This is the second of a multipart series on the past and future of capitalism. Part I is here.
When all of the property in a given society is owned by a single actor – say, the king, or a state – it will be managed at the actor’s discretion. It takes little imagination to think of the various beneficial or sinister outcomes that can emerge from this arrangement. Under feudalism, the commons were legally owned by the king, and the king generally deferred to the custom of letting peasants use them for certain purposes like farming.
Capitalism, however, presents a very different scenario. Under capitalism, all of a society’s property has been divided into parcels and privatized, meaning that a number of different actors have sovereign legal rights to do what they like with their property. Moreover, capitalism places these actors in a competitive relationship wherein they are driven to acquire each other’s property through various formal transactions like trade. These features of capitalism place everyone in a kind of economic ecosystem that we call a market; and much like biological ecosystems, markets tend to behave predictably as if they are following certain rules. This point is uncontroversial in economics – indeed, it is the very point of economics to uncover what these rules are.
Karl Marx’s analysis of capitalism claims to uncover a whole collection of these rules. Many of them are logically independent: some rules that he describes may accurately show us how capitalism works, even if others are incorrect. Let us turn to one of them now: Marx’s law of capitalist accumulation.
Marx begins with the observation that in capitalist markets, “the battle of competition is fought by the cheapening of commodities.” This is simply a restatement of the truism that competitors in capitalism can win by lowering their prices. He then observes that a vendor’s ability to lower prices depends on his ability to lower the costs of production, distribution, and so on; if he cannot do that, then he loses money.
Here is where an important dynamic comes into play: economies of scale. Simply put, bigger firms have advantages in production and distribution that smaller firms do not. Suppose for example that your company wants to make widgets, which requires two things: a machine to make the widgets, and the plastic the widgets are made out of. To make any money off of your widgets, you will have to at least earn back the cost of what it took to make them. But crucially, while this means that each widget will have to earn back the cost of the plastic it took to make it, each widget can split the cost of the single machine it took to make all of them. What this means is that as you make more widgets, the fraction of the cost of the machine that gets tacked onto the price of each widget gets smaller and smaller. If the machine cost $1.00 to buy and only made a single widget, that one widget would have to earn back the entire dollar. But if it made two widgets, each widget would only have to earn back 50 cents; and if it made four widgets, each widget would only have to earn back 25 cents.
So bigger firms that make more widgets can sell them at a lower prirce than smaller firms that make fewer widgets. This is a well-known dynamic of production – again, called “economies of scale” – that you can find in any first year economics textbook.
Marx’s genius was to recognize that this creates a self-reinforcing cycle. The bigger the firm, the lower the prices of its products, which means it will sell more products; and the more products a firm sells, the bigger it gets. “Therefore,” Marx writes, “the larger capitals beat the smaller.” The smaller firms just can’t compete; Wal-Mart drives one small department store out of business, takes in all of their customers, and then is able to drive a slightly larger department store out of business.
It is this dynamic that defines Marx’s law of capitalist accumulation. And it is this dynamic, Marxists argue, that explains why wealth has become more and more concentrated since the moment capitalism began. We saw this throughout the 16th, 17th, and 18th centuries, culminating in The Gilded Age and the great monopolies of the 19th century. And now we are seeing it again in the late 20th and early 21st century; we have already gone from a remarkably egalitarian distribution of wealth in the 1960s to a 21st century economy that has seen more multi-billionaires than any other time in history.
This process of concentration and centralization, Marx argues, can’t go on forever. Eventually, giant firms become monopolies. The competition that gave capitalism its dynamism, that was responsible for driving all of its innovation and productivity, and that maintained a kind of equilibrium of power between competitors that granted capitalist society its political stability – all of this dies out. Meanwhile, Marx argues, monopoly capital uses its power to drive down wages, relax workplace safety laws, and generally expand its profits at the expense of workers; thus “grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class”. Eventually, Marx insists, workers will have to overthrow capitalism as a simple matter of survival.