What’s wrong with the economy?

I believe that most working people ask ourselves questions about the economy throughout our lives. Why do the affluent have so much money, when there are hungry people all over the world? The government argues that the military works to provide for our security. If that is the true, why doesn’t the government make it a priority to feed the hungry? Why is so much money spent on banks, insurance companies, advertising agencies, and corporate law firms, when these enterprises add no value to the commodities we all need and want? Well, allow me to make an attempt at answering these questions.

First, I can say that these problems do not happen because people with power made mistakes, or that they are insensitive, or because of human nature, or because they are just plain stupid. No, my opinion is that these problems stem from the fact that we live under a system known as capitalism.

When we look at capitalism from an historical perspective, there are legitimate reasons why it came into existence. First, there were tribal societies that lived in a communal and truly democratic way of life. Then, the oligarchs of the slave societies of Greece and Rome began to understand that they could live more comfortable lives through military conquest. The feudal societies replaced slavery, and the craft guilds began to advance technology. Capitalism replaced those societies and began to create mass-production industries that operated for profit.

However, just as the societies of the past had been replaced, today capitalism has outlived its usefulness and needs to be replaced. So, in a nation that claims to be democratic, where they say there is “liberty and justice for all” what is the problem?

We can start with the writings of Adam Smith and David Ricardo. These were two economists who first outlined the fundamental laws of the capitalist system. Both Smith and Ricardo understood that there was a fundamental problem with capitalism that could not be resolved using capitalist methods. This is the problem of overproduction.

In their pamphlet titled, The Communist Manifesto, Karl Marx and Frederick Engels labelled this problem a “disease.” They went on to say that overproduction had never occurred before in history. In other periods of history, when there was a surplus of goods that people needed, those were seen as good times and people celebrated. But with capitalism, when there are more commodities than people will buy, corporations throw people out of their jobs and workers go through difficult times. These times are called recessions or depressions.

Why is overproduction a problem in the capitalist system?

So, the question arises: Why would overproduction create recessions and depressions? This appears to be illogical. Allow me to make a hypothetical case using the table below with the performance of a hypothetical corporation over a period of three years.

	First Year	Second Year	Third Year
Sales	$10	$100	$1,000
Profits	$2	$10	$50
Percent Profit	20%	10%	5%

 

So, we see in this chart that the hypothetical corporation has increased sales and profits in three consecutive years. This appears to be a positive trend from the corporate point of view. However, the bad news comes with the percent of profit on investment. While sales and profits are increasing, the percent of profits on investments are going down. Why do I think that this is the reality that corporations face today?

Back in the 1970s interest rates on savings accounts were about four or five percent. Today those same interest rates are less than one percent. For the average worker, this might not be very significant because we rely on our paychecks for an income. Interest on savings was never a big part of our income.

However, the deteriorating savings account interest rates reflects a decline in the rate of return on investments. This is the tendency reflected in the above chart. So how does this decline in the rate of profit effect the overall economy, and how do corporations deal with this decline in the rate of profit?

The answer to this question lies in the routine day to day corporate practices. Workers see this reality in the corporate drive to cut costs, sell more commodities, raise prices, and go into astronomical corporate debt. These are the methods that are necessary to maintain profitability, while the overall rate of profit is declining.    

So, when workers improved the standard of living in this country with the labor, civil rights, and women’s movements, corporations responded by investing huge amounts of money in factories around the world. In those nations the prevailing wages are between $1 and $10 per day.

Some people see this tremendous export of capital as a matter of thoughtless greed by capitalists. However, when we understand the nature of capitalism, this export of huge amounts of capital was absolutely necessary for capitalism to survive. So, while President Trump and all pro-capitalist politicians have a strategy of “America First,” the reality is that capitalist enterprises are routinely driven to invest in other nations.

How does the government support the corporate drive to maximize profits?

This brings up another point. In order for corporations to function as they do, it is absolutely imperative that the government make the drive to maximize profits their primary concern. So, while there have been cutbacks and enormous price increases for education and health care, the government has dumped trillions of dollars in a scheme known as quantitative easing. This meant that when banks were unable to collect on vast amounts of money from mortgages, the government spent trillions of dollars to purchase those worthless pieces of paper.

The government also subsidized the oil and auto industries by spending trillions of dollars on roads, highways, bridges, and tunnels. Why do I say this? Automobiles have no value if there are no roads to drive on.

This brings us to another question. Why are there wars in the world? The First and Second World Wars were about what nation would become the super-power and dominate the world. Britain used to have that role, but their empire went into inevitable crisis. Germany, Japan, and the United States went to war to determine what nation would be the new super-power. The United States won those wars at a cost of about eighty million deaths.

After WWII the United States government went to war against Korea, Vietnam, Iraq, and Afghanistan. We might think about the fact that none of these wars were declared. The government didn’t feel confident enough to get Congress to declare war because of the unpopularity of all those wars. When we understand the nature of capitalism, it becomes clear that all these wars were about consolidating the United States position as the world’s super-power.

As I mentioned, corporations are driven to cut costs and they have made enormous investments in nations where the prevailing wages are between $1 and $10 per day. Those nations usually need ruthless and repressive governments to enforce those conditions.

The government of Saddam Hussein in Iraq was this kind of ruthless and repressive government. However, Hussein decided that he would advance an independent course from Wall Street and invaded the nation of Kuwait. The punishment for this act of disobedience was a United States invasion that destroyed much of that nation. The U.S. government then installed a puppet government in Iraq.

The nation of Cuba doesn’t have many financial resources. However, the government there makes the needs of the people its top priority. So, the people of Cuba who once lived in dire poverty, now have lifetime rights to education and health care. This relatively modest change provoked Washington to implement a trade embargo against Cuba for sixty years.

How will a worker’s government change this reality?

The Cuban example begins to expose the basic myths of capitalism. While the Cuban people have lifetime rights to education and health care, workers in the United States pay exorbitant prices for both education and health care. Yet the government in this country claims that we live in a democracy.

We can begin to answer this riddle with the equation Karl Marx used to explain how the prices of commodities are determined. This was his formula:

Constant Capital (machinery and buildings used to manufacture commodities), plus variable capital (wages paid to workers), plus surplus capital (profits and other expenses not directly related to production), equals Capital (the average price of commodities.)

When we look at this equation, we see that constant capital and variable capital will always be needed. Machinery and workers must be maintained in order for everyone to have the things we need and many of the things we want.

However, when we think about what surplus capital is, we see many enterprises that in no way directly contribute to the manufacture of commodities. Saying this, we can say that both health care and education are necessary to humanity. Yet these services only contribute indirectly to the manufacture of commodities.       

However, there are the enterprises of banking, insurance, advertising, corporate law, and corporate management. These enterprises do not contribute directly to production, and are primarily concerned with generating profits for corporations.

We see examples of surplus capital in the skylines of cities throughout the world. These skylines are filled with office buildings that usually house the enterprises representing what Marx called surplus capital.

We all need many things. These include: food, clothing, housing, transportation, communication, health care, education, and exposure to culture that includes: music, dance, art, theater, film, literature, etc… While many goods and services are designed by engineers in office buildings, most of the enterprises housed in these buildings are completely unrelated to the manufacture of goods and services.

As I said, corporations need to accumulate vast quantities of debt. In the past Michael Milken and Bernie Madoff were sentenced to terms in prison for violating the laws regulating the sale of bonds.

Finance companies found a way to deal with this problem by inventing a fund called derivatives. These derivatives are complex bets on investments that are difficult or impossible to understand. Therefore, they are not regulated by the government.

The so-called economists who invented derivatives actually received a Nobel Prize for their efforts. Today derivatives are valued at hundreds of trillions of dollars. I believe Karl Marx would have called these investments surplus value or fictitious capital. So, while investors went to prison in the past for violating the laws regulating bonds, today investors reap obscene amounts of money on investments that are not regulated, but are highly volatile.        

So, while banking, insurance, and advertising contribute nothing to the manufacture of commodities, we need to pay for all those services with literally every commodity we purchase. This is one of the reasons why prices are so high.

Today, many of the commodities we use, like food, clothing, and cell phones are produced in other nations. The wages in these nations are between $1 and $10 per day. The workers who toil under those conditions are the ones who create much of the wealth in the world. Why do I say this?

Karl Marx wrote a three-volume analysis of capitalism titled Capital. The first sentence of this work stated: “The wealth of those societies in which the capitalist mode of production prevails, presents itself as ‘an immense accumulation of commodities.” In other words, Marx defined wealth, not as money, but in terms of the commodities we all need and want. Looking at the world from this perspective, we can say that there are enormous amounts of wealth that could be used to eliminate poverty and greatly improve the standard of living in the world.

Instead of investing in banks, or insurance companies, or advertising agencies, those massive investments could be made to eliminate poverty, end racial and sexual discrimination, remove the root cause of war in the world, and make sure that all enterprises work in harmony with the environment.

What would a socialist world look like?

Understanding these facts, we can question any politician or corporate representative who claims we don’t have the resources to make dramatic improvements in the standard of living. When we look at the skyscrapers in all the major cities, we are looking at monuments of the exploitation of workers around the world. How would this change if human needs were the primary concern of the government?

Working people would eventually be able to work considerably less and retire at a much earlier age. This would mean that we could all have time to pursue whatever interest we might have.

Black people, Native Americans, Latinos, and all oppressed nationalities would begin to have real control of their communities. The routine harassment, brutality, and prisons we see today would be an ugly memory. Students would learn the truth about the history of slavery, Native American genocide, the theft of land from Mexican people, all so a tiny minority could live in opulence.

Women would have access to top quality day care and would have time to truly enjoy life. They wouldn’t be judged merely by their appearance, but by their character. In that environment women wouldn’t feel the need to invest in billions of dollars in cosmetics, jewelry, mascara, and extravagant clothing. They would be appreciated for who they are.

People who are now called immigrants would no longer need to come to this country to earn a living. They could remain in their homeland and live fruitful lives. People from around the world would travel, not for money, but to gain an appreciation of our sisters and brothers all over the planet.

When we see what could be possible and then think about our current reality and where it is heading, I believe there is a clear choice. The struggle to make this a world where human needs are more important than profits is the struggle of our lifetimes.