A short guide to capitalism

Capitalism can be defined as a world-wide economic system involving commodity-production by wage-labour, driven by the imperative to make profits and to accumulate them as more and more capital.

Generalised commodity-production, nearly all wealth being produced for sale on a market: ‘Commodity’ is a term inherited by Marx from the Classical Political Economists Adam Smith and David Ricardo who used it to mean an item of wealth produced for sale on an ‘anonymous’ market, that is without knowing in advance who the buyer will be. This existed before capitalism, but only on the margins. With capitalism, the production of commodities becomes general with nearly all items of wealth produced for sale. As such they have an ‘exchange value’, or, in money terms, a price, which is ultimately related to the amount of labour that needs to be spent to produce them from start to finish.

The investment of capital in production with a view to obtaining a monetary profit: Capital, as a sum of money used to make more money also existed before capitalism but, once again, only marginally, as with moneylenders and long-distance merchants who bought cheap and sold dear. In neither case, however, was the money invested in production. This only began when certain conditions arose, such as productive techniques involving large-scale operations, the accumulation by a few of wealth in the form of money, but above all, the creation of a landless proletariat. Then, money-capital seeking a profit came to be invested in the production of commodities by hired wage workers. So, capital is a sum of money invested in production with a view to profit, or a sum of exchange values used to produce a greater amount of exchange values. Marx described it as ‘self-expanding value.’

The exploitation of wage labour, the source of profit being the unpaid labour of the producers: That most production of wealth today is carried out by people paid a wage or salary is not controversial. It’s obvious, an everyday experience. This reflects the division of society into a minority who, together, own/control all the means of wealth production, and the rest who, excluded from such ownership, are forced by economic necessity to try to sell their working skills for a living. What is perhaps not so obvious is that this involves ‘exploitation’. The word is associated with low wages and bullying overseers, but this is not the sense used here. Here, it refers to the fact that, as wealth can only be produced through work, a non-work income derived from production, such as profits are, can only come out of what those who work have produced. In more technical terms, productive workers produce new wealth with a value greater than that of their working skills, the difference being ‘surplus value.’

The regulation of production by the market via a competitive struggle for profits: There is not much controversy over this either, but two questions arise. First, what are the units of competition? They are capitals – sums of money invested in production with a view to profit – but embodied in ‘enterprises’. An enterprise can be an individual owner, a joint-stock company or corporation, a nationalised industry, even a workers’ co-operative; the institutional form of the enterprise is not important as far as competition is concerned. The second question is: who are enterprises competing with? It might be thought that competition is only between enterprises in the same line of business, but in fact it is much wider than this. All enterprises are ultimately competing against each other to draw as much profit as they can from the pool of new surplus value produced in all lines of business. Due to the tendency of all capitals to make the same rate of profit, while surplus value is created in production it is won on the market. This gives rise to the illusion shared by those in charge of enterprises that this is where profits originate and that they are ‘the wealth producers’. In fact, business acumen in the competitive struggle for profits affects only how much profit a particular enterprise gets, not where it comes from.

The accumulation of capital out of profits, leading to the expansion and development of the means of production: Capitalism is a profit system. Profit is what makes it go round. But it is not a system of profits for the consumption of the owning class. Certainly, they get a share of profits to enjoy themselves and lead a life of luxury, but to maintain their privileged lifestyle is not what capitalism as an economic system is about. It is not driven by their greed. The system works in such a way as to compel the re-investment of most profits as more capital, as more money invested in production. Marx remarked that the battle of competition is fought by the cheapening of commodities. The way enterprises do this is by improving productivity so that the unit cost of their commodity falls (more of them produced in the same period of time), so improving their competitiveness. The main way they do this is by installing new, more efficient machines, paid for out of profits. So, capital comes to be accumulated as more and more means of production, which also leads to enterprises becoming larger and larger. Growth of both productive capacity and production, under pressure of the competitive struggle for profits, is built-in to the system and imposes itself as an external force on those in charge of enterprises. This is what drives capitalism. If an enterprise didn’t re-invest its profits but disbursed them all for the personal consumption of its shareholders, then eventually it would lose out in the battle of competition and go bust. Capitalism is a system of profit for capital accumulation, not simply a system of production for profit.

A single world economy: You often hear talk about ‘the British economy’, ‘the German economy’, ‘the American economy’ and so on, which can suggest that capitalism is a collection of national capitalist economies. But it’s not. It’s a single economic system that now dominates the whole world. So-called national economies are merely parts of its domain that fall under the political jurisdiction of one or other of the 190 or so states into which the world is divided. Capitalism in one country is just as impossible as socialism in one country. Quite apart from when they run their own enterprises (nationalised industries), states, along side enterprises, are actors in the world capitalist system in their own right. They act to try to ensure that as much of world surplus value finds its way as profits to enterprises operating from within its borders, by helping to procure and protect overseas markets, investment outlets and sources of raw materials. But what they can do here is limited by the need to avoid undermining the competitiveness of enterprises operating from within their borders. States, too, have to submit to the economic imperatives of capitalism.