What is capitalism?

Do you really understand what capitalism is?   I’ve been wondering for a long time, and often wondered whether people who campaign passionately against capitalism really understand what they mean by it.  For some left wing environmentalists, such as Naomi Klein, we have to end capitalism if we are going to stand a chance of addressing climate change. For others, including Hawken, Lovins and Lovins, and Jonathan Porritt, capitalism can be reformed to protect the planet and create jobs, and although it’s not perfect it’s better than communism. For Marxists, capitalism . For the economist Thomas Piketty, capitalism inherently tends to lead to ever-increasing inequality.

But what is Capitalism? Is it a force for positive development, a lazy use of a blanket term, or a useful target for systemic change? I recently discovered the Palgrave Dictionary of Economics, which includes an 14-page entry on Capitalism by Robert Heilbroner (2008).

Heilbroner defines capitalism as a historical formation, comparable with feudal or imperial kingdoms.  Like other historical formations, it has a measure of success: for Capitalism, this is accumulation of wealth, measured by GDP growth at a national level, and profit at the level of the firm or individual. For earlier historical formations, success was measured through “the pursuit of military glory or the celebration of personal majesty”.  All of these are rooted in psychological desires for prestige and personal motivation.

Wealth is to be accumulated through a rationalistic process of exchange, with goods and services valued for their price in a market exchange, rather than how directly useful they are.  This focus on exchange value rather than use value is what is meant by the term ‘commodification’. The focus on price makes our economic decisions one-dimensional, rather than considering their many different social and environmental impacts.  This lends itself to quantification and mathematical modelling, and allows decisions to be made through a process that is highly rationalistic. However the end goal of accumulation is as irrational as that of military victory, and the outcome of this focus is that questions of morality and social good are excluded from day to day decisions about production and consumption. In order to support this system of economic decision making, greed is redefined as being good for society rather than sinful.

Like feudalism and imperialism, capitalism has mechanisms for creating order in society. Under earlier historical formations, order was created through commands, which had to be obeyed.  Capitalism, however is based on using markets, price and profit to create order in society, and individuals are free to choose to enter or not enter into contractual relationships.  However, different individuals have different levels of freedom.  Owners of the means of production have the right to withhold this private property from usage by society, and labourers have the right to withhold their labour, but landless, labourers would starve if they withheld their labour indefinitely from every potential employer, whereas owners of land and machines could survive by making use of these directly.  Thus capitalism, like feudalism before it, is a mechanism of social domination which benefits the more powerful and wealthy.

Unlike earlier historical formations, capitalism creates ‘the economy’ as a separate entity to the state, and raises the question of the right relationship between the economy and the state, “a problem that uniquely preoccupies capitalism”, according to Heilbroner. One role of the state is to protect the institution of private property, and enforcement of contracts, i.e. to support the ‘public good’ of the market itself. The role of the state as a provider of infrastructure, healthcare, social security and so on is highly contested political ground, however, and has become strongly identified with the political left (pro big state), and the political right (pro markets).

These opposing positions in relation to the role of the state, however, are perhaps deeper than simple political questions. To fulfil its own logic of accumulation through ever-increasing profit or GDP, capitalism must expand, through creation of new markets in other territories or in previously uncommodified areas of life. It repeatedly reaches limits of expansion achievable under particular institutional arrangements, leading to crisis and re-invention. Neoliberalism, with its policies of “fiscal austerity, deregulation, free trade, privatization and greatly reduced government spending” (Investopedia, n.d.), can be seen as the most recent mode of capitalism, extending the reach of the market logic and monetary measures of success into sectors which for half of the 20^th century have, in many countries, been provided by the state.  Heterodox and post-Keynsian economists attempt to develop economic theories for a very different approach to dealing with crises of capitalism, through increasing rather than decreasing state spending. However, when we take into account environmental limits to infinite growth of global material throughput, we reach some fundamental questions about the compatibility of capitalism with sustainability.

These deeper questions are being asked by the international degrowth movement, and by academic institutions such as the Centre for the Study of Sustainable Prosperity. Capitalism’s tendency to exacerbate existing inequalities (Piketty, 2013) is one of its most problematic features, although it is not unique to capitalism. Addressing this requires an acknowledgement that power and domination are perennial human concerns, which will always need some counter-force if society is to avoid becoming ever more polarised.  Under a capitalist system, this counter-force could come in the form of periodic debt amnesties, progressive taxation regimes.

A problem that is more unique to capitalism is the exclusion of meaningful questions of what is good, or of value, from day to day decisions, and the imposing of accumulation of wealth as the dominant goal of society. This exclusion makes it difficult for capitalism to be responsive to localised information about environmental or social issues that come in any format other than price, and is related to the problem of externalities, which capitalism sees as ‘market failure’ to be corrected. The focus on the price signal also means that the preferences of those with more money take precedence over those with less money, adding to other mechanisms which exacerbate inequalities.

The need of capitalism to continually expand leads to commodification of more and more areas of daily life, where exchange and negotiation replace relations of reciprocity, mutual support and care.  Capitalism offers us individual freedom from state coercion, protection of private property, and free contractual engagement. But at the same time, the industrialised world is facing an epidemic of loneliness, mental health problems, feelings of disempowerment. Perhaps the high rates of suicide and the mass shootings in the USA are symptoms of a society which brings us individual freedom at the expense of belonging, and social mobility at the expense of a secure role in a community.

What kind of a future would we like to see?  Do we need to overthrow capitalism to achieve it? Is it possible to change our direction of travel, or is capitalism itself too inherently resilient? If we did do away with capitalism, would we gain something better, or be left with something worse? Is capitalism going to run itself into the ground, with ever-worsening crises? If so, can we create a resilient system in the shell of the old, that can provide some stability and prosperity as the limits of material growth increasingly meet environmental limits, and inequalities become increasingly intolerable?  No-one has the answers to any of these questions. Perhaps the best we can do is attempt to create a growth-agnostic economy, that is stable with our without economic growth, put in place mechanisms for redistribution of wealth, and redesign our industry according to the principles of circular economy. And to do this in a way that takes as many people with us as possible, both the powerful and the disempowered.