Citizen Action Monitor

Capitalism’s structural dynamic “undermines the interests of those it’s supposed to serve”

Does a self-perpetuating system of “creative destruction” contribute to prosperity in any meaningful sense?

No 2081 Posted by fw, October 22, 2017

To access all other synopses from Prosperity without Growth, click on the Tab titled “Prosperity without Growth” — Links to All Posts in the top left margin of the Home page. 

In Section 2, Chapter 6, Jackson began his endeavour to “unravel some of the workings of modern capitalism” with a semantic analysis of the “varieties of capitalism”.

His dissection of capitalism continues with today’s synopsis, Section 3. Chapter 6, as Jackson takes on the tough task of making the complexities of the “structures of capitalism” comprehensible to a lay public. No easy task this. For starters, Jackson, an ecological economist, presumes his audience understands the meaning of his title. He leaves us to piece together some semblance of the meaning of the term ‘structures’ in the title from our reading of his dense, 2132-word economics discourse.

I quickly gave up trying to convert his dense analysis into a shortened synopsis. Instead, in the piece below, I opted for a long synopsis by creating subheadings and word highlights to structure the text in a way that I hope captures some sense of meaning of his “structures of capitalism.”

For any who may be interested in a more “reader friendly” perspective on capitalism’s structure, check out this article: What is Capitalism? By Peter Stausenmaier, New Compass, March 14, 2015. He writes: ”Understanding what the world was like before the rise of capitalism, and envisioning a different world beyond the capitalist reality we live in today, calls for an examination of its myths and the structures on which those myths are built.”

Tim Jackson is a British ecological economist and professor of sustainable development at the University of Surrey.

**********

Structures of capitalism, a synopsis, from Chapter 6, “The ‘Iron Cage’ of Consumerism” of Tim Jackson’s book, Prosperity without Growth, Routledge, 2nd edition, 2016-17

Capitalism simplified

Firms employ Labour (people) and Capital (buildings and machines) to produce goods and services for Households (people).

Households (people) provide their Labour and Capital (savings) to Firms in exchange for Incomes, which comes from Firm’s sales revenue.

People spend some of their Income on consumer goods and services, and some of it they save.

The missing complexity

Missing from the above simplified outline of the “mechanism of capitalism” are 1) the Public Sector (Government) and 2) the Foreign Sector (overseas Firms, Households, and Governments). In addition, the representation of the Financial Sector is over-simplified.

Globalized finance adds complexity

The emergence of the globalized financial sector added complexity to the previously more simplified structure of capitalism. The added complexity introduced “a whole new set of actors and a whole new set of possibilities: different ways of spending and producing, saving and investing,” – an added complexity that contributed to the 2008 financial crisis.

Households put some of their income in Savings accounts of banks, credit unions, investment houses, and the like, who then invested those Household Savings – directly or indirectly – in the business sector to generate profits.

Profit is key to capitalist system

Households give their savings to firms on the expectation of a generous return on their investment from a “stream of profits from the firms they invest in.”

By definition, Profit refers to an “increase [in] the difference between revenues from sales and the costs associated with the so-called factor inputs: capital, labour and material resources.

Firms seek profits for several reasons: 1) to increase the firm’s value to attract more investors; 2) to increase creditor confidence in the firm based in the knowledge that their investment is secure and rising; 3) the firm knows “it has sufficient resources to maintain its capital stock and invest in new processes and technologies”, which will increase its productivity efficiency; and 4) firms that show good returns attract more investment.

Risks associated with Cost reduction

Firms seek to reduce costs by switching to  1) more energy efficient materials and appliances or 2) less labour-intensive processes, both of which require capital. This ongoing need for Capital impels a search for low-cost credit. In boom and bust capitalism, there is a risk of Credit drying up because “reducing Capital costs indefinitely isn’t an option.”

But which of a firm’s two cost reduction options should it target – materials or labour? Higher labour productivity lowers the cost of its products and services. Failure to reduce its labour costs could put a company’s products and services at a competitive price disadvantage compared with national and global enterprises. Reduced sales results in lower profits to its shareholders, risking capital flight from the company.

At a national level, rising Labour productivity can lead to 1) rising wages; 2) low interest rates; and 3) a higher standard of living. Productive workers can bargain for higher wages without threatening company profits or inflation. In addition, companies with rising labour productivity fare better in global markets. On a worrying note, Labour productivity globally, and in advanced economies, has been trending downward for the last four decades.

By reducing labour costs, the increased efficiency brings down the cost of goods over time. However, the goods themselves have energy costs that offset the efficiency savings.

Moreover, efficiency alone – with emphasis on “alone’ — doesn’t automatically spell business success for two reasons: 1) constraints attributable to the laws of thermodynamics, set physical limits to efficiency improvements (in certain processes); and 2) it’s new technological and product innovation that displaces existing technologies and products – without innovation and novelty, increased labour efficiency doesn’t cut it.

The essential role of “Creative Destruction” in Capitalism

Jackson gives credit to Venezuelan economist Carlota Perez for explaining how creative destruction has given rise to successive ‘epochs of capitalism’:

“Each technological revolution ‘brings with it, not only a full revamping of the productive structure, but eventually a transformation of the institutions of governance, of society, and even of ideology and culture.”

Jackson also cites US economist William Baumol who underscores the life and death stakes for players in the Capitalist market:

“In such an environment [of creative destruction], no firm dares to fall behind in the innovation race, in which the penalty for the laggards is often the death of the company.”

Visionary entrepreneurs and investors are critical to this self-perpetuating cycle of creative destruction: the former for creating novelty, the latter for providing the necessary funding to bring novel products to market.

What does creative destruction have to do with human flourishing?

Jackson asks: “Does this self-perpetuating system really contribute to prosperity in any meaningful sense? Isn’t there a point at which enough is enough and we should simply stop producing and consuming so much?

Constructive destruction seems to undermine the interests of those it’s supposed to serve. Jackson elaborates:

Product lifetimes plummet as durability is designed out of consumer goods and obsolescence is designed in;

Quality is sacrificed relentlessly to volume throughput;

The throwaway society is not so much a consequence of consumer greed as a structural prerequisite for survival; and

Novelty has become a conscript to and an agent for economic expansion.

The author concludes Section 3 with a bridge to Section 4, “Social logic””

But neither can we see novelty as entirely neutral in the structural dynamic played out through capitalism. In fact, there is something even more deep-rooted at play here, conspiring to lock us firmly into the cycle of growth. The continual production of novelty would be of little value to firms if there were no market for the consumption of novelty in households. Recognizing the existence, and understanding the nature, of this demand is essential.”

%d bloggers like this: