The prolonged US recession and recent increase in income inequality has energized viewpoints challenging capitalism as a sustainable economic model.
Some media and pundits have rallied around the Marx ideology that we are beginning to see capitalism starting to unravel itself. This viewpoint is largely based on a faulty premise:
In his “Das Kapital”, Marx argues that the capitalist’s pursuit of profit accumulation over time will increasingly lower wealth for the rest of the populace (workers or employees). This appropriation of wealth of the masses by a few is unsustainable and leads to class warfare. He elegantly frames the argument as follows:
The ultimate objective of commercial transactions in a capitalism economy is for a capitalist (investor) to seek profit, or what Marx calls a C–>W–>C’ transaction. (C is the initial capital invested by the capitalists, W is the totality of labor/productivity contributed by the workers, and C’ is the net capital, or profit, reaped by the capitalists from the transaction). By necessity C’ > C in a capitalism economy.
Marx argues that since capitalists seek ever increasing capital accumulation, subsequent transactions over time must appropriate greater amount of labor from the participating workers . This is illustrated in Figure below. In the initial transaction, the capitalist invests C1 and demands W1 in workers’ production capacity to yield C2 in net capital. In future transactions, the capitalist invests C2 and demands W2 in workers’ production capacity to drive C3 in net capital. In order for capital accumulation (i.e. C3>C2), the workers must increasingly contribute more labor (i.e. W2 > W1; proof by contradiction that C3 <= C2 for the curious).
The key to Marx’s argument in above Figure is that W2 > W1 in a capitalism economy; participating workers must progressively contribute more of their labor capacity for a given wage from the transaction. This effectively leads to wealth decrease for the workers and is ultimately unsustainable (i.e. when the demand on worker’s labor contribution W meets their production capacity L).
Marx’s argument fails to take into account one critical consideration: competition driven innovation and productivity increase, as depicted in below Figure.
Over time, capitalist transactions drive improvement in worker’s productivity through technology and management innovation. This is necessitated by ruthless competition between capitalist entities for profit. While successive transactions demand more from workers (i.e. W2 > W1), the worker’s production capacity has also increased (i.e. L2 > L1) . The worker may not be worse off after all; over time, she can complete a given transaction and earn the corresponding wage while using up a smaller portion of her total production capacity (i.e. W2/L2 < W1/L1). If the capitalist attempts to extract a greater portion of the worker’s capacity without additional pay (i.e. further alienation of surplus value in Marx parlance), the worker can take her talent to a competing option in the market. (One implication not explored in this article is the worker’s need for increased knowledge and education to unlock maximum production capacity).
In short , Capitalism doesn’t sow its own destruction. The capitalist pursuit of profit accumulation in a competitive market results in enhanced productivity. The resulting productivity increase allows a worker to contribute more labor without increasing her “burden”.
The key question shouldn’t be what economic model can replace capitalism, but how can we better enable competition and innovation in a capitalism framework to accelerate productivity.
Selected sources: A Companion to Marx’s Capital; A Grand Pursuit – Story of Economic Genius