Capitalism’s Major Flaw

Profit!

The article in New Scientist (3022) entitled "Capitalism’s Hidden Web of Power", questioned the current analysis of the 2008 slump. Yet, the slump, itself, was more or less taken for granted, and the only important questions to be addressed were deemed to be about how to police irresponsible companies, so that such things could be “nipped in the bud”, and retrieved before too much damage was done. The idea was that, with sufficient information, an impending crisis could be avoided. The recession would not be so deep, and the recover would be much swifter!

These correcting analysts insisted that the criteria for assessing risk were inadequate. Various institutions and involved researchers now vied to add the obviously as yet excluded component, which they termed “Complexity”.  [Not the many other meanings of this word, but merely how complicated many companies had become was what was meant]. But, of course, they were wrong too!

Complexity as it was now being revealed is there on purpose - to HIDE things!

But, it isn’t the methods used in organisation that are the unintended reasons for this problem, but exactly what they are always trying to hide!

The reason for these desperate swoops is the nature of Capitalism itself! And, of course, this has to be hidden at all costs. Tell me, are these regulators going to rearrange things so that the real causes are plainly evident? Of course they aren’t.

No one really looks closely at how Capitalism works. It is treated as a natural given, and all efforts are concentrated upon re-organising the deckchairs on the sinking Titanic!

So, why do slumps occur? For that they certainly do! How can a system sustain itself in the face of the most unavoidable chronic crisis?

If Capitalism, as is claimed, delivers, of itself alone, “a better life for all”, why is it so frail, and so regularly (and catastrophically) compromised? Can you really blame it all on Complexity? Of course not!

It is much more likely that it is inherently and fatally flawed. And simply cannot avoid these major calamities. Is it not inevitable given how Capitalism actually works? Whilever the so-called experts are studying Complexity, no one is studying modern Capitalism as an economic system. And, no one is addressing its regular crises and inevitable, ultimate collapse.

What is the guiding Principle of Capitalism? It is the acquiring of PROFIT! And, what precisely is that? Is it like wages for work done? NO, it certainly isn’t! It involves having wealth, and investing some of it to get a nice regular addition to it! It is “Much getting More” without really doing anything for it.

“But”, I hear the cry, “we are risking our wealth!”

No, they aren’t! The Stock Exchange guarantees that. Only the uninformed small investors will be wiped out! The big boys never get ruined. They even make money out of slumps. NOTE: In 2008 a famous British Capitalist was seen in Iceland, as its economy was collapsing, buying up whatever he could get for a song! How do you think he did out of his hurried trip?

PROFIT is an added overhead above all real costs and payments, to pay both owners and investors an unearned bonus. And, indeed, some of these playing the Stock Exchange don’t even care what their investments finance. For as soon as a profit is to be made they SELL!

  

Now, you may well ask, “How on earth does it ever work (between the slumps of course)?”

It is because there is always the promise of unearned profit literally forever.

That keeps moneyed people investing, and others setting up companies. But, the values generated by such activities are never real values. So-called confidence inflates expectations and hence Market Values always above Reality. Yes, always!

Indeed, within Capitalism, inflation is not only inevitable, it is actually essential, for it helps the company owners in two different ways. First, it decreases the current values of the wages they pay their workers, and, second, it also decreases the real value of any capital loans that they must pay back. [Just imagine what a mess they would be in when Deflation is in charge – the value of borrowed loans increases, and the value of their workers wages increases too]

Capitalism is a system for owners, and is built upon Credit in its every corner.

And, of course, the mismatch between Reality and inflated values occasionally gets revealed, and the whole edifice begins to crumble.

And who then is made to pay?

Who is still paying for 2008 today?

Inflation in Capitalism

In capitalist societies, the phenomenon of Inflation is unavoidable; indeed, it turns out to be actually essential for the maintenance of the economic system. This is due to the invaluable roles it plays within such a system, based entirely upon borrowed capital to finance the establishment and development of the companies that carry out literally all its transactions.

So, when a loan (or investment) is required, it will usually involve two commitments. Taking a loan will involve the addition of interest to also be paid on as yet outstanding parts of that loan. And secondly the paying back of the borrowed Capital will also be required, usually within a given time period.

NOTE: Investments are somewhat different as the money invested is not paid back, but can be retrieved by selling the investment on the Stock Exchange (maybe at a profit), or if the firm collapses, most, if not all of it, could be lost.

Naturally, with such a risk, the annual dividends paid would therefore be higher.

Now, such pressures upon the system, where the whole development is based upon borrowed money, with additional charges unavoidable, necessarily causes Inflation – the value of the currency is always being devalued to some extent. But, let us consider the effect of such inflation upon the value of the sum borrowed. If every year the value of the currency is decreased by inflation, it means that what is paid back off the borrowed sum will be of less value than it was when borrowed. So, over extended periods paying off the capital becomes less and less in current values, and hence costs the borrower less in real current values to redeem it.

Now, no lender will be happy with such a decline in the money they have lent, so they reduce those effects by limiting the period of time that the loan, or any part of it can be outstanding. They also change the yearly interest charged to offset the decline in value of their loan.

Clearly, the lender must ensure that the terms of the loan, including the rate of interest, balances the books, and guarantees an acceptable profit upon the transaction. So clearly, that rate of interest will not only exceed the rate of inflation, but also will also actually contribute to that rate of inflation itself.

Also, it is always possible that the borrower will default, and the lender will lose some if not all of his loan. So, if there is any doubt about the borrower, the appended yearly interest rate will be upped considerably to protect the lender.

We should also see how bad it is for a borrower in difficulties, for the more problems he encounters, the more interest he will be charged upon subsequent loans, so such a business can be pushed into bankruptcy, while a dominant and flourishing business will be able to borrow money ever more cheaply.

You can certainly see why slumps occur!

Let us now look at all this from the other end – that of a worker in a company. Let us see how inflation affects the wages of such an employee.

Given a fixed wage, inflation will reduce its buying power. It will have the same effect as a cut in wages – hitting the earner, while helping his boss! So, employers borrowing money to finance their business get a “double help” from inflation. It decreases their loans, while also decreasing the real wages of their employees.

Clearly, a worker wanting to maintain the value of his or her wages will require regular wage rises, at least in line with inflation, and often above inflation to increase their cut in the process that they are involved in. The current slump 2008-2015 (so far) has seen no real increase in wages while inflation has been regularly present over almost seven years. The wages of the worker has therefore been regularly cut, while his employer has seen his own owings decline throughout. It is crystal clear who is being made to pay for the crisis, even though it was certainly nothing to do with those workers.

In addition, during that same period, literally millions of reasonably paid full-time jobs have been terminated – mostly in the public sector, and replaced by private sector jobs at lower wages, often involving either part-time working or even zero hours contracts

The whole of the slump is being reversed by getting the necessary wherewithall out of the workers.

But, this has only been possible in the more powerful capitalist states. The weaker ones (as explained above on loans) have been pushed more and more to the wall, by debts and ever-higher interest rates.

The points made here about loans, inflation and interest rates means that those in the deepest holes are forced to pay the highest rates for their necessary loans, and the local bourgeoisie implement the cuts in jobs and wages to try to foot the ever expanding bills. The interest rates being charged to working class families in financial difficulties have now reach phenomenal proportions upon the so call “pay day loans”, and along with fines for late payment, and even bigger hikes in interest rates, they are being impoverished.

Inflation is a necessary cog in the mechanism that is Capitalism, and it is also a cause of such things as slumps, and the means to extract the owners from their slumps, on the backs of the workers.

The Unsolvable Problems of Capitalism

 The Answers are NOT within it!

On what economic basis can a society be constructed and maintained?

My western country is a capitalist society, which is based upon investment, by people with the reserves (wealth) to do it, into enterprises both big and small. The incentive for doing this is that the investor will “own” a piece of the company that has been invested in, and will therefore receive a proportion of its dividends (profits) annually. Also, the holder of the “share” can sell its investment to someone else via the Stock Exchange, and if your (i.e. the investor’s) company is doing well, you can make a profit on that too!

There is NO alternative to this method within capitalism. And, the problem always is, “How does the investor come by the wherewithall to invest?” Well, the present day answer is that they got it from other, prior investments – both in dividends (profits), or in selling other investments for more than they paid for them (profits). Capitalism feeds upon itself, but only, ostensibly, via private entrepreneurs, who fund its development, and thus “kindly provide jobs" for the working classes.

In the modern world the old small-scale production is simply not good enough. It is too expensive! Large-scale production will produce cheaper goods, but will necessarily also require large amounts of initial investments to even get started.

Now, of course, the question of where the very first investments came from before sufficient was available in profits or dividends was, indeed, a major problem. It was called Primitive Accumulation, and has been dealt with very well in a prior SHAPE Blog posting (February 2012), as well as in SHAPE Journal Special Issue 22 (in July 2013)

But, we must also address today’s ever-present problem, of sufficient available investment to keep the “immense pantechnicon moving”. For, it gets harder and dearer to set a new production in train, while at the same time older companies are less and less able to compete with those equipped with the latest facilities.

This is unavoidable due to the Declining Rate of Profit – recognised in the 19th century, and still in evidence today! It is, of course, caused by the incessant necessity for technical advance, in order to be cheaper than your competitors. So, not only in new start-ups, but also in updating and improving your equipment, the need for more investment is always arising.

Indeed, the demand actually outstrips the supply, so companies have also to borrow money at high rates to fill the gaps, and this takes the rate of interest that has to be paid OUT of the hands of the borrowers, and into those of the lenders. And these could only be the Banks!

The source of the Banks’ funds will be the wages and savings that they hold for literally everybody. The lender’s main criterion will be, “Will the borrowers continue to be able to pay the necessary interest?”, while a secondary one will be, “Will they, in the end, also pay back the loan?” If the lenders are satisfied with the answers, they will lend the money, sometimes even if the chance of a full repayment isn’t totally assured – but, of course, in such circumstances, the interest rate charged will be upped accordingly!

Now, usually, when a loan comes up for repayment, the loaned-to company simply borrows elsewhere to pay off the past loan, and the new lenders use the same criteria of ability-to-pay in deciding to forward the necessary amount. BUT, this method is NOT based upon true intrinsic values!

More money is loaned than will ever be repaid at the equivalent value, so the debts are extended ever further into the future. The consequence of this is Inflation!

Money values actually continually decline. In fact, it is a very important part of maintaining the capitalist system: for it affects the different classes selectively. As will be shown, it is very advantageous to the capitalists, as their financial mechanisms keep their values in an advantageous balance, but it is quite the reverse to workers, for the latter only lose by inflation.

NOTE: Good indicators are House values! My current home has risen in value from when I bought my first to now by a factor of 100. Is that mostly reflecting intrinsic value, or is it Inflation?

Now, think what this means in terms of loans and investments! What was borrowed and the interest payable will inevitably SHRINK due to inflation, for it involved borrowing at old values, and is increasingly paid off (with interest) at the new decreased values. So, capitalism depends upon Inflation to keep going!

NOTE: Indeed, the opposite possibility, that of Deflation would mean that both interest and even the final repayment value would be much more that what was initially borrowed. Capitalism would collapse!

Also, without the rich investors Capitalism also couldn’t work!

So let us inspect some downright lies.

How does inflation affect Working People? Looking at the current situation we see inflation going up much faster than wages: it makes them constantly poorer, while their masters pay old dues at the new lesser values. They actually gain doubly! For their loans decline in current values, while their workforce becomes ever cheaper! The situation fulfils their needs perfectly: they can overcome the devastating, if temporary, reinstatement of real value, in a depression or slump, by making the Working class pay for the subsequent re-build!

Now, if you think about the past and present methods of Imperialism and Globalisation, it is clear that they were all followed in order to pay less! For, what they were doing was exporting their problems to what was called The Third World would certainly enable that saving. But, in the end, even that was to some extent terminated as the Third World rose up and Empires melted away! 

The biggest and most recent solution was to bring the Socialist countries back into the capitalist fold by showing sections of those populations (those who could, in the right conditions, become rich) just how well they would do under capitalism. And it worked - for a while at least!

China is the best example. It provides goods cheaper because its workers are paid less. But now, both Russia and China are becoming not only markets and sources of cheap labour, but competitors in the capitalist stakes. Why do you think capitalist Russia is such a bogey?

The Arab Spring and current upheavals in the Middle East are other examples of the exploitation. And, in consequence, local populations are correctly blaming Western capitalism for their problems, and not only rebelling against their imposed, dictatorial leaders, but also increasingly mounting an assault upon the real behind-the-scenes manipulators – the western capitalists. It is no wonder that the current alliance against the Islamic State, as well as the USA, also significantly includes the reactionary regimes in Saudi Arabia, United Arab Emirates, Bahrain, Qatar and Jordan. What an amazing mix! Are they really in it for humanitarian or moral reasons? You know that cannot be true!

Yet, the Sunni version of Islam, which is claimed to be the Islamic State’s motivation, is the same as that in Saudi Arabia, and of the rulers of Bahrain, regularly acting against their own Shia people. Why would these reactionary regimes line up with the capitalist west?

By the way, it is interesting who does the work in these oil-rich Arab countries? It isn’t the indigenous inhabitants, but brought in labourers from elsewhere without any legal or representational rights.

So, who or what can oppose these collections of parasites?

It isn’t this or that religious group, or anyone else on moral grounds, but only the committed socialists who are for the Workers in all countries, and fight for the End of Capitalism, and its worldwide exploitation and even interventionist wars but only in their constant pursuit of even more Profit! 

The Major Crisis in World Capitalism

When watching the Stock Markets daily over the last extended period, you see a pronounced oscillation between steep dives in values followed by “not-so-quick” recoveries. And the Expert Commentators are always ready and willing to give “real, everyday” reasons for each and every reversal, which range from the Weather to bad, or even “good”, news. But, they only very rarely mention the contributions to this behaviour of the “profit-Takers”, where the money-men buy at the bottom of the market, followed by a hopeful rally by the less well informed, and then immediately sell to achieve yet another unearned and parasitic profit. Like the businessman Green, who on the very day of the economic calamity in Iceland was over there like a shot to buy when the market dived?

And the usual commentator-experts will never mention that in any systemic crisis there are always such dramatic oscillations – like the death-throes of a living organism, as the usual reliable Stability is undermined drastically. Nor do they reveal the purely temporary nature of the changes that are made to deliver apparent and reassuring recoveries.

Certainly, no one looks at the Crisis in Capitalism as caused by its necessary fictional values pumped up to unsustainable levels by speculative moves to wring the maximum profit out of every seemingly advantageous possibility that arises – the usual over inflated bubbles abound and are kept aloft long enough to enable profit-taking before the inevitable puncture and deflation occurs.

The foundations of the System are once again tumbling, as they have many times before, and though the oscillations can, and sometimes do, seem to be on the brink of a cataclysmic avalanche of dissociation, these situations can and usually are overcome. But how will they do it, and will it always be recoverable? Will they always get away with it, leaving either the Working Classes or the Third World countries, or BOTH, to pay the bill?

The crises in the past seem to have been overcome, but are they really, or is it just an increasingly enormous stacking up of an ever bigger precipice for a future and final calamity? The answers, of course, are available – in History! As economies such as that in the USA recovered at the expense of many others after the Major Slump between the World Wars, many countries such as Germany, and other badly affected areas, could see only one way out – WAR! Germany, Japan and Italy put down the strength of the UK to its conquered Empire, and that of the USA to its enormous internal market and its worldwide Neo Colonialism. So, the Answer was to acquire the same domination by force of arms.

We cannot let them try it again! What is being escalated in Syria? And what are the motives of the western Capitalist Powers? Why did they support the Libyan Revolution? They are certainly NOT socialists, are they? They couldn’t give a damn for the people of these countries, but CONTROL of Libyan Oil and influence in new capitalist regimes as a result of the Arab Spring MUST be their short-term objectives. Will the ordinary people of all these countries be helped by the success of these policies of the Capitalist Powers? Of course they won’t! And why am I confident of what I say is happening? It is the evidence from my current series on this blog entitled Why Socialism? Though the initial responses were small, they have recently increased considerably. In about 11 days hits from 50 counties have suddenly appeared, and it is interesting where they are coming from. The biggest response is from the ex-communist countries, with a rapidly increasing number from Latin America. The Big Crisis may happen where it is least expected...