What does have a light side, a dark side, and grants its users powerful abilities? Capitalism. The dominant economic system of the last two centuries. Some extol its virtues, others make it the root of all evil, all with equal passion. In this week's blog we explore what defines capitalism: the good, the bad, and the ugly truth.
Capital and private property are the yin and the yang of capitalism
At the core of capitalism is the capital, an investment made in pursue of a profit, a gain superior to the original investment. Capital also refers to the means of production: the factories, machines and tools bought with the investors’ contribution. A business is profitable when the sale of a product or service generates more money than it costs to produce. This profit goes back to the owners of the capital because they took the risk of investing in the first place and deserve a reward. Profit can also be reinvested so that the business can increase production or expand its activities.
The second aspect at the core of capitalism is private property. There is no capitalism without private property. Private property is an unnatural concept created by man in order to facilitate trade. This is where the state or government comes into play by guaranteeing private property rights through a legal system financed by taxes. 'Theft is only punished because it violates the right of property, but this right is itself nothing in origin but theft', said radical French Enlightenment writer Marquis de Sade.
Lifting people out of poverty
Before capitalism was feudalism, a rural society where wealth came from the land. The aim of production was consumption, as opposed to accumulation. What was produced went to the workers and the state or church. Transformations in agriculture, advances in the methods of production and trade led to the industrial revolution and capitalism developed in parallel.
Industrialisation and urbanisation have reduced the proportion of the world population living in absolute poverty, that is with less than $2 a day. Today, 8% of people still live in absolute poverty, mainly in rural Africa, and half of the world population is middle class or upper class, according to the World Data Lab.
Capitalism as a medium for democracy and innovation
Capitalism has been a medium for democracy. Economic success gave early capitalists a share of the political power. Workers followed suit and organised themselves politically under trade unions. Trade unions managed to regulate working conditions, increase wages and living standards. With the support of unions, political parties achieved social reforms such as the universal suffrage and helped establish welfare states in most modern capitalist countries.
Competition is what drives businesses to innovate. Most innovations and new technologies have a positive impact on society. This is what Adam Smith, the ‘father’ of modern economics, refers to as the ‘invisible hand’ of capitalism. Yet, in most cases the benefit to society is a consequence of the capital owners' self-interests and their pursue of profits, not their initial objective.
Rising inequalities, the threat to democracy and the worsening of working conditions
The pursue of profit leads to the accumulation of capital. The more capital, the more profit. The first consequence of the accumulation of capital is the uneven distribution of wealth. Uneven distribution of wealth creates inequalities with economic and social implications such as mass migration, limited access to health and education or increase in violent crimes.
The second consequence of the accumulation of capital is the accumulation of power. The more capital one possesses, the more influence one yields over the economic and political institutions that are supposed to reduce inequalities. This contrasts with the democratic principle of one person, one vote, regardless of how much capital one possesses. Ultimately, the pursue of profit encourages the people with capital to challenge democracy when it interferes with their own interests.
In the last 40 years, liberal economic policies have led to monopolies and oligopolies. Living standards are now stagnating, working conditions have deteriorated and workers' bargaining power is extinct. As countries industrialised, people became richer and consumption increased. The result of which is a society based on mass production and mass consumption, and catastrophic environmental damage.
Zero-growth capitalism and workers cooperatives
The capitalist principles of competition and accumulation have pervaded all aspects of everyday life. Similar to investors pursuing the accumulation of capital, people seek the accumulation of material goods. Competition-or the pursuit of performance-starts as early as primary school and continues at work and in our social and personal life.
Some of the features associated with capitalism, such as growth or stock exchanges, are not necessary for it to exist. A growing number of economists are promoting the benefits of 'zero-growth capitalism' or 'steady-state economy'. However, nonconformist theories are voiced out when they challenge the dominant economic ideas. Socialist alternatives are equally met with strong resistance.
Cooperatives or workers' owned businesses reconcile capitalism and democracy. The power of making decisions no longer resides into the private hands of the capital owners. The workers can decide what to produce, how to produce it, at what cost, and what to do with profits. There are currently 2,000 cooperatives and mutual enterprises in Australia.
Nobody gets rich with their own money
Therein lies the paradox of capitalism in its current form: because a business is profitable does not mean its activity is beneficial to society. Inversely, an activity that is beneficial to society may not be profitable. Indicators of economic success alone are not enough to measure the impact of economic activities on society and their benefit to the global community. Lasting economic activities should be the ones that answer a need for society and lead to social progress.
Capitalism is a spectrum and depends on the society within which it evolves. When left to its own devices, capitalism creates inequalities, hinders social progress and silences democracy. Should we fail to acknowledge our current economic system's shortcomings and, most importantly, addressing them, then the shroud of the dark side will inevitably fall upon us all.