1. economics

workshop 1. capitalism as an economic system

What is an economic system?

In schools and universities, economics is taught as if capitalism is “natural”, or the only system possible. But in fact there have been, throughout history, many different ways of organising how people use and produce resources.

Here are just a few examples:

** Hunter-gatherer traditions and cultures about how to live with the natural world
** ‘Gift economies’, such as the ‘Pacific cultures’ studied by many anthropologists
** Slave-based systems – e.g., Roman empire, US Southern States in the 19th century
** Feudal systems – e.g., Medieval Europe
** Command economies – e.g., Soviet Union, Maoist China
** Market Socialisms – e.g., Yugoslavia under Tito
** Syndicalism – e.g., the “short summer of anarchy” in Barcelona 1936
** Co-operative production and distribution systems – e.g., co-operative movements in Europe in the 19th and 20th centuries

And history isn’t over. There will be other kinds of arrangements in the future … maybe ones we can’t even imagine yet.

Using, producing, distributing

The examples above are very different but, to simplify, all of them involve ways in which groups of people organise the use, production and distribution of resources. We might think of them as addressing some recurring questions of human social life:

** Use. What things can be eaten, hunted, planted, made, traded, given, hoarded, shared, etc.? What things should be left alone, what things should be shared by a group or can be claimed as individuals’ “property”, etc.?

** Production. What things should we make – cook, craft, build, decorate, repair, etc.? How much should we make? What resources and processes should we use to make things? How much time and energy should we spend making things? Who makes what? Who makes all these decisions, anyway?

** Distribution. Who can do what with things that are found or gathered, and things that are made? Who gets all the pies – and what should they do with them?

 

Klallam (Pacific NW Nation) Potlatch feast: (part of) a non-capitalist economic system

 

Example: Tahrir Square

When hundreds of thousands of people occupied Tahrir Square in Cairo in early 2011, they needed to create their own mini “economic system” to bring in and distribute food and other materials to everyone in the occupation. There were sleeping areas, collective kitchens and food distribution points, markets, toilets and waste disposal, assemblies to co-ordinate some of this, and lots more.

Example: Robinson Crusoe’s Island

Economists often like to use the example of Robinson Crusoe, from the novel by Daniel Defoe, as a very simple economic system. Even all alone on his island, Crusoe had “economic” decisions to make, like how much fruit to eat now or how much to save to “lay up a store, as well as of Grapes, as Limes and Lemons, to furnish myself for the wet Season, which I knew was approaching”. Later, Crusoe met “Friday”, and started a basic two-person class system.

Example:Soviet Planning

In the Soviet Union, many economic decisions were made through a system of state planning. The central planning commission Gosplan, in Moscow, collected statistics about what resources were available in the economy, and then issued detailed plans for what was to be produced by different regions and sectors (mining, agriculture, manufacturing, etc.) One important decision was: how much work and resources should go into producing goods for personal consumption, and how much into producing machines and materials to build up industry and the military?

Example: corporations.

Corporations compete with each other in markets. But internally a large corporation — and some are bigger, in terms of wealth and numbers of people, than small countries — are run much like socialist planned economies. Executives try to control the whole organisation from above.

 

Tahrir Square 2011.

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But just what is “the economy”?

The term economics comes from the Greek word oikos, a “household”. Economics, in ancient Greece, was the study of how a wealthy man should manage his household, including its budget and stores, and also its subordinated slaves, women and animals.

In late medieval Europe, we see the start of what would become known as ‘political economy’. Philosophers started writing texts about how kings, princes and other rulers should manage their wider ‘households’, meaning the resources, population and wealth of nations.

Political Economy flourished as a new science in 18th century England, as trade and industrial revolution took off, with writers like Adam Smith and David Ricardo. These classical economists now defined the economy as a special area that the state should keep away from. In recent years, “neoliberal” economists have pushed things further. Theorists like Milton Friedman and Gary Becker argued that all aspects of human life should be seen in economic terms. Neoliberal governments, from Pinochet in Chile to Thatcher and Blair in the UK, helped turn theory into reality.

Even a brief look at this history shows how the very idea of the ‘economy’ is heavily political. Thinking about economics has always meant thinking of the world in terms of property that can be owned and managed – whether by a rich ‘householder’, a king, or investment funds. We need to bear this in mind when thinking about ‘economic systems’. Do we want just to replace capitalism with another economic system? Or to destroy ‘economy’ altogether, and stop thinking and living like the world is there to be owned and dominated?

 

 

Adam Smith (1723-1790).

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In and out: production processes

Now to capitalist economic systems. To start things off, it can help to work through a simplified example.

Imagine … a car factory. In at one end come inputs. These include raw materials like steel, glass, plastics, etc., shipped in from steel mills, glass plants, etc. There are also parts, electronic components, etc., which have already been assembled in other factories. These inputs are put together by workers — trained human beings — using machines, which need energy to run. Finally out comes a finished output, cars.

How many cars will the factory produce? It depends, amongst other things, on how much of the inputs are put in. For example, here are some (completely made-up) figures for a factory producing at full capacity:

inputs

outputs

Raw Materials:

1000 tons steel, 100 tons glass, 10,000 megawatt-hours electricity, …

1000 cars

Machines

Labour:

50,000 person/hours

Capitalist economic systems typically involve strong division of labour: different workers specialise in different jobs, producing different parts of the process. They also involve division of decision-making. E.g., the factory has a manager whose job is to try and get as much output as possible. The hands-on job of squeezing the most hours labour out of workers is delegated to foremen. Workers get to decide things too: which way to turn the bolts … or whether to throw a spanner into the works when no one is looking.

But the decisions about inputs are not just made by one company. The same steel, or workers, could go to other car factories, or to make toys or guns instead, or more car-making machines. Or the iron ore could stay in the ground, and people could spend their time living life creatively instead of working in production lines. How are these decisions made?

 

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Modern Times.

Markets

In the Soviet system, decisions about allocating steel to factories were largely made by planning commissions. In a “free market” capitalist system, many of these decisions involve markets. In this example, a number of markets are involved:

  • The owner of the car factory tries to sell its products to consumers – in the car market.

  • The car company, as well as other businesses producing toys or guns, all need to buy steel – in the steel market.

  • They also need to hire workers – in the labour market.

Particular markets can work in very different ways – e.g., labour markets can involve internet job sites, government jobcentres and training schemes, regulations such as a minimum wage and employment tribunals, or cash-in-hand work and gangmasters, etc. But all markets have some basic points in common including sellers (supply), buyers (demand), and prices.

Unlike a planning system, “decisions” in markets can be quite decentralised. Overall outcomes – what is produced, how products are distributed – are not made by one individual or committee, but may be the result of many actions by many different individuals and groups, often acting independently. For example, there are lots of different car factory managers, and lots more car buyers. Each one can make an individual decision about what to produce, sell, or buy. The “total production” of cars in the economy is a result of all these separate decisions. And of many more decisions made in other interlocking markets.

This does not mean that some people and groups are not more powerful than others in markets. It just means that power relations are more complex, and can be hard to identify.

 

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Santiago, Chile September 1973.

Markets and Power

A monopoly is where there is only one seller in a market. A monopsony is where there is only one buyer. For example, the company called De Beers had until recently a near total monopoly on the world’s newly mined diamonds. Monopolists do not have to compete with other sellers who might undercut them, so they have considerable power to set the price on their products; and so to make high “monopoly profits”.

An oligopoly is where there are a small number of sellers. These sellers may join to form a cartel which fixes prices by agreement. The OPEC cartel of oil producing states is an important example.

According to the theory taught in economics textbooks, the more sellers there are, the more the price should be bid down by competition. In a “perfectly competitive market”, with many sellers, the price would be forced down until it just covered costs, and there would be no profit at all. Economic theory often works with this idea that markets are perfectly competitive. But in reality, such markets don’t exist outside textbooks. By controlling prices and production, big companies and cartels have power over distribution of commodities in markets. We can call this market power. In general, an individual or company has more power in a market the more resources – capital, money, or other commodities – it has to trade.

So, ultimately, market power comes down to owning stuff. But what does that mean? In many markets, ownership of resources is guaranteed by property law:the state recognises what resources belong to you, and can send in police and bailiffs to back up your claim.So market power does not exist unless it is guaranteed by other forms of power: the political and military power of the State, which enforces property laws with violence (see Chapter 4); and the cultural power of the norms and values that keep us believing in private property, and desiring more and more consumer goods (see Chapters 6 and 7).

 

 

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Profit

Most writers on capitalism, from Marx and Weber through to neoliberal economists, assume that owners of capital have one basic interest: the pursuit of maximum profit. In later chapters we will look more deeply at this assumption, and the very idea of capitalistic ‘self-interest’. For now, though, assume that it’s so. In our simple example, profit = revenue – costs, where revenue is the money made from selling cars, and costs are what the factory pays for all its inputs.

So, to effectively pursue profit, the car company’s managers need to think about a number of markets. On the one hand, it aims to make as much money as possible in the car market. On the other hand, it wants to buy the inputs it needs as cheaply as possible.

Suppose its market researchers predict that they can sell 1000 new cars at £10,000 each. That will be a total revenue of £10 million. The table below also gives some (again, imaginary) costs for inputs. The money spent on machinery here includes maintenance of wear and tear, replacement parts, etc. – what economists call depreciation.

inputs

outputs

raw materials = £2.8m

1000 cars = £10m

machines (depreciation) = £500,000

labour = £700,000

Material Costs = £4m

Revenue = £10m

The thing is that, usually, the car company will only get the revenue from its car sales after the cars are produced. But it will need to pay for inputs in advance. So it will have to borrow money to fund its production.

This brings in another kind of market – financial markets. As we will see in Chapter 2, there are various kinds of financial markets, including bank lending, stock markets, and bond markets. They work in different ways, but again we have the same basics. This time the commodity being bought and sold is finance, i.e., money to lend. The “buyers” are the people and corporations trying to borrow money; the “sellers” are the lenders; the price the borrowers have to pay is the interest rate.

For example, the car manufacturer needs to borrow £4m to pay for inputs. It agrees to pay back the money with 25% interest a year later, after the cars are sold. In the longer term, the car manufacturer probably also had to borrow to buy the machines and building for its factory. It will have to keep paying interest on these fixed costs, probably for many years.

costs

revenues

Material Costs = £4m

Sales = £10m

Total Finance Costs (long and short term) = £2m

Total Costs = £6m

Total Revenue = £10m

Suppose the car manufacturer got it right and it can sell all its cars for £10,000 each. Then it makes a profit of £4 million. Governments may take some of that in tax. Out of what is left, the car company’s owners or managers now have a new decision: how much should they invest in expanding the business, buying more up-to-date machines, etc.? And how much should they keep for themselves to spend?

Things don’t always go so smoothly. If the factory can only sell 500 cars, or has to sell them all at half price, then it makes a £1 million loss. The input costs and interest payments still have to be paid. If the company can’t borrow more money to keep afloat, it will go bust.

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Core features of Capitalism

From the simple example we’ve been looking at, we can highlight some key features of capitalist economic systems, which need investigating further in the coming chapters. These include:

Markets. Decisions are made through many complex interactions of buyers and sellers in markets. In the next chapter we will look in more depth at some very important kinds of markets, the markets for finance capital.

Commodities. Things that are bought and sold in markets are called commodities. Cars, steel, energy, and even wage labour are pretty obvious examples. But just what kinds of things can be bought and sold, owned and managed? One issue we will need to look at is how, over the history of capitalism(s), different kinds of resources have become commodified. For example, in 16th and 17th century England, and in the colonies, wild spaces and land that was traditionally held in common was forcibly “enclosed” and parcelled up amongst landlords. More recently “intellectual commons”, or even the genetic codes of wild plants, are being trademarked and patented, and so “enclosed”.

Property. The only people who can buy and sell in markets are those who have ownership rights over commodities. Thus behind every market is a background of property rules – laws, conventions, regulations about who owns what, and what they can do with their property.

The State. And behind property laws is the state – standing guard to enforce them with violence.

Profits. Much of the capitalist economic system, its power and invasiveness, is based on the pursuit of profits, which drives the commodification, appropriation, invention, production and spread of new commodities.

Labour. Central to many forms of capitalism is the way that human time and energy is also commodified, bought and sold. This includes not just wage ‘labour markets’, but also forms of slavery, domestic labour, prison labour and more.

Cattle: the “original” form of capital?

From cattle to capital

Historians usually trace capitalism back to the 15th or 16th centuries; but the word “capitalism” itself only goes back to the mid 19th century. The word “capital” is older. It comes from the Latin capita, for “head”. In the middle ages, “chattels” meant a wealthy person’s movable wealth, especially animals or livestock – including, where slavery was legal, slaves. The term still survives in our modern English word “cattle”. So, perhaps capital originally meant “heads” in the sense of the number of animals (“heads of cattle”) belonging to an owner.

The 18th century ‘classical economists’ identified three “factors of production”: land, labour, and capital. Capital now meant all other materials and machines involved in production. By the 19th century land was no longer considered to be a separate “factor”, just another form of capital. In the 20th century, with neoliberal theories of “human capital” (“intellectual capital”, “social capital”, etc.), some started to see human energy and skill as just another kind of capital too. We can also distinguish between physical and financial capital. Finance is not actual tangible stuff, but promises, agreements, IOUs, and contracts for using physical capital. That’s what we turn to next.

 

Wild, but not free.

In capitalism, more than in a central planning system like the USSR, many key economic decisions are decentralised and uncoordinated. Global capitalism is not (well, not completely) controlled by a conspiracy of billionaire capitalists with a secret plan. Even the biggest capitalists and investors often don’t have a clue what is going on in the markets.

At the same time, there are obviously massive imbalances of power and control in capitalism. In capitalism, you have power if you can trade in markets: that is, if you own property.

Capitalist rhetoric is about freeing the markets from the state. But the markets always need the state, keeping behind the scenes during “normal” times, but doing the most important job of all: defending property. The foundation stone of the whole system is state violence.

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Further Reading

Like other subjects, economics is a political battlefield. A battalion of ideology lurks behind every claimed “fact”. What makes it even worse is how hard economists try to hide this basic point. So you get a mass of pro-capitalist economics textbooks which never talk about politics, or even history, and ignore the existence of any alternative positions. And also a few Marxist textbooks which are just as confident about their own dogmas. You may find that you will learn more from historians, and a few anthropologists, than from economists.

Some personal favourites:

Peter Kropotkin – The Conquest of Bread. Still classic statement of anarchist communist economics. Kropotkin thinks about the urgent question for an age of revolutions, inspired by the Paris commune of 1870: how can an insurrectionary city or country feed and resource itself without domination or exploitation, while simultaneously having to fight off counter-revolution?

Alfredo Bonnano – Let’s Destroy Work, Let’s Destroy the Economy.
Silvia Federici – Caliban and the Witch. Excellent feminist and autonomous Marxist history of the rise of capitalism and the state, the commodification of our bodies, the attack on women by early capitalist institutions, and the resistance.

E.P Thompson – The Making of the English Working Class. Massive, detailed, history of early industrial capitalism in England, the destruction of pre-capitalist social relationships, and the development of new forms of resistance.

Anonymous – Desert. Any discussion of capitalism and anti-capitalism risks being irrelevant unless we consider what drastic climate change means for our future possibilities. This book is a very important anarchist contribution to doing that.

Marshall Sahlins – Stone Age Economics. Hunter-gatherer economics and the “original affluent society”.

Naomi Klein – Shock Doctrine. I think this is one of the most interesting texts on recent neoliberalism and “disaster capitalism”.

Classic texts on the nature and origins of capitalism

Karl Marx – Capital. I have very mixed views on this book. Some of it is very important, and still insightful. In particular, the last part (Part 8) of Volume I is certainly worth reading. This is where Marx looks at the history of the development of capitalism in England. This is not only the inspiration for a lot of later historical work on capitalism, but its ideas are still powerful in their own right. On the other hand, I think that the first part of Volume I, which introduces the core ‘labour theory of value’, is just deluded, and dangerous, metaphysical nonsense. Other parts, like the unfinished discussions of the ‘tendency of the falling rate of profit’ in Volume III, offer a mixture of genius and claptrap.

Max Weber – The Protestant Ethic and the Spirit of Capitalism. This book is important because it is one of the first to think about capitalism not just as an economic system but as a culture, with its own new values and forms of desire. Weber’s particular historical explanation of the emergence of the profit motive is interesting, but probably not the whole story. And he definitely takes it too far in trying to see capitalism as having just one guiding ‘spirit’, an ethos that he thinks explains not just entrepreneurial capitalists but also factory labourers.

R.H. Tawney – Religion and the Rise of Capitalism. Another important take on the rise of bourgeois culture, again focusing on England. Tawney’s main contribution is to look at the breakdown of the old medieval religious ideologies which had helped limit the scope of the market.

Karl Polanyi – The Great Transformation. Polanyi’s book was the first to bring new insights from anthropology to bear on the history of European capitalism. It’s an interesting read, but you might also skip to more recent studies which update this approach. Of which I’ll mention two:

Keith Hart – The Memory Bank: Money in an Unequal World. Is a helpful clear exposition of some basic themes in the history and anthropology of capitalism, and brings in Hart’s research on how different forms of capitalism have emerged in their own ways in Africa and other parts of the world.

David Graeber – Debt: the first 5000 years. A big book, with a wealth of information and further reading suggestions in the anthropology and history of capital, debt and money. Although some of Graeber’s particular theories are pretty speculative.

Some classic capitalist economic theory

Adam Smith – The Wealth of Nations
David Ricardo – On The Principles of Political Economy and Taxation
J.M. Keynes – The General Theory of Employment, Interest, and Money
Milton Friedman – Free To Choose. This being his more “popular” defence of capitalism.
Gary S. Becker – The Economic Approach To Human Behaviour. Perhaps the most radical statement of the all-conquering ambitions of neoliberal economic theory and the rational choice model.

There are also some useful (though sometimes a bit technical) discussions and notes on different traditions in economic theory  on the History of Economic Thought website of the New School for Social Research (leftie university in New York).

 

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