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... the long run, each capitalist recession will concentrate wealth into fewer and fewer hands.