Thursday, August 6, 2015

Postcapitalism - What is Capitalism?

What do we mean by capitalism?

I’m going to define what I think we mean. The term “capitalism” for the modern economy was coined by Karl Marx in his book Capital, and he meant something very specific. He was attempting to document the “new” emerging economic system and what made it distinct and unique from the ones prior.

And what was that? Markets? Around since the Champagne fairs and bazaars of the Orient. Prices and wages? No, those were around even in the Middle Ages, albeit in a more limited form. Making stuff with tools? Clearly around for all of recorded history, as was “technological innovation.” Using money for exchanges? No, that was nothing new, the Romans had plenty of coins. Credit?” Again, around for a long time in periods of stable government with long-distance communication and the rule of law. Banks? Those were around since at least the Renaissance, for example, the Medici and Lombard banking. Globalism? What about the Silk road? The Arabs had the first global economy centered around the Indian Ocean, but they didn’t have capitalism. Bonds? We’re getting closer- government bonds began as a revenue-raising tactic for revolutionary war by William of Orange in 1694, and the IOUs started circulating as a form of currency. Stocks? Closer still – the first stock exchange was in Amsterdam in 1602 and traded shares of the Dutch East India Company (VOC). Working in factories? Now we’re getting a bit closer – those began in the 1774 with Arkwright’s cotton mills. Mass production? That really took off in the twentieth century, but there are antecedents. Bubbles and crashes? Pretty consistent since the Tulip and South Sea Bubbles. But are any of those things capitalism? All of them together? If we have any one of those, do we have capitalism by definition?

Usually open markets, private ownership and monetary exchanges are what most people take capitalism to mean. But that is not the real definition of capitalism.

I’ll define what I think is the definition of capitalism based upon my understanding of Marx (which is admittedly limited). Marx detected something particular about capitalism, and the clue is, of course the world Capital. The central idea is the transformation of some amount of money into more money through the making and selling of some sort of product or service. The starting money we might call capital. The resulting money we might call profit. Money in-between we can call income or revenue.

As Marx defined it, money was not a neutral medium of exchange between two commodity producers (the "exchange value"). Rather, commodities were sold expressly to take a certain amount of money, and wind up with a bigger amount of money than what you started with, through some sort of alchemy. That alchemy he called capitalism. This is the famous M-C-M’, with M’ > M, as opposed to C-M-C. So whatever money you pay out to make your commodity, in wages, equipment, materials, etc., you need to get back through sales more than that initial sum. That is, you always need to sell your commodities in the Market for more money than you spent to make them. The only way you can do that is to sell more commodities than before, to sell new/better commodities that people don’t have already, to lower the cost of producing that commodity, or to raise the price of the commodity.

If you do not end up with a bigger number at the end of this process, then you have a problem. Since anyone can enter the market, you are in incessant competition against other people doing the same thing. If you do not turn a profit, someone else will, and you will go out of business or be bought by the more successful capitalist. Thus you have an imperative to always maximize profit, or be defeated by someone who does. Thus, competitors drop out, and the big fish gobble up the little ones, which is why markets always head towards monopoly or oligopoly – domination by a few firms, with competition being largely ceremonial within walled-off areas of influence (that’s your demographic, this is mine; you take the West Coast, I’ll take the East Coast, etc.). No market for any commodity is infinite, and the better/more efficient makers usually win out. Also, perfect competition would reduce profits to zero, so competition must always eventually be restricted or eliminated in some way to preserve profits.

That's why markets produce a lot of goods, and a lot of novelty. The production processes unleashed by this system were noted, and even praised, by Marx. That is, he praised the fact that system produced a lot of stuff, but condemned the fact that it made people miserable by doing it (alienation).

Because of the division of labor, and because we’re so efficient, it doesn’t make sense to have every single person as their own small business. Capitalists aggregate large amounts of labor together to produce the commodity or provide the service. Thus you always have less capitalists than workers, and you have antagonism between them, since the incentive is to pay the workers as little as possible to maximize profits, which you are under an imperative to do. Because you need to make a profit, you always need to pay workers less than the value in the market of whatever it is they produce. In essence, you steal some of their productivity and turn it into profit.

The profit is the “reward” to capitalists for coming up with the money to mobilize resources, aggregating the labor, and theoretically taking on the “risk” of failure. Profits can be reinvested into the company, or just paid to the capitalists who can save or spend it. We can call this accumulation. Also central is the idea of investment. This is the deployment of money we call “capital” for the express purpose of growing its amount. The more wealth you have, the more you can put into investments rather than daily needs. Because capitalists are the ones who own the factories that produce the goods and the firms that provide the services (The “means of production”), the money they spend ultimately comes back to them. Because workers are paid less than the value of what they produce, this does not happen. This is why wealth tends to concentrate among a small number of people, and why the rich tend to get richer and the poor poorer, even with material abundance.

Also central is wage labor – selling one’s time to a buyer (called an “employer”) in exchange for the money tokens one needs to buy things from the ownership class. Since people do not own what they need to survive – concentrated ownership works as a lash for people to work (wage slavery). Capitalists are always under relentless pressure to produce more goods and to reduce wages.

Everything is based upon making enough profit – whether the shelves in the store are empty or not, whether people eat or don’t eat, whether homes get built or not built, whether rents are affordable or not, whether people have jobs or not, whether people have shelter and healthcare, how much tax revenue there is and whether or not government can afford to do this or that (according to the standard view). Everything is based on profitability, and profitability must always increase, or disaster results (unemployment, recession, etc.). The increase of profits is generically called growth. It matters little how profits are increased, whether by giving people the things they want or by cheating them out of their savings, as long as profits go up. Growth is measured in GDP, and it too, must always go up, or the economy is in “recession.” There is no steady state; like a bicycle it must move forward or tip over. Credit and social trust are key to those interactions.

Since profit is maximized by creating the most output with the least amount of input, there is a relentless drive toward efficiency, that is, producing the greatest amount of output with the lowest amount of input, including labor input (called “productivity”). Thus, even though workers need jobs in order to survive by design, the system is designed to eliminate as many jobs as possible. As firms get more efficient, their profits increase, which will engender growth, which will employ the redundant employees, so the thinking goes. Employees’ skills and jobs on offer are matched by some sort of mystical osmosis.

Mass consumption is also required. I’m sure you’ve heard that consumers buying stuff is “70 percent of the economy" (in the U.S). This is the flip side of selling all those goods is that you need someone to buy them. As wealth concentrates, that becomes harder and harder. Companies squeeze workers to inflate their profits, but destroy the purchasing power to buy them. Thus you have an economy where the rich have to spend heroically just to keep things going, and all the economic development gets channeled into high-end luxury niche goods while prices for necessities increase with no real benefit for most people.

There is no finish line. There is no stopping point. There is no “enough.” There is not even a pause without widespread immiseration of whole populations. The system must grow forever or crash.
That is the essence of the system. Critical to this definition is absentee ownership, the division between owners and workers, wages, growth, completion, accumulation, and, especially, profit. We can define capital as money that is expressly designed to be turned to more money. The couple hundred bucks in your wallet right now is money, but it’s not capital. Your 401K is capital, but not money,-- not only can you not buy anything with it, you cannot even spend it if you wanted to. Of course one can be converted into the other at any time, blurring the distinction.

This why capitalism is very good at making stuff. Not many people can build a car from scratch for themselves, and even if you could, it would be much more expensive. Ditto with almost anything – shoes, clothes, refrigerators, computers, table saws, peanut butter, you name it. These things take time and materials to produce. There are a limited amount of these things. Thus it is easy to sell these things at a price such that money is converted to more money; a profit is made.

But something happens after a while. You have to compete against all the stuff you have already put out there. To deal with this, a few strategies are employed:

1.) Endless novelty. Creation of new “needs” and invention for its own sake (toys, video games, body spray, toasters with microchips).

2.) Fashion: A change in design –the “new and improved” model. Old versions are belittled and made to feel outdated. We need “new” iPhones.

3.) Planned obsolescence. Make sure the product fails after a certain period of time. For example I have an old iPod Touch, and suddenly a few weeks ago all the programs were “no longer compatible”

4.) Relentless advertising and emotional manipulation of our feelings and emotions to get us to buy more than we actually need, to the point where we’re supersizing our homes and renting storage lockers for all our stuff.

5.) Colonizing new markets i.e. the Ponzi model. As long as more people buy in at the bottom, you can sell more. New countries are brought in as markets to sell to, and this is framed as “eliminating poverty” when we start selling surplus goods in these markets (e.g. China, Vietnam, Brazil, etc.).

But in order to sell stuff for more money than you put in to make it, goods have to be relatively scarce. That’s an essential difference between digital goods and material goods.

Cars are excludable. If I’m using the car, you can’t use the car at the same time unless we happen to be going to the same place. But we can both listen to the same .mp3 file at the same time. So can everyone else.

Certain goods need to be made artificially scarce. This is done through the courts – you can’t sing "Happy Birthday" without paying Warner Music Company money or going to jail. That’s how the company makes millions from a song written by someone in 1935 that everybody knows.

Or its done by restricting ownership – by subscriptions that specify that you can only use the software for a specific amount of time. Or by putting extra code in that causes the software to self-destruct or not work.

How does this make us better off? It doesn’t. Instead we “force” a capitalist model upon it because that is the “system” we have to live under.

With all the digital stuff online, the question is always ”how does it make money?” The current way is by spying on us and “aggregating “ data and selling it companies who bombard us with relentless advertising that we do everything in our power to avoid. Of course, many of us don’t even have the money to buy the stuff anyway. Forgive me if I think this model is self-defeating and stupid. I just don’t see this as being workable long term. And yet these digital companies are considered the “future” of the economy and are worth billions.

For example, Microsoft is a huge company. But to stay in business selling software, it must constantly either 1.) deliberately hold back improvements and roll them out slowly so people will keep buying (obsolescence) 2.) Add various features nobody want or uses (bloat). 3) Make it so that he software shuts down after a certain length of time or is incompatible with competitors (sabotage). The free sharing and replication of digital goods must be criminalized, and this criminalization is called “piracy.” You cannot watch a video today without dire warnings against “piracy.” But think of the traditional definition of piracy. Basically hijacking ships and stealing the cargo from its rightful owners on the high seas. How is that anything like sharing videos and software?

Open-source shows that the aggregating of people does not have to be done by corporations anymore – that is the insight of the peer-to-per economy like Wikipedia. It also shows that cooperation, not competition, produces a superior product. Open-source software proves that you do not need a profit motive to make things that work well – in fact the profit motive makes them work worse (due to things like software bloat, proprietary formats, planned obsolescence, and vendor lock-in) And the data can only be made scarce through an oppressive mass surveillance regime combined with government monopoly power – decidedly different from capitalism which is supposed to hold as its highest ideals “freedom” and “competition.”

I think this is at the heart of a lot of the contentions about the incompatibility between capitalist markets as Marx defined them and digital technology that so many thinkers talk about. Who owns this stuff matters, and restricted ownership and artificial scarcity make us worse off in the long run, not better, and can only be maintained by draconian restrictions imposed by all-powerful bureaucracy at the cost of freedom. How is this compatible with the “free market” celebrated by capitalist thinkers? It's not, no matter how many gyrations they go through to claim it is.

The reason we always illustrate capitalism with making stuff – cars, boats, planes, washing machines – is because that’s what it’s good at. And it’s done a great job! (if you discount the environmental devastation, that is). But in an economy where making stuff really isn’t all that important anymore, and where what we want are things like leisure, education, good health, entertainment, etc. why are we forcing the new economy into the straightjacket of capitalism instead of allowing it to evolve beyond it?

Anyway, those are some more thoughts. More to come.


  1. You're starting to get dumb again. Marx did identify an issue in 19th century capitalism with concentration of wealth, and he correctly predicted this would lead to an eventual depression due to underconsumption, which happened in the 1930's. The problem of underconsumption was fixed by government transfers. We are faced with a minor underconsumption problem right now, but it should naturally resolve itself sometime in the 2020's when the baby boomers start retiring en masse. Plus we have a huge overhang of infrastructure that needs updating. Plus the emerging healthcare economy I previously mentioned.

    The great error of Marx was failing to distinguish the active entrepreneur from the passive rentier capitalist. The active entrepreneur is a laborer, by far the most important laborer in the entire economy and thus deservedly well-paid. The passive rentier capitalist, by contrast, should rightly be seen as something of a parasitical drone. The way to deal with this parasite is to make capital so abundant that returns on capital approach zero, what Keynes called the "euthenasia of the rentier capitalist". We are approaching this point, hence the very low interest rates right now. Marx's failure to distinguish the extremely valuable entrepreneur from the parasitical passive rentier capitalist is why communism failed. Without entrepreneurs, no advanced economy can operate, since entrepreneurs are the people who make things happen, whether in the private and public sectors.

    Human nature is such that entrepreneurs must be motivated. A few people may toil in obscurity for the sake of humanity, but they are very rare. Motivation under capitalism is with money, but money is just a proxy for power and position in the social hierarchy, which are the real wellsprings of human motivation. You could just as easily motivate with emblems of social position, such as stars on a general's shoulder to distinguish him from the bars of a lieutenant. Career military men will literally walk through fire to convert from bars to stars. Power and position in the social hierarchy are necessarily scarce. For everyone who moves up, someone else must move down. Because the communists failed to think these things through properly, they set up a bad system of incentives. Entrepreneurial types under communism mostly poured their energies into zero-sum rising in the political structure rather than positive-sum efficient allocation of scarce resources so to raise standards of living.

    Nothing about capitalism requires infinite growth. Modern capitalism does require positive inflation (2% or so), otherwise we get debt deflation dynamics, but we could easily have inflation simultaneously with declining population and GDP. Every year, a substantial amount of human and physical is destroyed through death and depreciation. By simply not producing new babies or reinvesting to replace physical capital losses, the economy would naturally shrink. Japan will be seeing such natural shrinkage in the near future, with no collapse.

  2. Lionization of the ontapanures bothers me, especially when they're held up as the one indispensable element. I don't want to be lorded over by ontapanures (predators) any more than by financiers (parasites). Anonymous is basically voicing the "it's really corporatism you're against" canard. Getting from the predation of the ontapanures and the parasitism of the financiers and other rentiers, to symbiosis, will require cooperation supplanting competition (gamesmanship), not positive-sum games (which require metastatic growth) supplanting zero-sum games.

    Those who are my allies and not my enemies will voice the opinion that labor is a more important factor of production than ontapanureship and capital combined.


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