Capitalism’s highs and lows

I was asked to make the introductory speech at the Conference “Heurs et malheurs du capitalisme”, which took place at Université Blaise Pascal in Clermont-Ferrand on February 4th. Bénédicte has been so kind as to translate the written version of my speech.

Capitalism’s highs and lows? When we talk these days of its highs, it is because its lows are so much – uncomfortably much – on our mind.

But what exactly do we mean when we refer to “capitalism”? Many authors merely consider that capitalism is “any aspect of our current economic system”. For example, they mistake capitalism for the market economy. Markets are a system of distribution and circulation of products, operated by merchants, and resting on mercantile profit. It may exist in economic systems that are in no way capitalistic: feudalism, for instance. Other authors mistake capitalism for liberalism, a political doctrine that, according to its proponents, seeks to optimize the role played by the state in our societies, but actually aims at reducing the role of the state as much as can be.

Of course, today’s economic system combines capitalism, market economy and liberalism. Nevertheless capitalism has some specifics: it is an economic system dominated by the capitalist, i.e. the holder of capital. The capitalist is that person who temporarily parts from his or her capital at a price: the payment of interest at periodic intervals, taking place until the loan’s “maturity” has been reached: the contractually determined time of refund.

Let’s consider the typical circumstances these days of a big corporation. Initially, the capitalists or investors vie with the company executives for the surplus: that is, the additional wealth that was created through the combination of various elements: 1) raw materials and natural forces (the sun, the rain, the wind… ); 2) a quantity of work, of a certain quality; 3) capital constituting advances for the production process. Then, in a second step, once the capitalists have been compensated, company executives vie with their employees for the remainder of the surplus.

In these interactions between three types of actors, the domination of one group over another is revealed by the fact that the dominant will present its domination as a given without any risk of being contradicted: “It is in the nature of things, says the capitalist to the executive, that I determine the share that comes to me (the interest rate I demand), the rest is for you to take.” Milton Friedman, high priest of accepted wisdom in financial matters, stated bluntly that the first duty of a company is to maximize the wealth of its shareholders. And the same goes when the executive addresses his employees: “It is in the nature of things that I determine the level of your wages”, he states peremptorily.

Interest payments, the loan’s reward, add up to the wealth the capitalist already owns, and become in turn available for lending. Consequently, capitalism is characterized by an inescapable dynamics of concentration of wealth. Which is also its Achilles’ heel: once a particular level of concentration of wealth has been reached, the machine gets jammed, until it stops. We have seen such moments over the last hundred years: in 1929 and 2008.

Capitalism recovers once the concentration of wealth, the source of crises, has been diluted through a more homogeneous distribution of it. The only voluntary method known for such a redistribution is taxation of wealth proper, amputating the part which is in excess. Any tax system content with taxing only capital gains delays the day of reckoning when excessive concentration of wealth will force once again the economy to a stop. Wealthy people use their wealth to promote their views gaining acceptance, which explains why redistributive imposition is never implemented and why one day or other brutal means of redistribution of wealth are ultimately turned to. War destroys wealth and ensures its redistribution through an overall leveling down. Revolutions confiscate the wealth of propertied classes to redistribute it among the least affluent. The capitalist machine, revised to a smaller or larger extent, then starts over.

To escape this vicious circle, a better understanding of the physiology of capitalism is needed, which requires that we grasp the true nature of capital. In naive concepts of the economy, capital is a substance displaying the miraculous power of growing by itself. For Karl Marx, capital is “crystallized” labor: wealth that accrued through despoilment of workers. This definition is however restrictive: it excludes for instance from capital ore within the depth of a mine, to which Marx merely assigns a theoretical or potential “use value”. Wouldn’t it be preferable to define capital (as I’ve had the opportunity to recommend) [1] as “a resource which is lacking where it is needed, and which has to be rewarded if provided – whether we’re talking here of a productive or a consumptive process?

Defined in this way, capital is neither a miraculous substance, nor crystallized work: it simply happens to be what is missing where it belongs as a consequence of a particular definition (which will certainly be regarded one day as “extremist”) of private property. In this sense, the ore in the mine, should someone have been granted the right to say about it: “This is mine!”, constitutes by itself “capital”. Capitalism then is nothing but a particular shortcoming displayed by some economic systems: those where, as a consequence of a specific definition of private property, resources are artificially lacking at the location where they are useful, and where, therefore, the economic machinery constantly tends to seize up, perhaps unpredictably, but each time by the same implacable logic of an excessive concentration of wealth.

[1] Jorion, Paul, Le capitalisme à l’agonie, Paris: Fayard, 2011, pp. 53-60.