Capitalism is essentially the investment of money in the expectation of making a profit, and huge profits could be made at some considerable risk by long-distance trading ventures of this kind. Profit was quite simply the result of scarcity and distance. It was made from the huge difference between the price paid for, say, pepper in the Spice Islands and the price it fetched in Europe, a difference that dwarfed the costs of the venture. What mattered was whether the cargo made it back to Europe, though market conditions were also very important, for the sudden return of a large fleet could depress the prices. Markets could also become saturated if the high profitability of the trade led too many to enter it.
The warehouses of the Dutch merchants were bigger and more expensive than large ships. They could hold sufficient grain to feed the entire country for 10-12 years. This was not just a matter of holding back goods to force up prices, for large stocks also enabled the Dutch to destroy foreign competitors by suddenly flooding the whole European market with goods.
This was certainly capitalism, but a free market capitalism it clearly was not. The secret of making high profits was to secure monopolies by one means or another, exclude competitors, and control markets in every way possible. Since profit was made from trading in scarce products rather than rationalizing production, the impact of merchant capitalism on society was limited.
Apart from the occasionally heavy cost of new factories and new machinery, wages were the company’s main cost. Wage costs were minimized not just by holding wage rates down but also by replacing craft workers with less skilled and cheaper labor, as the invention of automatic machinery made this possible.
The exploitation of labor was not just a matter of keeping the wage bill down but also involved the disciplining of the worker. Industrial capitalism required regular and continuous work, if costs were to be minimized. Expensive machinery had to be kept constantly in use. Idleness and drunkenness, even wandering around and conversation, could not be allowed.
Robert Owen introduced “silent monitors” at his mills. Each worker had a piece of wood, with its side painted black for bad work, blue for indifferent, yellow for good, and white for excellent. The side turned to the front provided a constant reminder, visible to all, of the quality of the previous day’s work.
Time became a battleground, with some unscrupulous employers putting clocks forward in the morning and back at night. There are stories of watches being taken off workers, so that the employer’s control of time could not be challenged. Significantly, the government tried to tax the ownership of clocks and watches.
Industrial capitalism not only created work, it also created “leisure” in the modern sense of the term. This might seem surprising, for the early cotton masters wanted to keep their machinery running as long as possible and forced their employees to work very long hours. However, by requiring continuous work during work hours and ruling out non-work activity, employers had separated out leisure from work. Some did this quite explicitly by creating distinct holiday periods, when factories were shut down, because it was better to do this than have work disrupted by the casual taking of days off. “Leisure” as a distinct non-work time, whether in the form or the holiday, weekend, or evening, was a result of the disciplined and bounded work time created by capitalist production. Workers then wanted more leisure and leisure time was enlarged by union campaigns, which first started in the cotton industry, and eventually new laws were passed that limited the hours of work and gave workers holiday entitlements.
Leisure was also the creation of capitalism in another sense, through the commercialization of leisure. This no longer meant participation in traditional sports and pastimes. Workers began to pay for leisure activities organized by capitalist enterprises. Mass travel to spectator sports, especially football and horse-racing, where people could be charged for entry, was now possible. The importance of this can hardly be exaggerated, for whole new industries were emerging to exploit and develop the leisure market, which was to become a huge source of consumer demand, employment, and profit.
The buying of futures can perform a very important function, since it enables the reduction of uncertainty and therefore risk. If the price of corn is high but the harvest is some way off, a farmer can lock into the existing price by making a deal with a merchant to sell the corn at this price in 3 months’ time. Futures can also, however, be bought for purely speculative reasons to make money out of movements in prices. Financial futures of the kind that Leeson was trading in were more or less informed gambles on future price movements. This was what Susan Strange has called “casino capitalism.”
Money could also be made from “arbitrage,” which exploits the small price differences that occur for technical reasons between markets. If you are able to spot these differences, calculate rapidly what they are worth, and move large sums of money very quickly, you can make big profits this way.
As Leeson’s operations drained increasing amounts of money from London and sent Barings hunting for loans around the world to cover them, Leeson’s bosses actually thought they were financing profitable deals made by their star trader.
It is not the nature of the activity itself that matters but the possibility of making profit out of it. Indeed, it is typical of a capitalist society that virtually all economic activities that go on within it are driven by the opportunity to make profit out of capital invested in them.
Capital is money that is invested in order to earn more money. By extension the term capital is often used to refer money that is available for investment or, indeed, any asset that can be readily turned into money for it. A characteristic feature of the development of capitalist societies is the emergence of institutions that enable the conversion of assets of all kinds into capital. Hernando de Soto has argued persuasively that it is the absence of these institutions, above all functioning systems of property law, that frustrates the emergence of local capitalisms in the Third World. He claims that an enormous amount of value that is locked up in property cannot therefore be realized and put by entrepreneurs to productive use.
These freedoms are, on the other hand, somewhat illusory, since in a capitalist society it is difficult to survive without paid work and little choice of work or employer may be available. Wage laborers are also subject to tight control by the employer and, as we saw in the cotton mills, capitalist production meant a new kind of disciplined and continuous work. Workers had become, as Marx put it, “wage slaves.”
The importance of wage labor is not only its role in production but also in its role in consumption. Wage laborers cannot themselves produce what they need or may wish to consume, they have to buy it, thereby providing the demand that activates a whole range of new capitalist enterprises.
Markets, like merchants, are nothing new, but they are central to a capitalist society in a quite new and more abstract way. This is because production and consumption are divorced — people do not consume what they produce or produce what they consume — and are linked only through the markets where goods and services are bought and sold. Instead of being a place where you can buy some extra item that you do not produce yourself, markets become the only means by which you can obtain anything. They are no longer located just in market-places but exist wherever buyers and sellers make their exchanges and, nowadays, this commonly means in some electronic space where prices are listed and deals registered. This applies not only to goods and services but also to labor, money, and capital. The wage, that is the price, for labor is established on a labor market, where employers compete for labor and workers compete for jobs. Money itself is bought and sold on currency markets. The ownership of companies is bought and sold in stock exchanges.
This competitiveness, which contrasts strongly with the monopolistic practices of merchant capitalism, makes capitalist production exceptionally dynamic.
Capitalist enterprises have, nonetheless, found ways of reducing competition. Those with an edge over their rivals may relish the cut and thrust of competition, but this also creates uncertainty, reduces profits, and causes bankruptcies. Companies thus form trade associations to regulate competition. The market can be rigged by agreeing not to engage in price competition or deciding that all will pay the same wage rates. Competition can also be reduced by mergers and take-overs which concentrate production in fewer hands. There is in capitalism always a tension between competition and concentration, which are equally characteristic of it.
Speculation of this kind is often regarded as an unproductive and parasitic activity that is wholly separable from the real economy where goods and services are produced. Unproductive it may often be, but it is not just a means of making money through speculation but also a way of avoiding risk. Since the relationship between supply and demand is always changing, markets are unstable. The building up and storage of stocks is a means of insuring against some adverse price movement that could destroy profit and wipe out a business. Trading in futures is another way of reducing uncertainty and originated long ago as a sophisticated way of protecting producers and traders against unpredictable future movements in prices.
So, the answer to our question is that capitalism involves the investment of money to make more money. While merchants have long done this, it is when production is financed in this way that a transformative capitalism comes into being. Capitalist production depends on the exploitation of wage labor, which also fuels the consumption of the goods and services produced by capitalist enterprises. Production and consumption are linked by the markets that come to mediate all economic activities. Markets enable competition between enterprises but also generate tendencies towards concentration in order to reduce uncertainty. Market fluctuations also provide the basis of a speculative form of capitalism, which may not be productive but is, nonetheless, based on mechanisms that are central to the operation of a capitalist economy.
They were more interested in manipulating markets than developing technology and organizing labor. If they wished to invest their capital in other ways, they were more likely to lend it at a good rate of interest to governments, particularly to rulers seeking to finance their frequent wars.
After deposits close to the surface had been exhausted, deep mining, whether of copper, gold, silver, or lead, required large amounts of capital and this provided an opportunity for merchants to move in and take control of production.
Investors now received dividends from a “joint-stock” company and could no longer withdraw their capital, though they could sell their shares. This innovations gave companies a more permanent and independent existence by enabling them to build up their capital on a long-term basis. It also created a market in shares and it was no accident that a stock exchange was established in Amsterdam at the same time.
If we are to understand the origins of the capitalist world that we live in, an understanding of the growth of large corporations is arguably as important as an understanding of the emergence of capitalist production itself. The great break with the past was not so much the rise of capitalist production, which emerged very gradually through a series of small steps, but the establishment of large, capital-intensive operations organized by great corporations. From this perspective, the financial innovations of merchant capitalism in 17th-century Holland were of immense importance.
These innovations can themselves be traced back to 16th-century Antwerp. There, merchants had developed new ways of financing their trading ventures and spreading risk by drawing on the capital of a wider circle of “passive” investors. In the 16th century they were no longer tied to particular trading transactions but became a means of moving money around internationally, thereby enabling the creation of a European capital market.
The areas the refugees left were broadly speaking those that were economically stagnant or in decline and those where they settled were in the forefront of economic development. Economic leadership shifted from Italy to Germany and Flanders, then to Holland, and only later to Britain.
Changes in economic leadership could result from shifts in trade, the impact of war, or political and religious change, but they were, as in our own day, partly the result of international competition and the self-undermining consequences of success. Thus, Italian economic decline in the 16th century resulted partly from the shift of trade from the Mediterranean to the Atlantic but was also the result of competition from lower-cost producers in northern Europe. The Italian cities had provided an environment in which crafts producing high-quality goods could flourish, but wages had risen, while the guilds and their regulations prevented innovation. Local attempt to stamp out lower-cost production in rural areas only made the situation worse. The less developed countries of northern Europe, like some less developed Third World countries today, could out-compete the established centers of production.
What was it that made Europe the birthplace of capitalism? Virtually every distinctive feature of European society has been advanced by someone as the explanation of the emergence of capitalism in Europe.
Under feudalism, power and wealth were linked to the control of land not the ownership of capital. Production was not for the market but for consumption by the producer and the lord, who used physical rather than economic coercion to extract the surplus from the producer. There was no “free” wage labor, for agricultural labor was tied to the land.
Under feudalism producers had, on the other hand, some degree of freedom, because, unlike slaves, they had limited and specified obligations to their lord. On the other hand, unlike independent and self-sufficient peasants, they were forced to produce a surplus.
One must add that feudalism did not inevitably shift to capitalism in this way. It did so in Western Europe but not in Eastern Europe, where landowners actually increased the feudal exploitation of the peasantry in the 16th century, in order to make more money from the export of grain to the cities of Western Europe. Thus, the economic development of Western Europe for a time at least intensified feudalism elsewhere. Feudalism had the potential to evolve into capitalism but whether it did so or not depended on other factors.
The inability to construct successor empires resulted also from the feudal structure of medieval monarchies. The military and financial weakness of feudal rulers, who were dependent on the military service of unreliable followers and unable to mobilize sufficient resources, doomed their imperial ventures to failure.
One of the striking features of the development of capitalism in Europe was the periodic movement of its leading edge from one country to another. As conditions deteriorated in one area, entrepreneurs could find pastures new somewhere else.
Perhaps, however, it was distinctive ideas rather than distinctive structures that resulted in the development of capitalism in Europe. Religious beliefs motivate people, give their actions meaning, and regulate their behavior through norms that specify how they should live.
Protestant beliefs, especially those of the Calvinists (or Puritans, as they were called in Britain), drove people to lead an abstemious life, to save rather than spend, and therefore resulted in the accumulation of capital. Protestants also believed that God should be served not by a religious withdrawal from life but through the proper conduct of the occupation that God had called them to perform.
Rather than expecting that other advanced civilizations would generate capitalism, there are, in any case, good reasons why they did not. Most advanced civilizations were dominated by a single ruling group that used military or religious, rather than economic, coercion to scoop off the surplus from those who produced crops and goods. This surplus was then used for territorial expansion, the maintenance of military power, and projects and displays that enhanced prestige. Some form of bureaucratic apparatus was constructed to tax, regulate, and subordinate the population. Individuals certainly accumulated exceptional wealth and possessions in these societies, but through their connections with the state rather than purely economic activity. There were, in other words, easier way to become rich and powerful than through the accumulation of capital and the management of labor.
Deregulation was in the interests of industrialists, who wanted the freedom to develop their activities without state interference. They wanted wage-rates to be set by the labor market not by the state. They also wanted free trade, in part to assist exports but also because imports of cheap food would allow them to pay lower wages.
Employers too became more organized. Employers’ associations were establishing themselves in the second half of the 19th century, as employers banded together at industry level, partly in order to counter the growing industrial power of the unions but also to reduce the uncertainties generated by unregulated competition.
The main way in which employers reduced uncertainty was not, however, through association but through concentration. The simplest way of dealing with competition was to buy it up or merge with it.
In Britain, it also became more managed in other ways, as governments responded to class organization by becoming more involved in the management of class relationships. The state shifted from the repression of working class discontent to its management through incorporation, that is through the inclusion and representation of the working class. In the political arena, incorporation took the form of extending the right to vote, and the subsequent competition for working class votes between the existing political parties.
Not only were education and health taken out of the marketplace but also other important industries and services. This process started locally with the so-called “municipal socialism” of the last quarter of the 19th century, which took gas and water supply into public ownership and provided publicly owned city transport. The public provision of housing began with the 1890 law that gave councils the power to build houses. The taking of telephone companies into public ownership began in 1892. Then in the 20th century electricity generation, broadcasting, civil aviation, the railways, coal mining, and many other industries too numerous to list here were created or taken over by the state. Much of this “nationalization” was motivated not by socialist beliefs in the merit of public ownership but by nationalist concerns with the public ownership of key services and the inefficiency of fragmented or backward industries.
This second stage was shaped by the growth of large corporations, the development of class organization, corporatist relationships between the state and class organizations, state intervention and regulation, state welfare, and the extension of public ownership, which were interrelated and mutually reinforcing processes. What they all had in common was a reduction in the significance of market relationships in people’s lives, reflecting a general reaction against the dehumanizing impact of the market forces that had increasingly shaped the way that people lived during capitalism’s breakthrough period.
Why did managed capitalism collapse? One reason for this was that its corporatist institutions could not in the end be made to work. Government attempts to regulate prices and incomes failed time after time, because the cooperation they required between unions, employers, and the state was either not forthcoming or could not be engineered. When governments adopted more coercive policies, they met a union resistance they could not overcome, a resistance that could prove fatal to the governments themselves.
The real problem was that increasing international competition was putting the old industrial societies under growing pressure. With the decline of empires, and the growth of free trade, national insulation was breaking down. The economies of the recently defeated but highly productive nations, West Germany and Japan, were reviving. Employers responded to increasing competition by trying to reduce labor costs, which meant holding down wages, or shedding workers, or increasing productivity, all of which were unpopular with workers and resisted by their unions. As managed capitalism had developed, these unions had increased both their membership and their power so that they were in a strong position to resist changes they saw as against their members’ interests.
There were also broader changes in values and priorities, which signaled a popular reaction against managed capitalism. There was a growing revolt against higher taxation and a rising dissatisfaction with the take-it-or-leave-it attitudes of public services financed by taxation. These services did not provide the choice or responsiveness that consumers were coming to expect.
Market forces were to be revived by “rolling back the state.” Welfare expenditure was cut through the restriction of benefit payments, particularly the payment of unemployment benefit, by the replacement of grants with loans, and by increases in charges. There was, none the less, no overall reduction of state spending, since rising unemployment resulted in higher social security expenditure. Nor was there an overall reduction in taxation but rather a shift from income tax to indirect taxes, which, it was claimed, at least gave people greater choice, since they did not have to buy the products that carried these taxes.
As Andrew Gamble has forcefully argued, a free economy requires a strong state. The reviving of market forces actually led to more state regulation. There are plentiful examples of this from the Thatcher years.
Privatization alone could not stimulate market competition, if state monopolies were simply turned into private monopolies or private companies were allowed to manipulate markets, so a series of new regulatory offices were created to police the gas, telecoms, and water marketplaces.
Hospitals financed this way found themselves contracted to make payments to private capital for the next 25-30 years, and required to use the expensive services provided by private capital for all maintenance and repairs.
The first transformation, from anarchic to managed capitalism, showed that it was possible to protect people from at least some of the worst consequences of the operation of market forces. The conditions of work could be regulated and through collective organization workers could limit the power of the employer and negotiate improvements in wages and conditions. Welfare became a matter for the state, which removed key services from the marketplace so that they could be provided equally to all citizens. Governments tried to manage the economy by developing cooperation between the state and the organizations of unions and employers. Capitalism could be managed, even if those trying to manage it often got things wrong, sometimes gave in to pressure from the powerful owners of capital, or simply failed to deliver what they had promised.
The fundamental problem faced by managed capitalism was that in restricting and replacing the market provision of goods and services it was weakening the central mechanism of a capitalist economy. When increasing international competition and the economic problems of the 1970s placed severe strains on the old industrial societies, managed capitalism began to break down. It was also undermined by an increasing individualism that gave greater priority to consumer choice and market provision. There were calls for a return to the values and vitality of earlier times.
In a second transformation market forces were revived, though there was in practice no “rolling back” of the state, for market mechanism could only operate in the context of state intervention and regulation. Indeed, the whole notion of an earlier stage in which the market ruled was a myth, for during the time of anarchic capitalism the state had, through the maintenance of order, played a key part in enabling capitalism to function. The latest stage, of remarketized capitalism, has in fact been characterized by a massive increase in state regulation, which in some areas has become more extensive than it ever was during the period of managed capitalism.
The new world of remarketized capitalism provides greater choice and more freedom for the individual but also a less secure life, intensified work pressures, and greater inequality. As managed capitalism developed, the freedom of the individual was diminished in the name of greater equality, but in a remarketized capitalism, equality and security have been sacrificed to freedom and choice.
So what does the Swedish case tell us about capitalism? It shows that in certain conditions the conflict between employers and unions generated by capitalism can provide the basis for centralized class cooperation and a functioning system of corporatist management and welfare capitalism. It also shows that such a system could not in the end contain the underlying conflicts between capital and labor, which eventually paralyzed it. Increasing international competition and global economic integration then made such a high-cost system impossible to maintain, and Sweden eventually conformed to the international neo-liberal tendencies. This did not mean, however, that the structures and institutions created during the period of managed capitalism disappeared. The revitalizing of Swedish capitalism has not eliminated its collectivist distinctiveness.
As the importance of fringe benefits shows, some of the welfare that in Europe was the province of the state was in America provided by the corporation. Indeed, the term “welfare capitalism” in America refers to the corporate welfare provision. This is not to say that there was no development of state welfare in America, but this only provided a piecemeal safety-net for the poor.
The whole idea of a state-directed industrial policy was anathema in the US, but the creation of a military-industrial complex was, in effect, one form of such a policy. Business opposed government interference but accepted government money.
The greater mobility of capital, popular investment in the stock market, and the expansion of the financial services industry increased the importance of a company’s market valuation. According to the newly fashionable doctrine of “shareholder value,” the goal of management was no longer to invest in the future or build up a company but only to maximize its share price by increasing profits. Managers were given an incentive to do this through stock options which rewarded them for increases in their company’s share price. Managers had been at least to some extent separated from owners by the managerial revolution, but now they increasingly became owners again.
American capitalism was transformed by financialization during the last quarter of the 20th century. At a time when companies engaged in production were facing growing competition from abroad and struggling to make profits, financial activities were highly profitable and attracted capital.
Skills were rapidly imported from the West. Japan exemplifies dictum that “the diffusion of knowledge and skills” has been the “main force in favor of greater equality between countries.” But Japan also went a key step further in replacing foreign experts with home-produced ones. A national educational system was created which by the beginning of the 20th century was already in advance of Britain’s, even though Japan was far less developed economically.
The state maintained Japan’s economic independence. Foreign capital was kept out, until Japan had become a strong independent state. Indeed, it was the peasantry that bore the main cost of Japan’s modernization through a land tax that initially provided three-quarters of the government’s income. Japan also began to construct an overseas empire that would provide it with protected markets and raw materials.
The reconstructed zaibatsu and other similar groupings performed important economic functions. They provided coordination across industrial boundaries but also engaged in intense competition, which stimulated productivity and enhanced international competitiveness. They could pursue long-term policies aimed at building marketshare, because their reconstruction on the basis of mutual ownership and their finance by the banks relieved them of shareholder pressure for high dividends. This also meant that they were protected from takeovers by foreign capital or corporate raiders.
High employee integration gave Japanese companies the edge that enabled them to out-compete their Western rivals. The company provided the security of lifetime employment, wages that increased with seniority and length of service, welfare services, and often housing. In return employees had to work hard and long, giving up weekends and holidays if required by their company. Other mechanisms of integration were the absence of status distinctions within the company, company uniforms, and the social interaction of workers and managers both at work and leisure. Earnings differentials have been very much lower in Japanese companies than comparable Western ones.
Integration for some was at the expense of others. Contract workers, part-time workers, and women workers did not enjoy the benefits of lifetime employment and all that went with it. There was a sharp division in Japan between an integrated elite of permanent employees and a disposable periphery.
Like the other systems of managed capitalism that we have examined, the Japanese one ran into difficulties in the later 1960s and 1970s, when Japan also came under heavy and steady external pressure to open itself up to trade. This really began after the early 1970s rapprochement between the US and China changed the American view of Japan, which was now regarded not so much as a bulwark against East Asian communism but as an industrial competitor that engaged systematically in unfair trade practices.
The institutions that had enabled growth now attracted criticism. Lifetime employment was viewed as a “rigidity” that interfered with the free workings of a labor market and prevented companies shedding labor. Mutual ownership in the industrial groups was criticized for supporting unprofitable companies and preventing a refreshing inflow of capital from abroad. The banks were considered too closely linked with industrial groups and therefore unable to pull the plug on unprofitable companies. Faltering economic growth and the exposure of corrupt links between companies, banks, political parties, and bureaucrats combined to undermine the “developmental state.” Inside and outside Japan, there were calls for Japan to conform to the market model that, it was claimed, the pressures of globalization in any case made unavoidable.
If one considers real per capita income, thereby taking account of the beneficial effects of deflation on prices and Japan’s relatively static population size, Japan has actually performed better than Britain and the US since 2002.
The first point to make here is that models come and go. All 3 countries have at one time or another been considered by at least some people as the leading capitalist economy which others should emulate. Indeed, it was thought that their success would make it inevitable that others would have to follow the same path. Yet each national set of institutions generated its own problems and each economy ended up in crisis. Most recently, the free market and shareholder capitalism of the US seemed to be all-conquering but it was this capitalism that led to scandals galore and the long crisis that started in 2007.
While European states first created overseas empires, the US constructed its own less formal empire in the Pacific and Latin America, and in the last quarter of the 19th century Japan began to follow the European model and acquire its first overseas territories.
The main vehicle of the spread of capitalist production has been the transnational corporation. There was a particularly fast growth of these corporations during the last quarter of the 20th century, with their numbers increasing from 7K in 1973 to 26K in 1993.
Labor was cheap there not only because of its plentiful supply but also because it was unorganized and unregulated. Attempts to create independent trade unions were crushed by the combined efforts of employers and government. The Mexican government had a clear interest in turning a blind eye, since the maquiladoras made a major contribution to the Mexican economy by providing employment, around a million jobs at the beginning of this century, and making the second largest contribution, after oil, to foreign exchange earnings.
In the 1970s and 1980s Japanese capital moved in search of cheaper labor into the “tiger economies” of HK, Taiwan, Singapore, and South Korea. As production became more expensive there, a second wave of capital moved from Japan and the “tigers” into Indonesia, Malaysia, and Thailand. More recently a third wave of investment has gone into China and Vietnam.
This spread of wage labor has weakened labor in the old industrial societies. Workers there have not only lost good jobs, they have also lost bargaining power. Collective organization had enabled workers to reduce the power differential between capital and labor. Competition from cheap and unregulated labor abroad has undermined this collective power and unions have found it very difficult to extend labor organization to include overseas workers, who, broadly speaking, remain unorganized.
International tourism spreads capitalist practices into parts of the world that have been little touched historically by the growth of capitalism. It can penetrate into areas that have little capacity to produce goods or other services for the world market. Indeed, remote or undeveloped places can be particularly attractive to tourists because they are remote or traditional.
A process of commodification takes place as cultural practices, wildlife, sights, and views acquire a monetary value that they never had before. Customs may lose their authenticity when commercialized and nature may become less natural but commercialization can at least enable their survival in a modified form. In an increasingly capitalist world, the only way of ensuring the survival of cultural practices and natural sights is to find ways of making a profit out of them. Furthermore, the preservation principle can itself become the basis of an industry, as in the eco-tourism promoted by Costa Rica.
American fruits corporations began to shift production to Ecuador, where wages and other labor costs were substantially lower and there were no labor unions. The banana companies also used the WTO to pressurize the EU to end its preferential treatment of the banana growers in the ex-colonial territories of Africa and the Caribbean.
This kind of agriculture can be very productive of cash crops but it requires the extensive use of pesticides and herbicides also sold by these corporations, and large amounts of water. The environmental consequences can be disastrous, as scarce water resources are used up, chemical pollution increases, and biodiversity is lost. Farmers not only become dependent on the corporations but also go into debt, since considerable investment is required, and can then end up losing their land if poor harvests or other disasters destroy their capacity to service their debts. Small-scale agriculture loses its vitality and large capital intensive units take over.
Allied to this process is a commodification of nature, as plants, seeds, genes, and water, which were previously natural resources, often available freely to all, become commodities that have a monetary value. Knowledge itself has become commodified. The WTO requires countries to allow the patenting of information about plant strains and genetic material. This means the knowledge of the poor is being converted into the property of global corporations, creating a situation where the poor will have to pay for the seeds and medicines they have evolved and have used to meet their own needs for nutrition and health care.
International investment, most of which was speculative in character, increased by a factor of nearly 200 between 1970 and 1997. It reached $5T a day in 2011. This huge increase was not to do with currency trading to enable foreign travel or international trade but was speculation to make money out of currency movements.
The floating of currencies in the 1970s had created new uncertainties and new opportunities, which stimulated currency trading and futures markets. There was greater uncertainty for companies that needed foreign currencies for their operations and they therefore needed to protect themselves by trading in futures. Above all, however, currency trading increased because of the greater opportunities that floating rates provided for speculation.
Exchange rates fixed by the state and controls on the international movement of money did not accord with the renewed belief in free markets and competition.
Nor did the accord with the growth of financial industries and increasing competition between them, for the health of these industries depended on their capacity to draw an international flow of money through their markets. Competition between the established financial centers of the world lay behind the City of London’s “big bang” deregulation in 1987, as London tried to catch up with New York.
Capitalist institutions and practices have been spreading across the world, but at this point we must halt a moment and consider quite how global “global capitalism” really is.
Most of the money still flowed between the already developed societies. Thus, although the foreign investment going into poor countries has increased, rich countries still receive disproportionate amounts of this, while the investment that does go into poor countries remains heavily concentrated in particular areas.
The differences between rich and poor countries are so huge that marginal changes in international inequality are of no real significance.
They are often seen as flouting the nation-state, particularly by transferring employment abroad, but all are based in a nation-state somewhere and most actually have the bulk of their assets and provide most of their employment in this state. They exploit the facilities of their home nation-state, its infrastructure and institutions, and use its power to promote and assist their operations abroad. They may provide employment in poor countries, but they also exploit their cheap labor, drive out local competitors, and channel profits back to their home state. As Peter Dicken has argued, transnational corporation are also national corporations, and most cannot really be described as global at all.
Capitalism is global in the sense that it reaches almost everywhere but in a very uneven way. The flow of money and investment is so unevenly spread across the globe that it is in some ways misleading to describe it as “global.” Commonly used terms, such as “global capitalism” and “global economy” gloss over huge inequalities, and the continuing importance of national units and national governments.
It has been castigated and ridiculed for its inefficiency, its low productivity, its poor overall economic performance, and pollution of the environment, which all apparently made it living proof of the superiority of capitalism. Its record of industrialization and substantial economic growth, its maintenance of full employment and low inflation, and its capable provision of education and health care have now been largely forgotten, though no doubt many Russians still remember the stability and security it once provided.
The “shock therapy” administered to the economy in 1991 freed prices from state control and by the end of 1994 had privatized three-quarters of Russia’s medium and large enterprises. The consequences were catastrophic for most ordinary people. Between 1991 and 1996 consumer prices increased by a factor of 1,700 and some 45M people fell into poverty.
The WB was to assist countries with postwar reconstruction and development, while the IMF was charged with maintaining international economic stability. Although their functions were different, in the 1980s these institutions began to jointly promote the free-market ideologies and policies that increasingly held sway in the US and other leading industrial societies. Like other international institutions, they were dominated by their most powerful members.
They advocated 3 key and interrelated policies. The first was fiscal austerity to reduce wasteful government spending and eliminate loose monetary policies leading to inflation. The second was privatization to get rid of inefficient public enterprises, introduce market discipline, and also reduce government spending. The third was liberalization, the removal of barriers to trade, with the assistance of the 1995-founded WTO, and the ending of government interference with the operation of markets. These policies were implemented through “conditionality.” The loans made by these bodies were conditional on the pursuit of such policies. The high dependence of developing societies on loans meant that they were in a very weak position to resist such policies, however inappropriate they might be. Indeed, these policies were implemented in developing countries more rigorously than they were in the developed societies themselves. The US, Europe, and Japan have all heavily protected and subsidized their agriculture.
This does not, however, meant that there is only one route to economic success, for there are different routes to capitalism and, as we saw in the last chapter, different ways of organizing it. We should not confuse the elimination of alternatives to capitalism with the elimination of alternatives within it.
How did this happen? Initially, the trading season was short and lasted only a few months after the flowering and lifting of the bulbs. To meet expanding demand traders began buying and selling tulips that were still in the ground. They were now in effect buying and selling bulb futures. Promissory notes specified the details of the tulip bought and when it would be lifted, while a sign in the ground identified the owner. It was then but a small step to trade in the notes rather than the bulbs, for rapidly rising bulb prices gave the notes themselves an increasing value.
The tulip futures trade became a wildly speculative bubble, where prices were pushed up not by the demand for bulbs but the demand for the “paper” futures. Since only a deposit had to be made on the future purchase, a small amount of money went a long way, so long as the contract note could be unloaded on someone else at a profit before full payment became due. As contract dates approached, dealing became increasingly frenzied and the notes circulated faster. Prices eventually rose to the point at which no one was prepared to buy and then suddenly collapsed.
They raised capital by using up their savings, borrowing, mortgaging their property, or making payments in kind.
Marx argued that capitalism was prone to crises because production was separated from consumption. In pre-capitalist societies they were closely related, since most production was for more or less immediate consumption. Under capitalism, goods were increasingly produced for sale in markets and this relationship became more distant. Goods were produced in the expectation that they could be sold, but the market might be unable to absorb them. Marx described capitalism as anarchic because production was no longer directly regulated by the needs of those consuming its products.
A tendency to overproduce was in fact built into capitalist production. Competition between producers generated a pressure to expand production, since higher volume reduced costs, cheapened prices, and enlarged market share. When the amount of goods produced exceeded the demand for them, there would be an overproduction crisis and prices would fall, eventually below the level at which profits could be made. This not only damaged the industry concerned but had knock-on effects that spread the crisis. Investment would decline and hit those industries producing machinery. Workers would be laid off or wages lowered, which would further reduce consumer demand. In these ways, overproduction generated vicious circles, leading to closure and bankruptcies, and high levels of unemployment.
Mass unemployment then resulted in a social crisis, for in capitalist economy people were in a quite new way dependent on wage labor for their survival. Such crises occurred roughly every 10 years during the first half of the 19th century.
Although unemployment caused great suffering and some capitalists went out of business, these crises did not destroy capitalism. Indeed, Marx argued that it was crises that made it possible for capitalism to continue, since they eliminated the strains of overproduction, forced out the least efficient producers, and enabled the renewed operation of virtuous circles, once closures and bankruptcies had reduced production to a level closer to demand. Similarly, lower wages increased profitability and cheaper prices stimulated demand. Lower interest rates made it cheaper to borrow money for investment. Production could start to expand again, employment would rise, and there would be more people with money in their pockets to buy goods.
Capitalism would therefore expand its way out of crisis, but this expansion would only lead to “more extensive and more destructive crises.” This did not mean that Marx believed that capitalism would be ended by some huge economic collapse. It would come to an end only when overthrown by the workers it exploited.
When domestic production faced a crisis, it was hard to resist the temptation to protect the national economy against foreign competition and as soon as action of this kind was taken by one country, others followed. Furthermore, the 19th-century division of the world between competing empires provided the industrial societies both with an illusion of self-sufficiency and ready-made structures within which they could shelter. The result was a cumulative decline of world trade that made the depression worse.
It should be said that much of this growth was at others’ expense. The affluence of the industrial societies depended on the low prices of the primary products from the rest of the world. The low price of oil was particularly crucial, because it was not only a fuel but also the basis of a wide range of synthetic materials. These were substituted for the “natural” products of the Third World and further drove down the prices they could command.
This was a world of spreading industry and intensified international competition. As we have seen, the growth of international competition was one of the processes that had already led to lower profitability in the old industrial societies during the 1970s. Lower profitability then resulted in companies seeking to restore profits by finding cheaper labor in other countries, spreading industrial employment to new areas of the world. The industrialization of China began to bring another quarter of the world’s population into the capitalist world economy. All this increased international competition still further.
The continuing deindustrialization of the old industrial societies meant that labor was shifted from “good jobs” in manufacturing to poorly paid service work. Privatization exposed cushioned state employees to the rigors of the open labor market. Higher unemployment depressed consumer demand. How could the flood of products from the Far East be absorbed?
Consumption was maintained by increasing debt. Hire purchase had long existed as a means of borrowing to finance the consumption of particularly expensive goods, notably cars, but the invention and multiplication of credit cards turned borrowing into the normal means of paying for all goods and services. The buying of houses through mortgage borrowing became a normal means by which people acquired somewhere to live.
One indication of this is the growth in the economic weight of the banks. Back in 1960 the balance-sheets of the British clearing banks comprised of 38% of GDP, but in 2010 they had reached an astonishing 405% of GDP. Thus, the banks’ balance-sheets were between 4 and 5 times the size of the productive economy. “Balance-sheet wealth” was supplanting the creation of wealth through productive investment.
Many “sub-prime” borrowers had been persuaded to take loans they could not afford to service, with a view to sell on their property as prices rose. When house prices began to fall, the financial institutions which had made the loans or bought them as investments could not get their money back. But what really turned this situation into a crisis was the heavy indebtedness of these institutions. They had themselves borrowed vast amount of money, often from abroad, to make the loans or buy the securitized loan packages. Lehman Brothers had debts that amounted to over 40 times its capital.
The banks had made good profits from this “leverage” and their share prices had risen, but they did not realize how dangerous their situation was. They thought they were safe, because they had used sophisticated new financial techniques that were supposed to eliminate the risk of default. These techniques were, however, poorly understood by senior managers and promised far more than they could deliver.
This was no longer just a crisis for the banks. It spread through the whole economy because the hoarding of capital froze the financial system. Normal economic activity is lubricated by the movement of money between those with money to lend and those needing finance but a “credit crunch” ground this movement to a halt. Ordinary companies needing to borrow finance their daily activities found that loans had suddenly become very hard to obtain. Governments tried desperately to get interest-rates down and banks lending again.
The financial freeze then set off the cumulative deflationary processes of the “great recession.” Bankruptcies, rising unemployment and falling wages, falling sales and prices, interacted to depress economic activity. Fearful of the future, people started to save more and spend less, depressing demand. Producers drew in their horns and investment ground to a halt. A repeat of the Great Depression of the 1930s beckoned.
Debt and financialization are tied together. Financialization is overwhelming economies with debt, as “balance-sheet wealth” is created through the lending and borrowing of money rather than productive investment. Thus, to give one example, money is made not so much from building and then selling houses but from lending and borrowing to buy existing houses in the expectation that money can be made from renting them out at a price greater than the interest on the loan or selling them when their price rises. The price bubbles that result may eventually burst with disastrous consequences for borrowers and lenders. Hudson concluded that we are passing through a short-lived and unstable phase of ‘casino-capitalism’, which now threatens to settle into leaden austerity and debt deflation.
The history of capitalism is, however, littered with crises. Period of stable economic growth are the exception not the norm. The quarter century of relatively stable economic growth after 1945 may have shaped a generation’s expectations about capitalist normality but it was not historically typical of capitalism. Crises are one of its normal features, for there are so many dynamic and cumulative mechanisms operating within it that capitalism cannot be stable for long. The separation of production from consumption, the competition between producers, the conflict between capital and labor, financial mechanisms that inflate then burst speculative bubbles, the switching of money from one economic activity to another, are all sources of instability that have characterized capitalism from its very beginnings and will no doubt continue to do so.
One theme of this book is capitalism’s declining capacity to “externalize” its costs. Capitalist enterprises can only make profits because they pass on the massive environmental, infrastructural, and social costs of their operations to society. These burdens are largely borne by states but their capacity to shoulder them diminishes as governments find themselves forced into expenditure cuts, privatization, and austerity, while a growing inequality, in part resulting form such policies, undermines their legitimacy. Ironically, in pursuit of short term profits private capital uses its considerable power to promote policies that actually weaken the institutions and structures on which capitalism’s long term viability rests.