AILS: Capitalism

Assumptions

Before I began my quest to learn about one of (if not the) most prevalent economic systems in the world, I had some very specific ideas about what capitalism was. Firstly, I thought that capitalism’s main aim was to redistribute wealth amongst the population. Secondly, I thought it was the only market based economic system. And lastly, I had the notion that profits and growth drive large scale innovation & government monetary policy.

What I ended finding was that many of the altruistic parts of capitalism were by-products of the system, and mostly limited to the early stages. I also realised there are many differing definitions of capitalism, the one I ended up landing on is:

An economic system characterised by the private ownership of the means of production to generate profits based on markets of supply and demand.

Definition

As odd as it may seem to us in modern times there was a time when capitalism was not the dominate economic system across the globe. Back when Kings, Queens, emperors, monarchs and feudal rulers were in power all across the globe, the gradual move to capitalism was kick-started when land and labour started to become commodities. Agricultural practices improved and less people were needed in the fields. A migration occurred as people flocked towards city centres. The merchant class, who had started to consolidate their power, not to mention vast amounts of wealth, from the Age of Discovery, welcomed these new workers into their workshops and factories. The merchants eventually started companies to pool resources and secure much coveted royal charters to resource rich far flung countries. The demand for novel and unique products that could be produced from the rarities of distant lands meant the prices could be set to a high premium.

In a relatively short period of time artisans and journeyman become a much smaller part of the population with the creation of commodities becoming the work of multiple people. Workers doing smaller more less skill intensive tasks that didn’t require the knowledge of the whole process. Commodification of labour kicks off the by-product for early stage capitalism, raising the general wealth of the population and reduce poverty by allowing those with no wealth to generate it simply by trading their time & labour for pay. The general wealth of population is needed so the consumption of the commodities being produced can continue long term; if no one is buying, no profits are made. Profits are the cornerstone of capitalism and drive the use of capital as input for production, to ensure more value is extracted from the final sale than is put in to the cost of production. This profit motive is the life blood of capitalism. This profit margin is the only thing that determines if businesses are sustainable in a capitalist system, there is no moral or ethical component, no amount of altruistic or good faith will allow a company that is unprofitable to survive for long. The only reason any companies with products or services like these survive in our current economic system is because of things like regulation and state intervention in markets to promote social welfare, prevent monopolies and defend public safety.

Photo by Karolina Grabowska

The often touted claim to fame of capitalism, aside from raising people from poverty, is driving innovation. To remain competitive and make more profits, companies need to provide one of three things: a unique product, be cheaper than competitors, or have brand/value recognition. Only the first of these three tenets is a driver of innovation, though in the later stages of capitalism this is severely hampered to the point of being a non-issue due to risk aversion and ensuring profit margins stay high. The need for profits does often cause innovation, however only innovating on the delivery methods and extreme efficiencies of production. The companies that are in the best place to really innovate and make completely new products, are also the ones with the most to lose as their existing products having the lion’s share of the market, would be obsolete/redundant. The automotive industry or energy producers for example, they have an extremely vested interest in keeping the status quo so that their products and services are still profitable for years to come. Hence their extreme prejudice against moving to renewables and specific lobbying against climate science even though they have known for decades of the impact of fossil fuels long term.

man looking at a board strewn with papers and diagrams of different designs and ideas
Photo by Startup Stock Photos

The ugly truth is that capitalism is an economic system that is only centred around generating profits. Especially considering the late stages of capitalism which the developed world, and much of the developing world due to global trade, find themselves in. The apparent mobility & freedom of people to move upward in class, is not present in the later stages as wealth increasingly gathers at the top echelon rather than dispersing through.

Sources

https://www.oecd.org/sti/inno/39374789.pdf
https://www.bcg.com/publications/2015/growth-lean-manufacturing-rising-need-for-innovation-speed
https://www.thomasvan.com/business/capitalism-does-not-lead-to-innovation-innovation-leads-to-capitalism
https://www.capitalism.org/
https://en.wikipedia.org/wiki/Capitalism
https://thinkgrowth.org/why-cant-nestle-produce-another-nespresso-e2aeb3a5e086
https://www.unep.org/thinkeatsave/get-informed/worldwide-food-waste
https://www.managementstudyguide.com/types-of-economic-systems.htm
Global Capitalism. (2000). United States: New Press.

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