Even though most of us engage in economic activities on a daily basis, few of us actually understand the system.
Of course, since the global crisis we’ve seen a lot of publications on the failures of capitalism and how we could repair, improve, and perhaps replace it. But before thinking about what could be changed in order to improve upon the current conditions, we have to understand how our current economic system actually works.
And while we’re all taught the neoclassical understanding of economics from primary school onwards, to me it seems few of us actually posses the knowledge to critically assess its shortcomings. In an attempt to facilitate such an assessment, I try to clarify some of the main principles in the current economic system.
The image above illustrates the general principle of capital accumulation (click on it for larger version). Reading from left to right, we see a product being produced and sold in the way we are familiar with. In order to produce any object, labour (1) has to meet with materials (2), including means of production, in a productive environment (3). So far, so good.
But then something extraordinary happens: surplus value (4) is created. Or actually, it just comes into being. So when we look at the final price of the product we just produced, it consists of the price of production (5), which includes material resources, labour, means of production, and whatever extra services you can think of, and a profit (6).
At this point, most readers will say: “Yes, of course, this is how it works. One who creates something, should be allowed to profit from engaging in that activity”. I want to stress here that the price of production already included a fee for the producer, which means the profit is basically equal to the surplus value that came falling from the sky before. If we keep in mind that concepts like wage labour, profit, surplus value, and alike are all human inventions, one can seriously question the validity of this ‘profit’ thing.
But once this profit has been generated, where does it lead to? Well, now we’re touching on the core of capitalism. Profit, as you might remember from your high-school economics class, is used to invest. Invest in new means of production, expanding production capacity or research and development. Regardless of its direct application, the final goal is to apply this profit to generate more profit: accumulation for accumulation’s sake.
While of course not all business is as strict about it as could be, the thing that worries me most is the fact that this process of profit generating and investing in means of producing more profit (accumulation for accumulation’s sake) is completely accepted by mostly everybody, everywhere. While this process of accumulation is completely based on human concepts, we tend to think of it as a natural way of relating to one another. For me, realising that words like profit and surplus value are merely human concepts is the first step in understanding the current system, and ultimately finding alternatives.
- Graeber, David. Debt: the first 5000 years. New York: Melville House Publishing, 2011
- Harvey, David. A Companion to Marx’s Capital. London: Verso, 2010
- Harvey, David. The Limits of Capital. London: Verso, 2006