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CAPITALISM is based on the supposed supremacy of the market — of free transactions where buyer and seller are at liberty to decide what they want to buy and sell, to whom, and for how much.
Profit is the just reward for effort and provides the essential motive for investment and innovation. The myth is fundamental to orthodox or “mainstream” economics (rehearsed endlessly in popular media and taught in schools and universities).
One of those orthodoxies is that price of any commodity is determined merely by supply and demand — that prices fall when supply goes up or when demand drops, and vice versa. Another orthodoxy is that profit is solely the difference between expenditure and income — buying below something’s “real”value or selling above it.
This fiction of a free market is carried through into employment. The worker is “free” to choose who to work for and for what wage; and the employer, free also to select the worker and what to pay. The wage paid is essentially a function of supply and demand.
Socialists have always challenged this fairy tale of a “fair exchange” between buyer and seller — including the process whereby working people get paid for doing a job. They point out that power ultimately lies with the owner of capital — the “means of production.”
Working people have no alternative but to sell their capacity to work because they have no other means of subsistence. Employers then seek to extract the maximum value from this labour power and they do so within a legal framework established by the capitalist state.
Collectively, workers produce more value than they receive in wages. The difference is called “surplus value” and it’s appropriated by different sections of the owning class in different forms. Part of it may be taken in rent by the owners of land, buildings or machinery. Part is taken as interest by banks. The majority goes in profit to the owners of capital, to be reinvested to make more profit, or taken for their own consumption. In Britain today around 46 per cent of total national production is taken as rent, interest or profit. This represents the “rate of exploitation” and it has increased sharply since the 1970s.
Marxist economics can help us analyse why capitalism is inherently exploitative (not just of people but of the environment — but that’s another answer). It can also help explain why capitalism is so prone to crisis.
When the latest economic crash hit in 2008, the Queen asked assembled “experts” at the London School of Economics to ask why nobody had seen it coming.
They thought for a while and then argued among themselves. The crash was due to the irresponsible behaviour of individuals — ignorance, arrogance, speculative greed. Or it was institutional failure: lax (or over-) regulation — “we” need global regulation of money markets to stop it happening again. Some said it was due to theoretical shortcomings — an over (Keynesians) or insufficient (neoliberals) reliance on the market.
Others put the blame on the cultural “other” — US home ownership and an overblown mortgage market; irresponsible Greek public spending; Anglo-Saxon arrogance. Then they got together again and came up with a better answer; “systemic failure.”
The problem is — surprise — not capitalism as a system, but the workings of the financial sector and in particular the regulatory mechanisms put in place to ensure its “smooth working.”
In some ways this was a big advance for “orthodox” economists. Samantha and David Cameron (remember him?) reportedly had a sign in their country home which reads: “Calm down dear, it’s only a recession.”
For them, economic crisis is a joke — they’re insulated from the realities of austerity, which their party, and the capitalist interests that they represent, says is an inevitable and necessary requirement to regenerate the economy “in the interests of everyone.”
Marxists, in contrast, would emphasise the primary role of internal contradictions within the capitalist economy. Individual firms invest and innovate to cut wage costs (as a proportion of total) and expand sales, but collectively such activity causes overproduction and a reduction in aggregate demand despite falling prices. Profits fall and the incentive to invest is reduced.
This process occurs unevenly across the economy and at the peak of the crisis disrupts exchange relationships between capitalists. Because the only way capitalists can get a “fair” share of the surplus is by selling their commodities, those that don’t innovate will get a disproportionately reduced share and have to cut or halt production when they are no longer able to cover costs.
Hence, booms, as capitalists compete to innovate and overproduce, will be followed by the periodic downturns in economic activity. These crises tend to reduce all prices back down to their actual value. Crises also make it easier for the ruling class to reverse the gains that labour may have made during periods of growth and high demand.
The causes of, and responses to, crisis are a matter for analysis rather than doctrinal generalisation. For example, Marx saw a falling rate of profit as central to the capitalist system, but one that could be offset by a variety of factors including: technical innovation, market expansion, colonial exploitation and the imposition of labour discipline (including an assault on pay, on the “social wage”, and on trade union and workers’ rights; privatisation, outsourcing and job insecurity).
But the crash of 2007-8 was unlike any that had gone before. It was (and the crisis remains) essentially one of finance (rather than industrial) capital. The decades since the mid-1970s (when capitalist states finally abandoned the fiction of the “gold standard”) have seen an extraordinary “financialisation” of what is now a global economic system — a massive expansion of what Marx called “fictitious capital” based on credit, itself a claim on future production.
That crash has revealed the multiple contradictions in capitalism dominated by international financial institutions. Central to these are the decoupling of use value from exchange value and the role of money as a commodity separate from value and labour.
The classic is housing — for many more than just a home, but also a form of savings; but increasingly a vehicle of speculation. In both the UK and the US the trigger was the collapse of the housing “bubble” and defaults on “sub-prime” mortgages packaged and traded as bonds (mortgage-backed securities and collateralised debt obligations).
All this has been accompanied by falling real wages and demand and rising credit and personal debt — from student loans to credit card balances.
In Britain, credit card “borrowing” is growing at rates between 7 per cent and 11 per cent per year and the average household now owes a record £12,887 (around £8,000 per person) — before mortgages are taken into account. In Britain 3.2million households now spend over 25 per cent of their wage income on unsecured debt repayments.
The result has been escalating inequality and universal alienation — a disconnect between people’s perceived “identity” and reality — fostered by fashion, cheap consumer goods and social media; and facilitated by the decline of institutions (including trades unions and left political parties) which could challenge the status quo. Today, with the globalisation of production in a world dominated by finance capital, the repercussions of the crash of 2007-8 (and of its supposed remedy — austerity) continue.
The Governor of the Bank of England, Mark Carney, declared that if the economic crisis worsens, “Marx and Engels may again become relevant.” They always have been. A Marxist approach reveals that crisis is inherent in capitalism. Its super profits are based on the exploitation of both our planet and its people. The result is increasing poverty and inequality and huge environmental destruction which threatens us all. However there is an alternative…
This answer was collectively edited by participants in the ‘Introduction to Marxism’ course at the Marx Memorial Library and Workers’ School. Details of the forthcoming autumn series of courses and events can be found on www.marx-memorial-library.org.uk.
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