Is capitalism inherently doomed to fail?

Great Debates
1

I’m no master of fiscal theory, far from it. But reading and thinking has got me wondering about the foundation of capitalism and where it’s heading. Of course, capitalism hasn’t got a plan, a goal, in the same way communism/Marx-Leninism/Maoism have or had. There is no central committee deciding which way capitalism is going the next five years, and I guess that’s part of the beauty of it – it’s mostly self-regulating.

If I understand economics correctly, then capitalism is not just a question of supply and demand, neither that price, as a concept, puts a value on services and goods. No, the idea is that wealth is created, it’s not a zero-sum game. I don’t get less money, because Bill Gates gets more. In a way, I get more money, since the computer/IT revolution drives the economy, thereby creating more wealth, that trickles down from Gates and gives me a $100 buck raise a month, because the economy is booming (or at least it was, until 9/11 – now I’m unemployed).

But then there’s a question about how wealth is created. How does something go from worthless or dirt cheap to potentially valuable? Lumber is cheap, furniture are expensive. Plastic is cheap, DKNY sunglasses are expensive. Of course, supply and demand play a role but there is another part to (and now I’m gearing up to the topic): labor. I’m not going to go off in a communist/socialist direction, but there is a trend the last 50 years that, when reaching its equilibrium, will present us with a new kind of reality, in my opinion. I don’t think it’s going to happen soon, maybe not even during this century, but eventually, we’ll get there. Bear with me.

Let’s take a commodity: a computer. A typical retail price is for a low end with OS, mouse, keyboard, screen, is around $500. Nothing fancy, but a fair, brand name computer, such as Dell. Typically, said computer has been assembled in a country like Malaysia, India, Indonesia, Thailand. The finishing touches are done locally or regionally, depending on the country you buy it. For Europe, many such centers are in Holland or Ireland. In my case, when I order the computer, they install XP Home edition, Swedish version, and pack it with a keyboard suiting my national needs. One way to keep the price down is loading it with shareware in my own language.
One reason many centers are in Ireland is that the country came out of an economic recession by heavy subsidizing of foreign companies that settled there. Land was given free or for a token cost, and the country helped with infrastructure, most of it paid for by the EU. Holland, on the other hand, offer logistical advantages, having a central location and excellent infrastructure for handling the goods.

I’ll venture a guess and say that such centers in the US typically aren’t located in hot regions on the east or west coast, but in the middle or areas where unemployment is/was high.

Even if there are a lot of things that are added to a commodity that increase the value, one of the biggest factors are labor costs. Microchips are designed (at high cost by Intel) and made in factories (at low cost, in Malaysia), design is applied (at high cost, by designer firm in N.Y.) and molded into plastic at a Thai factory (at low cost). Typically, these last decades have shown us that we (i.e. Europe, North America and Japan) export high end goods and labor costs to poorer countries. The market for $500 computers might not be that big in Zimbabwe, but it’s growing in India and Thailand. And labor is becoming so expensive, it’s a good deal to place call centers in India, paying for the overseas phone connection, because labor is so much cheaper there.

Another factor is that some countries became giants when using cheap labor that isn’t so cheap anymore. We scoffed at Japan during the 60’s and part of the 70’s. South Korea came too fast, so we had no time to scoff theme before we were swamped by Daewoo, Samsung, LG, Hyundai and other brand names that offer excellent quality for very fair prices. My own Samsung TFT screen is several factors better than the previous Compaq TFT. Both were probably made in a low cost Asian country, but I didn’t hesitate when buying Korean.
It’s also been quite some time since “Made in Taiwan” or “Made in Hong Kong” were synonymous with “Cheap, bad quality knock-offs”.

And that’s the thing. When we export labor costs, we also raise income and education levels in the countries where we place these facilities. Irelands economy is booming, the plan worked. Unemployment is down, wages are up. GDP per capita is $29.800 the US has $37.800. India, on the other hand, is still way back there in the race: $2.900*. But statistics only tell half the truth. If we think inequality is big in the US and Europe, it’s abysmal in India. There, the lowest 20% in income, only earn 8% of the wages. In fact, the top 10% take home 33% of the wages, and in a country where the GDP per capita is that low, it’s easy to realize that the bottom fifth of the wage earners have ridiculously little money (cite).
But there’s another factor, which we tend to forget when we view India as a poor country. Ten per cent of the population is still 100 million people. In fact, the middle class in India can be said to be 200 million people, living with a materialistic standard which is (on average) on par with European or North American working class. The economy is booming there too. It’s hard to find media income and extrapolate, but one source thinks that by 2040, the average purchasing power will raise to $16.500, in today’s dollar (cite). This is still a bit away from the rich countries, but seeing that the poor will probably remain poor (at a higher level), my guess is that there will effectively be a large high earning middle class in India, living with about the same standard we have, by the middle of this century.

At that point in the future, India will be what Taiwan, Japan, S. Korea is today and it won’t be the center for overseas call centers or assembly plants for computers. Labor costs will be too high. So where will we stick them? Looking at trends, it seems that Sub-Saharan Africa is the place of choice. Poverty is still extreme, so labor will be cheap for a long time to come. But eventually, they’ll catch up too.

So then, the question for debate is this: Isn’t capitalism just an ongoing, 400 year old pyramid scheme, where those at the bottom get screwed and those at the top get rich? And as it is with all the pyramid schemes, once it isn’t possible to expand anymore, the whole thing will fold.

Caveat: when re-reading before posting, I realize this is very geocentric. I’ve used we as a shorthand for N. America and Europe, when it isn’t that simple. Please disregard that if it offends you, since no offense is intended. I’m aware that we have numerous posters in India, China ASF

*Source: The CIA world Factbook online

2

Extremely interesting question. Unfortunately I don’t have much to add since I am an economist in the same way that a Malaysian fruit-tree bat is a champion scuba diver, but I’ve been thinking many of the same things myself and look forward to what more knowledgeable people have to say.

3

At most, you’ve made an argument that the price of goods will eventually rise. For capitalism to “fail”, wouldn’t we need another system to replace it that was better? Better at what? Based on your OP, it would seem that “better” = “able to keep costs lower”. What system can do that? None that I know of.

4

I find the OP to be correct, in that it is the exploitation of labor in the transformation of raw material resources that creates wealth.

The problem with capitalistic thinking is that it is essentially based upon the idea that both of these commodities are continually in plentiful supply, and therefore relatively cheap.

Manufacturing has been hopping around Asia for the past few years in search of cheap labor, due to the very gentrification process you describe. There are certainly other labor markets that will be exploited in the next several decades, but unless cheap AI-equipped commercial robots are available by the time the last of the cheap labor markets has been exploited, there could be trouble in the form of prices rising very sharply and staying high for good.

And that’s of course assuming there isn’t a shortage of raw materials needed to make all this happen before cheap labor disappears.

There is no way to predict specific results of this, for it will depend on what any particular country is importing at the time whichever crisis hits.

5

It is because free-market capitalism is not a zero-sum game that we can continue to improved standards of living.

In the long run, the most efficient providers of a product will end up doing the most business. Because they are more efficient, they will benefit society as a whole by providing that product for a smaller cost (i.e., consume fewer resources). When many products of the economy are created efficiently, using fewer resources, more resources will become available for everyone to use.

Analogy: the entirety of world resources is a pie. Greater efficiency means each person can satisfy their hunger with a smaller piece of pie.

6

How does an artist, for example, become wealthy then?

7

Exactly. Someone invents a way to improve the yield of a certain crop. That creates wealth (and no one need be “exploited” in the process). The world suddenly has more of that crop than would otherwise exist.

8

John Mace: I don’t think we’ll ever see a classless society. People are people and some will be better at handling money than others, and I don’t see a problem with that. But what Europe and N America has seen during the past 50 years is an increasingly larger middle class. I actually think that it’s a fair, albeit simplified description to say that the poor working class in many countries comprise of immigrants.
Also, of course efficiency has created more wealth in the last 50 years than anyone could imagine back after WWII. The question is that this wealth is no longer exclusive to the wealthy, as seen with the ever increasing numbers that can be classified as middle class. Eventually India will be a solid middle class consumer society. And perhaps, eventually, so will Zimbabwe. At a certain point in the future, we might find ourselves in a situation where it’s no longer anby point in offshoring/outsourcing jobs to low wage countries, because there are no such countries left, or at least, not with enough people to handle all those jobs.
So where will we go then? To say that capitalism must be replaced by something ‘better’ and inplying that no such thing exists is not cutting it in my book - it might not be better, but if we indeed come to a point where cheap labor no longer is a resource, we might be faced with having to do something different. What will that be?

9

I believe you are also forgetting some factors that may come into play and eventually bring the downfall of Capitilsm (please forgive the spelling, I can never spell that word). One factor you are forgetting, is the why of rising Labour costs. Why did labour costs rise in the so-called developed countries? Unions, fo course, had a hand in this, but so did general education. As the developed countries matured and became developed their population also underwent a change. That change was education, most people in those countries have at least a highschool education, while a large number of people in the developing countries (where most of our products are now made) have very little education. I believe the idea is as you educate people you expand their minds and doing the same thing over and over and over becomes very boring. Also people began to realize that manufacturers could not be manufacturers without labour. But labour costs, initially, were very small, in other words the profits was always going to the big guys doing ‘little’ work (in terms of physical, actual making of product) and the little guys were doing much of the actual labour. The little guys would then demand a larger piece of the pie. I belive this is what contributed to the large middle class presence in the developed countries as the middle class was no longer reserved for shopkeepers and proffessionals, but also labourers (for example autoworkers, many of whom are paid similarly to teachers).

Another problem with capitilism, if you were to listen to marxists, is the debt wall. Much of the growth in the US, Canada and the EU, can be attributed to people purchasing items they can either not afford or not afford at present. I have no cites, but I believe most would agree with me that the average westerner carries a very large burden of debt, and this burden is not getting lighter with subsequent generations. Eventually a debt wall will be hit, where the amount of debt is larger then the amount of money. People will no longer be able to repay their loans, financial instutions will begin foreclosing on houses, farms business and other things. The people will get angry, and call for the forgiveness of all debts. This of course is not possible when debt gets so large, eventually chaos. Remember the end of “Fight Club”, they wanted to blow up the major credit institutions to start over.

These 2 ideas, IIRC from my political science courses, form some of the basis of Marxs’ theory. True Marxism has never been attempted because it was his idea that first capitilsim would have to occur, with the education of the masses, the masses, now smarter would get angry at the leaders who were keeping them down after first attempting to llve above their means in an attempt to be like the leaders (wealthy people in general), and revolt installing a workers paradise.

10

So says you!

11

As labor costs rise, automation becomes more economically feasible. Your reference earlier to the IC business is a good example. It’s not true that Intel does its chip manufacturing in Asia. The wafer fab portion (or front end manufacturing) is done mostly in the US and Europe. That process has been automated such that the labor content is relatively small. The assembly and test portion (back end manufacturing) is still highly labor dependent and **is ** done in lower wage countries.

Capitalism is simply the way free people interact economically. As long as our political systems are based on freedom, you won’t able to get rid of capitalism even if you want to.

12

Even if there was an equal distribution of income or capital, humans would create some means of distinguishing themselves. There would be some sort of social order or class. The status goods may change but the desire to achieve special status will not.

13

But we’re getting there through the mechanics of the global economy. And on a global scale, almost everyone in the post-industrial countries are at least middle class in a material sense: Housing, freshwater, food on the table, phone, car, tv, kids going to school, playstation, dvd-player. The fifference between me and Bill Gates is less than between me and a begger on the streets in Bombay. Gates have more and better cars, a bigger house, a private jet or five, and most importantly, wields a lot more power. But I have a carr, an apartment, and can buy an airline ticket. Most of these things are today are today unattainable for the poorer people in the developing countries.
I’m not arguing about distribution of capital, I’m wondering what will happen when 80% of the world’s population is middle class. John Mace believes in automated processes, where labor costs is not a factor. That’s one answer. However, it doesn’t address how wealth then gets re-distributed. One way that happens today is that a company hires people to manufacture goods, paying them wages. But when Dell can make computers without humans being involved, beyond the design stage and overseeing the automated process, where will we work? We can’t all make webpages and man call centers for them. And if my personal economy is not growing, I might not be able to trade up for a new computer every third year, making the demand for Dell computers decrease.

One way wealth has been created is by a constantly growing economy, but I believe one of the most important factors that has made it able to grow is the outsourcing to cheap labor. Or a pyramid scheme

14

A) Capitalism doesn’t depend on anything. The answer in true capitalism to rising labor costs is either lower profits or higher prices. That’s it. That’s the answer.

B) The greatest driving factor in the growth of the economy has been technological advancement, not cheap labor. There are plenty of good jobs available, people just need the education and job training to take advantage of them.

15

If it actually were a pyramid scheme, it would colapse on itself and the “last ones in” would be screwed, left with nothing. Yet you also claim that everyone will eventually become middle class. Isn’t that a contradiction?

16

I see this all the time: people claiming that capitalism depends on cheap labor (typically defined as third-world cheap), and that without cheap labor the whole system will implode.

But why?

Until the 70s there was a huge labor shortage in the US. Labor costs were sky high during the 50s and 60s, that’s where we got the notion that a blue-collar industrial job was a middle-class job rather than a disenfranchised proletarian job. There was no way to send manufacturing jobs overseas because the transportation infrastructure didn’t exist. Reliable electricity didn’t exist, reliable government didn’t exist. If you set up a factory in a third world country you couldn’t guarantee that some revolutionary wouldn’t blow the place up, or that the government wouldn’t confiscate your factory, you couldn’t guarantee that your raw materials would get to the factory or that you could ship out the finished products. You couldn’t get managers, you couldn’t get workers.

Slowly some third world countries started to be able to provide such things, Korea and Mexico being the prime examples. And all this feeds on itself, creating positive feedback loops…transportation infrastructure means you can ship in materials and ship out goods and get workers to the jobsite. Factories mean it is productive to invest in transportation infrastructure. Jobs means more money, so people can now buy manufactured goods, which means more infrastructure.

But the point is that the US and Europe functioned perfectly well with high wages. Exportation of manufacturing happened because cheaper labor means cheaper products and/or greater profits, not because cheap labor is a fundamental requirement of capitalism. It isn’t any more a requirement than cheap raw materials, or cheap education, or any other input. Capitalism is about the efficient allocation of resources based on price. A cheap price for the same good means the good is produced more efficiently. But of course goods are not always equivalent, and all labor is not equal…a single skilled worker can be cheaper than unskilled workers that get 1/10 their salary, if the skilled worker produces 10 times as much.

So if labor costs rise as unskilled workers around the world increase in skill and demand higher wages that doesn’t mean that less will be produced, only that labor costs will become a higher and higher fraction of the cost of goods. Will that mean higher prices? Yes, relative to a situation on an alternate planet with another supply of impoverished laborers. But will it be higher prices compared to what we pay, say, today? Not neccesarily. Prices move around in all sorts of funny ways. If you read older books you find people selling their coats to buy food and pay for rent in apartments in the city. Nowadays you couldn’t sell a used coat for more than a few dollars, and you can buy cheap food easily, but to pay for a city apartment costs dearly, you certainly couldn’t sell your coat to pay your debt to the landlady.

So in a future with a middle-class India and China some things will be more expensive, some things will be much cheaper, and it’s hard to say what will be what, but we certainly don’t need universal cheap labor or the wheels come off the global economy. Why would we?

17

Is capitalism inherently doomed to fail?

The short answer is: Of course not. Capitalism isn’t like Marxism/Leninism in that it doesn’t try to control anything. Its simply an economic system based on freedom. Its not trying to ‘fix’ any social problems, employment problems…any problems in fact (thats why liberal/leftists hate it so much…it doesn’t even make a pretense at trying to ‘fix’ anything).

So, lets work through your example. Capitalist companies are in the business to make money. One of the offshoots of this is that they want to make items as cheaply as they can while remaining competetive with other companies. One of the ways to do this, as you pointed out, is to move manufacturing labor (or even services labor, again as you pointed out) to areas where such labor is cheaper, thus bringing down the costs of their products. The UNINTENDED offshoot of this is that by moving manufacturing and services jobs to poorer countries/areas those countries/areas have an influx of…capital. :slight_smile: That means standards of living go up, and that means now there are NEW markets for products and services that weren’t there before. At a certain point, the cheap labor type manufacturing and services jobs become too expensive in such areas so companies move on to other areas of cheap labor, and the process starts again.

So, you posit that eventually we’ll simply run out of cheap labor areas because the whole world will become…middle class. And this is a problem? :stuck_out_tongue: Well, leaving aside the implausibility factor, its going to be a LONG time before this is the case. However, you are saying that when this happens, for some reason ‘capitalism’ will collapse upon itself like a pyrimid scheme. Why? All that would happen (in the VERY unlikely event that there simply were no more areas in the world that have cheap labor some time in the future) is that prices would go up because companies would have to charge more…because labor costs more. However, ALL companies would be faced with the same thing, so prices would rise across the board…and so wouldn’t really be noticable.

However, as John Mace pointed out, automation is the wild card.thats what could REALLY change our culture and civilization, though I still don’t see it causing capitalism to collapse. Cheap labor will continue to be used until its cheaper to use automated manufacturing or even services. Remember, companies are in the business to make money…thats the bottom line. They will do that by cutting their costs, be that by cheap labor or by automation. Capitalism isn’t a system thats designed to ‘fix’ anything…its just there to provide a free market, and that will continue even if all the cheap labor in the world goes away and the entire world becomes Western style middle class. If that happens it will simply be a happy chance…its got nothing to do with Capitalism per se.

BTW, for those of you saying Capitalism will collapse eventually due to lack of resources I’ll point out that there is a solar system full of resources out there waiting to be tapped. When they become too expensive and scarce on earth, when its cost effective to go get them…then go get them we shall.

-XT

18

Capitalism is like chemistry; it doesn’t advocate a way of doing things, it’s just describing what’s actually happening. So capitalism can’t “fail” as it has no goals to meet.

The mistake so many people make is that they claim capitalism will inherently create progress. This any true, capitalism (again like chemistry) can be used for many different purposes; some good, some bad. Just because a result was obtained by means of capitalism doesn’t mean it’s inherently a good result. A crack dealer who hands out free samples to ten year olds is practicing sound capitalistic principles; he’s taking a short term loss by investing his product into developing a future market which will create long term profits.

19

But it can “fail” in the sense of a particular capitalist economy reaching a crisis point where it becomes impossible for it to function as a capitalist system any longer. That’s what Marx predicted. I have never accepted Marx’s theories, but what he described is not logically, definitionally impossible.

20

I technically am a master of business, so I think I’m qualified to answer your questions.

Mostly, but we realize that Laisaiz Faire (sp?) capitalism is about as practical as communism. Not every good and service (ie police, fire, roads) can or should be subject to the free market and that through monetary policy, we can steer the economy somewhat so that it does not careen from boom to recession like an 18 wheeler using only the jersey barriers to guide it’s travels down the highway.

The future seems to be a blend of capitalism and socialism, with society deciding which goods and services should be provided in which category.

Market forces exist independently of capitalism or any other ism. Any scarece resource becomes inherently more valuable the scarcer it becomes. The advantage of capitalism is that it is the system closely tied to the market. In other words, it most efficiently provides what the market wants.

Trade is just another way of distributing resources. First come/first serve, lottery, and rationing are examples of other systems.

As raw materials are converted to finished goods, value is added along the way. I have little use for 4 oz of space age polymers, but fashion them into high performance sunglasses, I might pay $100. The cost of those glasses has to reflect not just the labor and materials but R&D, transportation costs, capital equipment, and other intangibles. If those economic costs aren’t covered, then the goods aren’t worth producing.

As you showed in your own post, those on the bottom don’t stay there. Right now, labor is cheep in parts of Asia. As the standard of living rises, they export labor to other countries, increasing their standard of living.

The biggest flaw of capitalism IMHO is that a free market is a reflection of the aggregated wants and needs of the people. People don’t always want whats best for them or for society.

You mean people like Adam Smith? While imperfect, the tendency of capitalism to increase production of desired goods, drive down costs and eliminate waste through competiton does seem to trend toward overall progress.