How capitalism works – and doesn’t work

workersresistance09poster1Philip Ferguson

The Spark February 2009

(The following article is the first in a two-part series on the present economic crisis. This part explains how the system operates; the second part, in our March issue, will be an examination of what’s happening right now – and what workers can do about it.)

According to economics.about.com, “In every economic system, entrepreneurs and managers bring together natural resources, labor, and technology to produce and distribute goods and services.” They do qualify this by claiming, “But the way these different elements are organized and used also reflects a nation’s political ideals and its culture.” (They also note Marx’s description of a capitalist economy as one in which a small group of people who control wealth make the key economic decisions.)

It’s important to understand that the idea that every economic system has, or requires, “entrepreneurs and managers” in order to operate is factually wrong. For most of the time that human beings have existed we lived in collective societies, without entrepreneurs and managers. Different social classes only arose about 10,000 years ago and it’s only in the past few hundred years that capitalism has been the dominant global system. Facts, however, have never been allowed to get in the way of capitalist ideology – that is, the set of ideas which seek to justify the present system and usually do so by making it appear that capitalism is ‘natural’ and eternal.


Capitalism, however, is neither. It arose at a particular point in time, due to particular circumstances. Ultimately, it was a product of human action and can be abolished by human action too.

Origins of class society

Around 10,000 years ago settled communities and agriculture began to develop in the Middle East. These communities still mainly produced things as use-values and the products were consumed by the producers themselves. The development of agriculture, however, led to the production of a surplus. The surplus took the form of agricultural produce – ie humans could now produce more than they needed to eat, to clothe themselves and so on.

The production of a surplus meant that, for the first time, some people could be freed from manual labour. It also meant there was now a struggle for control of the surplus and society became divided into classes.

At the top was a small class of kings, pharaohs and other rulers and an aristocracy, who dominated control of the surplus. They could also finance standing armies, separate from the rest of society, for the first time. Priests and other specialists could also live off the surplus.

A state apparatus emerged for the first time to maintain the division of the surplus in the interests of the new ruling elites and to ensure that society did not disintegrate as different sections struggled over the division of the surplus. Before there was a surplus, a state was neither necessary nor possible.

This early stage of settled human society and the production of an agricultural surplus was based on slavery. In this kind of society it was very clear who did the work and created the wealth of society – primarily the slaves. Exploitation in this society was very transparent. The slaves worked for nothing and were forced to work. They created their own subsistence plus a surplus, which was taken by their owners.

Other parts of the surplus were created in a few areas by small farmers. Part of their product was confiscated by local overlords and also by kings, emperors etc in the form of tax. In a few places, such as ancient Greece and Rome, there was also a small class of wage-workers.

These societies reached their peak in Asia Minor (now Turkey), Mesopotamia (now Iraq), Egypt, ancient Greece and the Roman empires, China and the civilisations of Central America and Peru at different points in time.

There is some disagreement about the nature of pre-contact Maori society in New Zealand. However, private property was minimal, slavery existed but was not hereditary and the surplus was very small. Social organisation was generally collectivist.

Feudalism

The next stage in human society developed firstly in Europe, after the Roman Empire collapsed. This stage is called feudalism. In feudalism, most of what was produced was produced by peasants and they consumed it directly, ie as use-values. The surplus was produced also primarily by peasants. Again, the way the production of the surplus was based on exploitation was transparent. For instance, peasants would work a certain number of days of the year for themselves, creating their own subsistence, and a certain number of days on the land of their feudal lord in which they creatied extra produce which belonged to the lord. In addition, peasants, on their own land, could often produce a little more than they needed, but this – and even part of their subsistence – tended to be confiscated by local lords and kings in the form of a range of taxes. Where the peasant had any small surplus left they could trade it at markets.

In both the slave societies of antiquity and feudal society, production was mainly for consumption. Even the surplus was largely consumed directly by those who expropriated it. For example, kings used the surplus product to feed and cloth servants, soldiers, and other retainers. Religions took part of the surplus to feed and cloth bishops, priests and so on. Only a small amount of what was produced was sold on the market. Market days were big events, because the market was peripheral to society on a day-to-day basis.

Another important characteristic of feudalism (and the slave societies of antiquity) is that the economic and political aspects of society were generally fused. For instance, the baron for whom you performed surplus labour was also your political master. If you revolted against the baron, or the king, the revolt was both economic and social-political. As we will see, this is different from modern society (capitalism) where the economic and political become separated into different spheres.

In feudal society small producers – peasants and artisans – also owned their own means of production. Peasants held land and some tools, artisans owned workshops and tools.

Origins of capitalism

In the late stages of feudalism, however, a number of important changes took place, eventually leading to the rise of a new form of human society – capitalism. These changes included the removal of large numbers of peasants from the land, as it became converted into the private property of aristocrats and turned into sheep and cattle farming, the arrival of Europeans in the Americas and the transfer of vast amounts of plundered wealth from there to Western Europe, the slave trade in which Africans were sold like commodities to enrich the emerging capitalist class and dynamic trade with parts of Asia. There was a scientific revolution beginning in the late 1400s, a philosophical revolution in the 1600s and 1700s (the Enlightenment) and in the late 1700s/early 1800s, the industrial revolution.

The dispossession of peasants in Western Europe meant that there was now a large class of people who had no control over any means of production for creating their own necessities of life. The only way they could now feed and clothe themselves was by selling the one thing they still owned: their ability to work. At first there was simply nowhere for them to work and many starved, were enslaved, or became parts of a big underclass in expanding urban centres, or rural outlaws. Plunder and trade meanwhile was concentrating large amounts of money in the hands of the emerging capitalist class. An important factor in the creation of modern capitalism was the slave trade. As Marx noted, “The discovery of gold and silver in America, the extirpation, enslavement and entombment in mines of the aboriginal population, the beginning of the conquest and looting of the East Indies, the turning of Africa into a warren for the commercial hunting of black-skins, signalised the rosy dawn of the era of capitalist production.”

With the dispossession of peasants in Europe and their conversion into wage-labourers and with the wealth garnered through the slave trade and plunder, the new capitalist class could establish factories and hire workers.

As capitalism developed, the dispossessed class largely became absorbed in the growing new workplaces, especially the big factories, or became wage-workers or tenants on big landholdings which had once been in the hands of their extended families, clans and other collective groups. (In New Zealand, this process was very visible in the second half of the 1800s, as Maori were dispossessed of land and had no alternative but to become workers for wages. It was also very visible in the way that land prices were established that meant no workers who came here from Britain could afford to buy land, but would also have to work for wages.)

Characteristics of capitalism

Because under capitalism the mass of people could no longer produce their own necessities, they were also forced to buy them. Moreover, in general under capitalism, production was now for the market, rather than for direct consumption by the producers. Production for the market in a capitalist society also meant production for profit. Goods produced to be sold on the market for a profit are called commodities.

So we can see a couple of the main characteristics of capitalism:

  • Commodity production – the production of goods to be sold on the market for a profit – becomes the dominant form of production in society and expands rapidly

  • The producers no longer own or control their own means of production; they have been dispossessed of these; the only way they can survive is by selling on the market the one thing they have left – their ability to work (their labour-power).

Under capitalism, we have the continuation of use-value production, but use-values are produced as commodities; the exchange-value aspect is more important than the use-value. We can therefore identify capitalism as involving two intertwined processes, one of which is universal (done by all types of society) and one which is specifically capitalist:

● Labour process (universal), production of use-values

● Valorisation process (specific to capitalism) – production of exchange value/value

The capitalists’ economic power was matched by their seizure of political power, as they overthrew (and executed) feudal monarchs in revolutions in Britain (1640s), France (1789) and, later, in other countries. In France, a large chunk of the old ruling class (the aristocracy) was beheaded.

Under capitalism, with the development of more and more technology, production becomes more efficient, the social surplus grows massively. However it becomes less immediately clear than it was under slavery and feudalism who produces the surplus and how it is the product of exploitation.

For instance, whereas under feudalism, the obvious physical division of the peasants’ working time between producing their own necessities on their own land and producing a surplus on the local baron or lord’s land, makes it equally obvious who produces the surplus and that they are being exploited, under capitalism things appear differently.

In a capitalist society it appears that workers sell their labour-power on the market for a wage. They go to work for 40 hours – or, these days, often more! – and get paid for those hours. So it appears that no exploitation takes place.

But where, then, does the surplus come from?

Exploitation

The surplus can’t come from simple sales – for instance, buying cheap and selling dear – because everyone would do this and the total transactions involving cheap and dear products would cancel each other out.

This is where we need to understand the way that production of the surplus and exploitation of the producers – transparent in slave and feudal societies – become opaque or invisible in capitalism.

What happens in capitalism is that while workers may, and certainly in the First World often do, sell their labour-power at its value – which is basically the cost of reproducing themselves in a fit state to work each day and being able to produce the next generation of workers – something else goes on in the production process. We can take the example of a worker the value of whose labour-power is $500 a week and whose wage is $500. It appears that this worker is getting a “fair day’s pay for a fair day’s work”. And, indeed, there is a genuine formal equality in the transaction on the market – the worker sells his/her labour-power at its value and the employer pays that value in the form of a wage.

However, when the worker is put to work in a factory or other workplace producing goods or services for the market, they will be using machinery and working in a group. Collectively, then, workers produce a mass of goods whose value is greater than what they are paid. Say they are producing cars. In a week, in a car plant, a worker might produce $1,000 in value in the form of a car or part/s of a car. So, just like the feudal peasant, the worker’s working time consists of two parts – one in which they produce a value in the form of car production of $500, which is the same as the value of their own labour-power (or the amount they need to live on each week) and which we can call necessary labour or necessary labour-time and another part in which they produce an additional $500 of value, again in the form of car production, which is the surplus and is produced through surplus labour in surplus labour-time. Whereas in feudal society, the social surplus usually takes the form of a surplus product (grain, animals etc produced over and above the peasants’ subsistence), in capitalist society it takes the form of surplus-value (a value over and above what is spent by the capitalist on wages, plant, machinery, power, raw materials and so on).

Because both necessary and surplus labour in capitalist society are performed in the same workplace as part of the same working week and the same physical product, it is not immediately obvious, as under feudalism, that the worker is being exploited through working extra hours and creating a surplus.

It would, however, become obvious if a group of workers said after 20 hours of a workweek, “OK, we’ve been paid $500 and we’ve produced $500 of value, now we’re going home for the rest of the week! The boss would not say, “Fair enough, see you next week.”

Because the capitalist owns the means of production and therefore the worker has no way of surviving without selling their labour-power, economic compulsion (and legal compulsion in the form of work contracts) ensures the worker will work the surplus labour-time. And, of course, few workers are even aware they are performing surplus-labour because of the way it is not obvious as it was under feudalism and slavery.

(In feudalism, as we noted above, the surplus is a direct product, separate from the product the peasant creates for their own direct consumption. The surplus in feudalism is therefore best described as surplus product. In capitalism the surplus is a value embodied in the product, just like the necessary work-time is, and is therefore best referred to as surplus-value. The surplus-value is realised when the product is sold. Then it becomes actual profit.)

The creation of surplus-value, which occurs through the exploitation of workers, is the key which makes capitalist society go round. Part of the surplus-value goes to the state, in the form of income and company taxes and finances government expenditure on a range of things from public health and education to the cops and courts and secret police; part of it goes to banks and other lending and investment institutions in the form of interest; part of it goes to those who own land and buildings in the form of rent paid by businesses; part of it is used to reinvest in new, expanded plant, machinery and research and development. And some of it is used personally by the capitalists to buy stuff like the $10 million home owned by prime minister John Key.

Division of surplus-value

As in ancient slave societies and feudalism, the surplus (or, more specifically, surplus-value) produced in capitalist society is divided up in various ways. The development of capitalism, for instance, leads to a massive development of the state – all these state services, managers and employees have to be paid out of the surplus. These include the costs of health and education, courts and prisons, standing military forces and so on. The thing about these goods and services is that they are not produced as commodities – they are not produced to be sold on the market to realise a profit. They are, or were in the past, free or cheap and therefore sell at much less than their value. So they have to be financed out of the overall social surplus.

The way this is organised is through the state taking part of the surplus-value in the form of tax. Generally, in a capitalist society, tax, including PAYE tax on workers, is deducted from the total surplus-value.

Some of the surplus-value also goes in rents paid by businesses to the capitalists who own the land and/or buildings and some goes in interest to other capitalists, like banks. Some of it goes into investment in new, more efficient machines and technology and hiring more workers (which could be called “productive consumption” because it leads to further production of wealth). Some of it goes into the luxurious personal lifestyles of the capitalists (which could be called “unproductive consumption” because it does not expand the total social wealth. John Key’s $10 million home, for instance, would fall into this category.

During economic boom periods – like the massive post-WW2 economic boom from the late 1940s until the early 1970s – there is such a huge mass of surplus-value that the growth of the state and state services present no problem to the economy. Similarly, during such times, workers in a few sectors may even increase their wages in a way which gives them a little bit of the surplus (although, generally, even in a boom, surplus-value and profit expands much more than wages).

However, the history of capitalism is the history of booms followed by busts. Booms have generally lasted 10-15 years, followed by busts. The post-WW2 boom was the great exception, lasting for around 25 years. Why do booms always lead to busts in capitalist society?

From boom to bust

In a capitalist society, because it is based on the spontaneous operation of a thing – the market – rather than conscious human control and planning, all kinds of things can and do go wrong from time to time. There can be too much production in one particular sphere of the economy, for instance. However, the fundamental cause of deepgoing recessions and depressions like the 1930s and much of the period since 1974 is the tendency of the rate of profit to fall. In the late 1970s, after several years of recession following the end of the postwar boom, the OECD did a study of profit rates in all the major capitalist economies and found that the rate of profit had been falling in all of them for some time, even at the height of the boom. The OECD study was not able to explain this and was somewhat mystified by it.

However, there is no big mystery about why the rate of profit falls once you understand the nature of capitalist economy and the way the surplus is created through exploitation. What happens is that as capitalism expands, more and more capital is invested in plant and machinery in proportion to the amount expended on labour-power. We can make an equation S/(C+V), where S represents the surplus-value and C and V represent the capitalists’ outlay: C is constant capital (spent on plant, machinery, technology, raw materials) and V is variable capital (spent on labour-power). C merely transfers its own value into the new product. V, however, creates additional value through surplus labour-time, as we have explained already.

As C rises more and more, in relation to V (the part which creates new, expanded value), the rate of profit therefore falls. The overall surplus-value may still be large and expanding, so at first there doesn’t appear to be a problem. However, after a period of years, capitalism is faced with re-equipping and modernising not only individual workplaces, but whole industrial sectors and even whole economies. It is at this point that the fall in the rate of profit becomes a problem, because they simply lack the necessary capital for the scale of modernisation required. Thus the first country in which the postwar boom ended and recession began was Britain, because it had the oldest industry.

For instance, take a point in time in which capitalists invest a billion dollars and gain a 10 percent rate of profit. That means $100 million profit. But as the rate of profit falls to five percent, they would have to invest $2 billion to make the same amount of profit.

When the rate of profit falls to a level where ordinary production cannot be sustained, let alone new investment to revitalise industries and stay competitive globally, economies go into major recessions. How do the employers respond to this situation?

Capitalists often resort to using what profits they do have to speculate in shares, property, foreign exchange and so on, so there is a massive growth of the artificial economy – the sector which produces no surplus-value but plunders overall social surplus-value. This happened on a massive scale in NZ in the mid-1980s, as in other capitalist countries. The unproductive sphere (the artificial economy) expanded massively, while the productive sphere (the real economy) stagnated, starved of investment. This resulted in the October 1987 crash when the real economy could no longer sustain the parasitic, artificial economy and brought it crashing down.

In economic crises, especially protracted ones like that which has followed the end of the post-WW2 boom, capital is forced to do two other essential things.

One is attack workers’ wages and living conditions, in order to cheapen the price of labour-power.

The other is increase the share of surplus-value in the hands of capital by decreasing the amount that is spent, usually by the state, on producing and providing public goods and services below cost.

In New Zealand, these two processes have been at work since the early 1970s, but reached their most ferocious under the fourth Labour government (1984-90) and in the first term of the fourth National government (1990-93).

Several years ago a prestigious Canadian foundation report found that real wages in NZ decreased 6 percent in the 20 years from the mid-1980s on. Many workers, of course, have suffered much greater decreases. Wages, conditions and workplace organisation has been rolled back on a massive scale, as employers have sought to cheapen the price of labour-power in order to boost profit rates. Most workers in NZ have direct experience of this. It reached its peak with the Employment Contracts Act of 1991 and the process has continued under Labour. In fact, the rate of inequality between the “average New Zealander” and the several hundred richest individuals and families in New Zealand expanded more rapidly under Labour than National. It has also become harder for workers to strike.

But the other process is something that people often find more confusing and that is privatisation and the other changes that have taken place in the old state sector. Often people can’t understand why, when these things weren’t broken, the fourth Labour government decided to ‘fix’ them and began selling off state assets and turning other parts of the state sector into SOEs (State-Owned Enterprises), Crown Enterprises and so on.

The main reason, as noted above, is because the state sector in capitalism, as in previous forms of society, is only made possible by – and lives on – the social surplus. In terms of how capitalism operates, the state sector is largely ‘non-productive’ – ie in the sense that it does not produce surplus-value but uses it up. Of course what is ‘unproductive’ for capital may be extremely productive/useful for society. However, private profit, not social usefulness, is the chief imperative in capitalist society.

When the rate of profit fell to such an extent that the postwar boom ended and a crisis began, an important way for capital to escape the crisis was to lessen drains on surplus-value. The less the deductions on surplus-value by the state, the more there was to convert into private profit.

Where the state had built up resources to a level where they could be profitably run as private businesses, capitalists were keen to get possession. So Labour sold a chunk of these to its wealthy backers and friends after 1984. The break up of the Post Office and the sale of the telecommunications part (now Telecom) is an example. The goods and services produced by these former state assets were now produced for sale at a profit on the market – ie became commodities – and so instead of being a drain on surplus-value they became contributors to surplus-value. This was good for profit rates, especially for those who got ownership of these enterprises at bargain prices, but not so good for the thousands of workers who were laid off by Telecom, NZ Rail and so on when they were privatised nor for workers more generally who now had to pay market rates (and more) for these services.

The other thing done by Labour and National from 1984-93 was creating SOEs and introducing market rates, or at least some form of such charges, for previously cheap or free services. Goods and services still in state hands therefore became commodified or partly commodified – ie, to varying degrees they too were now produced to be sold for either a profit or as close to cost as possible. This also required job shakeouts for workers in those areas, worse working conditions and pay for workers ‘lucky’ enough to keep their jobs and increased charges for all who use those services.

The other major reforms to reduce ‘non-productive’ deductions on surplus-value were to slash benefits (the 1991 “Mother of All Budgets”, maintained since by Labour) and to generally rein in spending on health, education and other ‘non-productive’ sectors.

After 1993, the crusading nature of these ‘new right’ reforms declined, mainly because while they did part of their job (driving down wages and living conditions, weakening effective workplace organisation, reducing ‘unproductive’ deductions from surplus-value), they did not succeed in bringing a new boom to the economy. The reforms have been bedded in both by Labour and National since 1993, with some of the roughest edges being smoothed down a bit.

Maintaining government budget surpluses, holding down spending on health, education and other ‘non-productive’ sectors, restricting wage rises and any kind of independent or militant workplace organisation, and continuing the process of commodification, albeit in a slower and more managed way, remain the core of economic policy of the two dominant political parties.

Class conflict

From the above we can see that struggle over wages and conditions and over how the social surplus should be divided and spent are in-built into capitalism.

The other kind of conflict that is in-built is the struggle over aspects of how work and the workplace are organised. These are generally linked to employers’ attempts to weaken workplace organisation and impose practices which cut costs and boost profits – or, in the case of the state sector, cut costs to cut drains on surplus-value.

However, this form of conflict is also connected to another in-built feature of capitalism – namely, that workers no longer have any control over the means of producing their own subsistence, let alone any surplus. They have to sell their labour-power and turn up each day at a workplace owned by someone else – either a private employer or the state. This situation can be called alienation.

On the one hand, the worker has been alienated from their own means of production historically (ie dispossessed); on the other hand, the workplace is an alienated and alienating place because the worker has little or no control over it. Rules are imposed. The products workers create are not owned by the workers, but the employers. In factories, workers become mere “hands” on production lines. Offices have increasingly come to resemble factories in the way they operate. Newer industries, like the fast food sector, also have factory-line styles of production. And where workers might figure out more efficient ways to do things, they are reluctant to pass these on to management because greater efficiency is likely to lead to job losses. Even humanising the workplace in small ways is often hard.

It is difficult to see how any of these problems can be overcome without reorganising society as a whole. For instance, if workers collectively produce the basics of life, or the value thereof, in 20 hours, we could have a 20-hour basic workweek. We would likely decide that we wanted free health and education and also reinvestment in more and more sophisticated machinery and technology etc to make production even more efficient. Therefore we would want a surplus and we could work out how many extra hours we’d need to work to create this. In such a situation, because production would be based on meeting human or social needs, and be rationally planned, we could work 25 or 30 hours a week total, have plenty to live on, have plenty of spare time and a big surplus for health and education and other things society wanted. And we would have control of the workplace, so the hours we worked would be a great deal more pleasant and humanised than at present.

* an edited version of this appears in the February issue of The Spark

Comments

  1. Matthew Cunningham says:

    Philip,

    Whilst your article presents an articulate and well-thought out summary of Marxian economics, a number of your arguments are either incorrect, unfair, or based upon false predications.

    For example, you claim that it was the creation of surplus, and the emergence of a ruling elite aiming to control that surplus, that led to the development of ‘standing armies, separate from the rest of society’. This argument is a half-truth – it implies that only nations that are under the sway of a ‘ruling elite’, and that generate a production surplus, will create a standing army. This is untrue. There is not a single socialist country over the last century that has not raised a standing army. The land army of the Soviet Union, for example, was the largest standing army in history, taking up a portion of that nation’s GDP rivaled only by that of North Korea. The only countries that do not maintain a standing army in this day and age are, in fact, capitalist. Therefore, either every single country claiming to be socialist over the last century was, in fact, not socialist – or else your argument is flawed.

    You also give the following description of the emergence of capitalism:

    “In the late stages of feudalism, a number of important changes took place, eventually leading to the rise of a new form of human society – capitalism. These changes included the removal of large numbers of peasants from the land as it became the private property of aristocrats who turned it into sheep and cattle farms; the arrival of Europeans in the Americas and the transfer of vast amounts of plundered wealth from there to Western Europe; the slave trade, in which Africans were sold as commodities to enrich the emerging capitalist class; and dynamic trade with parts of Asia.

    Peasants expelled from the land had no means of creating their own necessities of life. The only way they could now feed and clothe themselves was by selling the one thing they still owned: their ability to work.”

    What you are describing here is mercantilism, not capitalism. Whilst mercantilism was a precursor to capitalism, the earliest capitalist thinkers were actually opposed to mercantilism. The two main points on which capitalist thinkers like Adam Smith and Desmond David Hume disagreed with mercantilism were that:

    a.) The amount of wealth in the world is neither constant nor bound solely by physical resources; both wealth and investment capital were bound only by the logical limits of market demand.
    b.) The allocation of wealth should be controlled by the dynamic forces of the market rather than the preferences of the state; that is, people should be free to invest their labour and their capital in a manner of their own choosing, rather than through government letter patents endorsing trade monopolies and protectionist trade policies.

    Quite simply, neither the amount of ‘capital’ required to finance a free market nor the industrial processes that facilitate its production requirements existed in the time period you are describing.

    In discussing the means by which capitalism generates its surplus, you claim the following:

    “This is the surplus, which is produced through surplus labour in surplus labour-time … [t]he creation of surplus-value, which occurs through the exploitation of workers, is the key that makes capitalist society go round.”

    This theory is predicated on the notion that the ‘exploitation of the worker’ is the sole source of profit under a capitalist system. Theorists such as Ladislaus von Bortkiewicz and V. K. Dmitriev have called this assertion to question. If you examine the binary theory of economics proposed by Louis Kelso and Mortimer Adler, they claim that both labour AND capital are factors of production. Whilst the labour of the worker may produce the goods, it is the financial capital of the investor that facilitates the growth of new industries and the expansion of existing ones. Whilst I completely agree that capital is unfairly distributed in a capitalist system (unlike labour, which we each own), I believe that a fairer distribution of capital can be managed without resorting to the drastic measures of socialisation.

    In describing the shortcomings of the capitalist system, you claim the following:

    “Capitalist society is based on the spontaneous operation of a mindless thing – the market – rather than conscious human control and planning. This thing can and does go wrong from time to time. There can be too much production in one particular sphere of the economy, for instance. However, the fundamental cause of deepgoing recessions and depressions, like in the 1930s and much of the period since 1974, is the tendency of the rate of profit to fall.

    What happens is that as capitalism expands, more and more capital is invested in plant and machinery in proportion to the amount expended on labour-power. However, after a period of years, the capitalists are faced with re-equipping and modernising not only individual workplaces, but whole industrial sectors and even whole economies.”

    Marx’s ‘tendency of the rate of profit to fall’ is a flawed economic proposition, and has been proven as such. I refer you to the work of Nobuo Okishio who proved that such technological changes tend to RAISE the level of profit.

    The mindless ‘market’ that you refer to is, in reality, the dynamic flow resulting from a multitude of individuals and businesses practicing ‘human control and planning’ on a small scale. The ‘market’ doesn’t decide upon the process of supply and demand – these decisions are made by companies in relation to their own products and services. This decentralised method of decision-making is the most efficient method for determining supply and demand in a complex, globalised economy. Any attempt to concentrate the process of ‘human control and planning’ within the hands of one small, state level body has inevitably resulted in inefficiency, stagnation, and production inequipped to meet the demands of the population – as exemplified by the periodical flooding of the Soviet market with excess goods, balanced out by the regular shortages for basic necessities that saw consumers queuing up for hours just to receive them.

    In discussing the means by which capitalism seeks to repair itself during economic downturns, you state the following:

    “One is to attack workers’ wages and living conditions, in order to cheapen the price of labour-power.

    The other is to increase the share of surplus-value in the hands of capital by decreasing the amount that is spent, usually by the state, on producing public goods and services to below cost.”

    On these two conditions I agree – however, again, I do not feel that the only solution to these problems requires the drastic measures of socialisation.

    ‘Rationally planned’ economies such as the one you are advocating have historically proven to be complete failures. The economy of the Soviet Union suffered from decades of stagnation, inefficiency, and uninformed production measures. The economy of the PRC before the reforms of Deng Xiapong was similarly inefficient due to the relentless ideological compulsion to force full employment upon industries that only required half the workers they were burdened with in order to function.

    The national and global economy, coupled with the means of production, are infinetely more complex today than they were in the budding days of the Industrial Revolution during which Karl Marx lived. The only system that has proven itself capable of managing this dynamic process of supply and demand is the market, because it promotes efficiency, accountability, organisational robustness and, most importantly, an incentive system capable of promoting all of these qualities. The bloated and cumbersome mechanism of a command economy is woefully unsuited to this task. Mikhail Gorbachev, the last General Secretary of the Communist Party of the Soviet Union, lamented this fact in his memoirs when he stated that “the Achilles heel of socialism was the inability to link the socialist goal with the provision of incentives for efficient labour and the encouragement of initiative on the part of individuals. It became clear in practice that a market provides such incentives best of all.”

    In saying this, I do agree that capitalism has the proven potential for corruption and exploitation when it is left to its own devices. The “Dynamic Hand” concept of laissez-faire capitalism, much like the collective good of socialism, falls short when the fundamental flaw of human fallibility is introduced. This is why I advocate a combination of social democracy and binary economics – regulation of the market to avoid its excesses, Keynesian spending to promote growth and ensure universal access to essential services, greater democracy and employee ownership in the production process, and a broader and more equitable access to investment capital.

    Incidentally, I’m not writing all of this just to stir up trouble or troll on a socialist website. I enjoyed your article and your viewpoint (even if I hold a different one), and thought it would provide the chance for some good discussion and debate.

    Cheers, Matt.

  2. Philip That was a very interesting article but there is one small point that needs to be mentioned under “Why Labour Sold State Assets”.
    If I remember very clearly,that after the election Muldoon didn’t want to hand over the keys to David Lange unless he got an assurance that the incoming Labour government would not devalue the dollar. Muldoon knew that if the books were opened it would be very embarassing for him and the outgoing National Government.He had after all made a tacticle blunder calling for an early election. What had transpired was that the country was horrably in debt to finance Muldoons ‘Think Big’projects.
    This gave Roger Douglas a pretext to flog off the family silver.
    They could have leased out the land and dwellings, but no they flogged it off dirt cheap.
    The above mentioned seems to confirm what you say about them flogging the railways and post offices etc. to their friends,it was bloody corrupt and it has been going on ever since.

    Mathew that was a very good blog have you studied economics? I havn’t heard the term ‘mercantilism’ very often. Would that be the renaissance era with the rise of the merchant class? I would have thought they to be the first capitalist, trading goods to accumulate capital.

    I will have a look at my notes on the English ‘Land Enclosures’that occured just before the industrial revolution.

    Yours
    PD

  3. Matthew Cunningham says:

    Cheers Paul. No I haven’t studied economics, I study History and Political Science.

    I do enjoy research on economic questions, however, especially when those questions are framed within ideological terms (i.e. socialism and the command economy, liberalism and the free market, social democracy and the mixed economy, fascism and corporatism). I think these questions are especially poignant due to the current economic crisis we are going through.

    Mercantilism was certainly a predecessor of capitalism, but I assert that there are more differences between the two than most people believe. The most important of these is the idea of wealth – to a mercantilist, the amount of wealth in the world was fixed, whereas to a capitalist wealth is subjective rather than objective and is limited only by the theoretical bounds of consumerism. For a mercantilist to increase the amount of wealth they control they must conquer another country to appropriate it; for a capitalist to do so they need only seek to expand their consumer base or else develop a new good or service for market consumption. This is especially the case in a globalised economy as capital is indiscriminate – it goes wherever it can be most efficiently put to use.

    I’m unfamiliar with the English ‘Land Encolsures’, but i’m assuming this correlates to the privatisation of land that Phil mentions in his article.

    Cheers, Matt.

  4. Hi Matt and Philip. I have just Googled Wikipedia on the English enclosures and I am glad that I have because the material is pertinent to Philip’s article above on the privatisation of land and public utilities.

    Wiki. states that; “The process of enclosure has sometimes been accompanied by force, resistance,and bloodshed and remaines among the most controversial areas of agricultural and economic history in England.
    Marxist historians argue that rich landowners used their control of the state processes to appropriate public land for their private benifit.
    This created a landless working class that provided the labour required in the new industries developing in the north of England. For example;” In agriculture the years between 1760 and 1820 are the years of wholesale enclosure in which, village after village common rights are lost.” (1) enclosure (When all the sophistications are allowed for)was a plain enough case of class robbery.”‘

    Then it mentions the process of enclosure throughout history and the above mentioned was certainly not the first.It has even happened in my community very recently with the industrialisation of dairy agriculture.

    I think that there are very strong parrallels here with global privitisation that is going on in every part of the world.

    Yours PD.

  5. Philip Ferguson says:

    In response to Matthew Cunningham:
    1. The production of a surplus does make possible a standing army. The USSR was able to have a standing army because it produced a surplus. A surplus is not to unique to capitalism – only the specific form of the surplus (surplus-value) is unique to cpaitalism.

    A future socialist society will, as the article noted, still produce a surplus because it will want to expand health, education, leisure opportunities, research, technology etc.

    2. There have been three stages of capitalism – the first stage was mercantile capitalism, the seocnd phase was the era of the industrial revolution and the rise of industrial capitalism and the third (and highest phase) is imperialism. The dispossession of the peasants that I was talking about in the article actually largely took place prior to mercantile capitalism – it took place in the feudal era and for several centuries the dispossessed had no work and formed an impoverished multitude.

    In some places it took place later – the Scottish and Irish clearances being good examples. There are also still clearances taking place in the world today as capital spreads its tentacles into every area of the globe. You can’t have capitalism without separating the pre-capitalist producers from their means of production (most importantly, land) – this continues in places like New Guinea, parts of Africa and parts of Latin America today.

    3. In relation to the contribution of capital to profit, no Marxist denies that capital plays a role. Most basically, in a *capitalist society*, you can’t really produce – certainly not on a competitive level – without capital. However, in the production process, only labur-power creates *new, expanded value*, ie surplus-value. Machines, raw material etc *reproduce their own value*. So part of the total value of any commodity includes the value of the machines and raw material (constant capital), just as it includes the value of the labour-power (variable capital). But the total value also includes surplus-value and that can only be produced by the work done in the production process by the workers; they reproduce not only the value of their own labour-power but this new value.

    4. People have been trying to disprove Marx’s view of the law of the tendency of the rate of profit to fall for a long time. Always unsuccessfully. In fact, it wasn’t Marx who first noticed this trend but the great classical economists themselves and Marx set about trying to explain it.

    Okishio has been disproven by reality. An example of this is that after the postwar boom came to an end, the OECD itself was forced to study what had happened to profit rates. The key OECD study is T.P. Hill’s ‘Rates of Return’ (Paris, 1978) and his graphs show clearly the way the rate of profit was falling through the 1960s – the very height of the postwar boom. Serious capitalist economists know it falls, but they’ve never been able to explain it because they have no understanding of the law of value (or have rejected the concept).

    In point of fact, you can’t explain anything about how and why the postwar boom came to an end and how and why governments used particular methods at particular times to try to address the problem unless you understand concepts like the law of value, productive and unproductive labour, the law of the tendency of the rate of profit to fall and so on.

    Thus historians, political scientists and ‘mainstream’ economists trying to explain the end of the postwar boom come up with utterly banal, superficial ‘explanations’ like the ‘oil crisis’.

    Philip Ferguson

  6. Just to be helpful may I mention that capitalism is a social relationship, not a “thing”

    This is a system of production we are talking about here, not some weird Frankenstien’s monster

  7. The law condemns the thief, or villain
    that steals the goose from of the common.
    But leaves the greater rascal loose
    that steals the common from the goose.

  8. Well said Richard so very true.

    Sonic; Lenin said that “capital always concentrates itself into fewer and fewer hands” and goes on to describe how monopolies go on to destroy the last of the opposition “like the child eating it’s mother”.

    So what starts out to be a free enterprise system becomes an oligarchy of monopolies. Lenin called this stage imperialism, but the system has mutated into something way beyond what Lenin could describe in his day.

    Under the General Agreements of Trades and Tarrifs (GATT now the World Trade Organisation) in the ninties major global transnational corporations were persuaded to sell out their loyalties to national identities and go global and trade among themselves under the slogan of ‘free trade’.

    This does not mean that we can go anywhere we like Oh No!! the boarders are still in place and in some countries it is more difficult for ordinary workers to obtain travel visas.(Eg. Mexican workers who want to work in the US, or islander workers to NZ)Currencies are still trading at different rates so that these corporations can purchase cheap labour at slave rates.

    Sonic, do you honestly think that the global capitalist are going to change their wicked ways and reform!?
    LIKE HELL!!!!!

    IT’s VERY MUCH A FRANKENSTIEN MONSTER

    Yours respectfully

    PD.

  9. “of” the common should be “off” the common, (of course).
    I believe it is Leveller verse from the 17th century.

  10. Matthew Cunningham says:

    G’day Philip,

    Thank you for an interesting and thorough reply.

    I’ll respond first by addressing the argument you’ve raised over Marx’s assertion on the rate of profit to fall over time. I think you’re co-opting economic half-truths and hearsay to justify your ideological position here. The fact of the matter is, a large proportion of economists – those of both capitalist and socialist persuasions – DO consider the Oil Crisis as a valid explanation for the end of the post-war boom. You have to understand that the Oil Crisis was not an isolated event that toppled an unfazed global economy – it was merely the culminating event in a series of economic disturbances throughout the course of the 1960s and early 1970s. Interpreting it otherwise is an oversimplification.

    Firstly, you had a global economy built upon the strength of the U.S. Dollar under the Bretton Woods agreement. An appreciation of the paramount importance of the U.S. Dollar in this system is vital in understanding the economic turmoil of the 1970s. The reason for this is simple – any hiccups or downturns in the U.S. economy will invariably affect much of the rest of the world. This is important in the mid-to-late sixties due to several reasons – a massive increase in state expenditure due to the arms race, and exacerbated by deficit spending on the Apollo Program, the Vietnam War, and Johnson’s ‘Great Society’; growing public unhappiness with the effects of this spending, including periods of high inflation and tax increases; and a resultant shift in governmental thought on how to manage the economy from fiscal policy – which stressed Keynesian measures – to monetary policy – which stressed balancing interest rates and the supply of money. All of these factors had an influence on the growth rate during the 1960s.

    Secondly, you have the disestablishment of the Bretton Woods system in the early 1970s and the resultant floating of exchange rates and the price of gold. Quite simply, the stability and growth permitted by Bretton Woods had become untenable by the mid 1960s – the overwhelming dominance of the U.S. economy after World War Two had been counterbalanced by resurgent economies in Europe and Asia.

    Thirdly, you have the processes behind the Oil Crisis itself. Artificially low oil prices over the previous two decades had facilitated the long boom right up into the early 1970s. The price increases and boycotts introduced by the crisis exacerbated an economic situation already made fragile by the events of the preceding decade.

    The end of the ‘long boom’ was indeed a gradual process, and its roots can be seen in the previous decade – but not for the reasons you suggest. Dubbing the Oil Crisis theory as ‘utterly banal [and] superficial’, and those who subscribe to it as ‘minnows’, is condescending and inhibitive to rational debate.

    I still disagree with your confluence of capitalism with mercantilism under the term ‘mercantile capitalism’, due simply to the fact that the original theorists of capitalism defined it in OPPOSITION to mercantilism – however, I will accept your viewpoint as being part of an alternate, Marxist interpretation on the stages of capitalism.

    And now to, what I feel, is the core point of your argument – one which lines up very well with the core arguments behind socialism itself. You state that ‘[a] surplus is not to unique to capitalism – only the specific form of the surplus (surplus-value) is unique to cpaitalism’. You then define surplus-value as ‘*new, expanded value*’ which ‘can only be produced by the work done in the production process by the workers’. You follow this by stating that ‘[a] future socialist society will, as the article noted, still produce a surplus because it will want to expand health, education, leisure opportunities, research, technology etc’. Apart from admiring your determination – viewing a future socialist society in terms of ‘when’, not ‘if’ – what you’ve written summarizes one of the key arguments of socialism – the equitable division of surplus.

    To me, socialism is, in part, a response to the unfair division of surplus value amongst society under capitalism – a division that is particularly skewed towards shareholders that have contributed nothing to the company expect their capital. I won’t deny this unfairness because, well, that would be impossible. I also see socialism as a response to the lack of employee democracy and ownership in the production process – decisions on company organization and working conditions is typically beyond the hands of the lay workman. Again, I won’t deny this, although I WILL posit that a majority of decisions are not suitable for consideration by company-wide referenda. What I will do, based upon the arguments in my previous post about the superiority of the market in managing the dynamic and complex processes of the modern economy (points which you have yet to address), is to state the following facts:

    Fact #1: Capitalism is the most efficient generator of new wealth out of any economic system.

    Fact #2: There are certain services that are essential to human survival and dignity, including nutrition, education, healthcare, and a financial safety net during times of hardship. Common sense and humanity dictates that a market is inappropriate to manage these services.

    Fact #3: Unregulated capitalism has the proven potential for gross exploitation.

    Fact #4: Capitalism has the tendency to promote an unfair distribution of surplus, a lack of employee ownership in the production process, and a lack of workplace democracy. These are the three core inequities that the socialism argument aims to address.

    Fact #5: The three core inequities posited by the socialist argument can be addressed by methods other than socialisation. A more equitable division of surplus can be managed through regulations and modifications of the capitalist system, such as binary economics and social democracy. Employee ownership – which also facilitates the division of surplus value – can be facilitated by Employee-Stock-Ownership-Plans, which are gradually becoming the norm in the service industry. Workplace democracy can be increased under a capitalist system through internal business reforms or external trade union action, or through more drastic reforms such as those advocated by participatory economics.

    Basically, what I am advocating is that socialism was raised to combat inequities that are very real, but that the methods for combating these inequities does not require resorting to the drastic measures of socialisation. Capitalism, despite its flaws, has done more for humanity than any other system in history – but that in itself is not enough to justify its existence as-is. However, modifications on this system to perfect it are far more pragmatic and productive than resorting to the proven failures of planned economies.

  11. Matthew Cunningham says:

    I’d also like to argue against one of the other points you have raised in your article – the assertion that ‘the idea that every economic system has, or requires, “entrepreneurs and managers” in order to operate is factually wrong’. You’ve used an inappropriate analogy to reinforce this assertion. When you claim that, ‘[f]or most of the time that human beings have existed we lived in collective societies, without entrepreneurs and managers’, you are indeed correct; however, the social situation under which this system existed is so far removed from the modern world that it is wildly inadequate to even remotely imply it in the same context.

    Early human settlements were small, community-based, and utilised localised production. The most complicated decision that such communites ever faced would have been around how many cattle to kill for meat this season, or how many seeds should be sown to fill the granary for the winter months. The disconnect between this form of decision making and the kind associated with a modern, industrial economy, is so staggering as to render any direct association between the two impossible. I challenge anyone to manage a multi-million dollar construction project, or create an information system capable of handling millions of transactions per day, without some form of management structure.

    The hierarchical nature of systems is both natural and necessary. This is not implied in a sense of superiority and inferiority, by the way. If you have a task that needs managing, then you must have a manager. Imagine building a skyscraper, or a bridge, or an information system, or the Panama Canal, without some form of managerial structure. The entire thing would be a mess. Regardless of what form of management one implements, or how much “direct democracy” style involvement there is in it (ala factory councils, worker representatives), there will still be some form of leadership structure in place. Call it horizontal / vertical role differentiation, if it makes you feel better.

    The Soviet Union is a prime example of this – a bloated and cumbersome bureaucracy extending into virtually every area of everyday life. All people may be equal, but you still have commisars and workers, general secretaries and party secretaries, Supreme Soviets and Republic Soviets, regions and oblasts… the list goes on. You might counter that the end goal of socialism is the “withering away of the state”… well, this is something that simply has never occured. If anything, the Soviet bureaucracy simply became MORE complicated as time progressed.

    Therefore, your assertion that ‘entrepreneurs and managers’ are unnecessary, and your implication that they are only utilised under a capitalist system, is incorrect.

    Cheers, Matt.

  12. hey matthew,

    i won’t comment on the details of your responses nor anyone elses becuase thats not my field of expertise.

    a few things caught my attention, you expressed that movement toward socialism is a drastic measure ? as opposed to what i’m wondering, the effects of capitalism so far past and present are pretty drastic i’d say, i’m wondering just how binary economics and social democracy would begin to address the current global situation.

    i’m an anarchist, i beleive humans have the abilty to move beyond fear and therefore all its derivatives. so commonsense to me is .. the market is simply the collective of human beings and there interaction with each other, other earthly inhabitants and the environment.

    i would argue that the fundamental aspect the drives capitalism is growth, plain and simple. and like a virus humans have spread and grown, with no real thought that maybe the earth is alive, maybe if we keep extracting resources the way we do, then pump all the waste back in, we are destroying our host, not to mention species of plants, animals, and each other. and why is this ? because collectively we are unable to recognise the truth of past and present, which can clearly be seen if we have the courage.

    the truth i see is that drastic measures are needed if we have a peaceful, harmonious earthly existense in mind,

    this is not an economic crisis, this is a crisis of consciousness and identity,
    and no system will change this, we must change ourselves and the system will change,

  13. Matthew Cunningham says:

    Hi Sol,

    Cheers for the feedback. You’ve raised what I believe is as equally important an issue as that of socioeconomic organisation – however, I think you have conflated an ideological issue with an environmental issue. Let me explain.

    Judging by your concerns over the various actions of humanity that are ‘destroying our host, not to mention species of plants, animals, and each other’, you obviously share the same passion as me for environmental issues. It is clear that the process by which industrialisation has been (and continues to be) waged is fundamentally flawed. The two core reasons behind this are that it is not renewable, and its by-products are detrimental to its own survival.

    However, the fault here lies not with capitalism, but with the industrial process upon which it is built. Ideology is a concept, a structure of social, political, and economic organisation; industry is the physical means by which goods and services are provided to the population. As I have shown in a previous debate on this site, the use of this industrial process is not limited to capitalism, but has been equally practiced by socialism and other ideological structures in the past. See http://workersparty.org.nz/2008/11/06/greens-leader-fails-workers/#comment-1217 and http://workersparty.org.nz/2008/11/06/greens-leader-fails-workers/#comment-1221.

    Your assertion that ‘the fundamental aspect that [sic] drives capitalism is growth, plain and simple’ is indeed true; however, the context within which you have stated this is misleading. Growth is both a natural and essential byproduct of any efficient ideological and industrial system – including socialism. The net result of this growth – profit, or ‘surplus-value’ as Philip has termed it – is what fuels the increase in existing industry and the creation of entirely new industry. A lack of growth leads to economic stagnation, which means a decrease in the availability of goods and services, loss of jobs, and a decline in living standards. This is exemplified by both the economic crisis we are currently faced with as well as the decades-long ‘Brezhnev stagnation’ of the late Soviet Union.

    Furthermore, I think you are linking the idea of growth too closely to the idea of physical resources. Not all economic growth is predicated by the amount of resources in the world. Currency, the market, and many services it provides are intangible things limited only by consumer demand.

    I think what you are opposed to is uninhibited, unrenewable growth. Obviously the current industrial process cannot sustain itself indefinetely – either the finite amount of resources in the world or the environment itself will give eventually. What is needed is a fundamental shift in the industrial process itself, faciliated by ideological investment and regulation.

    Whilst I applaud your sentiment that we as a species ‘must change ourselves’, i’m less inclined to believe that human nature can be changed. That doesn’t mean we are helpless, however. Change is more pragmatically pursued at a state level, where collective action and accountability are better equipped to do what is necessary than the individual, bound only by their own nature, is. What we need is a ‘Green New Deal’ – a state-level commitment to renewability on par with the Panama Canal or the Manhattan Project. See John F. Kennedy’s commitment to land men upon the moon before the end of the 1960s for an example of the all-encompassing national commitment I am talking about.

    Cheers, Matt.

  14. cheers matt, i have enjoyed reading your opinions on other threads within this forum. in your last post you’ve made some interesting points, i’ll def take those on board.

    i will add that i’m observing you having an opinion on human nature..and i’m wondering how you justify your opinions on human nature.. you seem display a thorough logical and analytical ability, i intend no negativity in sayin this.
    from my studies i’ve found that even some of the most brilliant minds are unable to explain the intricacies of human nature .. let alone ascertain what it may take to influence an aspect or aspects of human nature.
    furthermore… in over 50 percent of all exchanges of ideas i’ve had in my life – about influencing change – the other people of peoples reference human nature as the main limiting factor in why we can or can’t be, do , have ….. ( fill this space with whatever you like )

    a person once said that .. science in general just observes the current limits of our collective imagination.. i tend to agree..

  15. Matthew Cunningham says:

    G’day Sol,

    I base my opinion on human nature on the assumption that it cannot be changed. This is, I believe, one of the fundamental laws of politics. Robert McNamara said much the same thing in his memoirs, albeit for different reasons than me.

    Quite simply, despite the leaps and bounds in social and technological advancement that humankind has seen over the last 10, 000 years, we are, evolutionarily speaking, still the same creatures we were when we first started cultivating agriculture. Many political ideologies stress the emergence of the ‘new man’ through structured ideological teachings; I contend that this is impossible. That’s not to say that an individual cannot change; however, the nature of choice means that, as a species, we will continue to want, hoard, lust and envy until we evolve the ability not to.

    All of this probably sounds very doom and gloom, but it’s actually a stepping stone into my next argument – that of the state. The state itself is, ideally, an embodiment of collective accountability – an imagined community of individuals that we enter into via a social contract. This social contract stipulates that, in return for a portion of our own individual sovereignty, the state shall provide us with a modicum of protection over the core values that preserve our own freedoms. In return for binding us by law, it binds itself by collective accountability – being an intangible idea less bound by the shortcomings of human nature, it must satisfy more than the base needs of a single individual to remain valid to its constituents. Hence why I feel the state is better equipped to handle change on a large scale – it is the best representative of common good in today’s world.

    One of the prime examples I like to use to show this is the unofficial consensus against the use of nuclear weapons that has persisted since the end of the second world war. Clausewitz claimed that it was human nature that any and all weapons of war developed by a nation would inevitably be used to further its own ends – and until the Korean War, it seemed likely that this trend would continue with nuclear weapons. Yet through a mutually unspoken agreement that nuclear war would defeat the purposes of going to war in the first place, the United States and the Soviet Union came to the conclusion that the purpose of the atomic bomb was not to be used, but rather to prevent its use. Through pragmatic necessity, the state ‘evolved’, breaking a pattern on weapons development and use that stretched unbroken back to the first days of human history.

    Cheers, Matt.

  16. Philip Ferguson says:

    Matthew Cunningham’s reply of February 14 once again deals only with the superficial levels of operation of cpaitalism. Bretton Woods collapsed because of relative US economic decline – the result of the falling rate of profit. In the same way, the supremacy of the dollar was built on US domination of world production. At the end of WW2, the US produced about two-thirds of global industrial output. That’s why the dollar was able to be used as global currency.

    The oil crisis arrived parallel with the end of the postwar boom; it was not causal. As OECD research (T.P. Hill, Rates of Return, paris, OECD, 1978) showed the rate of profit had been falling well before the oil crisis – a manufactured ‘crisis’ – hit.

    To understand the workings of capitalism you have to start in the sphere of production, not at the level of distribution, the finance sector, what is happening with any one particular natural resource such as oil, or whatever.

    The fact that a whole bunch of bourgeois economists reagrds the manufactured oil ‘crisis’ as bringing the postwar boom to an end simply shows their inability to move beyond the most banal ‘explanations’ of capitalist crisis. Serious bourgeois economists, like Hill, who did *actual reserach into the end of the postwar boom* didn’t argue that the oil ‘crisis’ caused the end of the boom.

    All of the other factors which Matthew mentions are secondary as well. If the rate of profit hadn’t have been falling, then deficit spending on Vietnam etc, wouldn’t have dragged down the US eocnomy. The US government spending on WW2 and Korea didn’t have such an effect on the US economy *because the rate of profit in the productive economy was going up rather than down*. You have to separate factors and find the decisive one, not simply make a list of everything that might have been going worng at any point in time – that doesn’t explain anything.

    In terms of Matthew’s list of “facts”, I must say it is odd indeed to see someone argue that “capitalism is the most efficient generator of new wealth out of any economic system”. Alan Bollard, for instance, argued at the Jobs Summit a couple of weeks ago that we are in the midst of seeing the biggest destruction of wealth in human history! I think Bollard is overstating the case, but it does show that capitalism sure knows how to destroy wealth.

    And this is one of the main problems with the idea about capitalism as being a great producer of wealth – a whole big chunk of the wealth created in the capitlaist system is *periodically destroyed*. What an incredible waste. Surely modern human beings can devise something much better.

    Secondly, it isn’t capitalism which creates the wealth anyway – it;s workers going to work day after day. Take away workers’ labour and see how much wealth would be created.

    As for social democracy, there really isn’t much left of it. What it did was take us in a big circle over the past century, partly building up welfare states and then partly dismantling them when capitalism ran into a new economic crisis. If you want to go round and round in circles with social democracy, best of luck with that. But I think rather than just getting dizzy, it might be better to think about a different socio-economic system altogether.

    Phil

  17. Matthew Cunningham says:

    In response to Phil’s rebuttal:

    In your first statement you claim that I have dealt ‘only with the superficial levels of operation of cpaitalism’. By way of explanation, you state the following:

    ‘Bretton Woods collapsed because of relative US economic decline – the result of the falling rate of profit. In the same way, the supremacy of the dollar was built on US domination of world production. At the end of WW2, the US produced about two-thirds of global industrial output. That’s why the dollar was able to be used as global currency.

    The oil crisis arrived parallel with the end of the postwar boom; it was not causal.’

    Yet all you have done is reiterate exactly what I have already said – that the oil crisis ‘was merely the culminating event in a series of economic disturbances throughout the course of the 1960s and early 1970s’, and that ‘[t]he end of the ‘long boom’ was indeed a gradual process, and its roots can be seen in the previous decade’. I have not claimed that the Oil Crisis was directly CAUSED by the turmoil of the previous decade – I have merely stated that it was the straw that broke the camel’s back, so to speak.

    When you claim that, in order to evaluate the factors behind the economic crisis of the 1970s, one must ‘separate factors and find the decisive one, not simply make a list of everything that might have been going worng at any point in time’, you are viewing the nature of cause-and-effect in an isolated and impractical context. History does not conform to simple ideas and rules. The past is a broad and dynamic context of events and repercussions where any given event is the consequence of multiple causative factors. In order to properly establish those causative factors you need to look at the event in a broader context. The economic turmoil of the 1970s was the result of multiple factors, many of which I have already mentioned and examined for their applicability. For you to casually dismiss them in favour of one single ‘decisive factor’ is an oversimplification, and leads me back to my earlier assertion that you are ‘co-opting economic half-truths and hearsay to justify your ideological position’.

    Your ideological presupposition is even more reinforced when you offer your unconditional support for T.P. Hill’s conclusions on the falling rate of profit whilst dismissing the counter-arguments of ‘a whole bunch of bourgeois economists’ without critically engaging with them. You cannot simply agree with the sources that support your predetermined conclusion and reject those that do not. That is bad history. The works of Leon N. Lindberg, Charles S. Maier, and Brian M. Barry (as well as those I have already mentioned in previous posts) are prime examples of theorists who assess, and subsequently disprove, Hill’s suppositions. I suggest you read their works before automatically assuming that they have done no ‘actual reserach into the end of the postwar boom’.

    You claim that ‘[i]f the rate of profit hadn’t have been falling, then deficit spending on Vietnam etc, wouldn’t have dragged down the US eocnomy’. This suggests you have misunderstood the role of the growing economies in Europe, Asia, and elsewhere in the world. You yourself have asserted that ‘[a]t the end of WW2, the US produced about two-thirds of global industrial output’ – a condition no longer tenable in the 1960s when the world economy had recovered so dramatically. The rate of profit had risen significantly in these countries such that the U.S. share of the global economy had proportionally been reduced. This was not an issue in earlier decades. Your assertion that ‘[t]he US government spending on WW2 and Korea didn’t have such an effect on the US economy’ does not reflect this fact. Korea, for example, was a shorter conflict that consumed a far lower proportion of the national GDP. World War Two, whilst drastically more expensive, saw the American economy operating under total war conditions – at the expense of various other national services and consumer goods. Virtually the entire nation rallied to wartime economic production in a fashion incomparable to the conflict in Vietnam. To view the two in the same context is inappropriate.

    You are correct that ‘capitalism sure knows how to destroy wealth’, and in the context of the current economic crisis I won’t deny that. However, this hearkens back to the roots of the crisis itself rather than any underlying fault with capitalism. The cause of the crisis lies largely in the ominously under-regulated sub-prime mortgage sector, brought about by a conservative economic position that removed state guarantees against such excesses. Contrast that with the social democratic / Keynesian principles currently being pursued by the Obama administration, which Federal Reserve Chairman Ben S. Bernanke recently praised for preventing this recession from becoming another Great Depression. I maintain that capitalism is the most efficient generator of new wealth (unlike a system that seeks only to redistribute existing wealth) and, whilst it is also capable of destroying that wealth when unregulated, social democratic principles can prevent such crises from arising.

    When you claim that ‘it isn’t capitalism which creates the wealth anyway – it;s workers going to work day after day’, you are in effect claiming that workers and their labour are a force completely separate from any economic system. Undoubtedly if everyone stooped working, the economy would grind to a halt – hence the power of strike action. However, the same would be the case under a socialist system (if, that is, the workers were not shot at by the supposed guarantors of the workers’ state, ala the Soviet Union). Capitalism is defined as a system whereby both wealth AND the means to produce it are privately owned – implying that the workers and their labour, much like under socialism, are an integral part of the economy. Furthermore, whilst workers may produce the wealth, it is the wise investment of capital in new enterprise that creates the conditions necessary for them to produce that wealth.

    You have still yet to address my core arguments on the inefficiency of socialism, the proven capacity of social democracy to meet all of the criteria that socialism aims to address (based upon my five-point fact sheet iterated above), or my comments on management. If you are to posit an economic alternative to capitalism (perfectly within your rights to do so), you need to stipulate the methods by which it will operate, the means by which it will avoid the dramatic failures of every socialist economy in the past, and the ways in which it will improve upon the conditions under capitalism. Not doing so means that you cannot prove that socialism is able to provide a better solution to the three conditions it aims to address – namely, the unfair division of surplus value and to the lack of employee democracy and ownership in the production process.

    Cheers, Matt.

  18. Really interesting post! Honestly!

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