Some within the environmental movement accept that capitalism is inimical to ‘saving the planet’. I tend to agree. To try and understand why this is, we first have to really understand how capitalism actually works. Understanding the process is a cool objective non political analytical approach. One does not need to be political to understand how a bond market works, one may become political afterwards. Similarly, grasping the basic drive of capitalism does not require adherence to marxist or neoliberal politics. What follows here is the analysis by David Harvey which can be found in his book: ‘The enigma of capital and the crises of capitalism’ (2010).
The first point to note is that capital is a process whereby ‘money is sent in search of more money’. It is not an evitable process, humans have used other economic processes (such as barter, subsistence) and could choose other economic systems. Capitalism (the economic system in which this process occurs) just happens to be dominant at this point in our history.
There are various ways in which the process of money searching for more money occurs:
1. Finance capital. I have lots of money and I will lend you some of it for a rate of interest. Banks in our current system have taken this to extremes. The money they have does not actually exist except as numbers on a computer screen. They then lend out to many others by making numbers appear on other computer screens. Doing this is easy because there is nothing actually to give, there is no concrete ‘thing’. So, ‘fractional reserve banking’ means I can take my £xbn and turn that into a bigger number on my screen and then ‘lend’ £100xbn to others and as long as this stays on computer screens we are ok. In addition it relies on whomsoever gave the first £xbn not wanting their money back all at once. Governments can just ‘create ’ money and lend to banks (quantitative easing), they just almost literally press keys on a keyboard and hey presto another £75bn appears as if by magic! This form of capital flow has dominated the UK economy.
2. Industrial capital (or production capital). This is how the UK created an empire, we made things. we actually dug coal, built factories and manufactured stuff.
3. These others: Mercantile capital, Landlord and Rentier capital and Asset capital (selling titles to stocks for example) are not quite so dominant as finance capital in the UK.
4. State capital. The government taxes then uses the taxes for things such as infrastructure to make more money.
So, capital takes various forms, money needs to keep circulating in search of more money. Capital has to flow or suffer losses, those who can speed up the flow will receive higher profits that those who cannot, innovation thus is very important. This flow also involves spatial movement, e.g. production processes have to be brought together with labour in particular spaces.
Once a capitalist has made a profit what stops them from just spending it all? Why do they keep the flow going? The “coercive laws of competition” and the “social power” of capital act to ensure capitalists move beyond consuming their profits and towards reinvesting. If I sit on my profit and just consume rather than reinvest then others who are in competition with me will innovate and steal my market and my profits will disappear. In addition having even more profit buys me social power, I can begin to ensure that I have a say in society in how this capital flows.
This reinvesting (in the absence of barriers) will produce compound growth of a certain %, depending on the circumstances and what is being invested in. For example, I invest £100 in a company and expect a return of 3% at least (also depending on the rate of inlfation). Any less than that then it may not be worth investing. If the return is 0% after a year and so I get my £100 back, I will not be happy, especially if inflation means that £100 is now only worth £98.
Economists tend to agree that a healthy capitalist economy produces an average compound rate of growth of return of 3%, below this and we start to consider stagnant growth and recession. If that happens then capital lies idle and loses value. However when we get returns of say at least 3% or more then this reinvesting leads to the “capital surplus absorption” problem. I keep making money but I need to reinvest it. Where are the new investments to come from? Where are the limits?
A crisis in capitalism occurs when ‘surplus production and reinvestment is blocked’. The barriers to investment have to be overcome.
What are the barriers? There are 6 potential barriers to the flow of capital through production. Blockages at any one of these will disrupt the flow of capital and lead to a crisis of devaluation:
- Insufficient initial money capital in the first place. “I aint got no money”.
- Scarcities of, or political problems with, labour supply. “I got the money but I can’t find any workers”.
- Inadequate means of production – includes ‘natural limits’. “I got the money and a workforce but the tin has run out, the mine is barren”.
- Inappropriate technologies and organizational forms. “I got the money, the workers, the tin is there but I only have shovels and the market for tin only deals in gold bars not money”.
- Resistance or inefficiencies in the labour process. “bugger, the workers want more pay”.
- Lack of demand backed by money to pay in the market. “I got the money, the mine, the men, the market but no one can afford to buy my tin”.
So the capital I owe lies idle and begins to lose value. I suffer a crisis of capitalism.
The central dynamic of capital is thus the ‘capital surplus absorption problem’. What do we do with the surplus capital we have accumulated after bringing together the means of production and labour (in industrial capitalism) or after lending out money and earning interest (finance capital)? The coercive law of competition and social power means we will reinvest and keep the flow going. Crises are thus endemic because this dynamic will keep coming up against barriers and will need to transcend them through innovation, or ‘creative destruction’.