NOTES ON THE PHILOSOPHY OF THE CAPITALIST SYSTEM
by Róbinson Rojas (1999)
The world economy today is a multidimensional system within which
factors of production ( capital and labour ) move according to
decisions that are made by transnational agents ( transnational
corporations ) operating in oligopolistic markets.
Trade flows, capital movements, inward and outward foreign direct
investment, technology flows, and labour movements are all regulated
by transnational agents operating in oligopolistic markets.
The world economy joins industrialized societies and less developed
societies in a web built by the main agents dominating these
oligopolistic markets where in less developed societies the
relationships between EXTERNAL and INTERNAL FORCES form a
COMPLEX WHOLE whose structural links are not based on mere external
forms of exploitation and coercion, but are rooted in coincidences
of interests between local dominant classes and international ones,
and, on the other side, are challenged by local dominated groups
and classes ( see Cardoso and Faletto, "Dependency and Development
in Latin America", and Rojas, "Latin America: Blockages to
Development").
Because of the above, to understand the political economy of
developing societies, we must study first the internal dynamics
of the free-market system, better known as "capitalist system".
On September 15, 1997, United Nations Conference on Trade and
Development -UNCTAD- released its Trade and Development Report 1997.
That reports summarizes the main features of the world economy
since the early 1980s in a way that is very useful for focusing
this lecture.
UNCTAD characterises the world economy as follows:
A) increasing integration through the unleashing of market forces
B) increasing social and economic divisions among, and within,
countries
C) mounting evidence that slow growth and rising inequalities
are becoming more permanent features of the world economy
UNCTAD's report documents SEVEN "troublesome" features of the
contemporary global economy:
1) growth is too slow, whether to generate sufficient employment
with adequate pay or to alleviate poverty
2) gaps between developed and developing countries, as well as
within the latter, are widening steadily (see BOX 2)
3) the rich have gained everywhere...and not just in comparison
to the poorest sections of society; "hollowing out" of the
middle-class has become a prominent feature of income
distribution in many developing and developed countries
4) finance has been gaining an upper hand over industry, and
rentiers over investors ( see BOX 3)
5) the share of income accruing to capital has gained over that
assigned to labour
6) increased job and income insecurity is spreading
7) The growing wage gap between skilled and unskilled labour is
becoming a global problem
In a nutshell, states the report, "rapid liberalization has
delinked finance from trade and investment" creating huge economic
unbalances and leading to "an increased concentration of wealth
in the hands of a few" which "is associated with stagnant
investment, rising unemployment and reduced pay"...
Why all of this is happening at the same time that the free-market
system is becoming more free? The capitalist system is
becoming more efficient, that is.
UNCTAD attempts an answer saying that "contrary to much current
economic thinking, increased global competition does not
automatically bring faster growth and development"..."nor do growth
and development automatically bring about a reduction in inequality".
And emphasizes: "no economic law exists that will make developing
economies converge automatically towards the income levels of
developed countries if they only open up".
And the above is because "growth and income distribution both depend
on how PROFITS are managed"...and, of course, PROFITS drive growth
in a market economy". Thus, "there are links between profits, income
levels and investment" in today's globalizing world.
MAXIMIZING PROFITS IN AN EFFICIENT FREE-MARKET SYSTEM
The main assumptions of the capitalist system are as follows:
- whatever the size of the population, there are not enough
resources for everybody ( the scarcity principle. See
R. Rojas, "Notes on economics: assuming scarcity")
- therefore, an "allocating" device must be put into place. That
device is the market
- the market makes possible that resources are enjoyed by those
who can buy them
- those who cannot afford the "market price" of goods and
services are excluded from the system as "inefficient agents"
- to ensure production maximization of profits is given as
the aim of the system
- from the above it follows that WHAT to produce, HOW to produce
and FOR WHOM to produce will be decided by those who attempt
maximise profits (the owners of capital, that is)
AN ARITHMETIC EXAMPLE
To understand more the philosophy of the capitalist system let us
put the following example, abiding by the rules of the free-market
system:
--price per unit of output will decrease from 10 to 1
--each unit of labour will produce 1,000 units
--profits will be 10 percent of total revenue (price x units)
Number of Units Price Total Total Remainder
workers produced per unit revenue profits per worker
-------------------------------------------------------
1 1,000 10 10,000 1,000 9,000
2 2,000 9 18,000 1,800 8,100
3 3,000 8 24,000 2,400 7,200
4 4,000 7 28,000 2,800 6,300
5 5,000 6 30,000 3,000 5,400
6 6,000 5 30,000 3,000 4,500
7 7,000 4 28,000 2,800 3,600
8 8,000 3 24,000 2,400 2,700
9 9,000 2 18,000 1,800 1,800
10 10,000 1 10,000 1,000 900
----------------------------------------------------
In this model maximization of profits happens when only
fifty percent of potential output is produced. Therefore,
maximization of profits is in contradiction with
maximization of output.
In this model employment will stop at 5 workers, leaving
5 excluded from the production system as "inefficient
agents".
In this model the "remainder per worker" decreases with
increases in output leading to an ever increasing gap
between levels of profits and wages. Leading to an ever
increasing polarization in distribution of income.
Making our model a bit more complex (introducing the law
of diminishing returns, productivity, etc), we can conclude that
the internal dynamics of the capital system behaves as
follows:
- employment grows at a slower pace than unemployment. The
free-market system creates more and more redundant population,
that is. ( see tables in The Robinson Rojas Archive)
- there is a long trend that pushes profits and unemployment
in the same direction.
- to maintain such a polarizing system of production, political
arrangements must be a mix of authoritarian and democratic
procedures, where most of the democracy will be enjoyed by
owners of capital and most of the authoritarian rules will be
suffered by the non-owners of capital.
- The instances of exploitation and oppression will be present in
the national dimension and the international dimension.
The adoption/imposition of the free-market system worldwide has
dramatic effects on the following areas of development:
Sustainability
Poverty reduction
Unequal social relations
Environmental protection
Human development
Patterns of participation
Institutional development
And those effects can easily lead to unwelcome types of economic
grow such as:
1.- JOBLESS GROWTH: the overall economy grows, but fails to
expand employment enough
2.- RUTHLESS GROWTH: the rich get richer, and the poor get
nothing
3.- VOICELESS GROWTH: the economy grows, but democracy/empowerment
of the majority of the population fails to
keep pace
4.- ROOTLESS GROWTH: cultural identity is submerged or deliberately
outlawed by central government
5.- FUTURELESS GROWTH: the present generation squanders resources
needed by future generations.
6.- DEPENDENT GROWTH: the economy grows, but as an appendage of
transnational capital, fracturing societies
socially and economically
(see R. Rojas,"Latin America: the making
of a fractured society" )
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1.- BOX 2 Back to text
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Share of regional GDP as percentage of total GDP -172 market economies)
------------------------------------------------------------------------
1980 1985 1990 1992
TOTAL OECD [21] 77.408 78.955 82.083 82.536
TOTAL WEST AFRICA[23] 1.387 1.084 0.479 0.425
TOTAL E&S AFRICA[27] 1.413 1.071 0.947 0.876
TOTAL N. AFRICA[5] 1.293 1.274 0.828 0.719
TOTAL M. EAST[14] 4.135 3.863 2.195 1.800
TOTAL S. ASIA[8] 2.203 2.460 1.919 1.485
TOTAL E. ASIA&P.[27] 3.302 3.749 4.297 4.837
TOTAL LATINAM[21] 7.188 6.126 5.470 5.540
TOTAL THE CARIB.[20] 0.396 0.417 0.321 0.270
TOTAL DEV. EUR.[6] 1.276 0.999 1.461 1.511
------------------------------
TOTAL MARKET ECON.[172] 100.000 100.000 100.000 100.000
=====================================================================
-----------------------------
1960 1965 1970 1975
TOTAL OECD [21] 82.082 81.798 82.219 79.435
TOTAL WEST AFRICA[23] 0.809 0.814 0.887 1.143
TOTAL E. & S. AFRICA[27] 1.627 1.487 1.371 1.380
TOTAL N. AFRICA[5] 0.743 0.809 0.854 1.028
TOTAL M. EAST[14] 0.978 1.544 1.704 3.143
TOTAL S. ASIA[8] 3.834 4.027 3.082 2.411
TOTAL E. ASIA & P.[27] 1.974 1.688 2.031 2.555
TOTAL LATIN AMERICA[21] 6.160 6.316 6.259 7.048
TOTAL THE CARIBBEAN[20] 0.396 0.410 0.431 0.420
TOTAL DEV. EUROPE[6] 1.397 1.107 1.162 1.436
----------------------------
TOTAL MARKET ECON.[172] 100.000 100.000 100.000 100.000
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Click here for complete table 1960-1975
Click here for complete table 1980-1992
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3.- BOX 3 Back to text
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Most of speculative investment is made through currency trading.
In 1995 $ 1.2 trillion of foreign exchange swapped hands in a
typical day. That is roughly 50 times the value of world trade in
goods and services.
In the early 1970s, prior to the liberalisation of the world's
capital markets, the value of currency trading was only six times
greater than the value of real trade.
If we take 1973 as 100, we have the following:
1973 1983 1995
World Trade 100 300 1,000
Foreign exchange trade 600 6100 48,000
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July 1998
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