Can Capitalism Survive?

The great economists of the past (Smith, Marx, Keynes, Schumpeter among others) predicted the stationary stage of capitalism and its eventual collapse. Schumpeter raised the issue in a bold way by asking “Can capitalism survive?” and his reply was disarmingly categorical: “No, I do not think it can”. Economic history teaches us that the evolution of capitalism is anything but linear, as it suffers from periodic profit crises resembling arrhythmias and occasionally cardiac arrests. However, during the crisis stage the “cathartic mechanisms” of the system are put into operation which mainly include innovations of large scale and substantial wage reductions that restore the profitability required for a new wave of economic growth.

Capitalism in one way or another managed to surpass all previous great depressions (1815-1845, 1873-1896, 1920-1940 and 1970-1980) and the economic recoveries that followed all had their own distinct imprint. For example, in the crisis of the 1930s, the governments, by stimulating demand and encouraging innovations (in products, processes and institutions), laid the groundwork for the postwar “golden age of accumulation” that lasted until the end of 1960s. The crisis of profitability that followed (1970-1980) first broke out as a monetary and later as an energy crisis, but in no way did it have the painful consequences of high unemployment and generalised misery of the crisis of the 1930s, thanks to governments’ management policies and their welfare functions.

In the 1980s, however, it became apparent that the functioning of the government absorbs a great deal of society’s surplus thereby reducing investment and exacerbating the declining profitability of the private economy. The ideology of neoliberalism has spread worldwide through the reduction of government regulations (but not necessarily its expenditure) and sometimes through privatization aimed at increasing profitability. The economic boom of the 1990s came not from major innovations (which perhaps destroyed more jobs than those created), but mainly from the dismantling of many of the welfare functions of the state and by reducing interest rates to near zero, while at the same time keeping real wages stagnant. There were many who spoke of the ”triumph of capitalism”, the “new golden age of accumulation”, the “new economy”, the “dot.com economy” which thanks to the advancements in information technologies made capitalism ‘depressions-proof’. Meanwhile, although profitability increased, nevertheless it remained significantly lower than the level it attained in the 1960s (50% of that level approximately).

One would expect that the current crisis that erupted in 2007 will “run its course” and the economic boom will soon follow. However, the low level of profitability (albeit not necessarily profits) is not expected to exceed that of the “new golden age of accumulation” since neither corporate taxation, nor interest rates can be reduced further, while real wages are already near the subsistence level. Therefore, if we accept that the falling profitability predicted by Marx (and all the major economists of the past) as a long-term trend of capitalism is valid, then it is certain that investment activity will not generate enough employment and incomes which are necessary for the maintenance of social cohesion. The society of two-thirds of the “new golden age of accumulation” is likely to become an elusive dream for economic policy makers of the future. Hence, from Marx we pass to Schumpeter, who argued that the collapse of capitalism would come from the financial annihilation of its natural supporters, that is, the middle class (farmers, professionals and small businessmen) and the mounting challenge from the intellectuals and especially young people (mainly students), who increasingly feel that they have nothing to gain in the future society.

Having said the above, I do not necessarily advocate the imminent collapse of capitalism, but I predict that if capitalism continues to exist in the future it will be quite different. There are two likely scenarios: The first is already in process and will inevitably lead to authoritarian solutions in an effort to contain capitalism’s internal contradictions and result in uncontrollable situations that quickly transcend national boundaries. The second is to harness the market forces and channel their internal dynamics in socially desirable directions. This means the urgent need of a form of national planning within a new framework of international financial architecture. Failure to plan in a direction of containing the market forces amounts to planning the development of centrifugal forces of the system and precipitating its eventual collapse with devastating consequences. “Can socialism work?” Wondered Schumpeter and his reply was “yes, it certainly can”.

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This post was written by Lefteris Tsoulfidis