Excesses of Capitalism

How Capitalist Excesses Discredit the Market Economy

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Exzesse des Kapitalismus

Table of Contents

  1. Abstract
  2. Preliminary Remarks
  3. The Conditions for Capitalist Excesses
  4. The Particular Dilemma of the Market Economy
  5. The Up-to-Date Definition of Capitalism
  6. The Globalization of Capitalism
  7. The Driving Forces of Capitalism
    > The Deregulation
    > The Predatory Competition
    > The Supply-Side Economy
    > The Growth Doctrine
    > The De-Democratization
  8. The Consequences of Global Capitalism
    > The De-Industrialization
    > The Social Divide
  9. The Prevention of Capitalist Excesses
    > Domestic Economic Measures
    > Foreign Trade Measures

1. Abstract

In the course of the neoliberal globalization, capitalist excesses have been catapulted into a new dimension. In addition to the devastations caused by this development, it is regrettable that market economy principles are discredited by equating them with capitalism. An up-to-date critique of »capitalism« can serve to show the potential of a non-capitalist market economy.

2. Preliminary Remarks

Recently, the term »capitalism« has been used remarkably unbiased and without historical reference despite its ideological usurpation in the 19th and 20th century. This is primarily the case when it comes to characterizing and criticizing the current neoliberal economic system. There are good reasons, as I will point out, for an unbiased use, especially, if an up-to-date economic definition of the term is applied.

To start with, it should be noted that there is no school of thought, no scientific theory, and no express economic model of capitalism. There are, just as well, no express confessions to capitalism apart from a few thoughtless or cynical statements. Today, the term rather refers to undesirable economic developments caused by private agents who selfishly and arbitrarily have labor, natural resources and capital at their command and obviously inflict harm upon both employees and the environment for the short-sighted increase of their returns on investment. Ultimately however, when social and environmental degradations become omnipresent, the capitalist process of impairment rebounds on the capital itself – on real and monetary capital likewise.

Capitalist excesses are not a sole phenomenon of today’s market economies. They are to be found in every economic system in which a ruling social class is in a position to command land and other natural resources, physical and monetary capital as well as workers at will and claim the bulk of returns for themselves: in ancient systems of slaveholders, medieval mercantilism, feudal and absolutist systems of all shapes, and also in the centrally administered socialistic economies of the former Eastern bloc. But what currently matters to us is the development of the neoliberal economic system, whose capitalist excesses have reached an intensity unprecedented in economic history due to the intentional worldwide integration of incompatible national markets – euphemistically called economic globalization (see also the complementary article Economic Globalization).

It is important to warn against the illusion that capitalism or capitalist excesses were historically inevitable transitory phenomena that would automatically rectify and transform themselves into a more humane state. Several economists of the 19th and 20th century believed, out of various considerations, in »natural« systemic transformation allegedly focused on the benefit of mankind – Karl Marx certainly being the most prominent of them. Historical developments are, however, never predictable, and any attempt to prove an inevitable succession of economic development phases is an absurd untertaking. Moreover, the attempt is counterproductive, because it prevents the rational analysis of the current neoliberal system and the design of a future-oriented system based on the analysis.

Anyone alert to the course of the ongoing financial crisis and its impact on the real economy can but note that the crisis at first accelerates the neoliberal process of power and capital concentration in the financial industry and subsequently, after a delay, exerts the same effect on the real economy – in some cases even fostered through government investments, as shown by the merger of Commerzbank and Dresdner Bank in Germany. In so doing, the current crisis already feeds the next crisis in that it concentrates power and capital in even fewer hands, and further weakens democratic control and reinforces the conditions for capitalist excesses. Nevertheless, it is futile to speculate whether or when the neoliberal economic system will collapse. It’s rather a civic duty to draw lessons from the obvious defects of this system and translate them into political action.

3. The Conditions for Capitalist Excesses

The first precondition for capitalist excesses are unbalanced social and economic power relationships. Since these imbalances occur in any form of society, any economic system is vulnerable in principle for an unequal distribution of property and disposal rights over productive capital. The second precondition is the explicit granting of unlimited private ownership of land and other means of production as well as quantitatively unlimited entrepreneurial activity – including the necessary access to labor and raw materials. The emphasis here is on quantitative limitlessness, which automatically initiates a process of concentrating productive capital and economic power in ever fewer hands.

In modern Western industrial societies capitalism has developed a symbiotic relationship with different market-economy systems. Characteristic for these symbioses are

  • a tendency towards centralized economic structures with a mass production targeted at anonymous (global) markets, and
  • a largely unregulated predatory competition targeted at expansion and profit maximization in the private economic sector.

It is remarkable that the modern relationship between capitalism and market economy even flourishes without the utmost laissez faire, making it rather difficult to unmask and combat it. The capitalist private sector, for instance, has proven to be quite compatible with a public sector offering a number of indispensable general-interest public services. The same is true for relics of formerly comprehensive antitrust laws that serve to prevent a complete and unpopular monopolization of national economic structures. Additionally, regulations are maintained or enforced which act as a valve for social pressure from below by ensuring certain minimum standards for working conditions and environmental protection.

However, the symbiosis between capitalism and market economy is not stable. Especially under the current regime of the neoliberal globalization, the political responsibility for the structures and mechanisms mentioned is gradually shifted from the national to the supranational and eventually to the global level. In the course of this, regulations lose the last remainder of their democratic legitimacy and liability, and are replaced, if at all, by ineffective voluntary commitments. The neoliberal competition between countries for business locations and jobs, mainly based on dumping of standards, doesn’t offer any incentives anymore for substantial social and environmental pioneering acts at the national level. The increasingly unequal distribution of property, productive capital and wealth as well as the exploitation of natural resources are therefore merely combated with great restraint.

4. The Particular Dilemma of the Market Economy

The existing symbiosis between capitalism and market economy demonstrates how vulnerable market-economy systems are to capitalist excesses, even if they are based on a free and democratic order. This is due to the price formation that results from free interactions between supply and demand, in market economies usually referred to as »free pricing«. However, the crucial point is that maximum efficiency of the flow of goods and cash and the corresponding benefits can in principle only be achieved under a strictly social-ecological regulation. Without such a regulation, the »freedom« of pricing is too easily and too readily misinterpreted by private capital owners and their supporters to mean that it was solely intended to maximize the efficiency of their capital – that is, maximizing their returns on investment –, and that these private maximizations were a precondition for general social welfare.

This misinterpretation usually finds its way into economic policy, just to eliminate the barriers to destructively high power and capital concentration and to promote an apparent productivity that is abstracted from its social and environmental commitments and based on unlimited, destructively high economies of scale and scope. The result is devastating: More and more people, in their role as workers and consumers, are excluded from the economic cycles, natural resources are exploited and destructed, and natural cycles are damaged and interrupted. That is, the welfare of society and environment is subordinated to the maximization of private returns on investment. For more details see the article Scale Economies and Productivity.

Under the current neoliberal economic system the misinterpretation by private capital owners is again responsible for capitalist excesses. This time, however, it took on an unprecedented dimension: The competition in deregulated global markets, based on dollar prices and subject to severe cost pressure, is the reason why productive capital is not only exempt from its commitment to society and environment at the place of its origin, but can in addition be detached from its local ties and relocated to foreign sites solely according to the criterion of highest returns.

However, no false conclusion should be drawn from the capitalist derailment of the market economy. There is indeed a constant threat of derailment – which has to be countered by economic policy measures –, but it must not be misconceived as a natural amalgam of market economy and capitalism. After all, the market economy is the only known economic order suitable to establish optimal welfare in terms of social justice and environmental sustainability – provided democratically legitimated social-ecological regulation has been established. In conclusion, only a regulated, non-capitalist market economy can guarantee a future-oriented social and ecological development.

5. The Up-to-Date Definition of Capitalism

The economic definition of capitalism is amazingly simple:

An economic system can be called capitalist, if the efficiency of the allocation of the productive factor capital is given absolute priority over the efficiency of the allocation of the productive factors labor and natural resources.

The definition in colloquial terms:

An economic system can be called capitalist, if the returns of capital owners are generated at the expense of jobs, wages, social benefits and environmental protection.

CapitalismPNG01

Figure 1: The resulting inefficiency of the capitalist allocation of labor and natural resources manifests itself in unemployment, underemployment, precarious wages, private and public poverty, and in the exploitation of natural resources. The accruing external costs are not allocated to the economic activities and agents who cause them, that is, the costs are not internalized, but are passed on to the general public (to the taxpayer). In specific terms, this means a minority will benefit from returns of capital investments, while the majority has to pay for unemployment benefits, income support, welfare payments and environmental costs.

Capitalist excesses are, as a matter of principle, accompanied by a false definition of productivity put forward by neoliberal protagonists to legitimize their property and disposal rights over productive capital, claiming that they were a guarantee for general well-being. Arithmetically, capitalist productivity results from centralized mass production, generating cost advantages through sheer scope and high volumes (economies of scope and scale). That is, unit costs are reduced through centrally produced high volumes to create the necessary room for pricing manoeuvres as well as for excessive returns on capital.

From the perspective of business administration the capitalist definition of productivity is not really to be objected against. However, since there is no regulation and control at the macroeconomic (national) level, the business productivity is stripped of its social and environmental provision, so that neither the well-being of workers nor that of the environment is considered in entrepreneurial activities. As mentioned before, the neoliberal-capitalist productivity is abstracted from mankind and nature, and hence generates social and ecological costs rather than yields. Because of its exploitation of human and natural resources, it proves to be a destructive apparent productivity. And since there can be no isolated efficiency of any productive factor within an apparent, negative productivity, the capitalist protagonists are caught in a collective self-deception with regard to their supposed capital efficiency, a self-deception that will sooner or later rebound upon them in the form of collapsing social structures and ecosystems.

It is crucial for the understanding of macroeconomic productivity that economies of scope and scale can only be effectively and thus beneficially implemented in decentralized economic structures and under democratic accountability and control. In particular, they must be part of regional economic cycles and closed material cycles to ensure short transport routes, and, the respective gains in productivity must always be used for pay rises and reductions in working time. In short, economies of scale and scope are sustainably effective, if they are implemented to serve full employment and environmental protection without compromise.

6. The Globalization of Capitalism

Figure 2: Ever since the deregulation and »liberalization« of national markets started in the seventies of the 20th century, capitalist excesses and their consequences have entered a whole new dimension – an escalation hardly seems possible. The illustration shows the typical cascade of social and environmental devastations caused by today’s neoliberal capitalism. The cascade starts with the deregulation of national markets, being the primary cause, and ends with social cleavage, climate change, extinction of species and famines, being the devastating impacts that affect livelihoods. In order to interrupt the cascade and overcome neoliberal capitalism, economic-policy countermeasures have to be targeted at the primary cause – which is the deregulation shown at the upper end –, otherwise only the subsequent symptoms of the development would be tackled.

7. The Driving Forces of Capitalism

The Deregulation

The advance of capitalist tendencies into the global dimension commences with the deregulation of financial markets, followed by purely speculative financial transactions including the associated risks for the real economy.

Accordingly, the free movement of financial capital worldwide is complemented by

  1. the free movement of real capital and its related jobs,
  2. the free-floating of exchange rates,
  3. the abolishment of countervailing duties, tariffs and trade quotas, and finally
  4. the deregulation of goods, services and labor markets.

On this basis, an unregulated global competition emerges not only for products, but as well for factors of production, and, as a new phenomenon, the unregulated locational competition for lowest wages and standards emerges, generating accordingly high returns on capital. For the first time in economic history, capitalistic activities and transactions are exempt from limiting economic-policy regulations worldwide.

Regarding the special situation of productive factors under neoliberal conditions, I recommend the articles Factors of Production, Factor Price Equalization and also Protection and Protectionism.

The Predatory Competition

Due to the deregulation and the resulting »liberalized« global markets, national economies that differ in productivity (up to a factor of 20) and have equally incompatible standards clash without protection. Instead of applying the proven protection through customized exchange rates, tariffs and trade quotas, competition is held based on globally applicable absolute price advantages in dollars, with the dollar acting as key currency. Countries and enterprises, originally committed to high standards, are forced to adapt to the low standards dictated by emerging countries in order to remain competitive in export markets, and, at the same time, are flooded with low-price imports. As a result, all enterprises – regardless of whether they produce for export or domestic markets – are exposed to an enormous cost pressure which they pass on to their countries of operation, continuously impelling the countries to lower their social and environmental standards. In addition, the global cost pressure intensifies the capitalist process of economic power and capital concentration, and creates monopoly-like structures on a global scale. Enterprises not withstanding the cost pressure are irrevocably driven out of their markets – with the effect that regional economic cycles collapse and entire regions become de-industrialized. In addition see the article Economic Competition.

The Supply-Side Economy

Industrial capacities are more and more oriented towards global opportunities to maximize capital returns by relocating financial and real capital, by ramping up capital-intensive production, and by focusing on high-demand standardized products. For lack of economic policy, the necessary balance at the national level between productivity, wages and purchasing power can thus no longer be secured. To counter global cost pressure global players are forced to target their supply at ever changing anonymous global market segments, whilst the purchasing power decreases worldwide due to unemployment and underpayment, that is, due to lack of productivity-oriented working time reductions and lack of productivity-oriented wage increases respectively. Consequently, the decreasing purchasing power causes global excess supply, further fuelling predatory competition and worsening unequal income distribution and supply-induced consumerism – both being breeding grounds for social tensions.

The Growth Doctrine

The growth doctrine has its origin in the industrial striving for expansion and profit, promoting purely quantitative growth, if at all, for lack of regulation. Owing to the systemic social and environmental devastations the doctrine gains additional weight, since economic policy seeks to counter unemployment, underemployment and environmental damage with tax and other relief for business enterprises – euphemistically referred to as »stimuli for growth«. The so-called Growth Acceleration Act of the German government is an example of this economic nonsense. Regarding environmental damage neoliberal protagonists indoctrinate the public by claiming that a quantitatively growing national product was imperative to »finance« the prevention and remediation of environmental damage.

With stagnant domestic markets, the industrial striving for expansion is increasingly focused on export markets – with the risk of dwindling domestic cycles, dangerously high export rates, unbalanced trade and extreme macroeconomic vulnerability. Furthermore, high export rates tend to provoke so-called bazaar effects, if the domestic value-added quota for exports is reduced due to increasing imports of intermediate products, thus degenerating the export production into assembly lines for foreign components tending towards »bazaar trade« and worsening the macroeconomic vulnerability.

The De-Democratization

Democracy is the natural enemy of capitalism, because it exposes and denounces excessive privileges and inequalities. Therefore, the profiteers of capitalism try to misrepresent economic issues as being too complex for democratic decision-making, with the ulterior motive to assign the task exclusively to neoliberal oligarchic cliques. Moreover, the global process of economic concentration automatically causes economic-policy decisions to be taken increasingly centralist and exclusive. As a consequence, economic policy is reduced to political patronage and supply-side orientation, and the term economy is more and more used as a synonym for global industry and even global industrial players. All other economic participants, in particular employees and consumers, lose their status as independent agents and are degraded to »beneficiaries« of a »caring« capitalistic policy. As a compliment I recommend the article Undemocratic EU Institutions.

8. The Consequences of Global Capitalism

The De-Industrialization

The process of power and capital concentration, including the export orientation, is the reason why global economic players along with their specialized workforce are concentrated in a relative small number of industrial centers, and why the remaining geographical areas have become economically desolate. This de-industrialization, however, does not only involve large-scale industry, but also covers small trade and handicraft, basically all businesses that can not withstand the dumping-competition from cheap imports, even if they themselves are not engaged in foreign markets.

Due to concentration and increasingly capital-intensive production the range of professions in demand is being narrowed to export-specific skills – creating structural unemployment. The upper, export-related employment segment is still relatively stable with wages following productive growth, the mid-range segment shrinks as wages fall, while the lower segment grows with wages becoming precarious and skills in demand declining.

The Social Divide

The neoliberal development reinforces the unequal distribution of property and disposal rights over productive capital as well as the unequal distribution of income and prosperity. As the middle-class erodes at the lower end, society is torn apart into a small and wealthy upper class, a shrinking middle class, and a growing, impoverishing lower class whose livelihood has to be secured through an increasing volume of transfer payments to supplement precarious wages and pensions. With tax revenues falling due to global cost pressure, less and less money is available for transfer payments including income support, so that in Western industrialized countries poverty is also spreading among the working population creating a new class of »working poor«.

9. The Prevention of Capitalist Excesses

CapitalismPNG03

Figure 3: The basic cause of capitalist excesses, namely the deregulation or »market liberalization«, leads to a cascade of undesirable developments and devastations: from concentration, displacement and de-industrialization via declining social and environmental standards to unemployment, poverty and environmental destruction. To interrupt the cascade, the measures which are likely to pave the way for a free, non-capitalist market economy, have to be applied to the upper end, primarily to »market liberalization« and subsequently to »concentration«. In doing so, a clear distinction must be made between domestic economy and foreign trade, because a free market economy can basically only be established within a uniform economic area, while foreign trade necessitates trade agreements.

Domestic Economic Measures

Based on the principle of subsidiarity, economic concentration needs to be countered by taxing business size, resource consumption and number of employees on a progressive scale according to technological feasibility, so that the entire economic value added is generated at the lowest possible level, that is: economic value added is continuously decentralized and new value added generated to cover all areas. In addition, the harmful use of resources needs to be taxed and the sustainably careful use to be subsidized. Hence, decisions can be taken autonomously, directly problem-oriented and with local democratic legitimacy; local and renewable resources can be preferred, and the supply and demand of labor can be easily coordinated. Economies of scope and scale are automatically limited to produce social and ecological yields at every level of the subsidiary structure. Due to this structure, all three factors of production – labor, natural resources and capital – are allocated with equal efficiency, generating a positive, social-ecological productivity that manifests itself in full employment and environmental protection.

The effective building of subsidiary economic structures under the conditions of the neoliberal globalization as a base for a post-neoliberal economic order is addressed in the article Building Subsidiary Economic Structures.

Foreign Trade Measures

Foreign trade and international competition must be targeted towards general progress and mutual gains by constructively incorporating them into domestic activities and competition. To ensure that, bilateral trade agreements are imperative, primarily to determine exchange rates which neutralize the average price difference between trading partners. Moreover, trading partners have to grant one another autonomy concerning decisions on tariffs and trade quotas for the fine-tuning of external and internal competition. Whenever applying a price-neutralizing exchange rate, products can be identified on both sides that have a relatively lower price compared to the corresponding products of the trading partner and therefore become potential export products. Vice versa, products having a relatively higher price give an indication for potential imports of corresponding products from the trading partner. In multi-bilateral trade relations all trading countries can thus maximize their gains from trade without jeopardizing their domestic economic structures.

Furthermore, I recommend the articles Future-Proof Foreign Trade and Sustainable Social Welfare.

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Click here for the German-language version: Exzesse des Kapitalismus

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