The inherent flaw of capitalism

[Little John]

According to Marx, capitalism contains the seeds of its own destruction. What he was essentially getting at is that the endless competition between industrialist bosses would inevitably lead to a collapse of their customer base. This, in turn, would lead to civil unrest and, eventually, revolution.

The reason for the above is the need for profit. In its most essential form, profit may be defined as a situation whereby you exit an economic transaction with more resources than when you went in. In order for anyone to extract a profit, a loss must be incurred by someone, or some thing, somewhere else. Either the supplier of the raw materials makes a loss, or the manufacturer makes a loss, or the retailer makes a loss, or the customer makes a loss, or the workers all the way up the production chain makes a loss. Someone or something has to make a loss. The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Growth is the only thing that has allowed capitalism to paper over this fundamental flaw in its very heart and so allow it to last for as long as it has. Which, in historical terms, is not very long at all. This is not to say that any system of human organisation would not have run up against the same resource buffers. It's just that capitalism has proved to be very efficient at getting us here. In this sense, whilst resources are available to enable growth to occur, the "loss" is incurred by the Earth itself. Now that growth is no longer physically possible, the days of win/win capitalism are over. In a static or contracting economy all profits must be balanced with losses.

Or, to put all of the above more succinctly: Capitalism does not work in a static or contracting economy unless one is prepared to accept considerable levels of bankruptcies/social unrest etc. Fractional reserve banking (FRB) stimulates and amplifies economic growth by borrowing from the future and so avoids, for a time, the inherent flaw in capitalism. The earth has finite amounts of easily accessible industrial resources eventually resulting in a situation where growth has stopped. Capitalism's inherent flaw is exposed.

I need to expand here, on a subsidiary, but very important factor. That of fractional reserve banking. FRB is a financial process whereby if I go to a bank and borrow money from them I must pay it back with the monetary fruits of my own future productive activities. The money that the domestic bank lent to me, they also borrowed from a commercial bank. The commercial bank lent that money into existence. However, they only did so on the back of knowing that they can go to the central bank, after-the-fact and make good their lendings. Thus, ultimately, central banks/commercial lenders decide how much is lent into existence to you and me based on an assumption of how much productive activity will be happening in the future such that the lending can be repaid. Of course, the reality of how the credit trickles down through the system is far more tortuous and indirect than the schematic, above. But, in principle, this is how our FRB "money" supply grows.

FRB, in the above conceptualisation, may be seen as borrowing from the future. Or, if you prefer, FRB is a form of the lending of the future to today. The semantics of the description matter less than the actuality of the process. FRB has been yet another weapon in the armoury of capitalism whereby the losses incurred today can be papered over. In FRB's case, by drawing down profits from the future. Thus, economic growth is accelerated under an FRB system of money creation.

However, there is a fundamental truth we all know in our guts and which science has merely formalised. Namely, that there is no such thing as free lunch. As long as there are a large amount of resources, we can pretend, for a while, that there is. Once we hit the limits of those resources, though, FRB stops working as a consequence of the future failing to honour the FRB promises of today. At that point, we get economic collapse (the current crisis is the beginning of that collapse). From now on in, in order for profits to be maintained, someone has to lose for someone else to gain.

Perpetual economic growth is over. A money supply that is increased over time via FRB credit is over. Capitalism is over. The future will be either some form of socialism or a return to serfdom for the majority

[DominicJ]

So, your 16 and studying politics in college?

Marx sauid a lot of things, America is still standing, the Soviet collapsed years ago.

Firstly, you dont understand profit.
Probably because, like Marx, you believe value is fixed.

Trade happens because EVERYONE profits, if everyone didnt profit from a trade, the trade would not happen, becase one partner would pull out.

A man with a well and nothing else will die in a week.
A man with a crop field and nothing else will die in three days.
If one man sells water for food, and the other sells food for water, both profit.

The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

In what way is that a paradox?

If a product requires 10 units of wood, 6 units of steel, 4 units of labour and 6 units of petrol, and an inventor creates a new process that creates the same product, but uses only 3 units of petrol, you would be cheering about three saved units of petrol.
So if he created a new process that requires only 2 units of labour, why is that not also good?
Its frees up a valuable resource for other purposes.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Currently, 3% of the UK's population is employed in agriculture, and we are 60% self sufficient in food.
Previously, more than 70% of the population was employed in agriculture.
People invented new processes and new machines that used less labour, and those newly unshackled labours were free to work in other industries.

Growth is the only thing that has allowed capitalism to paper over this fundamental flaw in its very heart

I think you misunderstand, the flaw creates the growth, growth doesnt hide the flaw.

Capitalism does not work in a static or contracting economy

Do you even know what "capitalism" means?

You do not understand Fractional Resevre Banking, it does not work as you say, the correct fucntion has been explain many time on here.
Banks lend out a Fraction of their deposits, and keep a fraction in reserve.
Its a very simple system.
You lend, ie "deposit", the bank £100
The Bank lends £95 to someone else.
They dont "create" £95. That is why bank runs happen.
If Northern Rock created new money to lend out, why would it not be able to pay back everyone who wanted their money back?

Socialist states also use fractional reserve banking.
As does Communist China.

[biffvernon]

Indeed, Steve.

Your phrase "FRB is a form of the lending of the future to today" puts the position rather politely. Since the good folk of the future have not yet given their permission for this loan it would be better described as a theft. A rather larger theft that that of the street kids looting the trainers and booze but the scales of justice are loaded in favour of those who profit from usury and against the hoodie.

[Little John]

So, your 16 and studying politics in college?

Marx sauid a lot of things, America is still standing, the Soviet collapsed years ago.

Firstly, you dont understand profit.
Probably because, like Marx, you believe value is fixed.

Trade happens because EVERYONE profits, if everyone didnt profit from a trade, the trade would not happen, becase one partner would pull out.

A man with a well and nothing else will die in a week.
A man with a crop field and nothing else will die in three days.
If one man sells water for food, and the other sells food for water, both profit.

The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

In what way is that a paradox?

If a product requires 10 units of wood, 6 units of steel, 4 units of labour and 6 units of petrol, and an inventor creates a new process that creates the same product, but uses only 3 units of petrol, you would be cheering about three saved units of petrol.
So if he created a new process that requires only 2 units of labour, why is that not also good?
Its frees up a valuable resource for other purposes.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Currently, 3% of the UK's population is employed in agriculture, and we are 60% self sufficient in food.
Previously, more than 70% of the population was employed in agriculture.
People invented new processes and new machines that used less labour, and those newly unshackled labours were free to work in other industries.

Growth is the only thing that has allowed capitalism to paper over this fundamental flaw in its very heart

I think you misunderstand, the flaw creates the growth, growth doesnt hide the flaw.

Capitalism does not work in a static or contracting economy

Do you even know what "capitalism" means?

You do not understand Fractional Resevre Banking, it does not work as you say, the correct fucntion has been explain many time on here.
Banks lend out a Fraction of their deposits, and keep a fraction in reserve.
Its a very simple system.
You lend, ie "deposit", the bank £100
The Bank lends £95 to someone else.
They dont "create" £95. That is why bank runs happen.
If Northern Rock created new money to lend out, why would it not be able to pay back everyone who wanted their money back?

Socialist states also use fractional reserve banking.
As does Communist China.

No. I'm 48 and I'm a teacher, amongst other things.

Since the points you have made appear to be addressing what you think I have written, as presumably read through the prism of your own predjudice, there is sadly little for me to respond to.

[Little John]

Indeed, Steve.

Your phrase "FRB is a form of the lending of the future to today" puts the position rather politely. Since the good folk of the future have not yet given their permission for this loan it would be better described as a theft. A rather larger theft that that of the street kids looting the trainers and booze but the scales of justice are loaded in favour of those who profit from usury and against the hoodie.

yep

[DominicJ]

The reason for the above is the need for profit. In its most essential form, profit may be defined as a situation whereby you exit an economic transaction with more resources than when you went in. In order for anyone to extract a profit, a loss must be incurred by someone, or some thing, somewhere else

I demolished this, which is the central part of your arguement.

However, if you feel both the well owbner and the field owner dont profit by selling each food/water, theres not much to argue....

[Little John]

So, your 16 and studying politics in college?

Marx sauid a lot of things, America is still standing, the Soviet collapsed years ago.

Firstly, you dont understand profit.
Probably because, like Marx, you believe value is fixed.

Trade happens because EVERYONE profits, if everyone didnt profit from a trade, the trade would not happen, becase one partner would pull out.

A man with a well and nothing else will die in a week.
A man with a crop field and nothing else will die in three days.
If one man sells water for food, and the other sells food for water, both profit

.

Ok dominic, I'm going to do this once. However, any more of the silly ad homs, and it will be the last time:

On your first points, above, you are confusing free-trade with capitalism,. They're different things. Free trade that is not based on capitalist profit but is based on the genuine free exchange of goods and services is naturally a good thing. Genuine free trade, however, is a rare and beautiful flower.

The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

In what way is that a paradox?

If a product requires 10 units of wood, 6 units of steel, 4 units of labour and 6 units of petrol, and an inventor creates a new process that creates the same product, but uses only 3 units of petrol, you would be cheering about three saved units of petrol.
So if he created a new process that requires only 2 units of labour, why is that not also good?
Its frees up a valuable resource for other purposes.

Your argument only holds water so long as new innovations are possible leading to new employmenr prospects for the displaced workers, in turn maintaining the customer base. New innovations are only possible as long as there is ever increasing access to energy and other industrial resources. So, as I was saying in my previous post, this works only so long as growth is maintained. As soon as it stops, however, the flaw in your reasoning is exposed.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Currently, 3% of the UK's population is employed in agriculture, and we are 60% self sufficient in food.
Previously, more than 70% of the population was employed in agriculture.
People invented new processes and new machines that used less labour, and those newly unshackled labours were free to work in other industries.

Again, your reasoning holds only so long as the earth itself bears the loss. As soon as it can't (in other words, as soon as grwoth is no longer possible), your argument falls apart.

Growth is the only thing that has allowed capitalism to paper over this fundamental flaw in its very heart

I think you misunderstand, the flaw creates the growth, growth doesnt hide the flaw.

Capitalism has accelerated growth. This, in turn has accelerated capitalism's demise. It's called a paradox Dominic.

Capitalism does not work in a static or contracting economy

Do you even know what "capitalism" means?

Yes

You do not understand Fractional Resevre Banking, it does not work as you say, the correct fucntion has been explain many time on here.
Banks lend out a Fraction of their deposits, and keep a fraction in reserve.
Its a very simple system.
You lend, ie "deposit", the bank £100
The Bank lends £95 to someone else.
They dont "create" £95. That is why bank runs happen.
If Northern Rock created new money to lend out, why would it not be able to pay back everyone who wanted their money back?

Socialist states also use fractional reserve banking.
As does Communist China.

You are referring to domestic lenders who have capital ratios to maintain. Central banks and commercial banks do not have these ratios. Or, at least there is no legal requirment. However, the money that the domestic lenders replensish their ratios with comes from commercial lenders which in turn is backed up by central banks. Thus, making the capital ratios of domestic lenders an illusory safety brake on the system of money creation.

And yes, I am aware that FRB is used by socialist states. I did not say that it was a tool soley used by capitalist systems.

[UndercoverElephant]

According to Marx, capitalism contains the seeds of its own destruction. What he was essentially getting at is that the endless competition between industrialist bosses would inevitably lead to a collapse of their customer base. This, in turn, would lead to civil unrest and, eventually, revolution.

The reason for the above is the need for profit. In its most essential form, profit may be defined as a situation whereby you exit an economic transaction with more resources than when you went in. In order for anyone to extract a profit, a loss must be incurred by someone, or some thing, somewhere else. Either the supplier of the raw materials makes a loss, or the manufacturer makes a loss, or the retailer makes a loss, or the customer makes a loss, or the workers all the way up the production chain makes a loss. Someone or something has to make a loss. The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Except it hasn't worked out that way because of the globalised economic system. The most profitable way for western manufacturers to make a profit is to get Chinese people to do the work. Unfortunately this means their customers (the British people) don't have enough jobs, which destroys their capacity to spend money.

Perpetual economic growth is over. A money supply that is increased over time via FRB credit is over. Capitalism is over.

Maybe. I think the fiat money system and FRB is over. Does this mean capitalism is definitely over?

The future will be either some form of socialism or a return to serfdom for the majority

Maybe there are other alternatives?

[Little John]

According to Marx, capitalism contains the seeds of its own destruction. What he was essentially getting at is that the endless competition between industrialist bosses would inevitably lead to a collapse of their customer base. This, in turn, would lead to civil unrest and, eventually, revolution.

The reason for the above is the need for profit. In its most essential form, profit may be defined as a situation whereby you exit an economic transaction with more resources than when you went in. In order for anyone to extract a profit, a loss must be incurred by someone, or some thing, somewhere else. Either the supplier of the raw materials makes a loss, or the manufacturer makes a loss, or the retailer makes a loss, or the customer makes a loss, or the workers all the way up the production chain makes a loss. Someone or something has to make a loss. The above leads to the paradox of a situation where the ideal for any capitalist would be to do away with all workers and automate all production since this would prove to be the most profitable arrangement.

However, those workers are also their customers. Thus, in doing away with them, they have destroyed their customer base's capacity to spend money on buying their products.

Except it hasn't worked out that way because of the globalised economic system. The most profitable way for western manufacturers to make a profit is to get Chinese people to do the work. Unfortunately this means their customers (the British people) don't have enough jobs, which destroys their capacity to spend money.

Perpetual economic growth is over. A money supply that is increased over time via FRB credit is over. Capitalism is over.

Maybe. I think the fiat money system and FRB is over. Does this mean capitalism is definitely over?

The future will be either some form of socialism or a return to serfdom for the majority

Maybe there are other alternatives?

Capitalism is over because it inevitably leads to the concentration of wealth in the hands of a small number of people. This is fine so longs as "perpetual growth" allows them to keep throwing enough crumbs at the rest of the population such that they don't get too restless.

Given the welfare bribes that have been handed out to an underclass in this country in order to keep them sweet whose work has been offshored to Chindia, it is hardly surprising that they are kicking off now those bribes are beginning to be withdrawn.

In other words, no so fine once growth stops. At which point that small number of people end up hanging from lamposts.

Or, they don't and we get a return to sefdom.

[Ludwig]

So, your 16 and studying politics in college?

Marx sauid a lot of things, America is still standing,

Only just, or hadn't you noticed?

the Soviet collapsed years ago.

Firstly, you dont understand profit.
Probably because, like Marx, you believe value is fixed.

Trade happens because EVERYONE profits, if everyone didnt profit from a trade, the trade would not happen, becase one partner would pull out.

That's why capitalism doesn't work without growth or the prospect of growth. Real growth - growth in supply of goods and materials, not just the printing of money. Without real growth, one person's profit[1] is another's loss. A child can see this. But economists obfuscate the fact with all sorts of confusing and convoluted arguments.

[1] In the sense of the real value of what one can buy with the profit - everyone's profits may nominally go up in a no-growth environment, but only if by less than inflation.

[DominicJ]

Steve
You clearly do not know what Capitalism means.

I'm bored, rant away little hippies, plan our future economy to your hearts content.

[Mean Mr Mustard]

Ok dominic, I'm going to do this once. However, any more of the silly ad homs, and it will be the last time:

Once again, condescending Dom has failed to engage in polite discourse, as required on this forum. Don't bother next time, Steve.

Interesting and comprehensive points you have made about intergenerational imbalances, as if prospects weren't bad enough already.

[Bandidoz]

Is it not the case that the teachings of Marx in French universities lead to spirited leaders such as Pol Pot?
http://en.wikipedia.org/wiki/Khmer_Rouge

[Mean Mr Mustard]

Is it not the case that the teachings of Marx in French universities lead to spirited leaders such as Pol Pot?
http://en.wikipedia.org/wiki/Khmer_Rouge

Not to mention Mugabe...

[biffvernon]

Is it not the case that the teachings of Marx in French universities lead to spirited leaders such as Pol Pot?

From which one should not deduce that all French educated Marxists become become guilty of genocide.