by Piet Coetzer

Capitalism in trouble

Troubled mining and agricultural symptom of wider global crisis

The Trouble with Capitalism.jpg

The turmoil that has beset the South African mining and agricultural sectors, with resultant destructive tensions between various stakeholders, is probably but one of the symptoms of a more fundamental global crisis. Increasingly, commentators are referring to threats to free-market capitalism as we have come to know it. (Read more)

Glenn Silverman, Chief Investment Officer at Investment Solutions, said in an analysis at the end of last year that “[c]apitalism has proven to be the best economic system there is, but it too has its flaws. As such a more sustainable version of capitalism is called for, one that focuses on sustainable growth, not growth at all costs.”

In another article  published in the Monthly Review in May last year John Bellamy Foster and Robert W. McChesney wrote that “the general consensus among informed economic observers is that the world capitalist economy is facing the threat of long-run economic stagnation (complicated by the prospect of further financial deleveraging), sometimes referred to as the problem of ‘lost decades’. It is this issue of the stagnation of the capitalist economy, even more than that of financial crisis or recession, that has now emerged as the big question worldwide.”

In his book The Trouble with Capitalism: An Enquiry Into the Causes of Global Economic Failure, Harry Shutt, a former senior research consultant with The Economist argues that investors and governments, lusting for exponential returns in a contracting economy, have pushed global markets to the edge of an abyss. Dismissing supply-siders and the notion that technology and global trade create more and better jobs, his research has found instead increasing structural unemployment, diminishing returns to labour and capital and diminishing ability to tax.

Under the heading “Global economic woes prompt soul-searching on capitalism” The Guardian in the United Kingdom recently wrote, “While policymakers insist vigorous recovery will arrive, there is concern that deep structural problems are stalling a revival.”

Despite the fact that capitalism, throughout the 250-year history of the modern industrial age, has proved its resilience and regenerative powers with a lasting upward trend of production, the depth and length of the present financial and economic crisis has led to a degree of soul searching.

In what can be neatly projected on the problems now besetting the South African mining and agricultural sectors, The Guardian  states that “[t]o understand why, it is necessary to look at the basic ingredients that historically have made capitalism tick in all its many guises, be it America's free-market approach, Sweden's welfarist model, or China's state-run variant.”

The ingredients listed are:

•Stability; without which entrepreneurs will not take risks. In the early stages of development, this means adherence to the rule of law and a system of property rights that guard against expropriation. Over time those taking long-term investment decisions need to feel confident that there will be a steady stream of returns and that the banking system is robust and well-managed;

•Legitimacy; which is not the same as fairness or equality. Capitalism is neither fair nor equal, and never will be, but large quantities of fairness have been injected to ensure it has retained political legitimacy;

•Sustainability; is the third ingredient needed for capitalism to work. Companies that deplete their capital, either physical or human, can thrive for a while but eventually run into problems;

•Creativity; Capitalism was good at giving consumers what they wanted, even though some might argue that some of those wants were generated by clever marketing and aggressive advertising. Old industries declined and new industries took their place. Companies that failed to make profits went out of business, with resources – eventually, and often after a tough period of re-adjustment – reallocated to growth sectors of the economy; and lastly

•Profitability; Before new and more efficient production methods for agriculture and industry were developed in the 18th century, per capita incomes in the West had risen at a glacial pace for more than 1 000 years. Modern industrial capitalism generated surpluses and it was this that differentiated it from the subsistence model.

The article divides the history of capitalism in two phases:

•A pre-World War II-phase legitimised by rising living standards for workers and because the gap between rich and poor narrowed. “Consumers funded their spending out of rising incomes rather than through debt, while the Bretton Woods system ironed out balance-of-payments problems. With climate change not yet on the agenda, the system looked sustainable; and

•A postwar phase, which saw a greater emphasis on creativity and profitability. Life was made tougher for workers, easier for entrepreneurs. Trickle-down economics, it was argued, would lead to everybody being better off; the magic of the market would guarantee that economies were sustainable; control of inflation and self-regulation would ensure stability.

The financial crisis, which started in the American housing market and spread to the rest of the globe during 2008 and 2009, exposed a capitalist system in trouble. It became unstable, illegitimate, unsustainable and unprofitable. Banks wobbly, there was public disgust at the antics of the financiers, years of weak income growth had left consumers trapped by debt, “and global industrial production and trade were collapsing”.

As the emergency measures of 2008 and 2009 by governments and international institutions have become permanent fixtures, The Guardian concludes: “Capitalism is alive but has been preserved in aspic.”

It is clear that across the board, including key sectors in the South African economy, there is an urgent need for leaders from stakeholders from government, industry, labour and consumer bodies to put there heads together to ensure a more sustainable, legitimate and equitable economic dispensation emerges from the present crisis.


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