Ways to fix capitalism (that don’t work)
On the face of it, giving people more money to spend seems a good idea. Who doesn’t want more money? But it won’t work, at least not as intended; for two reasons.
The first is that the payment from the state is never going to be much more than ‘basic’, something near the poverty line such as the level to which in Britain a person’s income is made up to under the Universal Credit scheme. This is in part because the capitalist state will want to keep the amount spent on UBI down, but also because, if the income was too high, it would undermine the economic coercion that is behind the wages system.
If people could live, even if rather sparsely, on the income, there would be less pressure on them to go out and find an employer. Some advocates of the scheme say this would strengthen the low-paid workers’ bargaining position and see it as a reason why it should be introduced. But this is precisely why no capitalist government would introduce it at any level other than around the poverty line.
So, if introduced, it would only be as a tweak to the welfare or tax systems, with the basic income replacing other benefits, amounting to no more than a ‘redistribution of poverty’. The results of an experiment in Finland (tinyurl.com/y93baxxv) showed that it did bring some benefit to the unemployed who received it in that they no longer had to submit to intrusive and dehumanising means testing, nor trying to find a job that wasn’t there (capitalism needs a certain level of unemployment, so there are always going to be some unemployed), nor going on useless courses about how to fill in a CV. On the other hand, those receiving it didn’t show any extra inclination to seek out a job; which was why it was not adopted.
The other objection to the scheme is that, as it would be paid to every citizen, whatever their situation and even if they were employed, it would be bound to have an effect on wages; it would strengthen the employers’ hand in bargaining over wages as the price of people’s working skills. Wages reflect the cost of reproducing these skills. So, if wage-workers are paid an amount by the state, the employer will not need to pay so much. This wouldn’t happen immediately but it would exert a pressure for money wages not to rise in line with the general price level. In the end, what the right hand gave the left hand would take away.
In June 2016 Swiss voters – they get the interesting things to vote on – rejected a proposal to introduce a Basic Income from the state for everyone as of right whether they are working or not. Perhaps surprisingly, only 23 percent voted for with an overwhelming 77 percent against.
The voters were asked to decide only on the principle of introducing an unconditional universal Basic Income without any mention of its level. However, its promoters such as BIEN Suisse did publicise a figure of 2,500 Swiss francs a month, or 30,000 a year, an amount just slightly above the then poverty line in Switzerland.
We pointed out above that the introduction of a full Basic Income scheme would result in a strong downward pressure on wage levels, resulting eventually in a fall in wages. The Swiss proposers of the scheme didn’t even bother to argue against this. Not only did they accept it but they incorporated it into their scheme. In an article in French costing the scheme on the website of Génération RBI (Generation Unconditional Basic Income) they emphasised, with graphs and numerical examples, that everybody earning more than the poverty line would be no better off financially since, they said, their wages would be reduced by the amount of the Basic Income:
‘Wages are going to adapt themselves to become a complement to Basic Income. For example with an Unconditional Basic Income of 2,500 Swiss Francs, someone who at present gets 8000 Swiss francs from their employer will not get more than about 5,500 or so wages which will come to be added to their Basic Income’ (http://rbi-oui.ch/laboratoire-sur-le-financement-du-revenu-de-base-inconditionnel/).
So their total income would be the same, only under their scheme, instead of all of a worker’s total income coming from their employer, a part would come from the state and a part from their employer. This would not be a subsidy to employers (another danger of such schemes) as taxes on employers would be increased to pay for this.
And of course a Basic Income equal to the poverty line is neither going to undermine the wages system nor break the link between work and consumption, as other supporters of such schemes have argued.
The only viable way to break the link between income and work is on the basis of the common ownership of productive resources; that will allow the principle of ‘from each according to their ability, to each according to their needs’ to be implemented.
‘A key unique quality of capitalism is the employer/employee relationship between two different groups of the people engaged together in the economic system. That relationship entails an exchange of wages or salaries for labor power (the ability of an employee to work). A contract between employer and employee covers that exchange plus the employee’s exertion of brains and muscles over lengths of time and to ends specified by the employer.’
A defining feature of capitalism is indeed the wages system. Ending capitalism does involve the ending of this employer/employee relationship. Wolff, however, sees this as being implemented at enterprise level, describing as ‘instances of communist enterprises’ worker co-ops where ‘one and the same community designs, directs, and performs the work of an enterprise such that each community member has one vote and enterprise decisions are made democratically.’
His justification for calling worker co-ops ‘communism’ is that they are commonly owned by those working in them and end the employer/employee relationship as far as their members are concerned. But if the common ownership of something by a group is ‘communism’ then there are many other examples of it within capitalist society. What socialists aim at, however, is the common ownership of the means of life by society as a whole – a communist society.
Wolff’s envisages co-operatives producing for the market alongside private and state enterprises both under capitalism and in ‘socialism’ (by which, going completely off the rails, he seems to mean places like the old USSR). He advocates co-operative enterprises as a way forward for workers within capitalism in the same way that other reformists used to advocate state enterprises.
This brings out that his definition of capitalism is incomplete. It needs to include as well as the employer/employee relationship that production is carried on for sale with a view to profit. Capitalism is a market society in which everything is bought and sold, not just labour power.
Common ownership on a society-wide scale implies that the democratically-run productive units would not be producing for a market, precisely because what they produced would belong to society and be available to be distributed in non-market ways, whether free distribution, free use or taking according to need.
Workers’ co-ops have to function like a capitalist enterprise with all the shortcomings this involves such as having to make a profit to re-invest in up-to-date methods of production so as to remain competitive and stay in business.
This was candidly recognised by Txema Gisasola, when he was the president of the much-cited Mondragón co-operative group, who told the Financial Times:
‘We receive visitors from many companies and many countries, and some come here with a magical idea of what Mondragón is. This is not magic. We are in this market, competing in the capitalist world, and the only difference is how we do things and why we do things. We have to be competitive, we have to be efficient, we have to have quality in our products and give satisfaction to our clients, and we have to be profitable. In that sense we are no different from anyone else.’ (https://www.ft.com/content/d7d2fbcc-85b9-11e2-bed4-00144feabdc0)
This does not mean that there is no place at all for co-operatives within capitalism. There are some niches for a few of them, but they can never spread to take over the whole economy as their more romantic supporters envisage. Co-operatives are in fact not an alternative to capitalism at all, just one form of capitalist enterprise and a not very efficient one at that.
But would it? Could it . . ?
The rich, especially the super-rich, can certainly afford to pay more tax. Even the arguments put by their apologists don’t deny this. They concentrate on arguing that they shouldn’t be taxed too much, that if they were they’d move abroad or would no longer be prepared to work for capitalist firms in a country that did this. This would happen to some extent but confirms that capitalism is a world system and that any solution to the problem is not to be found at national level. But the fact remains that the rich are rich enough to pay more tax out of their huge incomes and piles of accumulated wealth.
Would making them pay more tax end austerity? Austerity is the government cutting back on its spending so as to reduce the burden of taxation on profits in a slump as a way to help a profit-led recovery (the only way a recovery can come about). Increasing taxes on ‘rich corporations and individuals’ would allow the government not to have to cut its spending so much, but if more than a one-off would prove to be counter-productive.
The incomes of the rich come in the end, one way or the other, out of profits. Not all of it is spent on conspicuous consumption (in fact that’s against the logic of capital accumulation, which is what capitalism is all about). Most is saved and so comes to be re-invested in production to make further profits, a part of which will provide their future unearned incomes.
So taxing the rich is in the end a tax on profits. This is obvious in the case of taxes on ‘rich corporations’. Corporation tax used to be called ‘profits tax’ and that’s what it still is: a direct tax on profits. As capitalism is a profit-driven system anything that reduces profits or makes profit-making too difficult will bring about an economic downturn. In a slump it would delay recovery.
Since you can’t tax the rich unless the rich continue to exist and continue to draw a taxable unearned income, i.e. unless capitalism continues to exist, the Left populists who chant ‘Tax the Rich’ are proposing the old failed reformist policy that the Labour Party used to espouse of redistributing income from profits to workers, but not even to try to improve workers’ conditions but merely to try to stop them getting worse.
It won’t work. In promoting the idea that it could, they are peddling the same sort of empty and unrealisable promises as the conventional politicians. The fact is that capitalism cannot be reformed to work in the interests of the wage and salary-earning working class and their dependants. The only way out is to replace capitalism – with its division into rich and the rest – altogether.
When a note or a coin is used in payment it passes physically from one person to another who can in turn use it to make another payment. In other words, cash circulates and is untraceable in that it doesn’t bear the mark of who happens to own it at any time. The Bitcoin scheme aims to create this for electronic payments (electronic payments do of course exist today but are not untraceable).
This was a technical challenge but the geeks who thought up the scheme (maybe only because it was a challenge) solved it by requiring anybody buying or selling with their electronic money to adopt a pseudonym and by incorporating into the software encryptions and procedures to confirm transfer of ownership and to prevent double spending as well as to create new bitcoins until a total of 21 million is reached.
So, technically, it works. In fact there are claims that, being untraceable, it works too well in that it allows money laundering, drug dealing and tax evasion (just as cash does but not ordinary electronic payments). Also, people have been speculating on the exchange rate between bitcoins and conventional currencies going up or down, leading to bubble and bursts.
But there’s also the ideology behind it. Because it’s a means of payment that has nothing to do with the state, it is being touted by free-marketeers (or ‘libertarians’ as they are called in America). They have visions of it replacing state-issued money and solving the problems of depreciation, inflation and financial crises which in their view go with it. Currency reformers see it as a way of ending both the US Federal Reserve and the commercial banks’ supposed power to create additional purchasing power out of thin air.
This is not going to happen, if only because bitcoins can only be used via the internet, but also because capitalism cannot do without a state and because for most people cash and identifiable electronic payments are more convenient. But suppose that it did. This, as the Gegun Kapital und Nation Group have pointed out in their excellent article on Bitcoin, would not solve the economic problems of capitalism since these are not caused by some flaw in the monetary system but by the very nature of capitalist production and of money capital. A fixed money supply, as envisaged under the Bitcoin scheme, would not prevent booms and slumps but it would constrain the accumulation of capital:
‘While clearly a state intervention, the central banks’ issuing of money is hardly a perversion of capitalism’s first purpose: growth. On the contrary, it is a contribution to it. Systematic enmity of interests, exclusion from social wealth, subjection of everything to capitalist growth – that is what an economy looks like where exchange, money and private property determine production and consumption. This also does not change if the substance of money is gold or Bitcoin. This society produces poverty not because there is credit money but because this society is based on exchange, money and economic growth.’
This reflected not the assumed ignorance of MPs, who actually got it right, but the confused use of the word money. This is now used to describe two different monetary phenomena. First, what in America is called ‘fiat money’, money issued by administrative decision by the state as notes and coins and electronically. Second, what used to be called ‘bank credit’, loans banks make to businesses and individuals. This is now called ‘bank money’, so banks are regarded as ‘creating money’ every time they make a loan.
This confusion misleads some into thinking that banks can create money in the same way that the state creates fiat money. However, what commercial banks lend is not ‘spirited out of thin air’. It is already existing money that they lend on from what they themselves borrow from depositors and the money market.
Bank lending certainly has the economic effect of increasing spending. It is this that gives rise to the illusion that they are ‘creating new money’. But what they are doing is making available, to those who want money to spend, the money of those who don’t want to spend theirs for the time being. This is not creating new money, only activating existing money. That’s precisely the economic role of banks and their usefulness to capitalism.
In 2017 Swiss banking reformers obtained the 100,000 signatures needed to initiate a referendum to restrict bank lending in the way Positive Money proposes, or, as they put it, to stop banks benefiting from being able to create electronic money out of nothing.
Explaining the apparent logic behind the proposal in the Financial Times (5/6 December), Martin Sandhu wrote:
‘The bank decides whether it wants to make you a loan. If it does, then it simply adds the loan to its balance sheet as an asset and increases the balance in your deposit account by the same amount (that’s a liability for them). Voilà; new electronic money has been created.’
This is indeed what happens from an accounting point of view. Double-entry book-keeping requires every new asset or liability to be balanced by a corresponding liability or asset. In this case, in making the loan, the bank acquires a liability. This has to be balanced, in the accounts, by a corresponding asset, recorded as an IOU from the borrower. That a new asset has been created out of nothing is only an illusion arising from an accounting convention.
Outside the accounts department all that has happened is that the bank has committed itself to making a loan to a customer. It ought to be obvious that, to be able to meet the obligation (liability) to pay this, the bank will have to be able to fund it, but currency reformers (and, surprisingly, some financial journalists) overlook this and believe that banks really can ‘simply’ create out of thin air what they lend.
This is not to say that loans have to be funded entirely from what people have deposited with the bank (a view sometimes attributed to critics of the thin air school of banking) since other sources of funding are available, from the money market (i.e. other financial institutions) or the central bank, some of which can even be done after a loan has been made.
Like Positive Money, the Swiss banking reformers subscribed to the mistaken, monetarist view that an over-expansion of bank lending causes (rather than merely reflects) booms and busts and they want to control and restrict it to try to prevent this. It won’t work but that’s the theory.
The proposal is that banks should not be able to re-lend money deposited in current accounts. When it receives such a deposit the bank will be required to re-deposit it with the state’s central bank in return for what Sandhu calls ‘State e-money’. All banks would be able to do with this is transfer it between current accounts.
This would certainly restrict bank lending but it wouldn’t (and is not intended to) stop it altogether. As the Swiss banking reformers explained, after the enactment of their reform:
‘The banks can only work with money they have from savers, other banks or (if necessary) funds the central bank has lent them, or else money that they own themselves.’
But this is already, now, the case! Money deposited in a current account is just as much a loan to the bank as is money deposited in a savings account. Banks can, and do, re-lend most of it too, except that, unlike with a savings account, it keeps all the interest. But if money re-lent from a current account is money created from thin air, why is money re-lent from a savings account not? Don’t ask us. Ask Positive Money.
When it contracts or stagnates this is a sign that profitability has fallen. Growth won’t take place again till this is reversed. When there is a slump the obvious solution seems to be to increase consumption by giving people more money to spend. Keynes wasn’t so naïve but he did provide an economic theory that justified doing this. So it is fair to say that the Keynesian solution to a slump is that the government should intervene to increase both its own spending and consumer paying demand.
The fallacy behind this policy, still advocated by Labour left wingers and the Green Party, is that it assumes that capitalism is an economic system geared to meeting paying consumer demand whereas it is in fact an economic system geared to making profits to accumulate as capital. Profits are the key to growth not government and consumer demand.
In a slump there is a fall in consumer demand but this is a consequence of an increase in unemployment due to a fall in profitable investments. This is why government action to increase demand does not work. Only an improvement in profit prospects, leading to an increase in business investment, will bring about a gradual exit from a slump. Various things that happen in a slump help to bring this about. Lower wages, lower interest rates, a fall in the value of fixed assets and the elimination of unprofitable firms all help to restore profitability. So does a reduction in taxes. In fact, insofar as a government does not decrease its spending and so taxes to finance it, this can prolong a slump.
Governments can pledge to ‘go for growth’ as much as they like but unless profits recover there will be no growth.
Interviewed on the Andrew Marr Show in June 2020, Rishi Sunak, then still the Chancellor, stated that the economy was ‘driven by consumption’. It is understandable why he might have thought this since consumption (consumer spending) accounts for some two-thirds of GDP. But it does not follow that it is therefore this that drives the economy. In fact, it isn’t.
Apologists for the system claim that under capitalism ‘the consumer is king’; that, in other words, production is carried on – even initiated – in response to what consumers want as indicated by what they are prepared to pay for and do pay for. But this does not explain how consumers come to have money to spend in the first place.
Most consumers are wage and salary earners who get their spending money from the sale of their capacity to work at a particular job, their labour-power, to an employer. So, where do employers get the money to pay them from? It’s a part of the capital they must have to start up a business and keep it going.
Under capitalism production is initiated by capitalist firms seeking to expand their capital by making and accumulating profits. It goes like this. Capitalists invest in production, including hiring workers; workers exercise and use up their labour power to produce new value, including the value of their labour power; capitalists pay workers as wages the value of their labour power; workers spend their wages on buying what is needed (food, housing, clothes, entertainment, holidays, etc) to recreate their labour power to replace what they used when they worked; capitalists buy the renewed labour power; and so the circuit recommences.
This means that what workers buy to consume is the reproduction of the part of capital invested in employing them. Workers’ consumption is a part, not the initiator, of the circuit capital goes through to increase its value. What drives the economy is business investment for profit. This depends on the prospects for profit-making and goes up or down depending on whether these are good or bad. Less business investment means fewer workers employed and so less consumption; more business investment means more consumption. So, far from consumption driving the economy, it’s the other way round. Consumption is the tail not the dog.