Reflections on Captialism - Part I

(9/13/2009) - Standing close to the end of the first decade of the 21st century, it seems that Western-style free market capitalism is a resounding success.  It outlasted the USSR, transformed Mao’s China into a sort of free market, authoritarian oligarchy, and brought unprecedented wealth and prosperity to humanity. 

This is the story at least, a narrative so prevalent in the United States that it approaches a pseudo-truth.  Of course, the truth is more clouded than this simple story of an ideology with a dream.  Many writers have brought attention to the losers of capitalism and broader economic development.  The child in 19th century America that began working in the mills at the age of six, the old Chinese couple forced to move from their childhood home to make room for a dam, the family slaughtered in war funded by money from mining operations in the Congo. 

I don’t want to reflect on this kind of human waste and tragedy, as I don’t have much to add to the discussion at present.  Instead, I want to examine some of the aspects of capitalism that have worked for many people, some that don’t, and some that work, but only for only a little longer. 

Outdated Ideological Divides

Capitalism is not some natural object like a tree or eye, or even a man-made object like a car (note to philosophers: I’m speaking within the discourse of every-day human dialogue and economic life, not within a ‘higher’-level discourse that might not consider these to be single objects).  Capitalism is a human ideology with a historical and intellectual heritage.  As a result, the ideas and practices that we associate with capitalism are an amalgamation, a set of often contradictory and sometimes silly propositions (i.e. humans are rational beings who will always act in their best interest), constructed by a loose collection of imperfect thinkers and loose talking businessmen and politicians. 

Capitalism also means different things to different people.  For some, its not true capitalism without a true “free market.”  In this article, “Capitalism” refers not to one specific definition, but to the many Capitalisms that have several common features: 1) Individual people control the means of production and distribution for most products and services, 2) making profits or money is considered the primary goal of production and distribution, 3) relative free trade exists between capitalist enterprises.  Under this outline, very few countries, if any, are 100% capitalist.  The United States comes close, but China doesn’t seem to come very close at all, since the state has ultimate control over property and guides how industries function, and it really isn’t as free a trader as most (mostly due to the way it sets the value of its currency).

The ‘Miracle’ of Compound Growth

Despite the differences in economic models, both the United States and China have been incredibly good at consuming finite natural resources.  It seems to me that the old ideological divides used to describe Capitalism from Communism or Socialism or what not are not useful when evaluating whether or not an economic system is sustainable.  Both economic systems employ what has been perhaps the most important part of capitalism’s success: reinvesting capital earned through economic activity in new products and technology, with the purpose of creating more wealth and capital that can be reinvested again, in a process that leads to compounded growth in economic production. 

For example, Henry Mullens invests $10,000 to form the Widget Manufacturing Co.  In the first year, Widget Manufacturing Co. sells $100,000 worth of widgets, and produces $15,000 in profits.  Mullens takes $5,000 of that money for his personal use, and re-invests the rest in his company.  With more machines, the company is able to produce $200,000 in widgets, with profits of $30,000.  Mullens takes his $5,000, and reinvests again.  After 10 years of this pattern, Widget Manufacturing Co. will sell over $250 million dollars in widgets.  In its 14th year, Widget Manufacturing Co. would produce and sell nearly $1 trillion in widgets.  This is an incredibly optimistic and unrealistic example, but it illustrates the powers of reinvestment and compound growth.  Though practices that lead to compound growth have been enormously important to capitalism’s success, the phenomenon is not exclusive to capitalism.  

The Finite Downsides of Capitalism

In the real world, the benchmark rate of growth that most economists seem to shoot for in a “mature” economy is about 3% a year (if you look at any government economic projection, the “normal” years, usually in the future, all have approximately this growth rate.  An economy increasing its production by an average of 3% a year will double in size approximately every 24 years.  Lets suppose that a country’s economy has been growing an average of 3% a year since 1900 (I’m pretty sure the United States’ has grown at about this rate on average for awhile now).  By 1924, the economy will be twice the size as it was in 1900.  By 1996, it will be 16 times its size.  By 2024, the economy will be increasing every year by an amount greater than all American economic production in 1900.  Though much of this growth will come in the service industry, we have yet to create economic growth that didn’t lead to increased consumption of resources.  People like buying things. 

In short, compounded economic growth is, by definition, unsustainable in a world with finite resources.  All the prominent economic ideologies of the 20th century – Capitalism, Communism, Socialism, etc. – had compounding rates of growth at one time or another, if not for extended periods of time.  If human civilization is going to achieve sustainability at anything remotely resembling our current worldwide standard of living, we need to forge a new economic model, a new way of producing and distributing goods.  

In posts to come, I’ll draw out some ways I think we can change our attitudes toward the economy, or at least ways I’d like to see opinion go once the finite reality begins to set in and change the fundamentals of how the system is able to function.