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the life cycle of capitalism

By Staff
2.13.2010
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This discussion about capitalism will argue that the economic law of economies of scale MUST result in ever fewer, ever larger corporations over time. Furthermore it will be argued that this is in fact what has happened in America over the course of the past 200 years.

Capitalism, has a natural cycle due to economies of scale.

We are told today by the people in charge, that the success of America is due to the long term embrace of laissez-faire free market capitalism.   The phrase is French, and it literally means to “let do” and more broadly it implies “let it be” or “leave it alone”.  According to the origins of the words, it means “allowing industry to be free from state intervention”.  M. Le Gendre famously replied when the mercantilist minister asked how the French state could be of service to the merchants,  “Laissez-nous faire” (‘Leave us be’, lit. ‘Let us do’).

Yet today, the US government owns the majority of the housing in the United States through the ownership of the largest mortgage institutions. The Government is the largest US employer. The Government owns the automakers.  It bails out large so called “too big to fail” corporate entities with the citizens money. So this is not “hands off” or “let it be”, this is the exact opposite of that which is direct ownership or financial interest while being financed by the taxpaying citizens.

“And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.” – Senator Dick Durbin 2009

According to the literal definitions of words, what has happened over the course of the past 200 years in America is that the United States used to be laissez-faire free market capitalism, but it has moved far from that, almost to the other extreme which is in this case fascism or a corporate/government merger. A very few, very large corporations, banking interests and powerful special interest groups are in control. It is however still being called today what it used to be, in a convolution of  terms.

People in America today all shop at the same mega retailers, they consume their media from a handful of corporations,  satellite radio beams from coast to coast instead of local programming, shopping malls look exactly the same anywhere in the US,  mega global restaurant chains span the globe.

This mincing of words has left a lot of people confused.  Capitalism means competition but more importantly it means hands off. It means letting large bankrupt entities fail.  Many US citizens would gasp at the notion that the US has decayed into Fascism and yet do not understand the fundamental definitions and concepts behind the words.  Recent polls have shown that when the public et al is asked how they feel about capitalism, they say they don’t like it. What they are really saying however is that they don’t like what this is. What this is, is fascism. It is exactly the opposite of what it is called using the definitions of the words, and the definitions of words are the only thing we have to go by.

What a mess.

So how did we arrive at this point? The economic law of economies of scale states that if you are a larger entity, and if you can buy and produce in larger quantities, then your marginal cost of production will be lower.  Simply stated it means the larger you are, the lower your cost of production and the more competitive you are.

Because of this economic law, what happens over time is that competition favors the larger entity. You didn’t see mom and pop hardware stores invading the landscape in the US and putting out of business Home Depot and Lowes, did you? In fact,  it was quite the opposite, wasn’t it? The fact is that in every avenue of competition, there have become ever fewer, ever larger players over time.  As they have grown in size, they have bought increasing influence and political power and have erected barriers to entry to new competition. The banking institutions have  become so large and powerful that they are immune from failure. They now have the ability to draw on the people’s future labor to meet their margin calls from speculation. The corporations have bought so much power that the US Supreme court ruled in 2010 US corporations can now make unlimited political contributions. Now the few large remaining corporations have nearly unlimited power because they fund and control the political body directly.

So the fact is that what started out in America as laissez-faire free market capitalism and is still called that today by the people in charge,has  slowly and continusouly decayed into something else.  The larger corporations have consumed the smaller corporations because of the law of economies of scale. They have bought more power and influence and thrown up new barriers against smaller competition and new market entrants.  Now, we are at such an advanced stage in this process that in many areas of competiion there are only two or three players left. In some there are only one.  The government, the ultimate corporation, has become the largest.

So, the point of this essay is to say that because of the economic law of economies of scale, capitalism has a natural cycle. It goes from capitalism to fascism. In fact, this was known to be the case over 100 years ago.

“Fascism is capitalism in decay” – Vladimir Lenin – Founder of the Russian Communist Party

To conclude this set of words, stated as a theorem: “Capitalism has a natural cycle and continuously decays into Fascism due to the economic law of economies of scale.”  – Craig Harris

Monopolies Everywhere
By James Kwak
Thomas Frank has a review in the Wall Street Journal (behind a paywall, but Mark Thoma has an excerpt) of Barry Lynn’s new book Cornered, which apparently documents the prevalence and power of monopolies and oligopolies in lots and lots of industries, not just finance.
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  1. February 13, 2010 at 11:19 pm

    [We are told today by the people in charge, that the success of America is due to the long term embrace of laissez-faire free market capitalism.]

    Straw man! Every time we came close to laissez-faire capitalism, the economy collapsed! That’s what caused the Great Depression!

    • Andy V.
      March 23, 2012 at 3:51 am

      NO, what the federal reserve caused the great depression with their easy money policies of the 20’s. They were roaring because of inflation by the fed!!!This is not a natural market force!!!

  2. Bill
    February 15, 2010 at 2:02 pm

    One point I would make is that if the “too big to fails” had been allowed to fail, that would have had a natural cleansing effect of taking out the largest and allowing new entrants. The point I’m taking away is that since it did happen the way it did, you can argue that once the big guys get so big, they have enough political power to prevent their demise. Does it have to be that way? Excellent food for thought and this is a very though provoking piece.

  3. Rae
    February 19, 2010 at 5:27 pm

    Ben Hoffman,

    Your naked assertion shows great ignorance of the forces at work. Any realization of a laissez-faire economy was destroyed by the monopolization of interest rate and money supply controls in 1913 when the Federal Reserve was first created. Additionally, the government granted limited liability which is afforded corporations was already alive by the late 19th century – corporations are not a product of a laissez-faire economy, they are a product of government legislation. Although I might tend to agree with your statement about the straw man argument, your point about laissez-faire causing the great depression is absurd, and it shows no understanding of the many forces that were at work during the time – namely artificially low interest rates, the massive increases in the money supply during the 20’s, and the fractional-reserve banking system (which are all supported by non-market government controls).

    On to the main article… Economies of scale are not the only force at work in a capitalist economy, and they do have their limits. To suggest that economies of scale would inevitably lead to some kind of oligopoly of corporations denies the existence of several other factors – employee satisfaction, desire to do business face to face, individual demand for local production, technology which allows individuals to buy en masse, etc. The local burrito shop that just opened up in my hometown is booming compared to the Wendy’s and McDonald’s that surround them. You do pay slightly more for the food (for they don’t have massive contracts with Smithfield or Tyson), but the customer service is better because the people don’t feel pinned down under a massive corporate bureaucracy- they all dress like punk rockers and people love it.

    Although some efficiencies are gained by size, you also lose some… To suppose that economies of scale are the only forces at work is myopic in my opinion; however, I thank you vehemently for making the rare distinction between modern corporatism and capitalism as a philosophy.

    P.S. Your site is very interesting. Check out mine at catfishsprockets.wordpress.com – music, videos, and random words.

    On

    • February 19, 2010 at 6:07 pm

      You are raising an interesting point of debate, one that I hoped would be raised. The point of debate is that since we have arrived at a situation where the few remaining large corporations have tremendous political influence and power along with the means to erect barriers to entry to new competition, did it have to be that way?

      In other words, in response to your argument that size doesn’t trump all other factors, it appears that in this case, it did. I would argue it was inevitable because money = power in this version of capitalism, maybe in any version.

      That said, I want to be clear that this is not an anti capitalist rant. It is simply an argument that capitalism has a natural cycle which ends with very few, very large and powerful entities. To argue against that, you have to argue what could have been done differently to prevent it, or why it didn’t have to be that way.

    • Andy V.
      March 23, 2012 at 3:53 am

      Amen!

  4. Rae
    February 19, 2010 at 8:55 pm

    Thanks much for your response. I’m intrigued by what you’re saying, and I think that the majority of my previous post, at least the parts concerning your article, were probably mostly a problem of nomenclature.

    It is my belief that any socio-economic system eventually runs into the problem of monopolization of power. This is evidenced not only by recent examples of totalitarian “socialist” or “communist” countries where a great centralization of economic power was held in few hands, but also in ancient Roman or Egyptian times, where feats such as the Pyramids or Coliseum boast of massive economic control.

    Having recognized the tendency toward monopolization in a society, I think it is important to note how it happens…. is it a result of pure trade and economies of scale, or is it a result of political corruption, corporatism, violence, and lies? I would side with the latter. What I was trying to thrush out in my previous post was that there were several distinct steps taken by powerful interests in our country to bring the political system under their thumb. Usually something like – lobby representatives to create a federal bureaucracy, infiltrate it, use it to construct entry barriers to competition, use it to create policies beneficial to the industry, use it to regulate out competition, etc. Or, in similar vein – provide vast sums of money for candidates who are sympathetic to our cause and lobby all the others. The main point is that they did not accomplish their monopolization by free trade, but by corrupting public officials to whom the American populace had outsourced their own defense of property, economic security, and regulation.

    You’ve said “To argue against that, you have to argue what could have been done differently to prevent it, or why it didn’t have to be that way.” In my opinion, the failure we are all witnessing is a result of our unwillingness as people to take responsibility for our own lives. Instead, we have forsaken our natural rights and entrusted them to the largest corporation of all – The United States Government. Government employees, presidents, cabinet members, senators are all subject to the same negative proclivities as any human being, and as they err, they err in broad strokes.

    Since that rant is probably rather unpalatable at this point, I will try to bring it back together by giving a few concrete examples of what could have been done differently to prevent the rise of the modern oligarchy: The government should have never granted businesses the ability to incorporate and achieve limited liability status. The gov’t should not have monopolized interest rate controls and placed them in the hands of the federal reserve (very important for the development of the banking oligarchy). The gov’t should not have constructed arbitrary and destructive intellectual property laws which hamper innovation and human progress(what big pharma relies wholly upon). The government should also not have supported an naturally unsustainable system of fiat currency and fractional reserve banking.

    These are but a few examples, and they are all critiques of government action, albeit influenced by private financiers. Perhaps that is what you meant all along… that capitalism would eventually enrich people enough that they could exploit their governmental structure to their own benefit. IF so, I do agree. I will avoid any type of psychological or philosophic analysis of the human condition at this point, but suffice it to say that I believe it is the consummate and eternal struggle of man to resist anything which operates by violence or threat of violence, which of course is the very foundation of government – instead people should rely on voluntary association alone, and this includes mutually beneficent trade. Greedy capitalists will do everything they can to achieve monopoly status, but without the help of gov’t they will never succeed. Competition, innovation, and general distaste for huge companies are natural hedges which prevent the formation of anything like what we see today.

    I would like to be clear that I am not saying that a laissez-faire socio-economic structure is some kind of panacea that would make us all perfectly equal harmonious beings, but neither is laissez-faire the creator of modern monopolies.

  5. August 30, 2011 at 8:29 am

    Era of Capitalist growth could broadly be marked between year 1775, when James Watt’s coal fired steam engine was deployed somewhere in mines near the city of London and year 2008, when staff at Lehman Brothers packed their personal belongings for one last time before leaving their famous office building in the city of New York. With world peak oil extraction achieved once and for all in the first decade of 21st century and is in a permanent decline from here onwards. Very much like a retiring decorated soldier with lot of war medals on his chest but unfit for redeployment. for full article see http://daradhillon.blogspot.com/2010/11/life-cycle-and-nirvana-of-capitalism.html

  1. February 14, 2010 at 8:12 am
  2. February 19, 2010 at 12:14 am

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