Capitalism, Automation, Crisis

We define capitalism as a form of economy which is based on private ownership of the means of production and within which commodities are primarily produced for the purpose of exchange. Within capitalism humans are formally free to sell their labour or to refrain from doing so.

Property, Freedom of Contract and Exchange

Capitalism is based on the principle of property. Private property is a legal institution which differs from mere possession in that it grants the holder of private property not only the right to immediate use but also to exchange under conditions of her choosing. Private property and accompanying freedom of contract lead to the consequence that every transaction formally happens with the agreement of both parties. Because these institutions and laws are human-made, these foundations of capitalism can only be ensured by an institution which is superior to the single participants of the market and which mandates the observance of the laws; for instance, by punishing theft or forcing the signatories of a contract to observe its conditions etc. This function is exerted by the state.

The state's enforcement of private property rights and freedom of contract allow for exchange to take place. The prevalent form of exchange within capitalist society is to buy or sell commodities using money, a universal medium of exchange. Money is a necessity for the effective organisation of exchange in a complex economy.

Production and Wage Labour

Commodities like bread, smartphones or kitchenware can only be exchanged once they have been produced. For this purpose, a human workforce is needed, but also means of production like resources, factories, machines or fertile land. However, most of the population don’t own such means of production. To provide the essential things for their lives, they are forced to sell on the so-called “labour market” the only thing that they have, their ability to work. These people are the working class. The owners of the means of production, in Marxist terminology called “capitalists”, or in everyday language “entrepreneurs”, buy this labour. In exchange for a salary the workers produce the commodities by using the means of production. The level of the wages is negotiated on the free market, but when there are more workers than jobs, the capitalists have the upper hand in this negotiation. They can arbitrarily decide on the level of the wages, since enough unemployed people will be willing to apply for any job. Disregarding inventions from the side of the state, like a minimum wage etc., a lower limit on wages is only set by the amount of money that the workers need to keep themselves alive and able to work. Marx calls this lower limit the “reproduction cost of labour”. Negotiating the length of the workday, capitalists are also in the better position. Free competition ultimately entails that workers have to work the longest possible hours for the lowest possible wage.

At this point two objections might be raised: First, readers might point out that in countries like the United Kingdom, Ireland or Germany, workers earn wages which are much higher than the cost of reproduction. In these countries, labour regulations are in place, like the 8-hour working day in Germany. But precisely this is the point; using the tools of organised class struggle, workers could achieve some changes to the law which partly improved their economic situation. These improvements are not the result of the economic principles of capitalism, but of public or social interventions that workers had to fight for.

The second objection reads as follows: When capitalists have the upper hand, they might be able to press down wages, but can we really conclude that all of them will end up doing so? Isn´t the problem simply that the capitalists are just too greedy? Wouldn´t the wages be higher and the working hours shorter if the capitalists were just more kind-hearted people? In the following, we will show how this view ignores the reality of capitalism.

Capital and Competition

Money becomes capital when it is used in a way that leads to its accumulation. In the sphere of production this first requires the purchase of means of production and labour. By using these factors goods are produced in order to sell them at a profit. But where is this profit coming from?

Marx divides the used capital into three parts: The constant capital (c) which is used for the means of production, the variable capital (v) which is the capital used to pay wages and the surplus value (s), which represents the yield. If we subtract the variable and the constant capital from the total capital C, we get the surplus value: C = c+v+s.

To give an example: We assume that one pair of shoes costs 30 €. Moreover we assume that the machine which is needed to produce the shoes costs 1000 € and it can produce on average 100 pairs of shoes until it has to be exchanged. Therefore, the costs for the machine amount to 10 € per pair of shoes. For the material for the shoes we calculate 5 € per pair, so the constant capital amounts to 15 €. One worker can produce one pair of shoes per hour with this machine at a wage of 5 € per hour. If we subtract now the constant (10 €) and the variable (5€ ) capital from the price (30 €) we get 10 € surplus value. Because of the ownership situation these 10 € are going to the capitalist.

The surplus value can be used in one of two ways: Either for luxury consumption by the capitalist class, or it can be reinvested in the economic process. In the following we will show that in the medium- to long run, the economic survival of the capitalist depends on the amount of profit that can be reinvested. The need to maximize profit arises as a result of this necessity to invest. This is one reason why the capitalists cannot simply pay higher wages to their workers.

In simple terms, we can differentiate between two forms of investment. Extension investments mean that a company, for instance, builds new factories or hires more workers so that the sum of profit can be expanded. The proportion of the surplus value compared to the total cost of production (Profit Rate = s/(c+v))stays constant in that case, but the sum of the earnings rises proportionally to the expenses. That means that more capital can be utilized and so more profit is gained. But those extension investments are limited:

On the one hand, more jobs are emerging so the demand for labour is increasing, which leads to increasing wages and ultimately to lower profit rates. On the other hand, the demand for the produced goods are limited, which leads to difficulties selling the produced commodities. At this point another form of investment enters the game. The development of the productive forces leads to the emergence of better machines and production processes so that the same amount of a commodity can be produced using less labour time. This is called automation. Let’s reconsider the previous shoe example, but we assume that a new machine has being developed that allows the workers to produce the same quantity of shoes in half of the time. To keep it simple we assume further that the new machine has the same price as the old one. The costs for the machine (10€) and for the material (5€) are the same, but the variable capital is decreasing because, assuming the same hourly wage (5€), two pairs of shoes can now be produced in one hour, so only 2,50 € has to be added to the cost of production of one pair of shoes. The profit now stands at 12,50 €, an increase to before. Those enterprises which first make this kind of investment can earn an additional profit, in our example the 2,50 € per pair of shoes. Once the new technique has spread, the price of the commodity decreases. Those who are still producing with the old machines earn less surplus value which means that there is less money left for price competition and investment. This vicious circle deepens until the costs of production are higher than the price of the commodity.

Thus, in the end, all companies are forced to buy the new machine. Otherwise they can no longer sell their products at profit and run bankrupt. Since capitalists need money, because they are always forced to buy the newest and best machines, they are dependent on maximising surplus value. They have no other choice than to strive for maximum profit.

As we have seen right now, the main problem leading to the dumping of wages is not the greed of the owning class, but the compulsion of profit to allow for new investment. This implies that a personalised or moralising critique of capitalism is inappropriate. The problem of capitalism is a result of the the structures of capitalism and not the immoral behaviour of individuals. Although the capitalist class, as opposed to the working class, gains a material profit from the capitalist system, its members are not free in their decisions but heavily restricted by the rules of competition under the condition of the market and private property. That does not mean that the capitalists have no space for free decisions at all, but this space is very limited.

We have shown that capitalism systematically and necessarily leads to low wages and long working hours. This means that many people around the world cannot satisfy their basic needs or have to work until exhaustion. These conditions are not the result of underdevelopment, but of the social institution of private property.

Progress and Inefficiency

All of that said, capitalism has accelerated technological development massively. Especially the competition between individual capitalists for additional profit used to push the acceleration and progress of development. Today, however, capitalism has lost this function: It´s no longer a motor of progress, but an obstacle to it.

The capitalist form of production did not only lead to the invention of more effective methods of production and new products but also to new forms of networking and communication. While the technological progress in the early 19th century was driven by decentralised capitalist competition, the current situation is different; today research requires much more resources and at the same time it is much easier to coordinate. Individual inventors are no longer the ones who are selling their ideas for their own goods to private companies, but research teams which are being paid by multi-billion-dollar companies are the ones pushing this progress. But employed researchers could also be sustained in a society that is not based on private property. Nowadays the patent law and so-called “intellectual property” cause nothing but inefficiency; when, for instance, Apple invents the best ventilation for laptops and the other producers cannot use it because of a patent, that does not constitute a rational utilization of productive capacities. The chemical industry even develops, at huge cost of resources and labour, new procedures for the production of the same things, just to elude patent laws.

There are innumerably further examples of the fundamental inefficiency of the capitalist mode of production, one of them being “planned obsolescence”: Headphones for instance are being constructed in a way that they break after an unnecessarily short period of time, just to force the customers to buy new ones. The advertising industry is a sector of the economy which contributes absolutely nothing to social wealth but nevertheless consumes a significant amount of labour and resources. Furthermore, it makes no sense that products like MP3-files, movies or computer games are not freely made available to everyone. They are being artificially run short.

Crisis and Surplus Population

Capitalism is not only an inhuman and inefficient system, but it also creates the conditions for its own downfall. In the following, we will explain the so-called “unfolding contradiction” of the mode of production that continuously leads to dramatic economic crises.

Since capitalists are, as we have discussed above, forced to produce more efficient machines all the time, the proportion of the constant capital increases compared to the variable capital. Marx called this ratio the “organic composition of capital”. When, due to the usage of new machines, more products are being produced in a shorter amount of time, the number of workers which are needed to produce the same number of commodities decreases. The proportion of the wages in relation to the product decreases, jobs disappear, and people lose the ability to sustain their lives. This leads to the demand for commodities to decline and enterprises can no longer sell their products. Companies go bankrupt and the crisis develops its own vicious cycle.

The banking sector plays a significant role in the crisis. The Finance sector is not the driving motor of the crisis, but it reacts to the problems of the real economy that we explained above. Money, that cannot longer be profitably invested in the productive sector, is moved into the banking sector instead, where it creates fictional profits (fictitious capital) and so maintains the illusion of a well-functioning valorisation of capital. Moreover, credit given out by the banking sector artificially creates demand. Both together can delay the economic collapse for a short time, but as we saw once again in the crisis 2007/08, the bubble will always burst sooner or later.

Many scientists argue that 40-60% of the jobs will disappear in just the next 20 years because of automation. Robots and advanced computer programs may not only make redundant low paid jobs, but will also affect jobs in the administrative and technical sectors. We thus have to assume a worsening of the dynamic of crisis. If capitalism cannot be abolished, soon a large part of the global population will no longer be able to sustain their means of subsistence. Capitalism yields a surplus population, which can no longer be economically valorised.

Our Position

We have seen that the capitalist system, which is based on the right to private property, is the reason being many social problems: poverty, long working hours and unemployment. Furthermore, this system of production gives rise to a number of inefficiencies and a crisis-tendency which destabilizes the whole economic system and yields an unemployed surplus population. Capitalism leads to the creation of unnecessary misery.

The possibilities of reformism, the attempt to achieve improvements within the capitalist economy, are very limited, which is why we strive towards the complete abolition of capitalism. The means of production must be transferred to public authorities. Private property relations, the root of the capitalist system, and consequently the exchange of commodities must be abolished. This doesn't affect personal belongings. The personal toothbrush and other objects of personal use will not be expropriated.

The question of what a well-functioning alternative to the capitalist system might look like will be discussed at another point.