Capitalism

Victor D. Lippit

• Publisher: Routledge
• Year: 2007
• Print ISBN: 9780415435062
• eBook ISBN: 9781134480029
• Topic: Business
• Subtopic: Business General
• Index: Business

This imaginative and ambitious book rethinks the nature of capitalism. Lippit, a leading heterodox economist in the USA, here delivers a comparative study of different forms of capitalism. He first critically examines the three main capitalist prototypes:

* the Anglo-American, market-driven version
* the welfare-state capitalism of continental Europe
* the state-led capitalism of East Asia.

After investigating their various intricacies, he then goes on to analyze the common weaknesses of each different strand. A provocative and stimulating read, this book will be welcomed by postgraduates and professionals in the fields of economics and political economy.

1 The capitalist system

It is only natural for people to take for granted the economic and social institutions within which they carry out their daily activities. In industrialized countries we think of educational institutions, the job market, career opportunities and so forth as creating a set of choices or possibilities that we navigate to achieve our chosen ends. We are, of course, aware of marginal changes in institutions, but to envision an entirely different set of institutions is almost akin to envisioning an alternative universe. In the usual course of events, then, we do not think of capitalism as a distinctive means of organizing human existence, even though capitalism has a history, a future, and immense consequences for the human condition. My intention here is to explore a set of issues related to capitalism—its nature, forms, history, contradictions, and future. I do so not with the hope of providing definitive answers, but with the hope of spurring thought that will enhance our ability to understand the forces shaping our behavior, to control our economic and social environment, and to consider countermeasures for some of the serious threats that capitalism poses to human existence.

Capitalism first appeared as the dominant economic system during the course of the “long” sixteenth century, and it is no accident that the rapid acceleration in living standards in the portion of the world that is now industrialized can be traced to the same era. As Adam Smith perceived in his An Inquiry into the Nature and Causes of the Wealth of Nations (1776), individuals’ efforts to pursue their own material benefit can generate positive social and economic consequences for the entire community. Smith’s insight continues to provide a core theoretical justification for the capitalist system, especially for the proponents of free enterprise and the market system. The enormous increases in income and wealth that have materialized in the industrialized countries are currently in the process of spreading to other parts of the world, with the Asian tigers—South Korea, Taiwan, Hong Kong, and Singapore—already enjoying living standards comparable to those of the West, and large regions like China apparently in the midst of similar transformations. If capitalism persists for several more centuries, as seems to be highly likely, then from the vantage point of the future, capitalism may be seen as the system responsible for the transformation of the human condition from one of mass subsistence to mass prosperity.

The consequences of capitalism, however, are not entirely positive. As many economists have recognized, the widespread benefits of the market system are accompanied by pervasive market failures. When people buy houses or drive cars, for example, they are unlikely to be focused on their personal contributions to global deforestation or warming. Moreover, even if some enlightened individuals are conscious of these consequences of their behavior, the global trends will hardly be altered if they refrain from pursuing their personal ends. In cases like these, the common good that Adam Smith envisioned resulting from individuals’ pursuit of their own benefit will not materialize. Thus the capitalist system calls into question the future sustainability of the human habitat. Further, history is filled with instances in which the pursuit of individual benefit under the capitalist system has contributed to social injustice on a gargantuan scale. One need only consider the history of the slave trade, or the fact that Liverpool, the first great industrial city in England, owed much of its prosperity in the eighteenth century to that trade and the building of ships for it.¹

Further, if we think of the world as being in the midst of an extended period of capitalist transformation, perhaps extending forward as long as the four and a half centuries capitalism has already existed, then it would be well to keep in mind the fact that the majority of the world’s population has not yet benefited from the promise of material prosperity that the capitalist system appears to make. To the contrary, the early stages of capitalist development have typically been accompanied by vast immiserization and exploitation. During the Industrial Revolution in England, children as young as seven had to work in factories for twelve or more hours per day (Mantoux 1961: 410–412; Ashton 1962: 113); the widespread exploitation of child labor remains commonplace in countries like China and India today, countries just starting out on the path of capitalist development.

In response to the transparent injustices of capitalist development, socialist and communist movements have attempted to define an alternative path. These have invariably foundered, most notably with the collapse and disintegration of the Soviet Union. This collapse can be attributed to many factors (including of course the hostility of the capitalist world), but two especially noteworthy ones include a series of internal contradictions and a failure to develop a workable basis for economic calculation and action. If socialism is in some measure a system meant to overcome the inequality (of income, wealth and power) and alienation that characterize capitalism, it is difficult to see how a system of central planning, which concentrates authority in unprecedented fashion and leaves ordinary working people with little control over their own work and lives, is compatible with socialism. Moreover, in the Soviet Union, as a consequence of the inefficiencies inherent in central planning, an ever–growing share of national product had to be allocated to capital formation for each incremental rouble of consumer goods production, pushing aspirations for popular prosperity ever further out into the future (Nove 1986: 155; Gregory and Stuart 1995: 316, 326).

While my focus here is on the capitalist system, I mention the case of the Soviet Union simply to make the point that there is in fact no viable alternative to capitalism at this stage in world history. One would certainly hope that when and if the entire world has been incorporated as developed entities within the capitalist world system—that is, when capitalism has completed its transformative “task”—an alternative system will emerge that focuses on the development of the human potential rather than the unlimited increase in the quantity of goods and services that capitalism promises. I will develop the case for this position more fully below, but here I would like to focus on just two points.

First, as John Kenneth Galbraith (1984: 119–133) has pointed out, when wants are created by the system and then satisfied, there may be no net gain in satisfaction. In fact, for those unable to satisfy those wants, a more or less severe sense of deprivation may be engendered. More significantly, the cumulative environmental destruction associated with a virtually openended increase in production and consumption threatens the capacity of human beings to carry on life as we have known it—and in the extreme case threatens the continuity of human life itself. Thus, for example, with practically all countries treating the oceans as sewers—depositories for the ever-growing quantities of waste associated with expanding production and consumption—it may not require a stretch of the imagination to envision a time, perhaps a few centuries from now, when the oceans become vast dead seas in which nothing can live.

Already, extensive “dead zones” have appeared in various places, including one of around 7,000 square miles that appears every spring and summer in the Gulf of Mexico (Bungo 2004). In the dead zones, marine life has essentially vanished in response to sharp drops in the oxygen levels. According to the United Nations Environment Programme, the dead zones will soon reduce fish stocks more than over-fishing. The main cause of dead zones is thought to be excessive nitrogen from fertilizers and other human sources washing into the sea. These result in algae blooms; when the algae then die and decompose they absorb the oxygen in the water. Since the 1960s the number of dead zones in the world’s oceans has doubled every decade and is now nearing 150 (Kirby 2004).

In addition to endangering the world’s oceans, human activity has placed the atmosphere increasingly at risk, with the ongoing destruction of the ozone layer in the upper atmosphere having made exposure to the sun increasingly hazardous in recent decades. It is also not beyond the realm of imagination to envision a time when exposure to the sun has become so hazardous that outdoor activities are, in the main, restricted to the night or human civilization simply moves underground. Although these scenarios represent extreme cases, and actual environmental deterioration may well fall short of the extreme, it is nevertheless useful to consider the direction in which our unchecked actions are leading. Even if environmental deterioration merely involves significant expansion of the current oceanic dead zones, and merely calls for significant curtailment of daylight activities, dramatic changes in the way human life is carried out are likely to be required. This expectation is reinforced when all of the other aspects of environmental deterioration are taken into account.

The relationship between these threats to human existence and the capitalist system warrants close consideration. Capitalism is defined above all by the accumulation process and the ongoing search for expanded profitability. Enterprises can increase their profits by reducing costs or expanding sales; both of course play a role. There is, however, a limit to cost reduction; in the extreme case costs cannot be pushed below zero. On the other hand, there is no limit to the potential expansion of sales. Thus capital accumulation and the expansion of sales are at the core of the capitalist process. A fundamental contradiction exists, however, between an environment with given resources (the earth) and limited pollution absorption capacity on the one hand, and a system that requires everincreasing throughputs of production and consumption on the other. In this sense, capitalism is ultimately incompatible with the continuity of human life as we have known it.

My purpose in this book, then, is to explore the dynamics, contradictions, and implications of capitalism as a distinctive economic system. My intention is to introduce a number of perspectives that will facilitate the understanding of capitalism and its consequences. I believe it should be recognized that the capitalist system has both positive and negative implications for the character of human life. The chief positive element is the great improvement in living standards that capitalism has made possible for a sizable (if minority) portion of the earth’s population, and the promise it holds for those who have not yet been its beneficiaries. Table 1.1 indicates the change in living standards that took place in selected countries between 1820 and 1989.

Even while generating considerable prosperity in parts of the world, capitalism remains rife with negative features, ranging from inequality and social injustice to the crassness of commercial culture. Above all, however, its environmental contradiction, which threatens serious disruptions to human life on earth and in the extreme case its very continuity, must be a cause for concern. Since there is no viable alternative to capitalism, however, and since the capitalist system is likely to be with us for several more centuries at least (assuming that we do not destroy ourselves in the interim), my analysis of capitalism is meant to promote thinking about the dynamics and contradictions of the system with a view to enhancing its positive features and ameliorating its most destructive and socially reprehensible ones.

Table 1.1 Levels of gross domestic product per head of population, 1820–1989 (US$ at 1985 prices)

Types of capitalism

In the contemporary world, we can distinguish three primary types or models of capitalism. First, there is the Anglo-American type, a form of capitalism that emphasizes the role of markets and consequently tends to be extremely harsh in terms of its consequences for human welfare. Second, there is the continental European type of capitalism, with its emphasis on the welfare state and social democracy. Third, there is the East Asian model of state-led capitalism, exemplified especially by the form capitalism has assumed in Japan and South Korea. While no country fits these models perfectly, it is nevertheless useful to think of these different prototypes. I will argue below that the state-led model is no longer viable in its historic form, although in modified form it is likely to remain extremely important as the states of developing countries in particular take advantage of the opportunities provided by globalization and technological change to accelerate their growth trajectories. I will argue as well that both state-led capitalism and welfare-state capitalism are under severe pressure to emulate their American cousin.

The Anglo-American form of capitalism, which reaches a more extreme form in the United States than in the United Kingdom, is the harshest form. This is a consequence of its extreme reliance on markets, and a widespread conviction that market prices have some normative value. Thus if a person’s value in the labor market is insufficient to provide a living wage for himself (herself) and his (her) family, that is simply regarded as unfortunate, but not a cause for social action. In fact, it is argued conventionally that efforts to bring the minimum wage up to the subsistence level will deprive people of employment opportunities and the ability to improve their status over time by learning on the job. In effect, this argument has prevailed in American public policy since, over many decades, the minimum wage has been set below the subsistence level.²

Although the United States is the most prosperous nation in the history of humankind, 43.6 million of its citizens lacked health insurance in 2002, while 16.3 percent of its children lived in poverty (US Department of Commerce 2003). In 2004,

[m]ore than 28 million people [in the US], about a quarter of the work force between the ages of 18 and 64, earn less than $9.04 an hour, which translates into a full-time salary of $18,800 a year—the income that marks the federal poverty line for a family of four.

(Business Week, 5/31/04: 61)

While it is certainly true that many people have benefited from the relatively unconstrained free market in the United States, there are clearly numerous people as well who have failed to gain from the beneficence of Adam Smith’s “invisible hand.” These issues are above and beyond those raised by the prevalence of commercial culture and the destruction of the environment.

In the United States, someone who loses his job is likely to lose his health coverage as well. If that person is unfortunate enough to fall ill, there are a number of patchwork palliatives, but there is no formal safety net to provide succor. Since, moreover, the United States tends to have the fewest job protections among the industrialized nations, it is not an exaggeration to characterize its form of capitalism as “harsh.”

This is not to argue that the American form of capitalism lacks significant advantages. The rewards to innovation, hard work, and commercial success are substantial, generating incentives that support economic growth and a rising standard of living. Moreover, despite the prevalence of imperfect forms of competition, competitive pressures tend to compel improvements in efficiency on an ongoing basis, and encourage investment, research, and development. This is the part of the story that the market “faithful” emphasize, just as the critics tend to emphasize the harshness and injustice that are embodied in the same model. An accurate picture must recognize the existence of both parts of this duality.

In continental Europe, an alternative form of capitalism has evolved, one in which the potential injustices and inhumanity of the system are more fully recognized. In Europe, it is more difficult to close plants or fire workers. Health-care systems operated by the state cover the entire population, pensions tend to be relatively generous, a high proportion of wages is provided during illness (with payments coming from the employer, the state, or both), and generous benefits (and leave arrangements) are provided for childbirth and childcare.

The downside to the European system is the high level of taxation and other forces that discourage innovation, employment, and effort. In Germany, for example, as of 2002 there was a 41 percent payroll tax (split 6 The capitalist system between employer and employee) to cover health care, unemployment insurance, and pension requirements.³ Given the difficulty of firing workers, a European employer contemplating hiring a worker in his/her twenties must think about the possibility of a forty-year commitment; the worker becomes, in effect, a fixed cost. There is a high risk in making such commitments since firms are unlikely to have a clear picture of their business outlooks for more than a few years, if that much. The result is that firms tend to prefer to minimize new employment by automating production as much as possible, by establishing new facilities abroad, or by outsourcing as much production as possible. As a consequence, high levels of unemployment, especially among young people, tend to characterize the continental economies.

Moreover, in certain areas, the European economies are able to piggyback on the more dynamic American economy. By limiting pharmaceutical prices, European governments have achieved the laudable result of making prescription drugs more affordable. Since the cost of developing new drugs, however, can reach as high as $802 million (including the costs of developing drugs that fail to work),⁴ drug research and development would fall sharply if all countries followed the price control practices common on the continent. Thus for a number of reasons, the European model of capitalism, while more humane than its American counterpart, is also less dynamic. Although it is possible to envision forms of capitalism that combine the best features of each, albeit in modified form, substantive changes in the capitalist system (explored more fully in Chapter 8) will be required in other directions as well.

The issue of systemic change has added significance since both American and European capitalism are subject to a process of dynamic evolution, and the European system in particular is under enormous pressure to become more like the harsh, market-driven American form. As a part of the ongoing process of globalization, competition is becoming increasingly international in scope. Firms in countries with high levels of taxation and laws that limit labor mobility find it difficult to compete with firms in countries that create a more favorable business environment. Some of the European countries—such as the Netherlands—have introduced more flexible labor laws (especially by easing restrictions on part-time and temporary work), while others—such as Germany—have lowered taxes. The problem posed by such measures, however, is that they tend to undermine the job security and welfare-state expenditures that most of the European population regard as the foundation of a civilized society.

In thinking about the pressures for change in the various capitalist systems, it is also important to keep in mind the development of capitalism in new areas as some of the less developed economies industrialize and as the former “communist” countries take on an increasingly capitalist hue. The institutions in these developing and/or transitional economies are in a much greater state of flux, and whether the type of capitalism that emerges will be closer to the American or European model is still an open question, although i...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Tables
• Preface
• 1 The capitalist system
• 2 Social structures of accumulation: The theoretical issues
• 3 Social structures of accumulation: The reinvention of American capitalism
• 4 Capitalism, globalization, and technological change
• 5 Capitalism and the economic surplus
• 6 Capitalism and class
• 7 Capitalism and the environment
• 8 The future of capitalism
• Notes
• Select bibliography