Some key features of modern capitalism
This chapter examines four characteristics of modern capitalism. The first two are basically methods: its drive to externalise costs, and to commodify goods and services which were previously not for sale. The second two are basically outcomes: its inevitable concentration of wealth among the owners of capital, and its destabilisation of communities which it abandons or occupies. All of these are natural consequences of the pursuit of private profit.
The following two chapters look more specifically at capitalism’s major “first-strike” weapon (the corporation) and its weapon of mass destruction (the financial markets).
Externalisation of costs – making others pay
One of the geniuses of capitalism is its ability, and its drive, to externalise costs. Profits come from driving costs down and prices or sale volumes up. This section focusses on how corporations and societies drive their internal costs down by “externalising” them.
To externalise costs is to get someone or something else to pay them. I introduced it in chapter 6 thus:
“Capitalism externalises costs by “taking and not paying” (as in much harvesting of fish stocks and mining of mineral resources for example), “buying low and selling high” (keeping profit that rightly belongs to others), “leaving and not paying” (as in pollution and release of carbon), and “selling and neglecting” (ignoring downstream and disposal costs).”
You will readily see that each of the four great thefts described in chapter 14 involve the externalisation of costs – raw materials, land and slaves were taken or bought low, and the export of dirty production has aspects of all four types of externalisation. But, as already noted, the first three were associated more with imperial mercantilism than with modern capitalism as a system.
I’d like to quickly traverse the four types of externalisation.
Taking and not paying
There’s not much point in embroidering on the theft of raw materials and land already described in chapter 14, or the over-exploitation of “free” resources such as fisheries, described in chapter 8.
Buying low (to sell high)
The more powerful the institution, the more it can pressure its suppliers to lower prices. The natural tendency of capitalism (free of disruptions) is towards monopoly (ie fewer and larger corporations), so power imbalances are increasing all the time within the corporate sector, just as they are in the labour/wage sector.
Also, in industries where there are large numbers of suppliers, buyers can drive hard, or one-time-only, bargains and move on. This is particularly evident in the behaviour of some of the discount and supermarket giants (for example, Walmart and, in New Zealand, Foodstuffs), who use their power to demand lower prices from producers, and abandon them at will.
Consumers in the affluent world have become used to goods which are sold at artificially low prices, while the producers struggle to survive[i]. If the producers fail to make a living, their land or productive assets are bought up by larger corporations – or by the purchasing giants themselves (this is called “vertical integration”) – continuing the unholy cycle of aggregation and concentration of power and wealth.
The Fair Trade movement is an attempt to make pricing more reasonable between the initial supplier and the intermediaries, and it has continual scorn heaped on it as “distorting markets” (the invisible hand should be left alone, please). The true market distortions are caused by the large and dominant corporations, as described above.
Leaving and not paying
This is the world of by-products and pollution. Environmental protection laws have been passed in the affluent world over the last half-century, and, while in the US in particular they have subsequently been weakened, by and large the affluent world has been cleaning up its act in its own backyard.
But of course, it still consumes more and better goods and services, having exported production to the poor world, where labour, safety, and environmental protection laws are usually either laxer, or unenforced, or both.
The 1984 Bhopal disaster remains one of the most obvious and appalling examples of this behaviour. Careless management of a toxic chemical plant in India led to leakage of toxic gases which caused up to 8,000 deaths at the time, and more subsequently, directly affecting between 500,000 and 700,000 people. Even now, a generation later, the health and livelihood of tens of thousands continue to be damaged.
The corporation responsible, Union Carbide, now owned by the Dow Chemical Company, has continued to deny responsibility. The $US470 million it paid in 1989 to settle litigation represents only a fraction of the true costs of the disaster, and is no compensation at all for the loss of life, health and livelihoods.
The collapse of a garment factory in Bangladesh in 2013, with the loss of over 1,000 lives, also reminded us of the affluent world’s exploitation of the poor world, with shoddy construction of the factory the main cause. However, in this case, some responsibility was acknowledged by the affluent world purchasers, and commitments made to better construction.
Selling and neglecting
Less visible than these, but probably deadlier in the long run, is the export of solid, chemical, and electronic waste to the poor world.
The image of 44 gallon drums filled with toxic chemicals being dumped in West Africa, and left to corrode, spill, and poison people and the environment, haunts me.
Raj Patel quotes a 2007 study which estimates that net costs of $4.3 trillion in ecological damage alone have been exported to the poorer world through this behaviour. That’s more than twice the poor world debt of $1.8 trillion[ii].
Apologists argue that this is a benefit to the poor world, because they get income from storing and/or processing our waste[iii]. There is some validity to this, and people in poor countries are often grateful for the chance to pull themselves out of poverty. But this is usually accompanied by other costs, such as ecological or health costs, which are either not perceived by the countries, or not borne by the individuals, concerned.
One estimated example is that a tonne of hazardous waste which would cost corporations $1,000 to dispose of in Europe can be disposed of for $2.50 in Somalia[iv]. Leaving aside the question of fair compensation for the immediate handling of the waste, I can only imagine the long-term difference between “disposal” in Europe (which would probably require high degrees of safety in handling, reducing hazard, and storage) and in Somalia (which would probably involve leaving it on a piece of empty land).
Some apologists even argue, amazingly, that as the less affluent countries are currently less polluted than the rich world, they can afford to take a greater share![v] Leaving aside the question of how much less polluted the poor world might be than the wealthy world, such arguments show a frightening self-interest and hypocrisy. They suggest that the rich world’s levels of pollution are inevitable, and that the poor world can afford to bear more of rich world’s costs because it has not yet had the opportunity to consume and waste like the rich world. Let them stay poor, the apologists are saying, because they should be bearing their “fair share” of our costs, and if they do manage by the miracles of the market to become wealthy enough, by polluting like we have done, on top of absorbing our pollution they can do…what exactly? Export their waste to the poorer world?
When I worked in Canada in the 1980s, I was fascinated to be shown that some maps in and of the United States showed only blank space above the Canadian border. This was the “Great White North”. Rivers running downstream to the St Lawrence seaway (which is largely in Canada) could therefore readily be used to transport toxic chemicals and other effluent over the border into the blank space.
This beautifully illustrates the underlying mentality of the people who are happy that the poor world, and Africa in particular, is being used as a rubbish tip for the rich world.
To these people, there’s no one there – or no-one of any consequence, anyway. And the few who are there should be grateful for the chance we offer them, to improve their lot by processing our waste. Under conditions it appears we are not prepared to live with ourselves.
This is not slavery, but it is exploitation, degradation and even at times torture. The rich world needs to learn to deal with its own waste, or at the very least pay the poor world as much as it would have to pay within its own society for processing its waste.
Summing “externalisation” up
Two examples show how big an issue capitalism’s externalisation of costs really is. I have already referred to the first in chapter 6, the “true” $200 cost of a Big Mac. The second is from a recent IMF study, which estimates that the fossil fuel industry receives $5.3 trillion in subsidies from society at large[vi]. This represents 6.5% of the world’s annual GDP and, as the Guardian points out, this subsidy to one industry is greater than the total health spending of all the world’s governments. Less than 10% of this is direct subsidies – the rest is externalities such as local pollution and CO2 release into the atmosphere.
The reality of our world of seven billion people is that we can no longer “externalise” costs. While individual corporations and governments might seek advantage by passing off costs to others, any advantage is only local and temporary.
There is nothing wrong with separating out roles, and having people or organisations – or even countries – who specialise in things such as waste management and disposal. But they need to be recognised as equal and properly compensated partners in a world where the creators of the waste also acknowledge responsibility for disposal.
We also need to get a better handle on the real, total costs of economic activities, so better decisions can be made about what to do, and how to do it.
And finally, the creation of profit by gouging others (through buying low or taking or selling high) is not a sound moral basis for an economic system. More on this in Part 4.
“Commodification” is the assignment of economic value to something not previously considered in economic terms[vii]. In other words, putting a price on things, whether or not there should be a price put on them.
“Commoditisation”, on the other hand, is the drive for efficient production by making goods uniform, and therefore more plentiful and easy to obtain. This is both a great strength of capitalism (driving down costs and prices by mass production), and also a great weakness (mass production drives out higher cost “boutique” services, resulting in less variety of both production and goods).
Capitalism and the pursuit of profit are always looking for new things to sell and profit from. Actually, capitalism cannot even function without perpetual growth, because the extraction of profit means there is never enough money available to purchase the goods produced unless new sources of money are made available through more production[viii]. This logic also applies to the charging of interest on debt, another huge driver of our current “perpetual growth” economy – more on this in chapter 19, on the financial system.
I first came across the idea of commodification in the late 1980s, in relation to the preparation of financial information for government on an “accrual” basis. This involved setting up a “balance sheet” for government, which valued all the assets it held on behalf of the general population. So, for example, conservation lands were valued at the current market value of privately owned land on their fringes.
I found this process repugnant. First, because it assigned “market” values to assets held for non-market reasons. Second, because I suspected (accurately, as it turned out) that this might simply be a precursor to selling some of the public non-market assets into the private sector.
And third, because the process was used to assess whether New Zealand “Inc” (as it was and still is sometimes called) was in overall surplus or deficit. It didn’t bother to value our clean air, not-so-clean water, empty space and beaches, and social stability (what the private sector might call New Zealand’s “brand value”), just the bits of publicly owned property that looked like they might be saleable.
Interestingly, these financial statements currently record a healthy positive balance in New Zealand’s national government accounts, mostly because of the “revaluation reserves” held on land[ix].
The last 40 years have provided capitalism with a rich harvest of opportunities for commodification. There has been massive privatisation, not just of public assets, but also of services previously provided as “club goods”[x] by the public sector in many countries. Highways, prisons, hospitals and schools are being built and run by the private sector, for profit, while the public continues to subsidise them, and to carry the long-term risks for their underperformance or failure.
Perhaps the most sinister of these is the privatisation of war which has recently occurred in the United States. Weapons development and supply has long been a great source of profit for the private sector in a few larger countries. But now, private companies such as Blackwater are also being entrusted with the conduct of wars and military actions round the world[xi], despite the fact that the United Nations Mercenary Convention prohibits this (the United States, United Kingdom, Russia and China are not signatories). These private armies work in a shadowy world, less accountable for their actions – or for their treatment of their own employees – than the public armed forces. And they make very large profits.
Also in the late 1980s, I came across the efforts being made to prioritise health spending, through various methods such as benefit-cost analysis. These put a value on human life, using measures such as “QALYs” (“Quality-Adjusted Life-Years, about $NZ2M at the time, if I recall correctly, and I believe about $5M these days). This is then used as a basis for making prioritisation decisions.
I was quite comfortable with this at the time – while it seemed rather awful to put a value on a human life, it was being used as a basis for prioritisation of spending where funds were limited (not for considering whether human life should be sold or not). If you didn’t use such a calculation, how else could you do it? I remain unclear on whether there is a good answer to this question.
Of course, through slavery, humans have been and still are prepared to commodify other human life – and to sell it for a lot less than $2M. And not just life as a whole, but also body parts (blood, kidneys, eggs, bone marrow…), and of course, time sharing of the body (surrogate wombs). Most of these practices are frowned upon – even illegal – yet trade in them thrives, as wealthy people become desperate on the one side for life-saving organs (or babies), and poor people on the other side for money.
On the funnier side, there is the commodification of water in the affluent world. Large sums of public money have been spent on storing and providing clean and safe water for human use, particularly in cities. The costs of these have been recovered through general taxes and rates and, in some cases, water taxes and rates. But the private sector, seeing an opportunity to profit from human gullibility, has made a successful business out of bottling water and selling it to affluent people for ludicrous profits, when all the people really need to do is turn on the tap, for water which is fresher and, in many cases, cleaner and safer.
What is now called the “care economy” is another example of commodification. In earlier times in affluent societies, and still today in less affluent groups and societies, multiple generations or branches of many families lived together or in close contact, providing mutual support. The “nuclear family” (parents and children only) become the ideal in affluent societies, and from the 1950s to the 1970s (and still, in the minds of conservatives), the dominant model was “father as breadwinner, mother as homemaker”. As long as there was enough wealth for single income families to be self-supporting, and for the aged to live independently, this worked – more or less – although it was a much less rich type of family life than a multi-generation/branch one.
But as real wages reduced from the mid-1980s, and as single-parent families simultaneously increased, more pressure was put on parents to find work-time care for their children, and also less money was available to support older generations if needed.
This was another great business opportunity for the private sector – the commodification and privatisation of child- and aged-care, by the employment of people at very low wages to look after the families of the slightly better paid working people. The wealthy have always paid for family care, through the use of nannies and other servants. But mutual support by less well-off families has now been replaced in many cases by “outsourced” care.
Turning to the environment, commodification has created real challenges. The environmental movements continue to go through a phase of trying to put monetary values on natural assets and processes such as forests and wetlands. In some cases, these show extraordinary results – for example, New Zealand research has shown that the loss of wetlands, at rates up to 99% in districts like the Rangitikei has cost the economy billions of dollars[xii].
But putting monetary value on these things reduces them to common denominators, and makes it appear that they are exchangeable. So, for example, a more or less laudable practice such as “biodiversity offsetting”, which is a last resort planning practice (after all possible actions have been taken to avoid, or minimise, or reverse the biodiversity impacts of land developments), has led to markets in “conservation credits”. This is a situation similar to carbon markets, where people are able to distance themselves from the real consequences of their actions by buying and selling, and where the wealthy will naturally be able to buy what they need at the expense of the poor and the environment.
Commodification of the environment also attacks the value of “place”. Traditional farmers know that each place is unique, with its own characteristics, which should be cherished, protected, and worked with rather than against. So do ecologists, and many indigenous populations. And so does anyone who has spent time in the bush or forest, at least for the moments they have been there, and at rest.
George Monbiot argues that, “Accept the principle of biodiversity offsetting and you accept the idea that place means nothing. That nowhere is to be valued in its own right any more, that everything is exchangeable for everything else, and nothing can be allowed to stand in the way of the graders and degraders”[xiii].
The value of place applies not just to natural but also to human environments. And not just to social and cultural activities, but to economic activities as well. Are we better off as communities with groups of local shops, providing boutique services and recycling value within their communities, or with endless, indistinguishable, strip malls of McWalBucks, sending profits back to their distant owners?
Finally, a word about information and knowledge. These should be freely available as well, and the Internet has provided an enormous step in this direction. But the harvesting of data, and patenting of knowledge by private corporations, up to and including biological information such as genetic data, is always a step towards commodification and sale of these things. While the patenting of “naturally occurring” biological material such as genes is prohibited in most affluent countries, patenting of engineered material is not. If not life itself, then at least new variants of life, are now held hostage by capitalist corporations, to be commodified and sold for profit.
Commodification is reduction to a lowest common denominator (in this case, money). Some things shouldn’t be for sale, and putting a monetary value on them is usually the first step towards doing this. As the barest minimum, the basic rights stated in the Universal Declaration of Human Rights should never be for sale. Basic health, education, and personal security should be guaranteed and provided by the state, through citizens acting in a mutually responsible manner.
Concentration of ownership and wealth – getting it all
The third subject of this chapter is ownership, as the fundamental basis for modern capitalism. Various forms of capitalism have had, and have, various forms of ownership. “State” capitalism leaves the State, and in theory the people, as owners. But most modern, US-centred, capitalism is based on private ownership.
As previously described, capitalism starts from ownership of capital, and goes on to the organisation and management of production and trade. Its aim is to increase the value of the owner’s capital. Profit, translated into wealth for the owner, is sovereign.
Mercantilism clearly favoured the merchants over other contributors to the economy. Capitalism favours the owners. But interestingly, neoclassical economics, capitalism’s handmaiden, has until recently paid no attention to the wealth and ownership side of the equation, focussing solely on production – it makes the owners invisible. This is one of the reasons the work of Karl Marx and Thomas Piketty is so important.
Marx and the value of labour
Marx analysed the behaviour of capitalists and what I regard as his central thesis remains as powerful today as it was over a century ago. He saw capitalism as a system for the exploitation of the workers who in fact created the value for the capitalists.
His “labour theory of value” wrongly predicted the inevitable downfall of capitalism as the capital-to-labour ratio rose, and profits fell[xiv]. But the underlying moral proposition, that labour creates surplus value which workers should share on a fair and equitable basis, remains valid. The undermining and virtual destruction of union movements in much of the Western world has dramatically reduced labour’s ability to demand a fairer share.
For example, in New Zealand, since the “Rogernomics” revolution of the mid-1980s, real wages have fallen relative to productivity increases by at least 40%[xv], and from 56% to below 46% as a share of GDP[xvi]. The balance has been gains for the owners, plus the senior managers and advisors who have been complicit in the process.
Consistent with the New Zealand example, the Organisation for Economic Co-operation and Development (the OECD, a rich countries’ club) estimates that labour’s overall share of income fell from 66% in the early 1990s to 62% in the 2000s, while the share of the top 1% of workers increased, and overall productivity gains were substantial[xvii]. Technology (such as automation and roboticisation) and since 2000 trade (offshoring jobs) were identified as the main causes.
It seems paradoxical that capitalism, which is built on maximising profits through increased consumption, should be so intent on driving down the wages of resource workers, who are also, by and large, the potential consumers of those very goods and services. The only possible way to reconcile these opposing tendencies is by even greater growth in the overall level of production – ie, once again, perpetual growth. Fairer distribution of “surplus value” would at least reduce this pressure and, under a non-capitalist system, it could be eliminated as a problem.
Piketty and the redistribution of surplus value
Marx also popularised a related proposition that was common among socialists at the time:
“From each according to their abilities, to each according to their needs”.
This proposition was based on a society in which there was no ownership, describing the process of production (via each of our abilities) and consumption (of what each of us needs). As long as there still is ownership, I think it can reasonably be amended to form one of the bases of a fair and equitable society:
“From each according to their means (ie including both their productive abilities and the assets they own), to each according to their needs”.
Thomas Piketty, without directly challenging the current economic framework, has taken us a step closer to this proposition, at least in theory. In his recent book “Capitalism in the 21st Century”, he demonstrates that owners take the first slice of wealth created by production (a modern version of the “first fruits” taken by priests), and that the wealthier you are, the bigger the slice of new wealth you get, creating an unholy cycle of aggregation.
So, capitalism drives the wealthy up and the poor down. This seems a fairer analysis of our current situation than the “trickle-down” theory of the neoliberals, which posits that the (virtuous and wise) wealthy, helped by lower taxes, will invest wisely, creating jobs and hence more wealth for the (incompetent and unwashed) general population. There is no authoritative research which supports the neoliberal view. Indeed, “trickle up” has been shown to be far more effective, as illustrated by Joseph Stiglitz in “The Price of Inequality”[xviii].
The aggregation of wealth at the upper levels occurs not just because they take “first fruits”, but also because tax systems have changed over the last 30 years so the wealthy pay lower taxes. Moreover, they are more effective than the less well off at taking advantage of tax loopholes, not to mention defrauding the tax system. Stiglitz illustrates this by showing that the extremely wealthy in the United States actually pay a lower tax rate than the less well off[xix].
Piketty and Stiglitz both advocate more progressive tax regimes, and more tax on wealth (including higher inheritance taxes), to address this unholy cycle of aggregation. More from those with means, so there is more for those with needs.
More progressive tax systems, along with more equal power balances between labour and owners, are essential to addressing the imbalances that current capitalism has created in society by emphasising the rights and profits of owners at the expense of labour and the rest of society.
According to the economists, such changes will have negative impacts on the economy, and this is a bad thing. However, it is their economics which is bad, as discussed in chapter 16, not the impact of more egalitarian systems of income and wealth distribution.
Destabilisation of societies – chasing profit, not social benefit
This fourth characteristic of modern capitalism has already been partly covered, at least implicitly, particularly in the section on externalisation of costs.
The rapid innovation that has been characteristic of modern capitalism has led not only to newer and shinier products, but also to loss of stability in local communities, as factories and service roles have closed and opened, and people thrown out of and into paid work more rapidly over time.
The term “creative destruction” has been used as a description of this process, originally as a negative by Joseph Schumpeter[xx], who coined it, and then positively, by the neoliberals, on the grounds that it proved the dynamism of capitalism, and, anyway, newer is always better[xxi].
In this world of rapidly changing economic activity, at the whim of corporations, people are reduced to “factors of production”. They are simply elements of cost, to be discarded when lower cost alternatives become available, or the current line of production has become less profitable. Only the best corporations maintain long-term commitment to their employees through changes in lines of production.
Rapid movement of capital and production around the world, to use labour and materials at lowest cost, and preferably with least regulation of their behaviour, is now standard practice for large transnational corporations. It destabilises not only local communities, but also societies at large.
Apologists argue that overall, societies benefit as a result of the greater profits, and that the transfer of low-paid work to poorer countries helps them economically. But, as already discussed, it is not the communities which lost the work who benefit from the profits, but the owners of the corporations, and their senior managers.
The current dislocation and distress in the United States’ great industrial cities of Detroit, Chicago, Philadelphia and others demonstrate the real impacts of economic behaviour focussed solely on the pursuit of profit. As products became unprofitable or superseded, the corporations just moved on, leaving those who remained, and the civic structures, to pick up the pieces. Just as they ignore the whole of life costs of their products, they refuse to take responsibility for their employees beyond their current pay-cheque.
And what of the new countries and communities which production moves to? Many welcome the new work, as it provides higher wages than previously – for as long as it lasts. But there is no question that the corporations will treat them exactly the same as they have previous communities – exploit them, repatriate profits, and then abandon them. The corporation’s major efforts, while in town, will be to ensure that costs stay as low as possible through low wages and lax regulation. And the moment a cheaper option becomes available, they will move on.
The major facilitator of this rapid movement of transnational corporations round the Earth in pursuit of profits is the World Trade Organisation (WTO). This body was set up in 1995 to facilitate trade among all the major trading nations. In reality, it has enforced the freedom of corporations to operate and trade as they think fit, regardless of national laws in the countries affected[xxii].
Together with the IMF, the WTO has been a key instrument in the rapid growth of consumption in the affluent world over the last few decades. An IMF factsheet says: “The work of the IMF and the WTO is complementary. A sound international financial system is needed to support vibrant international trade, while smoothly flowing trade helps reduce the risk of payments imbalances and financial crisis.”
Well actually, the IMF oversees a financial system which is completely out of control (see chapter 19), and the WTO oversees a trading system which has destabilised societies both directly, as above, and indirectly, by taking advantage of huge subsidies on fossil fuels in the transport sector to accelerate trade without paying the real costs[xxiii].
The mobility of capital must be reduced, to help stabilise the societies it has affected.
[i] See for example the documentary “Food Chains”, directed Sanjay Rawal, 2014
[ii] “The Value of Nothing”, Kindle edn loc 686
[iii] Larry Summers, sometime President of the World Bank and director of President Obama’s National Economic Council, no less, in a World Bank memo in the early 1990s, quoted in “The Value of Nothing”, Kindle edn loc 1980ff
[iv] Raj Patel, “The Value of Nothing”, Loc 1999
[v] Larry Summers again (see footnote [iii])
[vi] See “Fossil Fuels subsidised by $10M a minute, says IMF”, guardian.com, 18/05/2015
[vii] See Wikipedia, Commodification/Business and Economics
[viii] See for example, “Capitalism Must Die”, Stephanie McMillan, pp59ff
[x] “Club goods” are goods which can be shared by groups in a community without interfering with others use of them (until congestion occurs)
[xii] Ref to be found again
[xiii] George Monbiot, quoted in “Six Capitals: The Revolution Capitalism Has to Have”, Jane Gleeson-White, 2015, Kindle edn loc 1117-1120
[xiv] In “Debunking Economics: The Naked Emperor Dethroned?”, revised and expanded edition, Steve Keen, Zed Books, 2011, Kindle edn loc 9808ff
[xv] Brian Easton, “Labour, Employment and Work in New Zealand 2010”
[xvi] Mike Treen, “Exposing Right Wing Lies”, 2010
[xvii] See The Economist, “Labour Pains”, 2/11/2013
[xviii] Stiglitz, “The Price of Inequality”, Loc 262 ff
[xix] “The Price of Inequality”, Loc 1452
[xx] Joseph Schumpeter, “Capitalism, Socialism and Democracy”, 1942
[xxii] See for example “The Price of Inequality”, loc 2741ff, and “This Changes Everything”, loc 1207ff