The Limitations of Capitalism
and the
Origin of Financial Crises
(continued)
A Brief Digression on the Emergence of Money
As trade expands barter becomes increasingly cumbersome and is replaced by a universal
means of exchange. The first such universal means is gold. This, in turn, accelerates the
unequal distribution of wealth that accompanies the decline of the consumer production
economy. Wealth disparity in a peasant community is originally limited. A peasant can
own just so many tools or sheep or land before it is beyond his ability to use or maintain
them. But gold is easily accumulated, stored and converted and requires no maintenance.
Gold does not need to be fed and it does not spoil so there is no limit to how much one can
accumulate. Gold is also more portable than most commodities and can be easily
transported and removed from the community where it is created. In addition, the ability to
store gold as well as its relative ease of mobility gives it the ability to transfer demand
through time and space. In other words, gold can be spent at a time and place of the
holder’s discretion and, as a result, it is no longer tied to the life of the community. In that
sense, the advent of gold as the preferred standard of exchange is one more nail in the
coffin of the consumer production community.
But gold has problems of its own. In barter, the products to be exchanged are readily
recognizable and need little or no verification. Gold, on the other hand, needs to be
weighed and its purity and value must be verified for each transaction. This takes time and
makes large scale trade cumbersome. To overcome this problem, gold is standardized and
replaced by coins of a given value. Coins are less bulky than gold and because their value
is set and constant they do not have to be weighed to establish their worth. A coin’s value
is a given and is immediately determined by its shape and design. In short, handing over
two florins in a transaction is much simpler and easier than handing over a sack of gold
which needs to be weighed by an acceptable scale to determine its value.
Coins also have problems. Although they ostensibly contain a uniform amount of pure
gold, coins can be clipped, shaved Isaac Newton devised the method of adding ribbing to
the perimeter of a coin so that any attempt to shave it could be easily detected. and
debased. They also gradually wear down through simple use. The result is that coins can
lose their value but the way this happens will have major repercussions for the future of
the economy. Since a coin’s face value is set as its gold content depreciates, it will now
take more coins to buy the same commodity. A loaf of bread that cost a florin will
eventually cost two florins. Thus, coins lead invariably to inflation.
Prior to the advent of coins, exchange value is difficult to manipulate. In a barter economy,
for instance, a chicken is worth a chicken and in a market economy an ounce of gold is
worth an ounce of gold. Values do not change except in times of extreme adversity such as
war and bad weather when certain goods such as food are scarce and more valuable. But
prices return to their old values as soon as the disruption ends and inflation never takes
root. However, a coin worth one florin is still worth one florin even after its gold content is
reduced. But since there are now more florins in circulation, their exchange value
eventually diminishes. Therefore, over time, it will take more florins to purchase the same
amount of goods.
The result is an increase in prices but this time that increase does not go away. Unlike price
shifts in a consumer production society, when prices rise in a money economy they do not
return to their old values unless there is a major social collapse. But at the same time,
prices do not rise continuously either. Devaluation leads to higher prices but once a new
equilibrium is achieved prices stabilize. Thus, the advent of coins is invariably
accompanied by periodic but discontinuous inflation.
The introduction of coins transforms the nature of the state as well. In fact, the state owes
much of its existence to a coin based economy. Before money, taxation was difficult to
implement because it was paid in kind, that is with commodities like grain or livestock, or
with labor. Neither was easily transported or stored. Before money, taxe collection
involved the transportation of bulky commodities such as grain and livestock that were not
only time consuming to gather but also required special storage facilities and maintenance.
Money not only made taxation easier and more reliable, it also eliminated the storage
problems and allowed the state to increase taxes or impose new ones. Coins are a boon for
the state because they don’t have the limitations of taxes in kind. At the same time, they
allow for deliberate devaluation. Governments in debt can call in coins and reissue them
with lesser gold content but the same value. This allows governments to pay off the large
debts incurred to outfit armies and administrative staff needed to retain power.
The Birth and Consequences of Capitalism
The new economic system that replaces the consumer production society is a market
production society. Where members of the consumer production society produced for
themselves and controlled the means of production, members of market production
societies produce for the market. This market production society is also known as
capitalism and it differs from the previous consumer production economy in several
distinct and critical ways.
The first and most defining outcome of this new market production society or capitalism
is the separation of the control of the means of production from the manipulation of the
means of production. By hiring workers to produce identical commodities at the fastest
speed in order to compete with other capitalists, the workers are no longer able to control
the conditions of their labor. This is made even more pronounced with the advent of
machines. Historically machines appeared first in the textile industry with the spinning
jenny and from then on, the pace and details of production were lost to the worker. As
capitalism separates the control of the means of production from the manipulation of the
means of production it pits the capitalists against their workers and produces class conflict.
As we have seen, unlike members of a consumer production society, a capitalist produces
commodities not for his own consumption but for the consumption of others. But this leads
to a problem. When has the capitalist produced enough? Remember that the peasant only
produces what he needs and only produces as much as he needs. When a peasant sows
enough seed to get him through the winter, he stops. When he makes the tools he needs, he
stops. But a capitalist has no such limits. A capitalist produces for others and not himself
and therefore he does not know how much to produce or when to stop producing. A
capitalist produces for a market and what he produces is determined by that market.
Consequently, a capitalist continues to produce a commodity until the market becomes
saturated and the value of the commodity becomes less than the cost to produce it.
This is an important point and requires elaboration. In capitalism, commodities are
produced to sell in the market and they are produced until the market can no longer absorb
them. At that point the capitalist stops producing or produces something else. Unlike the
peasant who stops when he has produced what he needs, the capitalist only stops when he
is forced to stop. The capitalist calls this “growth” and makes it the rationale of his
system. Growth, like capitalism itself, is a process without an end. Capitalism brings
growth, it is claimed, but it is never specified what kind of growth this is. All things grow
including tumors. Growth alone, without an end or purpose, is growth without limits. In
medical terminology, this defines a cancer.
There is no “end” or goal built into the capitalist process as there is in the consumer
production economy. The first capitalist associations retained some of the values of
consumer production societies and did have a goal. They were either family centered and
had a family goal (i.e. the Medicis or the Fuggers) or they were a lose collection of traders
trying to limit their risk by splitting the investment (i.e. the Plymouth Company or the East
India Company). In the latter case, the traders required the permission of the monarchy and
would receive a charter defining their purpose and a time limit to achieve it. A peasant who
produces for himself stops when he has all he needs but a capitalist has no such brakes. A
capitalist produces until the market is saturated. At that point he stops and, unfortunately,
so does the economy. The outcome is an economic system that moves in fits and starts.
Commodities are produced for the market until they exceed the market’s capability. Then
the production stops to wait for the market to catch up. During those stops in production,
workers are idled and the economy slows. This is inevitable and it is one of the reasons for
economic cycles under capitalism. They are not an accidental outcome of some mystical
interaction of supply and demand or of bad management or greed but an intrinsic feature
of the capitalist economic system. Incompetence and greed can aggravate them but, in the
end, recessions and expansions are an unavoidable feature of any market production
society.
This pattern of recession and expansion is compounded by another feature of capitalism.
Because the capitalist takes a profit from the sale of his commodities, the workers are
never paid the full value of their product. That means that the workers cannot purchase
what they have created with the wages they are given. As a result, the demand for all
commodities in a capitalist society cannot keep pace with the prices in the market and once
again the capitalist must halt production and wait for the market to catch up. This means
worker layoffs and another economic cycle. The only way to avoid this is to find new
markets. Colonialism was one way to achieve this, the creation of credit was another. Both
have limits. Once all the markets have been tapped, capitalism will collapse. How far and
how deep this collapse will be will depend on how far capitalism is allowed to grow
without oversight and control.
The pattern of recession and expansion also has another disquieting feature. It allows for a
growing disparity in wealth and power. Whenever a recession occurs, some capitalists are
affected more than others. Depending on the nature of the commodities produced, a few
capitalists may even prosper during a downturn. In any event, there will always be some
capitalists who retain their wealth and are able to buy out those who do not. These
fortunate capitalists will fuel a new expansion and emerge from the recession wealthier
and more powerful than they began. These surviving capitalists also use the recession to
streamline their production processes with technological innovation which usually means
that fewer workers need to be rehired. In the long run this means that recoveries will
become increasingly jobless.
Thus, like the Phoenix of mythology, all recessions contain within them the seeds of a new
expansion. And when that expansion occurs, the capitalists rally to denounce their critics
and blame the recession on outside factors. They will insist that the system works and that
it is back and functioning fine. But in reality, recession is built into the very fabric of
capitalism and cannot be avoided without government intervention. In fact, the recovery
only sets the stage for another recession down the road. Interestingly, once the economy
has recovered, capitalist apologists will work hard to give the impression that recessions
are not really all bad. After all, they are good for somebody and they allow the system to
weed out inefficiency. But this is only a half truth and a misstated one at that because, in
the long run, each capitalist recession will concentrate wealth into fewer and fewer hands.
The rich will get richer and the poor will get poorer. And as the number of poor increases
there will be fewer and fewer able to purchase the commodities in the newly reconstructed
market. When the whole world and every corner of it are brought into the system, there
will be no new markets to save capitalism. The system will then grind down once again
but this time without any possibility of a recovery.
Another new feature that is unique to the capitalist economy is competition. In a consumer
production society where everyone produces for himself, competition is pointless. One
cannot compete with oneself. In addition, since everyone’s survival is intimately tied to
everyone else in the community, the emphasis is on cooperation. In capitalism, this is no
longer the case. The one who gets the most to the market the fastest will make the most
money and those that lag behind may not be able to weather the periodic and unavoidable
recessions. And it will not matter who has the better product. The most aggressive will
always win in the long run.
In order for a capitalist to be the first with the most in the market, he must out-produce the
competition. This involves either bringing trade goods as quickly to market as possible by
using the fastest transportation and shortest route available or preventing competitors from
using them. But trade in quantity has limitations that the seller cannot always control.
Interruptions in trade will cost the capitalist money. As a result, another way is needed to
control the flow of commodities. Thus, the capitalist gradually shifts to producing his own
commodities directly for the market. He does this by employing the legions of disposed
peasants and craftsmen unleashed by his destruction of the consumer production society.
This is the origin of factories by way of the “putting out” system or cottage industry. It also
changes the nature of trade. Where trade began as an exchange of luxury goods or
specialized products, under industrial capitalism it is reduced to a movement of raw
material. But this leads to another problem. For a capitalist to control the market by
producing his own goods he will import only raw material but must export finished
material. The only way this can be done is to keep the areas that provide the raw materials
from being able to use them on their own, That way, they become forced consumers of
capitalist production. This is the point of colonialism and the English destruction of the
Indian cloth industry is a historical example.
Each recession ends with a decline in the use of labor in order to control costs. Recessions
allow mechanization and technology to be introduced into the production process because
labor under these conditions is too weak to resist it. The problem of capitalism is that
competition eventually diminishes profits. To overcome this, capitalists become
monopolies. However, if that is not possible, commodities have to be made more cheaply
and demand has to be augmented to purchase those commodities. But there is a limit to
how cheap something can be made so the capitalist turns the only thing left to cut
back—labor.
At first, guilds and unions are broken and wages are controlled. Next, unemployment is
deliberately kept high to keep wages down and cheaper labor sources are sought whenever
possible. Foreign workers are brought in to compete with local labor and when that runs its
course work the labor is outsourced to areas with lower wages. Because capitalism is a
means without an end, there is always a need for new markets to absorb the accumulated
commodities that cannot be purchased at home. But every new market eventually
encounters the same problem as the old one and the process must go on.
A final word on the concept of markets. As this brief overview has shown, markets are
present in both capitalist and non-capitalist societies. Free markets are those in which the
participants are equals and none is able to control either the demand, the supply or the
price of the commodities sold. Once some of the participants are able to dominate the
market because they are either more powerful or wealthy than other participants, the
market is no longer free. Controlled markets can be found in both capitalist and non-
capitalist (i.e. socialist) societies but they are much more likely in the former. The idea that
capitalism is synonymous with the free market is simply not true. To the contrary, a
capitalist needs to control the market to survive. This will eventually lead to the creation of
monopolies, cartels and advertising and a new variation known as financial capitalism.
A major intent of this essay was to show that capitalism is not the panacea for all ills that it
proponents claim but a socially and historically bound economic system that has serious
internal flaws. While it created a great deal of wealth and comfort for twentieth century
citizens from sanitation to faster transport to increased food production and better health
these improvements were largely confined to Americans and Europeans.
For other societies, capitalism has been a source of misery and oppression. It causes
tremendous upheaval to the consumer production society it displaces and it comes with a
set of internal contradictions that bring us continual economic cycles, labor conflicts and a
growing disparity in the distribution of wealth. As markets become controlled and
manipulated, the old version of capitalism centered on commodities becomes distorted and
unworkable and a new version centered on money and credit, financial capitalism, moves
in to take its place. But financial capitalism solves none of capital’s central problems and
adds several of its own. The discussion of these problems and changes and how they have
led to and created the current economic malaise will be the subject of Part II of this essay.
…because
towns are
centered on
markets, they
become the
power base for
a new class,
one that does
not produce
commodities
but bases its
wealth solely
on the sale of
commodities.
…capitalism is
the separation
of the control
of the means of
production
from the
manipulation
of the means of
production…
…recessions
and expansions
are an inevitable
feature of a
market
production
society (i.e.
capitalism).
…all
recessions
contain within
them the seeds
of a new
expansion…
Eventually no
new markets
will be
available and
then capitalism
must collapse
under the
weight of its
own
limitations.
To be continued...
...capitalism is
not the panacea
for all ills that it
proponents
claim but a
socially and
historically
bound economic
system that has
serious internal
flaws...
...in the long
run, each
capitalist
recession will
concentrate
wealth into
fewer and fewer
hands.