary economic disorganisation was not capitalism: nor was it anything like Leninism although it was controlled by the state through regulatory regimes, licensing systems, discretionary taxation, procurement policy for the overweening public sector, and the manipulation of monetary and fiscal policy.

The growth of the chaotic real-world business system was funded by the emergence of the parallel system of credit expansion in cyberspace that enabled firms and individuals - and governments - to borrow money to spend greatly in excess of what they earned. The gross overexpansion of that fantasy universe led directly to the credit crunch and to the slow realisation in the countries that were most affected by it that their economies had been despoiled of any solid foundation.

Some individuals have recently become rich by manipulating shareholdings and by creating or capturing intellectual property. Only a very few of them have behaved like classic Marxian capitalists and put their profits back into their real-world businesses as new investments; and even those few have realised that taxation will destroy their personal business empires on their death [if not before]. The portion of the economy that is controlled by individual capitalists [and by capitalist dynasties] is trivial; and the real economy is overshadowed by the nexus of fantasy businesses that is called casino banking.

We live with a systemic crisis: but it is decidedly not a crisis of capitalism: it is crisis caused by the absence of any system to ensure that the investment that is necessary for the future survival of the economy is being made. The present standard of living of every nation in Europe, except Germany, and of the USA is only maintained as it is by borrowing: most notably the borrowing that governments undertake to subsidise the welfare state. However incoherent, incomplete and insensitive the welfare state may be, it still maintains millions of people. The decisions about this system are taken, always have been taken, and always will be taken by politicians. Contemporary politicians have no serious business experience, no knowledge of Political Economy, no recognition of the nature or depth of the crisis that it is their duty to resolve. The mess was created by politicians, with the enthusiastic support of would-be capitalists who have been encouraged to 'go for it'. Few non-politicians believe that the political class have the intellectual power, or the integrity or the guts to meet these challenges. Recently the media have followed politicians in using diversionary tactics by decrying and individuals who can be characterised as 'fat cat' capitalists. But it is impossible to sustain the assertion that a predator class  of 'bankers' is exclusively responsible for the recent crisis. The pseudo prosperity of the era from 1980 to 2007 was achieved by the symbiosis of the human economy with the finance generated in cyberspace: that was not  capitalism.