overview of economic systems

What is Capitalism, Marxism, and Post-Capitalism?

Erik Financial Education, Markets, Thoughts of a Mastermind 5 Comments

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This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the third post in this series. Please go back and read the first post on Energy and The Earth is a Closed System, and the second post on What is Money. This post takes a slight turn from these two posts, but are necessary to read to see the thoughts which influenced this post. I’m not an expert – just a regular person trying to find the truth.

When searching for the truth, there’s a lot of information to read, consider, explore, and examine. When talking about money, the environment and economy, and other big picture thoughts, a lot of diving deep is required.

Before going forward with my thoughts on stocks, markets, and other wealth building strategies in this series, I have to take a step back and discuss the current economic system and how we got here. (It would be short-sighted of me to discuss current market conditions, monetary theory, and social and political events without considering past theories)

Over the next two posts, I’m going to be looking at economic systems, banking and monetary theory. In today’s post, we will explore (at a high level), the economic systems and theories of capitalism and Marxism, discuss the current economic and political environment through the lens of these theories, and talk about potential solutions for a sustainable future (guided by a book I read called Post-Capitalism).

An Overview of the Modern Economic System

Before talking about the current economic environment, let’s talk about the economic system in which we live in. Let’s dive into 2 systems (of many… think feudalism, slavery, socialism, communism, etc.) and thoughts which have influenced and formed the current economic system: capitalism and Marxism.

What is Capitalism?

Capitalism is an economic system where private entities own the factors of production. There are four factors of production:

  • entrepreneurship
  • capital goods
  • natural resources
  • labor

The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. An individual owns his or her labor.

The economic system employed in the United States is capitalism.

In a capitalist society, owners look to maximize their profit for their companies, and derive their income from ownership. Individuals work for the owners and are paid an hourly wage or salary.

For Capitalism to work, it requires a free market economy where goods and services are subject to the economic laws of supply and demand: as demand and price have a positively correlated relationship (demand up means prices go up), and supply and price have a negatively correlated relationship (more supply means lower prices).

Capitalism works in this environment because, in theory, multiple companies will compete for profits which will lead to increased efficiency, moderate prices, and efficient production.

In addition to a free market economy, robust capital markets should allow participants to issue, buy and sell stocks, bonds, derivatives, currencies and other commodities.

Political Implications of Capitalism

overview of economic systemsCapitalism is an economic system, but also has political and government implications. Depending on the situation, government involvement can vary from very hands on to very hands off. There are different schools of thought here – I’m going to focus on Laissez-faire economic theory.

The role of the government which employs Laissez-faire economics involves a government which protects a free market and the conditions necessary for capitalism. The government only steps in to prevent monopolies or oligarchies, and also prevents manipulation of information between parties and within markets.

To keep order in the economy and environment, the government should provide a strong national defense and maintain infrastructure.

What works so well in Capitalism is there is an intrinsic reward for innovation and growth: more money and profits for the owners. While Capitalism has seemingly worked for the past 200 years, but that doesn’t mean it doesn’t have it’s flaws or disadvantages.

What is Marxism and Marxist Thought?

In the 1800s, a man by the name of Karl Marx was coming up with his own economic system and theory while studying Capitalism and the economy: Marxism.

I’d like to preface this section by saying something I didn’t realize until after my research. Back in high school when I was learning about economics and world history, we touched on Marxism a little bit, but didn’t dive in. For my learning, it seemed the teacher and classmates had the thought that Marxism was horrible and the same thing as communism. Since that was the case, my logic was I didn’t need to study the theory because it was horrible and therefore probably misguided or wrong.

What I learned in my research is that Marx had some very interesting thoughts and points which had an influence on my thoughts. A lot of Marxist thought surrounds challenging where Capitalism goes wrong – how it ignores social dynamics of a class struggle between workers and owners. It was very interesting to read about Marxism, since Capitalist thought doesn’t talk about this “class struggle”.

While there are quite a few logical fallacies and pieces which turned out to false in Marx’s thoughts, Marxism is a valuable system to study and I’m going to dive in below for us here.

The Issues of Capitalism via Marx

There are a main points that Marx talked about:

  • The Theory of Alienation
  • The Labor Theory of Value
  • The Materialist Conception of History

These points came about through a few questions posed by Marx. In his eyes, it wasn’t enough just to hypothesize about the workers and owners in general, but to try to look through the eyes of those individuals and work his way up.

The questions were as follows (and with respect to the order above):

  • How do the ways in which people earn their living affect their bodies, minds and daily lives?
  • What is the effect of the worker’s alienated labor on its products, both on what they can do and what can be done with them?
  • How did capitalism originate, and where is it leading?

Let’s dive in.

The Theory of Alienation

Let’s talk about the Theory of Alienation first. Alienation of the worker occurs in a Capitalist society in a few ways:

  • The worker is alienated from his or her productive activity – he or she plays no part in decided what to do or how to do it. Instead, the owner sets these conditions of work, the speed of work, and even determines when the worker can work (through hiring and firing).
  • The worker is alienated from the product they are creating: they have no control or what is made and what happens to it.
  • The worker is alienated from other human beings. Over time, the workers and owners become split as owners continue to use their control over the worker’s activity and product to further their own product.  But, even with in the working class, there’s alienation as people are trying to survive the best they can.
  • Finally, the worker is alienated from something so near and dear to human beings: creativity and community. Since labor is predetermined, creativity is taken away and humans lose out on developing this skill over time in their work.

Through Capitalism, Marx argues, that when looking at The Theory of Alienation, a worker ends up being seriously diminished who is physically weakened, confused, isolated, and virtually without power. The products they produce are outside of their control, and the distribution is largely unknown as well.

Through this, the world ends up with a weakened working class which was enabled through the workers: they needed a wage, and exchanged their time for money.

The Labor Theory of Value

Now, let’s talk about another point Marx talked about: the labor theory of value.

In particular, Marx was concerned with the value of the products produced with regards to the “class struggle” and economy. Marx agreed with traditional economists that the value of any commodity is the result of the amount of labor time that goes into its production.

What is interesting about capitalism is that since the worker exchanges his labor for money, and is separated from the product he or she is producing, then as a result, at the end of the day, the worker cannot buy the same amount of product.

Stated a little more clearly, a worker to survive will sell their labor power, but as an after effect of alienation, will end up being able to buy back only a portion of what they’ve created in the marketplace.

Over time though, as efficiencies are found and implemented, a surplus of value is created through the use of machines and other methods. Through these efficiencies, less workers are needed, the profits increase for the owners, and the class divide increases.

Paradoxically, this surplus is also a weakness, as to sustain growth, the workers need money to continue to buy up the products. Under pressure from the constant growth of the total product, the capitalists periodically fail to find new markets to take up the slack. This leads to crises of “overproduction”, capitalism’s classic contradiction, in which people are forced to live on too little because they produce too much – and crisis occurs.

The Materialist Conception of History

capitalism and marxism

The final question we are going to examine is “How did Capitalism originate and where is it leading?” When looking at this question, Marx sees some contradictions to the general theory of Capitalism with itself.

How did Capitalism originate? Out of the feudalism system, the lords and feudal rights were not beneficial for production and growth, and out of many political battles and uprising of the serfs, capitalism originated.

Now, capitalists had the freedom to pursue and maximize profits, and workers equally as “free” had the freedom to exchange their time for a wage. With these freedoms, technology, productivity and science (in addition to many other things) were able to grow without bound (in theory).

A few things come out of these freedoms which are not obvious to people who study capitalism:

  • First, the goal of maximizing profits will tend to lead to rapid growth when there is not the demand for these products. As a result, frequent crises occur as this growth is not sustainable.
    • Owners buy and create factories, machines, materials, and utilize their workers’ labor power if they believe they can make a profit, no matter the availability of these factors and with little thought for the need of the consumers.
  • Second, a class struggle is inherently a part of this system. The owners have a goal in mind: maximizing profits and securing more power, while the workers have alternative interests: higher wages, safe working conditions, flexible work arrangements, job security, and (some) power.
    • As the owners become more successful, they grow ever more powerful with influence in the state, schools, media, and other public institutions which keeps the workers down – a contradiction as capitalism seemingly should help everyone.
  • Third, the state ends up being a partner to the corporations instead of what is traditionally portrayed by democracy (a political system associated with capitalism); namely, the state is chosen and a servant to the people.
    • The state acts to restrain the
      masses of workers should potentially could be upset in this constant class struggle. This could come through a variety of ways, but it typically will occur from passing and enforcing various laws and providing economic subsidies.

As these contradictions become more prevalent and intense, neither the state or owners can restrain the mass of workers who want more and will act upon their interests to get their fair share of the pie. The process of overthrowing capitalism would lead to a socialist society which would be constructed through democratic planning with the thought to serve social needs instead of maximizing profit.

Eventually, Marx believed that Capitalism would lead to socialism, and if fully actualized, communism. Though some of his thoughts were off base, and while the application of Marxism in various European countries did not work, I do find value from considering his thoughts and looking to see how we can build upon them for a better society.

Capitalism over the past 175 years and Today

The last 150 years, from the 1830s to 2018, the world, and in particular, the United States has seen incredible growth in technology, products and goods, and the average person’s standard of living.

From reading textbooks, you would have thought this has been the greatest period in history, though I’m going to take a little more skeptical position.

Hindsight is 20/20, and I’m going to get into some more of the things which have lead to this in the next post (monetary policy and the economic environment are intimately connected), but looking at present day conditions, there is much to be wanted from many of the “working” class.

In the 1800s and early 1900s, union and organized labor were big pieces in the workplace which kept owners from exploiting the workers for the maximization of profits.

Starting in the 1950s, unions started to decline and as globalization started to occur, a drastic decoupling of wages and productivity occurred (there’s a piece here that is related to monetary policy as well, but again, that’s for a later post).

productivity vs wages graph

Fast forward to today, in the United States, you have a number of people who are not pleased with these statistics and struggling to make ends meet. Many corporations spend thousands and millions of dollars to get laws passed to help profits and instead of passing these profits on to the workers, they instead use them for their shareholders (which is fine, just not good in terms of inequality of the population).

(a slight tangent, it’s important to remember the Pareto principle in terms of the distribution of wealth. Regardless of where the starting point is, 20% of people eventually will have 80% of the wealth)

This post is a discussion about the economic systems in place and I will not take an opinion on the graph above because that’s not the purpose of this post. I’m not going to say, “I’m pissed at this and give me money”, and likewise, I’m not going to say, “Well, those people who can’t get money need better education and to work harder”.

We live in a complex society where there are 100s of different variables at play.

My point here is that for the majority of people in the United States, capitalism isn’t optimal – as seemingly predicted by Marxist thought and taken advantage of through the owners and state.

Let’s not ignore what has happened in the last few years in America: there has been unrest of many people as the stresses of every day life has gotten to them. You see it in the rise of radical leaders all over the world and the protests which seemingly happen weekly. I’m fortunate to have been blessed into a situation where I can write about this and not have to worry about a solid paycheck – but many are not in this position.

What is Post-Capitalism?

At this point, a question comes into my mind: is capitalism working in 2018? What are the alternatives? Could there be a sustainable way to promote growth, achieve prosperity, and share wealth while also having incentives for innovation?

Enter a potential way to fix the problems of today’s world: post-capitalism.

Post-Capitalism is a school of thought which is gaining some traction in the economic community, and also a thought that many people (think Democratic socialists) are going towards but don’t have the entire picture or a rational thought of what it would actually look like.

Post-Capitalism is a theory that I was exposed to through Paul Mason’s book, Postcapitalism. The book was very well received in the media, and I thought it was very interesting to see how Mason took Marxist thoughts and ideas, and looked to see how he could balance Capitalist and Marxist thoughts for a better society and economy.

What are the goals of Postcapitalism?

Mason argues the following should be goals of a post-capitalistic society focused on social good rather than maximizing profits:

  1. Rapidly reduce carbon emissions to stay below 2 °C warming by 2050.
  2. Stabilize and socialize the global finance system.
  3. Prioritize information-rich technologies to deliver material prosperity and solve social challenges such as ill health and welfare dependency.
  4. Gear technology towards minimizing necessary work, until work becomes voluntary and economic management can focus on energy and resources rather than capital and labor.

Mason proposes that these goals could be accomplished:

  • Model policies thoroughly using abundant data before implementing them.
  • Tackle public debt, not through neoliberal privatization and austerity, but partly by closing down offshore banking and by holding interest rates below inflation rates.
  • Promote (partly through state support/regulations) collaborative/co-operative/non-profit forms of work and creative commons production, rather than highly unequal, autocratic and/or rent-seeking business models.
  • Break up monopolies or, where this is impractical, socialize them.
  • Socialize the finance system (via a transitional phase of re-regulating the finance sector).
  • Pay everyone a basic income.

The traditional personal finance and economic conservative inside me is struggling to see how this would be paid for, but after deeper thought, it makes sense to me. I’m someone who tries to consider all sides of a situation and not be tied to my position.

While this has been taken as a Utopian thought by some, there probably is some value in examining this theory in the coming years as things continue to transpire in the United States and abroad in the 21st century.

Concluding thoughts on this post about economic systems

Capitalism is cheered in the United States, as well in many markets around the world, but there are still flaws which are exposed over time.

I’ve touched on a lot here, and there’s a lot more I have to learn, but I hope this has given you some food for thought. The only thing I regret talking about in this post is how energy plays into all of these systems. These systems assume energy is plentiful, which may or may not be true.

In this series, my hope is that you enter and exit with an open mind to ideas, thoughts, and possibilities. Critical thinking is something I value and a principle of mine for personal development and growth. I don’t know if the thoughts of any of the systems Capitalism, Marxism, or Post-Capitalism are the answer and key to a successful economy for all. All I can do is continue to learn, present information on this blog, and look to inspire deep conversations to spur connected thoughts and actions.

I swear that each and every day as I dive deeper and deeper into my research and analysis, I sit here today in some mental state between confusion, enlightenment, clarity and peace, and hunger for more. I’m not an expert (not even close), but am learning more and more and loving my progress.

In the next post, we will dive into monetary policy and talk about banking. Look forward to learning how banks make money, how central banks influence the economy, and some monetary policies which are in place today.

Thanks for reading,

What is Capitalism, Marxism, and Post-Capitalism?

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Comments 5

  1. It would be worth noting Marx was not part of the labor class. Instead he was funded by a industrialist. I do not believe his ideals are workable in our current society where technology advancement is the key to improvement of individual well being. After all while the wage gap has increased over time, one would be hard pressed to argue even the poorest amongst us don’t have a better life then the middle class of 50 years ago. That being said part of Marx’s belief hinges on their being a point where technology advancement plateaus. Ie we’ve invented everything we can and technology does he work for us. Under that world perhaps since motivations to invent improvements in quality of life would no longer occur, thus stagnating the improvement in life of all classes. Then again as diacussed previously I believe we’re a long way from that.

    1. Post
      Author

      Thanks for stopping by FTF. That’s definitely worth noting. I’d say that I don’t agree with Marx’s methods, though it is still valuable to examine differing opinions when thinking and trying to improve my worldview.

  2. Erik

    One alternative that I would like you to explore is social entrepreneurship which I think addresses some of the issues with capitalism. I’m hopeful that more business owners will see the value of not just focusing on profits but also ensuring that they are making a positive impact in society that helps to maintain stable communities where everyone can thrive. Please feel free to check out my website to see how I’m personally addressing this issue by combining my business with a social initiative that I would like to have an impact in which is the area of affordable housing.

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      Author

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