Kapitalism = Capitalism - Regulation

Karl Marx had a theory of capitalism that few of us have managed to understand and fewer still accept.  We wrote him off as a communist agitator, an enemy of democracy and our economic model.   In that, we failed to heed his warnings, dire predictions that have now arrived at our feet.

What we're learning the hard way is that capitalism works best for us when it's subordinate to the state, that is to say it's regulated.   Today the evidence is inescapable that capitalism without regulation becomes the Kapitalism that Marx foresaw.

Ronald Reagan and his followers like Brian Mulroney ushered in an era of deregulation that achieved a near-religious stature.   Republicans to this day, whackos like Rick Perry, still worship at the altar of deregulation despite all the damage that has caused their country and their people.

A word about deregulation.   When you see a politician preaching deregulation you should immediately look for the "for sale" sign tattooed on his forehead.   A politician in a mood to deregulate is generally a politician with something to sell.   What he's selling, in many cases, is the public interest but, of all the forms of political larceny, deregulation is, hands down, the safest.   Sell government assets out the back door and you can go to jail.   Get caught fixing a contract and you may be headed for the Greybar Hotel.   Push through deregulation and you're merely freeing up the economy.  That's why there are six registered lobbyists for every member of the House and Senate - to buy subsidies, tax favouritism, and deregulation for the rich and powerful.   Now, in fairness, not all deregulation is corrupt but a lot more of it is than we often recognize.

But let's get back to Uncle Karl. Writing in today's Sydney Morning Herald, the senior economic advisor at UBS, George Magnus, suggests Marx saw this coming in deregulated capitalism:

As he wrote in Das Kapital, companies' pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an "industrial reserve army" of the poor and unemployed: "Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery."

The process he describes is visible throughout the developed world, particularly in the US companies' efforts to cut costs and avoid hiring have boosted US corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 per cent and real wages are stagnant.

US income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it's smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today's developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates.

The result is visible in the US, where new housing construction and automobile sales remain about 75 per cent and 30 per cent below their 2006 peaks, respectively.

As Marx put it in Kapital: "The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses."

So what is the answer?  We could begin by acquiring an adult view of government regulation.  Blindly accepting that regulation is inherently bad is good for someone, just not you or me.   The Crown Prince of deregulation is globalism, free trade.   Governments surrendered state sovereignty to corporatism, their sovereign right to impose tariffs and trade restrictions to benefit domestic economic and political interests.   It leads to massive job outsourcing and income inequality.  Go back to what Magnus wrote:

"When one company cuts costs to boost earnings, it's smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits."  Nike may like to make those trainers in Vietnam with $3 a day labour but they depend on other companies at home paying their employees $25 an hour so they can afford to buy those shoes.

We need to realize that Marx was right when he wrote that capitalism can self-destruct and, left to its own devices, probably will.   That is what's happening today.   Capitalism doesn't operate as an organized, self-regulating force.   In practice it looks much more like "for profit" anarchy.  If it is going to benefit our societies instead of undermining them, we have to tell it how it is going to behave.  Like an unruly child, it needs boundaries, limits.

Most of all we need a new generation of leaders, a generation whose future financial wellbeing hasn't already been assured.   We need a fresh crop of leaders with vision who can explain these lethal paradoxes to the public and rally support for reform.  Above all else, we need to rid our country of those who would prefer to rule not lead, those who have no vision of the challenges that lie ahead.

We have to recognize the social dimension to healthy capitalism because that is what generates stable, robust societies.   Economic income has to be fairly apportioned between capital and labour to bolster "income formation and effective demand on which companies rely for revenues and profits."   That's not programmed into the system that is the true legacy of Reagan, Thatcher and Mulroney.   They left that out entirely and that was very much by design.