Capitalism in its various incarnations.

There has been a great deal of comment lately regarding the obvious malfunction of our financial system and speculation as to whether some alternative to capitalism might be preferable. Many commentators invoking Karl Marx take it for granted that his analysis would cast some light on our present circumstances. But in fact today’s economic system would be unrecognisable to Marx, as would the previous version which existed between about 1950 and 1980.  The form of capitalism described by Marx was the second of the four phases which have existed so far,which are:

  1. Agrarian capitalism
  2. Early industrial capitalism
  3. Mature semi-functional capitalism
  4. Degenerate capitalism

Agrarian capitalism was the economic system which ran from the foundation of city states about 6000 years ago until the industrial revolution. That phase is normally called feudalism, but it meets the definition of capitalism as an economic system in which the means of production are privately owned. In that period the means of production of course consisted primarily of farmland,  although it would also include wind and water mills, bakeries, tanneries, forges, craft workshops and so on.

In the second phase, which I call early industrial capitalism, the principal forms of the means of production (ie “capital”) are:

  • factories
  • machinery
  • steelworks
  • mines
  • railway networks, locomotives and rolling stock

The ownership was still in the hands of a small segment of the population – although much larger than in the previous agrarian phase. Except in the case of small enterprises, the ownership was generally in the form of shareholdings in joint-stock companies. The system worked extremely satisfactorily for the owners, enabling a newly emerging middle class to live in luxury and idleness, but of course it was catastrophic for the rest of the population. The life of the industrial workers – many of them extremely skilled and talented – was utterly miserable. This is the form of capitalism that was the subject of Marx’s critiques. Since the workers were paid bare subsistence wages or very little more, they could not act as consumers. It was only the bourgeoisie and the professional and managerial classes who could purchase the goods which had been produced with this newly increased efficiency. That’s why the markets became periodically saturated, leading to recurrent periods of stagnation and depression.

After the Second World War the trade unions harnessed enough power to bring levels of industrial workers pay up to the levels previously held by the lower reaches of the middle classes: the clerical and minor managerial workers. Although this rising level was fiercely resisted by the industrial managers and owners, it was actually the salvation of the system. The vast expansion of disposable spending power by almost entire population of the developed world provided a market for the exponentially increasing levels of production as factories expanded their output. Henry Ford to his credit may have anticipated and actively embraced this prospect. He envisaged a system of production so efficient that the cars would be so cheap, and his workers so well-paid, that they would be able to own their own vehicles – an idea that was generally inconceivable in 1920. This phase which ran from about 1950 to about 1980 I call semi-functional capitalism. Although some people were substantially more prosperous than others (an inevitable consequence of the reinforcing feedback mechanism as we shall see when we look at the ’80/20 principle’ in a little while), the rising prosperity of the bulk of the population allowed them to become purchasers of vacuum cleaners, washing machines, motorcars and television sets. The rising income levels also enabled an expansion of savings and investment activity through the instruments of unit trusts, pension plans, endowment life insurance policies, and investment trusts – with which the modest saver could join the ranks of the capitalists, and become the owner of a small but significant share of the wealth of the nation.

From around 1980 onwards, under the influence of Ronald Reagan and Margaret Thatcher and subsequent politicians following their example, the widespread gains during that period have been steadily rolled back. With the exception of the wealthiest section of the population everyone else’s spending power has been massively eroded over the last few decades. The incomes of both working classes and the middle classes have failed to keep pace with the erosion of the value of currency due to inflation. And that’s even if we measure inflation by the government’s official figures, which are a massive understatement of the realities. Since the 1960s, the price of housing has increased by a factor or more than 100. The house that my parents bought in 1963 for £3,600 recently changed hands for £442,000!

The combination of increasing automation and shifting a production overseas to low-wage, low-regulation regimes has compounded the effects of real-terms pay reductions by adding widespread unemployment and under-employment. The reduced portion of the workforce which is employed productively therefore has to subsidise an ever increasing array of Social Security programs to support the impoverished. This must be paid for, either by direct taxation or by the governments and central banks creating money out of thin air. This inevitably fuels inflation.

The main impact of all of these factors is that the mass of the population simply do not have the resources to purchase products being turned out by the industrial system. This is the root cause of the economic stagnation which threatens us today. The rate of consumption has only been held up to its current level by wholesale and irresponsible extending of credit to large sectors of the population, who can have no conceivable chance of ever repaying it. Another impact is that it has become much more difficult for the average person to build up significant wealth during the course of the working lifetime. The return on investment has been reduced  dramatically by a combination of

  1. inflation
  2. fund management fees
  3. sales commissions on pension plans and other saving schemes
  4. excessively generous remuneration and share option scheme is for senior corporate managers

I therefore describe this phase  from around 1980 to the present as degenerate capitalism. The question arises: is this likely to be a final stable form of social organisation, or is it due to be superseded – and if so by what?