Far more than you ever wanted to know about economics (but far less than you need to know)

What do we know about capitalism?

It’s an economic system, functioning in part to produce and distribute goods and services. A capitalist system differs from a planned or command economy in several ways. Command economies, often associated with socialist governments, get their cues from the central government, which decides what will be produced, what factories will be built, how many wood screws and of what sizes the country will need, etc. Capitalist systems are built around markets, where buyers and sellers, through transactions, help determine supply, demand, and price. Entrepreneurs may seek investment capital to produce some good or service for which there is demand. If demand is high and supply is low, price usually increases. Think toilet paper during the height of the Covid-19 pandemic. Capitalist systems are usually much more efficient at producing goods and services valued by consumers, because at some point they respond to consumer demand (that’s a little naive, though–they also work to shape consumer demand through propagandistic industries, like advertising). Governments don’t necessarily have to do this. Despite claims that the huge defense buildup of the 1980s brought down the Berlin Wall, as much as anything, a more likely contributing factor to the collaps of Eastern Bloc countries’ socialist systems was that people became tired of waiting in long lines for stale, state-baked bread (and using a big chunk of their salaries to buy blue jeans on the black market . . . ). Explanations of revolution prefer long bread lines to ideology. 

Markets

What is a market? Well, think about markets in your town. Is there a market for food? Where? Safeway/Albertsons/Freddy’s/Grocery Outlet/Summer Farmers’ Market, etc.? Other markets here and/or elsewhere? For stocks, videos, undergraduate education, recorded music, TV programming, grains, livestock, etc. Think about the undergraduate education example. You might have considered other schools when you were thinking of attending EOU. There is a marketplace from which prospective students choose. You probably did some cost benefit analysis to figure out your opportunities, options–what does tuition cost, what is the likelihood of acceptance, how long will it take to get my degree, do they offer what I want, how would a degree from EOU stack up against other schools, etc. If you go to Safeway and Albertsons, you’ll find that the prices on their food items are similar. Why?

Now, think of a labor market. What is price in a labor market? What are the goods? Workers? How does supply and demand work? Skills? Location? What drives up wages (which, by the way, represent price in your modern labor market)? Unions, job skills, supply, etc.? Regulating the Poor focuses on the labor market concept.

Capitalism is dynamic

Because the system depends on individuals, presumably acting on their own self-interest, it is a very dynamic system, constantly in flux. Most of the time, like two tectonic plates occasionally moving and causing an earthquake, changes are small and incremental. But like those tectonic plates, sometimes the pressure builds, and seemingly immovable objects are dislodged–like the Big One or a Great Depression.

Think of the labor market. And let’s throw the stock market in to complicate things. Okay, China announces that it will open up new free trade zones for garment factories. Average wage in Beijing, China–where wages are highest–is about  $4/hr in 2022 (maybe that’s even too pricey for the companies looking to truly maximize the capacity to exploit the local labor force in a low-income country). American clothing companies begin drooling. The last of the garment manufacturers in the Southern U.S., who were considering going to Mexico, will now relocate to China. The workers will lose their jobs. Stock prices will go up, because this is likely to be good for profits in the clothing industry. Cheap sources of labor do that. They’ve long since abandoned the U.S. Here’s another example. Energy company Enron (in the early 2000s) commits major accounting fraud, in part to keep its stock prices high and keep people investing (so that executives can sell off their stock options and make millions). When the fraud becomes public, stock prices plummet to fractions of pennies per share. As a result, the company goes bankrupt. Thousands of employees lose their jobs, and their retirement pensions. Or consider this: a sawmill in a relatively small timber town re-tools (automates), and the owners lay off 50% of the workforce. We have mechanisms in place to handle these problems in the short run–unemployment insurance, some possibilities for job re-training, etc. The point is, however, that this sort of thing happens every day, somewhere. Markets go up and markets go down, and when they do, people get hired in some places and lose or change their jobs in others. Change is inherent in the capitalist system. Some level of unemployment is thus the norm. In a capitalist system, what would happen in the labor market if we had full employment? 

California has seen waves of migrant workers over the decades. After the Dust Bowl and the Great Depression, thousands of tenant farmers, evicted from their land in the Midwest and South, migrated to California in search of opportunity (John Steinbeck’s novel The Grapes of Wrath chronicles this period in history in painful detail). When they arrived, they saturated the labor market, upset the local balance, and ended up competing with other desperately poor migrants to work for wildly inadequate wages, being beaten by law enforcement for trying to organize, leaving, or starving, among the more common possibilities. The American pickers eventually fought for some improved working conditions, and were eventually replaced by Chinese workers, who were eventually replaced by Mexican workers. In other words, full employment can lead to ‘induced migration,’ to keep wages low.

What drives the capitalist system?

Profit. Entrepreneurs identify opportunities, seek capital and invest in the economy. If they’re producing goods or services, they may hire workers. Generally they seek to minimize workers’ wages and benefits, but remember about labor markets–if they set wages too low, the workers will seek employment elsewhere, right? But workers don’t get the full value of their labor–if they did, there would be no profit and entrepreneurs might not be willing to invest in the economy. This is all simplistic, but hopefully you’re getting the point. This is one reason government workers often fare better than their private sector counterparts–the government isn’t driven by the profit motive. In the non-profit sector, there are no profits per se–they have to be plowed back into the company.

The profit motive means that capitalists always have to be on the lookout for opportunities, or for threats. Look at McDonalds. They were the only game in town 30 years ago in fast food. Now they’ve had to change their marketing strategy, and adjust to a more competitive fast food market. Interestingly, post-Covid they have been paying higher wages to attract workers–in La Grande around $17/hr in Fall ’22. And … competition can be cruel. New technologies lead to more efficient production processes (think about information technology–50 years ago I learned to type on a manual typewriter–automation, or even mechanized agriculture). Cheap labor markets led multinational corporations to relocate their production facilities, which meant a lot more shipping lanes and port traffic, which meant globalization, which meant a vast new universe of profit opportunities. Changing consumer demand can also change markets, and that will affect labor markets. The bust in the high technology economy  in the early 2000s affected Oregon dramatically–much of Portland’s growth in the 1990s was based on that economy. 9/11 had dramatic effects on economies, people travel less, spend less money, states dependent on tourism have especially suffered, etc. Change and unemployment are chronic features of capitalism. The so-called ‘Great Recession’ that began in 2008, driven by high-risk and predatory lending practices bundled and sold as profitable investments by large investment banks, sent shockwaves through economies spanning the globe, and its effects lingered for years. 

Fox Piven and Cloward go on to say that while change is common, the capitalist system is resilient, and can withstand it in general–that’s part of the beauty of it. But . . . major disruptions, such as economic depression or recession (it’s scale–economists might say that recession is when your neighbor loses their job, a depression is when you lose yours), or large-scale modernization, or can leave millions unemployed or without needed job skills, or in a place where there are no jobs (i.e., the tenant farmers during the Dust Bowl).

Karl Marx would say that within the capitalist system are the seeds of its undoing. Why?