What’s happening with Capitalism?

by Nilio Gumbs Fri, Sept. 02, 2011

When Adam Smith mentioned the role of the “Invisible Hand” in his book the Wealth of Nations (1776), he was referring to the interaction of buyers and sellers (the market mechanism) which determine the price of goods and service – the bedrock of the capitalist economic system. It is no wonder that a typical classical economist would argue – leave it up to the” market” to allocate scarce resources!{{more}}

The ineluctable kaput of a capitalist system during the “Industrial Revolution”, which emanated in the latter part of the 18th century: the exploitation of workers, the egregious working conditions and the use of child labour influenced Marx to write his epistle the “Das Kapital” (the bible of communism). Where he looked at the built in contradictions of man’s relationship to the means of production (the owners of capital and the owners of labour). Using Britain as the backdrop for his analysis and his dream of a workers’ revolution, he envisioned the overturning of the exploitative relationship of the bourgeoisie by the proletariat (workers). Through some freak of self reflection, workers would recognize their true consciousness and rise up to overturn that iniquitous system and control the means of production themselves. When extrapolated to the organs of the state- would manage such on their own behalf and creating a utopian paradise for workers.

As we all know, Communism landed on the wrong side of Europe and the America and possibly history. Instead of a workers’ revolution taking root in a exploitative capitalist country, it emerged in a semi-feudal and agrarian one- called Russia in 1917- later the Soviet Union.

Marx did not foresee the accommodation, flexibility and adaptation of the capitalist system from self immolation and implosion: trade union recognition and collective bargaining to improve workings conditions and compensation, minimum wages, a ban on child labour and other social services for the working poor.

Instead of the death of Capitalism Marx himself had predicted, it was communism and its planned economy that suffered such a faith, despite a last ditch effort of Makhail Gorbachev to save it upon becoming General Secretary of the Communist Party in 1985. Gorbachev, standing at the same spot where Lenin stood 68 years earlier ( in St. Petersburg) in declaring victory for the Bolsheviks – phrased two important words used in the English vernacular: Perestroika (restructuring) and Glasnost (openness). The tide unleashed by his bold experiment in governance swept him and Communism away, leaving one dominant ideology and economic system to hold sway.

While Gorbachev was trying to salvage Communism, Ronald Reagan and Margaret Thatcher were busy scaling back workers’ rights that were successfully won over a century in their new found vision, and with pursuance of different approach to economics – called supply side – which gives incentives and tax breaks to producers instead of consumers (demand side), to stimulate production and investment. This “supply side”, kick started the United States and Britain’s economy in the 1980’s- through the trickling down effect- in the form of increased output, employment and increased tax revenues.

The prosperity of the 1980’s and 90’s was masked by America’s low savings rate and propensity of the government and households to borrow. The Great Depression of 1929, the abandoning of the Gold Standard (the dollar being backed by gold), the oil shock of 1973 and the global stock market crash of 1987 (Black Monday) were tell tale signs of the frailty of capitalism.

In 2008, the capitalist system was yet again jolted at its foundation, with the financial crisis in the United States and Britain causing havoc to financial markets around the world. Also, rising commodity prices in that same year as a result speculative buying and selling compounded problems further exposing the vulnerability of the capitalist system.

Three years on, concerns about rising government deficits and debt levels across the globe together with a wave of downgrading of European government debt have created alarm in financial markets.

The debt ceiling/reduction agreement in the United States, the unsustainable sovereign debt of Greece, Ireland and Portugal and the vulnerability of Spain and Italy to such a malaise have brought many developed countries under increasing pressure to cut their budget deficit and balance their books- creating economic gutted pain for many of their citizens.

The United States sovereign debt stands at 14.7 trillion, while Italy’s is around 1.6 trillion. The United States debt/GDP ratio is 70 percent, Britain’s – 60 percent, France – 80 percent, Greece above 100 percent and Japan’s – over 200 percent.

The riots in Britain are being attributed to the drastic cuts in social services made by Cameron’s conservative coalition government to improve fiscal balances and reduce sovereign debt.

Israel has been rocked by massive street protests, linked to the rising cost of living which has virtually reduced the middle class to the working poor.

The “Capitalist World” has to contend also with rising unemployment and the inability of their economies to generate employment. In the United States, unemployment is around 14 million – 9 per cent of the labour force. A note of caution – no “President”, since Franklyn D. Roosevelt, has won re-election if the unemployment rate is above 8 per cent. In Spain, around 5 million people are out of work- some 21 per cent of the labour force. The youth unemployment is even worse – some 45 per cent of the labour force.

The capitalist world is running out of options fast! The interest rates (monetary policy) are near to zero percentage point in most advance countries since the global recession in 2008. These Governments also have to tighten their fiscal belts. So what is the faith of capitalism? Can it reinvent itself as it had done before?

The collapse of communism and the “Arab Spring uprising” were unprecedented in modern history. Can the citizens of the major neo-liberal economies on earth lose faith in capitalism, leading to similar upheavals and the re-emergence of communism? If so, would the former progressive elements in the region shed their present skin? Are we to create pressure groups lying in wait? As said in private conversation at the “Mauby Shop”, I am simply too old for that! Let’s get it on!