The Transition from Capitalism to Socialism

Blog 20150218

The expansion of the Social Microcosm (Homo sapiens) went hand in hand with the Industrial Revolution and the capitalist economy that fed on that expansion. Up until 1989, the Social Microcosm grew exponentially along with the surpluses generated. It was as if there was no macrocosm at all—resources seemed to be infinite. But that never really was true, as seen from time to time in various places. Globally, the lower fruit has already been picked. The effort and energy required for continued expansion of the Social Microcosm increases daily. Capitalism requires continual growth to produce the surplus that results in profits. This essay may be short and simplistic, but I promise that it will provide you with a valuable fundamental approach to understanding economics free from the politics normally embodied within the subject.

Capitalism on an Island

The essential contradiction for capitalism is the production-consumption gap or, as I call it, the “P-C Gap”. The P-C Gap results when worker’s salaries are not enough to purchase the products they produce. That is why capitalism does not work on an island. The math is simple and obvious. As a capitalist, I might get my workers to produce $1000 worth of food, shelter, and clothing (FSC). If I pay them $800 and keep the difference as profit, the P-C Gap immediately arises. How can I sell my $1000 worth of FSC to workers/consumers who only have $800? On this isolated island, about the only thing I can do is to give my workers a loan for $200 (a temporary giveback of capital). This closes the P-C Gap and I can sell my $1000 worth of FSC. The only problem is that my workers would never be able to repay my loan. My profit will never be realized. Of course, island economies did not operate that way during prehistoric times. Hunter/gatherers might produce $1000 worth of FSC, with all family/tribe members sharing it more or less equally. There wasn’t a need for loans to close a non-existent P-C Gap and no need to work extra hard to produce a surplus that few wanted anyway. Similarly, the prospects for economic growth were limited—that is why population growth was miniscule, life expectancy was about 40 years, and workdays were only four hours. In particular, a stagnant population would consume the same amount of food each year. Surpluses would only go to waste.

Capitalism and Trade

During the early evolution of capitalism, there was a way to handle the P-C Gap: Trade. Any surpluses that my workers produced could be exported to other islands and other countries in exchange for cheap raw materials. Maybe I could not get dollars, but I could get iron ore and coal in exchange for the surplus autos that my workers could produce. With a few more loans, I could sell everything on what was becoming an international market. The greater the sales, the more I would produce. Of course, things did not always go so smoothly. There tended to be snags in the pipeline from production to consumption. Finding markets for surplus production is not that easy. Whenever I produced too much, the law of supply and demand caused prices to fall and products to stay on the shelves. Without the wherewithal to buy them, workers abstain. As the P-C Gap widened, the inevitable recession occurred. Recessions make socialism inevitable. The P-C Gap must be closed, or at least, diminished. Otherwise, there will be no buyers for the great surpluses that capitalism inspires.

Closing the P-C Gap

Capitalists have devised innumerable ways of closing the P-C Gap. As mentioned, there is always the possibility of loans, either directly to consumers or indirectly to their governments. These are preferable to higher taxes, which are government confiscations promising no return of capital. I will even lower interest rates—just promise to pay it back. With more money in their pockets, consumers return to the shelves, stimulating the economy back to production. These cycles would continue forever except for one thing: Globalization is slowly making the entire Earth into an island. No amount of free will can stop the globalization and return the economy to its glory days of rapid growth. Each developing country has experienced three basic phenomena: 1) economic growth rates approaching 10%, 2) population growth rates approaching 3%, and 3) urbanization signifying the degree to which it has completed its portion of the global industrial revolution. Subsequently, economic and population growth rates decline, eventually approaching 0%. In the coming decades you will be hearing a lot about “sustainability,” “steady state economy,” “no-growth economy,” “saving the planet,” and other buzz words for the univironmental equilibrium that we are gradually approaching.

Again, the irreversible transition to socialism is the result of capitalism’s tremendous productive capacity. With each business cycle, overproduction of goods results in a temporary widening of the P-C Gap. Products pile up, but consumers, not having been paid the full value of the products they produced, cannot afford them. Prices tend to fall according to the law of supply and demand, making goods more affordable, but that is never enough to close the P-C Gap entirely. Thus, governments have devised numerous ways to decrease the P-C Gap and thereby keep the system working. Like falling prices, each of these amounts to a giveback of capital and further development of the welfare state. These include increases in taxation of unearned income (capital) and decreases in taxation of earned income (wages). The taxes collected are handed out to consumers in various ways: government jobs, including those in the military and its associated suppliers, welfare checks, unemployment benefits, the unearned portion of social security, free or subsidized medical and educational benefits, free food (food stamps and tax deductions for food banks), free housing (government “projects” or private, government required “affordable housing”), free clothing (tax deductions for donated items), and the “creation of jobs” that provide a meal ticket, preferably without exasperating overproduction.

Capitalism and Robotification

Nevertheless, “exasperating overproduction” is the name of the game for capitalism. It behooves each individual capitalist to find ways to increase production while decreasing labor costs. These include increasing work hours, decreasing benefits, breaking up labor unions, moving operations overseas, importing parts made in cheap labor markets, and mechanizing the assembly process. Mechanization, of course, is the essence of the Industrial Revolution. The technologies developed in support of mechanization serve to replace the labor owned by the worker with the labor of robots owned by the capitalist. The ideal result of the Technological Revolution is the tendency to produce all things with robots, eliminating salaries entirely. Production would be cheap and plentiful. Unfortunately, there would be no consumers able to purchase it. This stark example shows why even the most capitalistic governments are forced to adopt redistributive policies that attempt to close the P-C Gap. Anything that gets cash into the hands of potential consumers enables them to buy goods overproduced by robots. Otherwise, the economy would come to an ideal screeching halt, as it tends to do slightly from time-to-time during recessions.

Of course, all this confiscation and redistribution of the wealth of robots is done with the utmost reluctance. Heated debates for and against the socialist remedies ensue, with each recession inevitably awaiting an outcome involving the next stage in redistribution. None of this has anything to do with choices involving “free will” or with whether capitalism or socialism is the better economic system. None of this is reversible, even though reactionaries occasionally succeed in eliminating some of the socialistic remedies in their attempts to go back to “the good old days” of less technology and less regulation of capitalism. These only serve to precipitate the next recession that much sooner. The political yin-yang vacillates from left to right, sometimes being stuck for decades with a dictatorship of one or the other. The upshot is that capitalism needs ever-increasing numbers of consumers, but it cannot get them without giving up some of its capital. The question of how much should be given up and which capitalists are to be so generous is the subject of ongoing political struggle normally won by the most powerful. To maintain that it need not be done at all is to flirt with revolution.

So where does this all end up? Do we eventually end up owning the robots, having them produce our necessities with little effort on our part? With their help, do we become both producers and consumers equally, eliminating the P-C Gap entirely? Does the Technological/Industrial Revolution eventually run its course, completing its mission in parallel with the global demographic transition? As seen for other species, the 1989 decline in the rate of growth of the Social Microcosm was an inevitable result of the limitations of the macrocosm. Over time, raw materials become increasingly more difficult to obtain. The easily mined ore and the shallow oil fields become ever more depleted, making such raw materials increasingly more expensive to access. Mechanization can accelerate the extraction, but only serves to widen the P-C Gap. Similarly, cheap labor produced by overpopulation becomes increasingly less useful in the face of increasing robotification. During the first half of the demographic transition, the folks who fled the increasingly industrialized agricultural areas might be assured jobs in the urban areas. Now, they are increasingly unemployed or underemployed, awaiting their share of a dream that is unlikely to be realized without a dramatic change in the system.

Next: The Myth of Exceptionalism

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Bligh said...

Progressives "change" the system.
Conservatives and Libertarians let the "system" evolve.
Survival of the fittest or adaptation has worked for 3.6 billion years now.

Luis Cayetano said...

"Progressives "change" the system.
Conservatives and Libertarians let the "system" evolve.
Survival of the fittest or adaptation has worked for 3.6 billion years now."

Yes, and it's produced major transitions in the history of life in which fundamentally new ways of organizing it have arisen. Conservatives and "libertarians" are dedicated to maintaining capitalism. The irony is that even as you talk about "letting the system evolve", you're actually talking about the MAINTENANCE of a system riddled with contradictions.