Capitalism, between Scylla and Charybdis

Wait a moment, you’ll say, why would I pay more wages when it is uncertain that this will directly translate into greater consumption of my goods and services? The consumption will be distributed across the entire market, so the market will benefit as a whole, while my shareholders will take the direct cost, which can hardly be justified?

I will only smile.

You see, the main reason why the so called free market economy works at all is the fact that it is state-regulated to a very large degree. But let’s start from the beginning.

There is an important aspect of capitalism which I haven’t yet mentioned, and it’s called the economy of scale. This means that if you produce more goods, you earn more profit for the same amount of investment in the production facilities; basically, if you sell 100 units of something and someone else sells 10 units, you both have the same expenses for the factory, you need to sell 20 units to break even. You are earning profits after the 20th unit, and the guy who sells 10 unit goes broke because he acquires a loss. What you then have to decide is whether it’s more useful for you to buy his factory and increase your production capacity, or to simply raise prices because you are out of a competitor. Essentially, as you grow larger, you increase your profit margin, which you can either collect, or use to pressure the competition by lowering the retail prices, forcing them to match and thus, because they are smaller, become unprofitable and either sell their business to you or go bust. When you killed everybody, you then control the market an can raise the prices as much as you like.

This is why capitalism initially produced the “captains of industry”, a phenomenon where all the manufacturing capabilities and all the capital were concentrated in a handful of monopolists who divided the market between themselves, thus determining the prices of everything and effectively ending the concept of free market.

This in turn forced the state to intervene, proclaim a “new deal” (a poker term, meaning the reshuffling of cards), break up the monopolists and legislate against such concentration of capital in the future. This is why I smile at the naivete of the free-market zealots: they don’t understand that the laissez-faire thing had already been tried, and that it lead to the point where all the factories, railroads, oil everything were owned by a handful of people, who then proceeded to dictate the way of life for all the others. The state, which the laissez-faire proponents so vehemently oppose, then intervened in order to re-instate at least some semblance of fair play into the market, assuring that nobody can get so big as to buy everybody else and thus have complete control.

I am not actually sure who initiated the process of legislating syndical rights, whether it was the state or the oligarchs, but the thing is, when a dozen people divide the market between themselves, it is quite easy for them to overcome the conundrum from the beginning of the article: when you’re so big that your consumers are in fact all consumers, for instance if you are Rockefeller and you own Standard Oil, you have no problem deciding that better wages for your workers mean greater marketplace for petroleum products. It is obvious, because the two essentially overlap. All your employees have petroleum lamps and need oil. It’s a no-brainer. And since the ten guys who owned the country already formed cartels to determine prices to mutual satisfaction, the precedent was already set for determining the price of labor. If the state did anything there, it was to assure them it was in their own best interest to have a marketplace that can actually consume goods.

So essentially, what I’m trying to say here is that a weak state results in strong companies which then take most of the roles of the state, and it didn’t prove to be a good thing. More often than not, the corporations will act in a very shortsighted manner and mess things up so hopelessly, that it will be up to the state to try and fix things. On the other hand, if the state grows too big, it will produce more legislation just to present an illusion of its usefulness, and levy more taxes to pay for all that paperwork, increasing the inner resistance of the economy to the point utter inefficiency, which then produces another dead end, and the pendulum turns to the free market proponents who rightly suggest weakening of the state and increasing the influence of the businesses. Unfortunately, once the state gets that much power, it will not willingly give it away, especially since big state means lots of employees, who vote, and have family members who vote, and this pressures the democratically elected leaders to preserve the status quo and increase pressure on the economy with more taxes and legislation until something gives.

It’s anyone’s guess how this may end. For instance, the first thing a state does when it can no longer pay for its expenses with taxes, is to go into debt. This goes on until it becomes financially insolvent, and then you get what’s happening to Greece: basically everybody works for the state, and despite all the propaganda about those evil capitalists who don’t pay enough taxes and the evil banks and foreign states who refuse to give them more free money, the fact is that there is really no reason for wealthy people to pay such excessive taxes at all, since they get nothing for it, really. It is fine to contribute to the common good with a tenth of one’s income, and even to contribute to the spiritual well-being of the community by contributing a tenth of one’s income to the church, but that’s 20% of one’s income. In today’s countries, you are taxed several times as much – both on the income side and on the expense side, until there’s really no motive for anyone to work anywhere but in government, because that’s where all the power seems to be. This, in turn, will collapse the economy and after the governments exhaust their last resort of printing money without backing, everything will go the way of the glorious Weimar republic, which was so bad that Hitler seemed to offer a good way out.

So basically, here we go again.