Hello friends! welcome to the 2nd blog of the Basic series. In the first blog, I talked about communism. Today let's talk about capitalism. What is capitalism exactly? How successful was it? or did it fail? let's find out.
Table of Contents
- Introduction
- Primitive Capitalism
- How does money make money?
- The ideology of Adam smith
- Karl Marx v/s Adam smith
- Rise of Monopolies
- They are of surplus value
- Joint Cooperatives
- Rise of Keynesianism
The word "Capitalism" comes from the word Capital which means money. or any topic of wealth. Whether you have houses or cars on land, they are your capital. In the last blog, I gave you the basic definition of communism.
It is a society where every person works according to his ability and receives according to his needs.
If we have to define Capitalism similarly, Capitalism is a society where "from each according to his ability, To each according to his capital".
A society where every person works according to his ability but gets returns according to their capital. The person with the most capital will get the most profit. After knowing the definition you'd ask me:-
"What kind of a society is this?"
"Where a person who has more money will get more money".
You heard it right, friends. I'll talk about the actual work later in the blog.
Basically, Capitalism is an ideology that promotes privatisation where the means of production like land, fields, factories, and industries, are owned by private individuals. In communism they were owned by the public, everyone owned these. Similar to communism, capitalism is a very broad term and ideology. There are many subsections of ideologies with differences among them. But if you look at it broadly, a few things are common in all types.
First is the Privatisation
Second, Minimal interference by the Government
Most capitalists believe that the Government has no business to be in business. This dialogue has been used by our Government recently.
The third is the Free Market and competition.
Fourth is something that is easily seen in a capitalist society, "Money begets money". Money is earned through Money. I explain this later.
First, let's talk about:-
The history of capitalism ( Primitive capitalism )
The oldest example of capitalism is feudalism. This can be called the primitive form of capitalism. This was around the 10th century when landlords occupied land, and the farmers and labourers who worked on the ground, worked tirelessly to grow crops. But all the profits from the land used to be taken by the landlords, and the farmers hardly earned enough to get by. you may wonder how this is an example of capitalism. The land was owned by an individual, the landlord. And to whom did most of the profit from the ground go? The landlord.
How does money make money?
Capitalism works similarly today. Whatever you do at whichever company, suppose you're an employee at Apple, you work the whole day and get a monthly salary in return. But the company earns get a monthly profit go? It doesn't go to you It goes to the company's owner.
Obviously, there are differences. Today you get workers' rights and minimum wages and are not exploited, in most cases who is the owner of this apple company? That person who holds the most number of shares of the company. Even you can become the owner of the company through the share market. If you buy some shares of Apple, any profits earned by it, you will get a part. Because you are also an owner of a portion.
We live in such a capitalist society today. An employee works in a company for a monthly salary and the profit earned by the company will be distributed among people who don't even know the day-to-day work of this company. You can earn a profit for the company by doing nothing if you invest in the company. And who can invest? Someone who already has the money. As I said, money makes money. One with the most money in a capitalist world can make 'more money easily by investing in such companies and taking their profits.
The ideology of Adam Smith
Modern capitalism started in the 16th-17th century in Britain and Netherlands. The first stock exchange of the first company to be listed was the Dutch East India Company in 1602.
Like there's Karl Marx for communism, similarly, there adam smith for capitalism. Know as the Father of capitalism. In 1776 he wrote the book The wealth of Nations. In the book, he talked about a policy laissez-Faire. It is a french word that literally means ' leave alone. The government should the economy alone and should not interfere. From here free market capitalism started.
Suppose you want to open a pizza and so does your neighbour. If a third person does not interfere between the two, there will be very interesting and fair competition between you. About who can make the better pizza and sell it at a lower rate. Both of you will try to compete with each other and start experimenting. Trying to improve the quality of the pizza. Because of this competition, both of you will innovate and think of new ways. About how the pizza can be improved and sold at a lower price. In the opinion of Adam smith, this competition was the invisible hand of the free market. where no one is forcing you to make a better, but the market situation is forcing you to innovate to make a better pizza. you are working only for your self-interest. you want your restaurant to grow and earn more profit and perform better than your neighbour. But your working in your self-interest is also benefiting others. It is also in the interest of society that you work for your self-interest.
This is the philosophy of Adam smith. To increase the efficiency of your pizzeria you'd eventually realise that doing everything was not smart. if you start taking orders yourself and making the pizza, it'll take a lot of time. It would be better to hire a few people. One to take the others at the from dest. One who'll make the Pizza and buy ingredients for it. One who will put the toppings on the Pizza and put it in the oven. And one whose work would be to deliver the pizza.
This is the Division of Labour. Every person specialises in his work and because of the specialisation, productivity and efficiency increase rapidly. Adam smith talked about this as well. This is one of the major reasons for the success of Capitalism across the world. Everyone realised that if they want to work in a better manner at a better speed, division of labour and specialization is necessary.
Take Apple company, if a person wants to build an iPhone, it will take him years. but if there is an assembly line of workers to manufacture these iPhones, where the first person would fit the screen and the second will fit the screws, then the assembly line will be able to manufacture numerous iPhones in a day. By implementing these ideas industrial Revolution began. Where large factories were established; but what happened then? I talked but that in the communism blog. The workers were forced to work for hours in terrible conditions. They were getting exploited and eventually communist ideologies started.
Karl Marl v/s Adam Smith
After hearing this you'd think that Karl Marx and adam smith would be sworn, Enemies. But this wasn't so, in reality, Karl Marx has written the book Das Kapital, in which he agreed with many viewpoints of Adam Smith. There were definite disagreements between them but it can be said that they were looking at the same situation from different perspectives.
On one hand, Adam Smith focuses on productivity and efficiency ( The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour. )
On the other hand, Karl Marx agrees that productivity and efficiency would indeed increase but his focus is on the individual. ( " the alienation of the worker is expressed thus: the more he produces, the less he can consume; the more value he creates, the less value he has. Labour produces fabulous things for the rich, but misery for the poor. Machines replace labour, and jobs diminish, while other workers turn into machines". )
He says that the worker would start feeling alienated if he works on repetitive tasks. To do the same for hours and years on end. The worker would not be proud of his work. He would question the purpose of his life. seeing himself as only a small gear in a piece of large machinery.
Karl Marx believed that specialisation would make workers more easily replaceable, and the capitalist would get more power to exploit the workers. The ideas of Karl Marx and Adam Smith are two perspectives on the same situation. Remember that both of them were born in different eras.
Adam Smith died in 1790 and Karl Marx was born in 1818. 1790 was a time when the Industrial Revolution had just begun. And Karl Marx grew up seeing the workers being exploited in the factories. Maybe if they lived in the same era, their opinions would have been agreed upon.
Rise of Monopolies
Moving ahead in history, we know that communism was first implemented in the Soviet Union. When it comes to the implementation of capitalism, in 1902 a significant incident happened. Three large steel companies in the USA, Carnegie steel, Federal Steel and National Steel, merged together to become US Steel. This was the first billion-dollar corporation in the world. Elbert H Gary was the chairperson of the company. And in the first year, it manufactured 2/3rd of the steel manufactured in the US. But there remained some competition in the steel industry. So Garry invited all his competitors for a dinner and asked them why they were fighting amongst themselves while someone else was benefitting from their competition. He suggested that they work together and stop competitive pricing. This was how the first billion-dollar company in the world become a monopoly.
According to the theory of Adam Smith, the Invisible hand of the free market was supposed to work and set things right. but in reality, this did not happen.
Whenever there's a monopoly for anything or a company, it is terrible for the consumers. Imagine you are stranded in a village late at night, waiting for a taxi. And the nearest city is 100-200 km away. But there is only one taxi. You ask the taxi driver to take you to the city, While he charges 500 rupees for the distance normally, he tells you that he would charge you 50,000 rupees for taking you. You will not have any option. The taxi driver will have a monopoly here. You are forced to pay that sum. This extra amount is known as profit in Capitalism.
Theory of Surplus Value
In Das Kapital, Karl Marx talks about this theory, the Theory of surplus value. If I run a company that manufactures a product, and you are an employee working in the company that actually makes the product, Suppose I earn a profit of 80,000 rupees by selling that product, but I pay 8,000 rupees to you as a salary. The 72,000 rupees that we put in is called profit, which Karl Marx called surplus Value.
The value of goods - the value of labour = Surplus value
All the surplus value and profits are taken away by me and you get only a salary. This is often seen in Capitalism. There can be many examples of this. A trader buys products very cheap from the framer and sells them at a much higher price. The profit or surplus value is taken by the trader. A scientist discovers the formula for a vaccine but in reality, the pharma companies selling that vaccine get the most profits. A singer actually sings the song, but it is the music label companies that take most of the profit.
According to Karl Marx, this is a system where everyone is trying to climb a ladder to stop being exploited, but as soon as they reach the top they would start exploiting others. A system where work is not rewarded but money is. If you have the money to establish a company and employ people, you can take away the maximum profits.
But obviously, not every company is like this, not every company owner is like this that'd keep on exploiting the employees. In contrast, the companies owned by private individuals are Joint Cooperative Companies such as Amul. More than 36 lakh of farmers are joint owners of Amul Co-operative. This is not a company listed on the stock market. You and I cannot invest our capital in Amul's company. The profit earned by Amul and its benefits is distributed among these farmers that have created this company together.
Joint Cooperatives
But obviously, to make such cooperation, one person has to take the lead. In the case of Amul, it was Tribhuvandas Patel who set up the Cooperative in 1946. Under the guidance of Sardar Vallabhbhai Patel. Regarding this, there was a film as well called Manthan. It was the first crowd-funded film in India. More than 5 lakh farmers working in Amul contributed 2 rupees each to make this film. Anyways, I got too diverted in the story.
Rise of Keynesianism
Coming back to the history of Capitalism, in 1929, Capitalism received a huge shock when the stock market crashed terribly and the Great Depression started. The recession has been a very regular feature of Capitalism. At this point entered the revolutionary economist Keynes, who altered the history of Capitalism. He believes that the Invisible Hand of the free market does not actually exist. In reality, if the free market is left free, it will lead to depression, recession, and monopolies. The theory of Keynes was that governments should interfere with and regulate companies. Small companies should be subsidized, and big companies should be prevented from getting monopolies, there should be strict rules and regulations in place.
Governmental Intervention
If the economy goes through a recession, the government should:
Increase the level of government expenditure on public works
- More people are employed
- Government must buy products from private manufacturers, which further stimulates the economy.
Cut Taxes
- If people are making more money, they will want to buy more things, which would help the economy.
Decrease interest rates
- If it is more economically beneficial for consumers to spend, rather than save, the economy will be further boosted because the more money that goes through the economy, the better off the economy is.
In the decades that followed Keynes, countries all over the world took inspiration from him and implemented a modal of Capitalism where rules and regulations existed. The next big shock to Capitalism was in the 1980s when Ronald Reagan in the USA and Margaret Thatcher in the UK reintroduced the free market of Adam Smith to the world.
The capitalism implemented in these two countries is known as Neoliberalism. The basic foundational idea of Adam Smith is that government should not interfere in the market and market share runs itself, and there exists an invisible free hand of the market, The current status is that in the last 40 years, in many countries of the world, especially the USA, we have seen Neoliberalism being implemented. Because of this inequalities have been rising significantly in the US. The rich are getting richer and the poor are not able to improve their situation. The big companies are starting to become monopolies. The impact of Neoliberalism has been felt in India as well.
What were the successful ideas of capitalism? What are the dangerous failures of Capitalism that we see today?
I will talk about it in detail in the next blog. I hope you found this blog informative, please share it.
Let's meet in the next blog. Thank you very much for reading this blog.