This is an attempt to set out a short and clear critical analysis of capitalism, to facilitate thinking about desirable change in our economy.
What is capitalism? Many different kinds of economic system are imaginable. The defining characteristics of a capitalist economy would seem to be:
Capital is privately owned. Most factories, firms and money to invest is in the hands of a few, as distinct from being owned by society as a whole, i.e., collectively, as in a commune, monastery or in many families. Most people have some capital, i.e., savings in the bank, but very little compared to the few rich and super-rich. In addition the rich few are the ones most able to use the money little people save, e.g., by borrowing their savings from banks to invest.
The owners of capital invest it. They are the ones in society who decide what is to be produced and what factories are to be set up. In some economies such decisions are made by society as a whole, or by the state.
They invest capital in whatever they think will make maximum profit for themselves. A society's capital is not invested in what it most needs. This is extremely important, and the source of most of the problems the capitalist system generates. There is a huge gulf between production for profit and production to meet need. There are many urgent needs in our society which we have the productive capacity to meet easily, but they remain unmet because those with capital can't make maximum profits doing that. Note that often they could make a profit producing things poor people need, but they can always make better profits producing for richer people.
This explains why many enormous problems exist. For instance,
All this is obviously appalling; there are much better ways to organise production, investment, distribution and development than to allow them to be determined by what will maximise the profits of the very rich few who own almost all the capital.
Defenders of the system argue that consumers have "sovereignty"; they determine production not capitalists because the latter are only responding to what consumers demand. This is partly true but overlooks the fact that corporations manipulate demand towards forms that suit them (e.g., they spend more than $500 billion every year in advertising, to get people to buy things they otherwise wouldn't buy). More importantly it overlooks the fact that corporations only respond to "effective demand', i.e., the demand of people with money, and mostly those with most money. Thus they only produce big and luxurious houses; they never produce small, humble and cheap houses, so poor people don't have much "sovereignty".
People with capital to invest compete in the market to take sales from each other. This is a very powerful force for "efficiency, because if a firm can't produce and sell as cheaply as others it will be eliminated. Obviously a major merit of the system is that it drives progress towards cheaper products, innovation and better technology. But is there no other way we could get these benefits while avoiding the disadvantages of the market system, including the stress and devastation that comes from all that competition, risk and working too hard, and the high rate of failure of small businesses? Defenders of capitalism argue that the only alternative would be for the state to make the investment decisions and this inevitably bogs down in bureaucracy, inefficiency, and corruption.
It is not obvious that state-run firms cannot be efficient. In general they run very well and where they don't better public scrutiny etc. would solve problems. But there are other alternatives, such as co-operatives, and "statutory corporations" like the Australian Broadcasting Corporation, run by elected boards at considerable distance from state control.
Anyway efficiency and innovation are not high priorities now. We could easily produce all we need for good lifestyles for all with a fraction of the work now done and at good-enough efficiencies. Much innovation now is of trivial products and ways to keep sales up.
The owners of capital don't have to do any work for their incomes. They can hire people to manage their businesses and just live off the profits after paying them and the workers, while they consume goods that are produced by people who have to work for their incomes. In a capitalist economy many can't even get a job and an income, but those with capital don't have to work at all.
Perhaps 80% of people get little or no income from interest, investments or shares etc. In fact most poorer people pay out much more in interest than they get, through credit card and housing debt, and in the cost of the goods they buy which include the interest component of the producing corporation's costs (estimated to be over one-third of every price, on average.)
In this society just about everyone accepts that it is alright to get money without having to work for it, happily accepts interest on savings and tries to get into shares and property so he can draw rental income or sell when the value of the property rises. This is morally disturbing. When it is work that produces the goods we all need, and capital and property is mostly owned by a few, it is clearly wrong for people to be able to get income and goods without work just because you own capital. Vast fortunes are made by the rise in property values, which the owners of the properties have done nothing to bring about. It is caused by urban growth and rising demand for housing. In a good society all who are able would do a fair share of the work needed to produce the goods we all need.
The defenders of the system argue that it takes both work and capital to produce things, and while wages are the reward to workers profits or dividends are the reward to those who make their capital available and invest and thereby take a risk. Again even if this seems reasonable the question is, is there not a more satisfactory way. It is a system which suits the owners of capital far more than the rest. Very rich people needn't take much risk (just put $1 million in the bank and you will get another $50,000 every year with almost no risk) and in general they make a lot more money than they lose. Secondly, what risk do they take? They risk losing their money and then having to work for an income like you and me!
Critics of the system say that no one should get an income without working for it, and that we could and should organise a society in which money doesn't earn money, and in which investment risks are shared by society as a whole. For instance the state might control savings through a state bank and decide what to invest this capital in, so that if a venture failed we would all share the cost. This approach doesn't have to involve a state as it can be taken by cooperatives and communities through their own local banks (a most impressive example being the Mondragon cooperatives in Spain.)
Thus capitalism is a class system. There are two basic classes, those who own capital and those who don't and only have their labour to sell. The former class has much more wealth, status and power than the second. Workers are forced to sell the only thing they have, their labour, to an owner of capital. If no one thinks he can make good profits hiring workers then they will be dumped into unemployment. A satisfactory society would make sure everyone had a livelihood.
The capitalist class can be seen to include many people who receive high incomes working for corporations and banks, the CEOs, managers and technocrats. There are also many professionals such as doctors, dentists and lawyers who get very high incomes, and then receive income from investing these savings.
For 80% of Americans who work for a wage real income has not risen for about thirty years, while that of the super-rich 1% of people has probably multiplied by six!
Below the working class is the dumped class, the "excluded", including homeless, unemployed, those on "welfare", disabled and mentally ill people. This reveals how brutal and callous this society is. (On the reduction in everyone's quality of life that this meanness brings about see Wilkinson and Pickert's book, The Spirit Level.)
Note that the many who run small businesses where the work is done by family members are not well-described as capitalists. Their premises are only the tools they use to work with for their incomes. Most do not accumulate any capital to invest in order to draw an income that their work didn't produce.
In a capitalist economy commodities are bought and sold. In almost all previous societies almost all things were produced for direct use, and not to sell. Natives and peasants produced food to be eaten by themselves or their group, and things were exchanged according to traditional rules, not traded in a market. But in a capitalist economy things are sold for money, and the money is used to buy other things. Goods such as grain are treated as commodities to be traded in a market to make money. Thus business is done and this enables some, especially those with money, to buy and sell, influence the market, speculate, buy where the price is lowest and sell where it is highest╔and make more money.
It is no good to the owners of capital if individuals and communities produce things to use directly or exchange with each other to meet their needs, without trading them. Only if things are bought and sold, and thus treated as commodities, will opportunities to make money open up. They want as much business to be going on as possible, and they want us to be dependent on having to buy and sell to get necessities; it's no good to them if we provide for ourselves without going into the normal monetary economy.
The main problem this commodification and emphasis on marketing relations leads to is that more and more goods and serviced get turned into commodities to buy and sell, such as leisure and entertainment, help and advice, aged care, art, sport. Our lives become increasingly involved in market relations, producing to sell, trading, calculating mere dollar benefits to individuals╔ Concern for non-economic values such as friendship, community, public service, standards, morality, justice, the welfare of people, social cohesion and pride╔tend to be driven out by concern to maximise individual monetary advantage.
There are three things that should not be treated as commodities; land, money and labour. It is for instance not acceptable that the labour of people can be bought and sold only if and when someone with capital thinks he can make a profit hiring them. It is alright to treat bricks as commodities, leaving them idle when you wish, but it is not right to treat a person like that.
There is a ceaseless, powerful "drive to accumulate". Capitalists invest their capital in order to make profits and at the end of the year they have more capital than at the start, so they invest the increased amount in order to make greater profits, and so on in an endless spiral of capital accumulation, of getting bigger and richer all the time, with no limit in sight. It can be a surprise to realize how novel this was when capitalism emerged a few hundred years ago. In tribal, ancient, peasant and feudal economies there was stability. People produced just enough to meet demand, including the wealth siphoned off to ruling classes, but there was no drive to increase wealth over time. A few kings were keen to get richer but the economy was not about everyone trying to maximize income and wealth.
Hence the inevitability of economic growth. Because of this central driving factor a capitalist economy cannot help being a growth economy. At the end of the year the owners of capital have more than at the start and (after consuming some of it) they want to invest more than last year in order to have even more at the end of the next year, and this means the amount of investing, producing and consuming in the economy increases all the time.
For a long time this process benefited many people in general, as more goods were produced, more jobs were created and (some) wealth "trickled down". Economic growth has become the supremely important social goal in all modern societies. However what is now clear is that economic growth is totally incompatible with ecological sustainability. There is already far too much producing and consuming going on and the environment cannot be saved unless we establish not only a zero-growth economy but one with far less GDP per person than in Australia today. (For the case, see.)
A growth economy must inevitably deplete resources and lead towards resource conflicts. Much of the conflict and violence in the world today is due directly or indirectly to the struggle between rich countries to get control of oil, minerals, forests, fisheries, markets etc. Rich countries could not have their high "living standards" unless they were taking far more than their fair share of world resources and condemning Third World people to low or impoverished conditions, but they are determined to increase their "living standards" all the time and without limit. Now China, India and many others are frantically trying to get into the same game. The outcome can only be increasing global tensions.
A zero-growth economy cannot be a capitalist economy. (It could be made up mostly of private firms.) Capitalism is about accumulation, making more money than you had, to invest in order to make even more, knowing that you must "grow or die".
In a zero growth society capital could still be in the hands of a few, but they would not be able to constantly seek out more profitable ventures, and accumulate capital to invest. This would be like the situation has been in much of Latin America for a long time, with a land-owning class living on the labour of slaves and peasants.
Extreme inequality results, and continually worsens. A glance at the dynamics in a capitalist system makes clear how the rich constantly get much richer as time goes by. They are able to devote society's capital to only those ventures that will most enrich themselves, while the people at the bottom of society are ignored. In the richest countries inequality is now extreme and getting worse. In the US the real/deflated incomes of 80% of Americans working have not increased in over thirty years! Meanwhile the income of the super-richest 1% has skyrocketed.
Many are cast into unemployment, poverty and "exclusion". A capitalist system has no need for and no interest in large numbers of people and it dumps them. If no corporation can make good profits employing people then they become unemployed and suffer boredom, poverty, loss of self respect and illness. Millions are discarded and condemned to live miserable lives, because access to jobs and income depend on whether some corporation can make more money hiring them. The cost is immense but largely psychological and does not have to be paid by employers, who are free to treat labour as a commodity to hire or ignore. In a satisfactory society there would be no unemployment and we would make sure that everyone had a livelihood, a role in working to make a worthwhile, respected, and enjoyable contribution.
We have a "mixed " economy, not a purely capitalist economy. Governments regulate the economy to a considerable extent and own some enterprises. They attend to many needs the capitalist system creates and ignores. Without this state action there would be social breakdown very quickly; the rich would soon take control of all wealth.
Thus many important things are protected and can survive only because the government (and social expectations) prevent capitalism from devouring or trashing them. (How many public parks would remain if those lands could be bought and developed? How long would disabled people live if they could only get an income if some firm wanted to hire them?) The extent to which we have a tolerable or good society is the extent to which capitalism is prevented from doing things it has a powerful tendency to do.
But it is a mistake to conclude that the state is opposed to capitalism. The state's main role is to facilitate it╔as much as is possible given that there are limits to what society will tolerate. For instance the government's overwhelmingly important goal is to maximize the amount of business turnover, i.e., maximize GDP. This means that it constantly seeks ways of enabling the business sector to do what it wants to do, although it also has to meet demands from other sectors as best it can. Governments do not always do only what the capitalist class wishes.
The owners of capital are constantly trying to push government regulation and control back, so they can have greater freedom to do what they want. In the era of neo-liberal globalization since the 1970s they have been astoundingly successful in reducing the amount of government action that restricts their activities, while increasing the government regulation that suits them, e.g., enabling freer movement of capital (e.g., Clinton's repeal of the Glass-Stegall Act, thereafter allowing banks to speculate more freely, establishing the IMF and World Trade Organisation, bailing out failed corporations, keeping welfare payments and corporate taxes down╔)
In most societies humans have developed there has been class struggle. A few end up on top and run things in their own interests. In our era the dominant class has great power over the state; they are able to get the state to rule in their interests. For instance if the government steps out of line the media, all owned by the capitalist class, will be turned against it. The corporations can "buy" governments through their big campaign contributions; politicians cannot get elected unless they have vast campaign funds, so they are not inclined to vote against ;policies big donors don't like..
It is no surprise then that governments have facilitated neo-liberal globalization, the enormous freeing of economies from regulation and public ownership that has taken place over the last thirty years. This has been desperately important to the owners of capital because by the 1970s opportunities for investment had become too limited. Governments therefore changed the rules enabling much greater "freedom for market forces", despite the fact that globalization has devastated the lives of millions of poor people. (See Globalisation.)
The moral character of the system╔.is appalling. Rich people are allowed to hold and control just about all of a society's productive capacity, and to devote it to what most enriches themselves and not to what people most need. Greed drives the system; the goal is to get as rich as possible, without limit. There is only competition and individual self interest; there is no place for helping, giving, generosity, nurturing, doing what is best for others, the public good or helping the underdog. It is alright to trash a competitor, take advantage of a weakness (the fire sale). It is alright to ignore all social, psychological and environmental costs of a venture, and just attend to the monetary costs and benefits to the investor. It is important to goad people to consume more and more without limit, to compete, to be envious, to be dissatisfied with what they have, to sell socially dangerous products. It is alright to charge as much as you can get regardless of what it costs you to produce, meaning that some corporations such as banks make astronomical profits, and dentists make big incomes while many people can't afford dental care.
Defenders of the system usually say that despite its faults it is a system which aligns with human nature, which they claim is selfish and competitive. They claim Adam Smith saw that by pursuing self interest the entrepreneur benefits society. But humans are capable of cooperation, generosity and helping as well as capable of being selfish and competitive; we should try to develop an economy which runs on nice values. After all the economy within your household does this.
Capitalism destroys society. The more a society becomes a market society the more that the morally undesirable values and behaviours noted above come to determine what goes on. A society is constituted by the bonds between people, the readiness to value the welfare of others, the public good, standards, traditions, institutions, etc. These things are quite different to the self-interested values of individuals. You can't have a society made up of purely self-interested individuals – it there are no social values there is no society. Yet the market principle has no place whatsoever for social values. A market is a place where the only concern is too maximize individual advantage. It is because of the increasing domination of our society by market principles that we are seeing increasing loss of social cohesion and breakdown.
"But the system is extremely successful╔and it has no rival." Capitalism has been astoundingly productive; it gets enormous energy and resources applied to finding more efficient ways to produce and sell, and innovate and develop, and in the process many people get jobs and cheaper products. It has generated the high "living standards" we enjoy in countries like Australia. It has taken us from the feudal village to modern globalised society. It is not surprising that most people would say that a (somewhat regulated) capitalist system is good, and there is no realistic alternative.
But the people who would say it is a good system are typically among the 1.5 billion for whom it works marvelously. For most people on earth it doesn't work well at all. In fact the "living standards" of the 1.5 billion in rich countries could not be provided without severely depriving the other 5.5 billion people on earth of their fair share of word wealth, because there is no possibility of all 7 billion living affluently as we do. We could not live well if we were not taking far more than our fair share, and the capitalist system guarantees that we do. It forces poor people to work in plantations producing to sell to rich world supermarkets, because that is most profitable for investors.
Even if we accept that over several hundred years the system has performed miracles, the rampant levels of production and consumption have created enormous problems of ecological destruction and economic injustice. These are now causing catastrophic environmental and social damage. We must now dramatically reduce resource use, environmental impact, production and consumption, but capitalism is by nature a growth system and cannot accommodate stable output let alone dramatic reduction.
Finally, even in the richest countries the system does not work very well at all for most people. Yes they have access to lots of cheap throw away goods in the supermarkets, and trashy entertainment, and travel, but increasing numbers cannot afford a house, people work maybe three times too long and hard, hours of work have increased along with unpaid overtime, stress, anxiety and depression are almost the most common illnesses. Real incomes for most Americans have not increased in decades and social cohesion and the quality of life are deteriorating. Note that the most serious problems capitalism is generating, such as oil depletion and the greenhouse problem, have not hit us yet.
So before you conclude that the system works well ask how it works for poor people, the Third World, future generations, and the ecosystems of the planet.
Capitalism causes grossly inappropriate Third World development.
Capitalism has developed the Third World into a state whereby most of its resources flow out to benefit the rich world's corporations and consumers, and its productive capacity is geared to us. Poor countries have abundant productive capacity to meet their own needs, but that is not allowed to happen. Why? Because the rules of the global capitalist system decree that development must only be development is of those things the owners of capital think will maximize their profits in a free/competitive market situation. Thus capitalists never invest in what most needs developing in the Third World, and poor people never get a fair share of the available resources.
The result is inevitably a situation of quiet, legitimised plunder. If the world had an economy which permitted appropriate development, enabling the Third world to have a fair share of resources and to put its own resources into meeting its needs, then the rich world could not have "living standards" anywhere near as affluent as they are now. (See Third World "development".)
Where is it taking us?
It is clear now that our society is hurtling towards catastrophic breakdown as we deplete resources and ecosystems. The economic system is driven by gigantic forces which cannot do anything but lead corporations and banks to struggle all the time to get bigger, penetrate more markets, take over more firms, get more resources, produce more and sell more, grow╔ Corporate wealth is increasing rapidly, so is inequality. The ecosystems of the planet are being seriously damaged. Social breakdown is increasing. The growth of the system takes over, grinds up and/or drives out social values and moral considerations such as justice and rights. People are driven more into the role of isolated workers and consumers dependent on corporations for more and more.
There is no possibility of checking these trends, let alone restoring community, the welfare state, national independence, cultural traditions or ecosystems while the capitalist system remains. It is a system that can only accelerate to ever more production, sales, profits, investments. If growth drops to 2% p.a. serious problems such as unemployment increase.
This is the situation that capitalism inevitably must lead to. If you let your fate be determined by what will most enrich the few who own the corporations and banks operating in a market, then you will inevitably end up where we are. The imperative to "grow or die" is built into the system so all these damaging trends will inevitably increase.
Governments could not control these forces even if they wanted to, let alone steer us to a more sane and sustainable post-capitalist society. They must enable growth, because that's crucial for the health of the capitalist economies they run. There are too many powerful snouts in the trough for any significant change to be made. Any major change (like phasing down coal mining) would greatly affect the interests of powerful groups and they would not tolerate such policies. In addition, people in general want more income, more wealth, higher living standards, so any government that proposed reducing production or allowing the Third World to have its fair share of world resources would be met with furious howls of outrage and thrown out. There will therefore be no significant change, and no possibility of the radical structural change needed, until the present system begins to break down.
It is most important to understand the inevitability of the trends driven by the forces built into the nature of capitalism, and that the system cannot be fixed. It cannot be reformed it to be acceptable; it has to be replaced. The problems now threatening the planet are caused by the fundamental nature of capitalism. For instance economic growth must be abandoned, and capitalism is by definition about growth.
Is there any alternative? At present most people would say that although reforms might be needed the present economy is the best and only way, and they could not imagine any alternative. The Simpler Way is the general kind of alternative which will have to be taken if the big global problems are to be solved. Its the core differences with capitalism can be summarized as follows.
Firstly it must be understood that in the coming conditions of intense scarcity, we will have to move to frugal lifestyles mostly in small highly self-sufficient local communities. There must be no economic growth. The major factories, steel works etc, will be publicly owned, not the property of private capitalists. (Most small firms could be privately owned by families and cooperatives.) The decisions about what to invest in will be made by all people (not by governments or even political representatives) via participatory democratic town assemblies (although expert managers and bureaucrats might then have the task of implementing them.) Thus there would not be control by distant, secretive authoritarian state bureaucracies. Remember, systems will be much less complex than today and government will mostly be at the town or suburban or small regional level.
Thus little would be left to market forces. In the first decades of transition there could in fact be a large free enterprise sector, with many small privately owned family firms and farms, and markets. But none of the important decisions such as major investments would be left to market forces or the profit maximizing interests of people with capital. In conditions of scarcity and zero growth that would quickly lead to the rich few taking most of the limited wealth and social breakdown. However after some time we will probably have the sense to run the economy by rational decisions about what needs producing to provide all with a good quality of life (as seems to have been done very effectively by the Spanish Anarchists in the 1930s.)
There would be no poverty and unemployment because town assemblies would have the resources, the banks, committees and working bees to make sure all were provided for, included, and able to practice a worthwhile livelihood.
Eventually we might all just do 8 hours work a week at a factory or office then be able to take the few goods we need for a satisfactory material lifestyle from public stores (although in the early stages we would probably still pay "wages" and use them to pay for our goods.) People would have a lot of time to volunteer for the working bees and committees that would build and operate most of the local infrastructures. The public assemblies, committees and working bees would thus take over much of the work now done by centralized governments. People would be acutely aware that their security and quality of life depended entirely not on their monetary wealth but on whether their community was working well, and therefore they would want to contribute conscientiously.
The argument is that in the coming crisis as the present unsustainable consumer-society runs into savage resource and environmental limits, we will have to adopt these kinds of ways, whether we like it or not, or we will not achieve satisfactory societies. (This does not mean we will inevitably go this way; the chances are obviously not very promising.)
Of course nothing like this vision could be achieved unless people came to hold very different values to those dominant today, i.e., unless they ceased to be interested in getting richer all the time, but enjoyed frugal and self-sufficient living, were content with enough within stable economies, were concerned with the welfare of their society, enjoyed giving and helping, and focused on enjoying non-material satisfactions such as craft, gardening, community, festivals, arts, conversation, learning╔ The argument is that The Simpler Way will reward these activities and contributions – people will find it enjoyable to be good citizens.
Appendix: Where the above critique differs from that of Marx.
This critique of capitalism differs significantly fro that put forward by Marx Marx’s analysis focused on the productive process and argued that the fundamental fault in capitalism was to be found there. In addition his theory of how history changed was in terms of the “forces” and the “social relations” of production. However the above critique of capitalism focuses on how the market system creates ever-increasing and terminal problems, primarily of distribution and inappropriate development.
Marx’s theory of value claimed that the value of a product corresponded to the amount of labour in it. Workers create that value but don’t get it all in their wages; the capitalist sells the product for more than he pays them and thus takes part of the value they created. Thus Marx says the productive arrangement is one of exploitation.
Lichtheim is one who says Marx made a major mistake in basing his critique on this theory that the value of an object was constituted by the labour needed to produce it. It bogged Marx and generations of Marxists down in turgid and inconclusive arguments, especially in trying to explain the difference between the value of a product in labour terms and the amount of money it could sell for, its “exchange” value.
The essay above focuses on a quite different fault, one that is clear and easily understood, and difficult to dispute. The capitalist owns the goods produced and he sells them for the highest price he can get, meaning that the system distributes products mostly to the rich and that development will mainly be of those industries, factories etc. that produce what richer people want to buy.
Thus there is no need to talk about exploitation or value to criticise the system. This also avoids the counter argument that capital as well as labour is required to produce things and profit is the reward to those who supply capital, so the system is not exploitative.
This is a matter of focus and it enables other elements in Marx’s approach to be accepted, such as the fact that capitalism has contradictions built into it, the fact that competition and the drive to accumulate mean that it must grow, that the system is the problem not capitalists, and that it has seriously undesirable social (and environmental) effects.
The focus on production is also related to probably the biggest fault in Marx’s account, i.e., the fact that capitalism’s growth imperative is now driving it through the limits to growth. (Unfortunately many Marxists still think that when capitalism has been eliminated production will be freed to provide high “living standards” to all.)