Cooking the Books: Boo to Capitalism

Writing in the Times (3 July) mad marketeer Matt Ridley complained:

‘”Capitalism” was a word largely invented by the opponents of commerce. The socialist Louis Blanc first used it in its modern sense in 1850, defining it as “the appropriation of capital by some to the exclusion of others.” (“Capitalist” had been used much earlier.) Marx and Engels then made it into a proper “boo” word. Ever since, the left has used “capitalism” to imply that all free-market commerce is run by big financiers, with massive investments, rather than merchants and entrepreneurs taking risks on behalf of consumers and driving down prices.’

It is true that ‘capitalism’, following on from the use of ‘capitalist’ to mean someone with money capital, has been associated with ‘big financiers, with massive investments’. It still is in populist and other non-socialist circles. But this was not Marx’s usage. He didn’t use the word itself, preferring to talk about the ‘capitalist mode of production’, a preference which shows that he associated what socialists now too call ‘capitalism’ with production rather than finance (or commerce).

Money capital, as a sum of money used to make more money, existed before the coming of the ‘capitalist mode of production’. It took the forms of money-lending and of money being advanced to buy goods in some distant market and to transport and sell them in a nearer market at a profit. In neither case was money invested in the actual production of goods.

Capitalism, in the Marxist sense, only came into existence when money was directly invested in production with the aim of selling what was produced and ending up with more money than originally. Marx analysed this profit as not originating, like that of the pre-capitalist merchants, in the market, in Ridley’s ‘commerce’, but in production. Its source was the unpaid labour of the wage workers employed to produce the goods.

In the capitalist mode of production, a capitalist is someone who invests capital in production, not finance. That capitalist might have borrowed the money. If so, the interest they had to pay on it would come out of the profits they made from exploiting wage-labour; it, too, would have its origin in the surplus value created by the producers.

For Marx, a capitalist was not a mere financier but someone who directly employed wage-labour, typically in his day a mill or factory owner. These days those who champion their interests talk of them as being ‘entrepreneurs’.

Ridley claims that these entrepreneurs take risks ‘on behalf of consumers’. Really? Investing money in production for sale on a market with a view to profit does involve the risk that in the end you might not make a profit. But this risk is taken on behalf of the shareholders, not the consumers who make up the market. The capitalist entrepreneurs (these days, ‘big’ enterprises ‘with massive investments’ rather the innovating individuals Ridley suggests) do have to be supplying what people want and can afford to pay for, but it is to make a profit not to satisfy a want that they risk investing the money.

In any event, what sort of economic system is it where a risk has to be taken to meet people’s needs? The rational aim of production is to turn out what the population needs, not to make a profit out of providing for those needs that can be paid for. If a productive system really was geared to meeting needs, then it would do so directly without having to pass via detours such as money capital and entrepreneurs. Capitalism fails that test.