Capitalism: the best of all possible worlds?

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Churchill once said that “democracy is the worst form of government except all the others that have been tried”. Herman Royce argues that capitalism deserves similar faint praise, but rather than abjectly accepting either system as the best we can do, we need to consider and try better ones that have already been proposed in detail.

It’s what we’ve been brought up to believe in, ever since the Great Depression ended. An article of faith: that capitalism and democracy are the best systems.

And haven’t they been having a good run lately? Although it’s not the fault of the system, exhort true believers, it’s just that it’s been too regulated, or not regulated enough, or it’s a victim of freak circumstances, or the month had an ‘r’ in it, or something else extenuating…


It is the system. And if it’s the best we can do, then we’re not trying.

Capitalism to start: competition for profits. Trouble is, profit for one cannot be made without loss for another. Don’t take just my word for it. Even some economists have worked it out. Gunnar Tomasson and Dirk J.Bezemer put it this way: “profit earned by one capitalist must be at the expense of someone else—be it worker, other capitalist, or banker.”[[1]] A diagram might clarify…

Simplifying a national economy into three producers, each of which can be treated as groups of different producers at the same ‘stage’ of production, a typical period might involve monetary flows like this:

In this scenario, ‘Ay’ and ‘Bee’ manage to profit, but ‘Sea’, the producers of final consumable products, can at best recoup only their total costs — and only if workers spend all of the income they receive over the period, and Ay and Bee spend all of the profits they make over the period (their profits reducing to zero as a result). In this eventuality, some of Sea’s member businesses might manage to profit, but others must lose by the same amount.

On the other hand, if Ay and/or Bee retain any part of their profits (for investment or other non-consumption purposes), Sea’s members cannot even cover their costs — they make a net loss equal to the profits retained by Ay and/or Bee.

Of course, the diagram leaves out money flowing in from exports, government spending, and credit. But even if these exceed the money leaving the flow via imports, taxes, and savings, still they do not prevent losses, they only transfer or delay them, and so on, for a while, effectively hide the fact…

Exports merely redistribute between national economies, shifting the burden without adding purchasing power globally. Government spending also only redistributes — within, rather than between, nations. Credit, a more complicated beast, initially adds to the economic flow, but repayment of the debt with interest – by which lenders profit — ultimately siphons more back out than went in, which deprives other competitors of their chance of profiting…

When credit is provided to producers, they must set prices high enough to cover their costs, make a profit, and repay their debt and its interest. So, producer credit can be treated as one of the ‘raw materials’ of Ay or ‘parts’ of Bee, necessary for Sea’s production, and profit-seeking lenders can be treated as ‘just’ another type of producer. But then, producer credit does not change the dynamics — still, whether funded by credit or not, businesses who profit (whether by making goods or by lending money) deprive others of doing so.

Credit provided to consumers, however, works differently: in the diagram, it would add extra money, originating from lenders ‘outside’ the producers’ box, to the flow passing to consumers. If spent on the products of Sea, consumer credit could allow Sea to profit – initially. Say $500 is leant to consumers to make a total of $4,500 available to buy Sea’s products – Sea could then profit by $500.

But for consumers to repay the $500 loan, plus interest of say $50, they must subsequently save a total of $550 – this cannot be spent on consumption, it requires foregoing some other purchase(s). If (to simplify the explanation) the savings are accrued in the next period, then Sea can at most receive $3,450 for the products it makes over that period, yielding them a loss of $550 for the period (which they could delay by retaining unsold goods), and a total loss over both periods of $50 — the amount by which the lender profits. In other words, lenders’ profits, if realised, must eventually ensure a corresponding loss for others. Alternately, if consumers default on any part of their loans, lenders suffer losses equal to the total profits made by Ay, Bee and/or Sea over the periods in question. Either way, over time, for producers and lenders together, profit and loss still must balance.

The only way out would be for consumer credit to be injected into an economy always more quickly than debt repayments siphon it back out. As long as this was kept up, as long as consumer debt mounted at the right pace, producers could keep making net aggregate profits.[[2]] And debt does indeed increase in modern economies, at least most of the time when they are growing.[[3]] But, as recent times have demonstrated decisively, neither mounting debt nor growth can be sustained indefinitely, and consumers sooner or later reject having always increasing debt. So, rising debt has an actual outcome of merely delaying not preventing inevitable loss; of putting off the day of reckoning via a precarious and ever-mounting stack of cards that must eventually collapse when the economy unavoidably sneezes.

Ultimately, debt fails to avoid the loss required to balance profit, because debt is only issued in our competitive economic arrangement when its lenders expect to profit from doing so. So, debt acts as a short-term solution that exacerbates the long-term problem.

To repeat the words of Tomasson and Bezemer:
“profit earned by one capitalist must be at the expense of someone else”.
So, in this allegedly ‘best’ economic system, someone always loses, sooner or later. Those who say there will always be poverty are right — at least as long as we have capitalism. Not only poverty, but also always instability.

So much for our ‘best’ economic system.

As for democracy, this has provided not the people power the word means, but infrequent chances to choose between inadequate options of mostly misrepresented party devotees to serve in mutually masturbating coalitions of political and economic forces that constantly shift and realign as they overtly and covertly tussle for control, swapping or sharing puppet and puppet-master roles as circumstances change and interests overlap or diverge. With mandates or consensus claimed despite a clear and obvious plurality of views, governments function as business managers for The Nation, Inc — all decisions subservient to the economy. Without a thriving economy, goes the political mantra, there cannot be enough resources to go round. Yet even with a thriving economy, little changes, and the status quo grows ever more entrenched.

Surely, this can’t truly be the best we can come up with?

Certainly, other more daring and very different systems have been proposed. They need to be more generally known and understood to have any chance of ever being implemented — but they exist.

I’m familiar with three detailed proposals for alternative systems: Participatory Economics (Parecon), Inclusive Democracy (ID), and A Free Lunch (FL) — the last, my own eclectic invention. All aim to provide better alternatives to market economies and modern democracy. None have a role for profit, and all expect much less time to be spent working — an average of one day a week (in the medium-term) for FL, about three days a week for Parecon and ID.

Parecon has focused mostly on economics, only recently incorporating ideas about political reform, whereas ID’s very foundation is the return of decision-making and power to ‘the people’, for political and economic matters. Each have various distinguishing ideas – such as Parecon’s ‘job-complexes’ and ID’s distinction between ‘basic’ and ‘non-basic’ needs – but both entirely reject money, and instead advocate ‘personalised vouchers’ (or ‘credit points’) that serve a similar role as money but, importantly, cannot be exchanged more than once.

FL, on the other hand, retains money in a familiar form, but defines it and its usage in ways that should avoid its pitfalls. FL’s one-day working week follows naturally upon recognition that much work now paid for does not create real wealth (seventy percent according to one estimate[[4]]). Don’t panic though: with FL, the lower income of a shorter working week is compensated for by equally lower prices. Reduced hours mean reduced costs for businesses, so without profit, prices can fall in proportion to income (or rise if circumstances change and longer working hours are needed). No more obsessive-compulsive ‘need’ to grow. And no more misplaced worship of the god the profit, the job, and the holy growth.

Don’t worry about your mortgage either. No profit means no compound interest. Besides, your home could cost you nothing. Even with total business costs (worker income) balanced by total prices, the price of any individual product need not equal its cost. Free (or discounted) goods – such as a fair quota of staple food and basic clothing, health care, education, even housing – can be afforded simply by increasing the prices of all non-free consumables by the appropriate proportion, the costs of the free (or discounted) goods, in effect, ‘absorbed’ into the prices of the rest. Likewise for costs of building factories, offices, and farms, environmental regeneration, welfare for the disabled and retired, any necessary or desirable expenditure that does not produce consumable goods.

To make decisions about what to produce and how to price it all, FL incorporates a political system called plurocracy: a bottom-up decentralised participatory structure underpinned by small self-governing electorates of about 200 voters arranged into progressively larger associations whose decisions require the majority agreement of constituent groups.

Facilitating it all, interest-free finance credits each producer account, at the start of each year, with enough funds to cover expenditures planned for that year, and credits consumer accounts each week with wages and/or welfare earned. A purchase debits the buyer’s account by the price, but credits the producer’s account with the cost. Over the year, some producers undoubtedly spend more or less than they expect, or sell fewer goods, or suffer shortfalls — so, by year’s end, their accounts differ from what they were at the start (data to help inform future allocation of work and resources). At year’s end, though, producer accounts are reset to zero, then re-credited for the next year’s expected (and plurocratically determined) expenditures. Consumer accounts are not adjusted, but kept cumulative: then, accounts of hard workers and frugal spenders stay mostly in credit, while big spenders and lazy burdens more often have debits. Because they are publicly available (even after death, as the ultimate epitaph), consumer accounts should evoke pride or shame, and so increase motivation towards working and spending responsibly.

It may sound too good to be true, or too unlikely to take seriously, but you’d want to be sure before rejecting it — which means having a good look at it until you understand it. And Parecon and ID are well worth a look too. Until enough people do learn about alternatives, we will be stuck with the instability, insecurity, poverty, and dominion of the few, that our current ‘best’ systems guarantee.

Herman Royce is God Almighty’s biographer and self-appointed spokesperson, inventor of A Free Lunch, and the first person in history to say “Now I’ve seen you naked, I could never eat turkey.”


[1] Gunnar Tomasson & Dirk J.Bezemer, “What is the Source of Profit and Interest? A Classical Conundrum Reconsidered” (University Library of Munich MPRA Paper #20320, 2010), p.11

[2] With sufficiently mounting debt, every producer could profit — but credit so supplied would not be spent evenly enough for this to happen.

[3] Bezemer stated by email that “What we observe in the data is indeed continuing growth of debt as the economy (and profits) expand.” The mostly steady rise of debt in recent times is also detailed in 'Adam Smith', Paper Money (G.K.Hall, Boston, 1981), p.292, & Buckminster Fuller, Critical Path (St. Martin's Press, New York, 1981), p.115. For more recent data, see http://www.rba.gov.au/speeches/2010/sp-dg-150610.html, http://www.debtdeflation.com/blogs/2010/11/05/solving-the-paradox-of-monetary-profits-2/ and http://yellowroad.wallstreetexaminer.com/blogs/?p=32

[4] Buckminster Fuller, Critical Path (St. Martin's Press, New York, 1981), p.226

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