Lessons of capitalism

A COUPLE of months ago, I suggested in an article in this paper that the current economic upheavals highlighted a new phase in the development of capitalism.

BBC business editor Robert Peston ran an article on his blog entitled A New Capitalism a few weeks back.

He, too, recognised that there are fundamental structural changes taking place in the economy and that capitalism will never be the same.

It will never be the comfortable, lightly regulated free-market system that bourgeois economists have espoused for the last half-century.

Peston claims that, in future, it will be a kinder, gentler form of capitalism.

He certainly doesn't explain how a system whose driving force is entrepreneurial greed can be made "nicer." This reads like wishful thinking.

In the end, Peston's piece is just another analysis of what's gone wrong with the Western economies. He's pretty sure that it all came about because of the over-indebtedness of households, private-sector firms and government. No surprises there then.

Three weeks ago, I took my students to an economics conference in London to hear from an array of economists and other specialists. The speakers were all fired up by the "exciting" things that were happening to the economy.

For the most part, they managed to convey that excitement to the audience of 1,000 or so students.

But, like Peston, none of these "experts" was able to offer anything that approached an explanation of the economic earthquake that was occurring around them.

The only speaker to succeed in truly enthusing the audience was Tony Benn.

He delivered a passionate moral invocation that the young should beware of the capitalist system.

He explained to them how the system exploits working people and is responsible for the present ills.

I'm sure that many of those students, like mine, went back to their economics teachers to ask more about this Marxist interpretation.

The first myth to dispel is that socialist economics is about bloody revolution.

The truly significant transformations undergone by economic systems such as capitalism are not cataclysmic or revolutionary.

They are gradual shifts, often brought about by changes in technology or changes in the manner in which capitalism organises and finances the means of production.

Capitalism itself grew in just such a way over a long period when the feudal economy was the principal organisational arrangement for economic production.

A capitalist class emerged gradually from the wool merchants of the 13th century to the merchants, mine-owners and factory-owners of the 17th century.

Their wealth lay not in land ownership but in the ownership of capital. By the 17th century, they formed a recognisable economic class with wealth that feudally based monarchs could not live without.

So, too, with capitalism. Since its earliest days, it has created forces within itself that presage its own transformation and eventual demise. It seems trite to say it, but capitalism really is about capital or, to be more accurate, the purchase of capital.

In its earliest days, capitalist production was financed internally. Most firms were small by modern standards and were frequently family businesses.

Finance - money with which to purchase capital - came principally from family savings or from profits.

There were joint-stock companies but they were generally unable to grow very large because there were few who would take the risk of losing everything if the firm in which they had shares became insolvent.

The collapse of various joint-stock banks and the railway companies in the first half of the 19th century were very public warnings of what could happen to shareholders when things went wrong.

It was necessary to solve this problem. The risks had to be reduced so that people could be persuaded to freely offer up their savings to companies, become shareholders and enjoy their share of the profits.

The answer was limited liability. In future, provided the firm in which you owned shares had taken out limited liability, you were only liable for the value of your shares when the business folded. It worked, opening up vast new sources of savings that could be mobilised by firms that wanted to finance expansion.

It really did make possible the growth of large-scale production, production that could take advantage of huge economies of scale.

Not everyone wanted to take the risks involved in buying shares. Many preferred to save their income in what they regarded as safer forms. But look what happened to it then.

Some of the money was saved in banks, some was saved in the form of insurance contributions and some - an increasingly large amount - was paid into pension funds. The insurance companies, the banks and the pension funds took these savings of the working population and bought shares. And they bought big.

Today, over 50 per cent of the shares in UK public companies are owned by UK financial institutions which also own shares in foreign companies in the same way as foreign financial institutions own shares in the UK. But, remember, these are our savings. The reality is that we, the UK population, indirectly own vast amounts of British and foreign capital. We, through our indirect ownership of shares, have provided the finance for firms to purchase capital.

But, alas, it would appear that we haven't saved enough to satisfy their needs. Caught in a downward spiral of lower demand and falling profits, sectors of the business community - capitalists to you and I - today face extinction. They are too big to be viable purchases for fellow capitalist vultures and they are probably too big for the government to allow them to go to the wall. The knock-on effects on the rest of the economy could be disastrous, let alone the political consequences of mass unemployment.

And so? Well, the government steps in and uses our taxes to rescue them. It would appear that, when we won't give them any more of our voluntary savings, they take our forced savings.

Perhaps this is, after all, a very significant stage in the development of capitalism. Perhaps a defining historical moment. Because, from now on, we haven't got anything left which the capitalist class can appropriate.

They've taken all our savings, voluntary and forced. Now, to keep British capitalism funded, the government has to borrow. And who, in the future, will pay back the borrowed funds? Us, of course. Working people. So, having got their hands on our voluntary savings and our forced savings, they've now got their hands on our future savings too.