Capitalism: Part II
This is how capitalism works:-
Lets consider ten pig farmers. They are all farming the same size plot of land with the same pigs. They live far from each other but brings their pigs to be auctioned at the town market every so often, which is the only time they meet. The auction is a "free market". Note that it has certain regulations but acts as a legal framework within which certain specified goods can be traded openly. The pigs are sold at market at competitive rates. The pig farmers struggle to make a living, because the market place has many things to sell and because the pig farmers compete against each other. The customers are also struggling because they have to pay more for their meat - ten pig farmers serving one market may not achieve maximum efficiency.
For the sake of argument we will assume that one pig farmer has some good fortune. He inherits some land. His pig farm is now twice as big as before. He can relax a little and sell the surplus meat at auction. He has no interest in driving out the competition - he just uses the extra wealth from selling more meat to have an easier life. Whilst he complains about his competitors he has respect for them. He knows they have to work hard and that he has just been fortunate.
Amongst other things he spends some of his extra wealth on an education for his eldest son, so that he can be sure that his beloved son will have a good start in life. His son learns about all sort of new-fangled ideas, one of which is called "capitalism".
Years pass and the pig farms are now all in the hands of the sons of our original farmers. Our capitalist pig farmer is eager to prove that he can achieve everything his father did and so much more! He intends to use "capitalism" to demonstrate just how big and important he really is! He starts selling his pigs at auction for 10% less than the usual price. His competitors are thrown into disarray. How can they manage to compete? Not realizing that the supply of cheap pigs is stricty limited, they cut their own prices. This cut-throat competition is too much for one pig farmer. He decides to throw in the towel. He needs to sell his farm - but no-one wants to buy it. They don't have the money you see. All except one. Our capitalist pig farmer was already wealthier than the rest - so he buys the pig farm that is for sale. And since he is the only buyer in town he gets it for a knock down price too. Now he has a pig farm three times as big as the nearest competition. The process repeats again, and another pig farmer gets driven out of the competition. We now have one capitalist pig farmer with 7 others. Notice that our capitalist pig farmer has only a small proportion of the total market. Nevertheless he has an effective monopoly. Not only does he set the price of pig meat at auction, he also puts the squeeze on his suppliers eager to get his high volume business. He also sets the price of pig farms, as he is the only one that can afford to pay for more land.
The 7 others are getting worried. There are mutterings at auction. Four of the pig farmers decide to get together to form one big farm. Fantastic! Now they have a farm big enough to compete with our capitalist pig farmer. This is called "consolidation". Sadly they still have 4 farmers living off the same farm so their costs are not competitive. Consolidation seldom works. Unless one of the pig farmers takes the deeds of the other farmers and then throws the other farmers off their land (asset stripping) then they won't be able to compete with our capitalist. So they go out of business too, leaving 4 more farms for sale.
Now we have four farms for sale, a capitalist pig farmer with four farms and three other small farmers. But there are another four farms for sale. All four pig farmers decide they have to snap up these remaining farms. The three small pig farmers haven't got any money to buy these farms, so they go to the bank. They all go to the same bank to take out the debt to buy the farms. It may seem strange that the bank is happy to lend to all three - after all, it looks like only one of the farmers has much of a chance of being succesful - but the bank doesn't care about this as we shall see in a later blog post.
The remaining four farms do not sell for a knock down price like the first two. Now we have more money in the system in the form of debt so that means the demand side for the farms is awash with liquidity causing asset inflation. Nevertheless we assume that the four farms are sold to the farmers that have taken out debt. The farmers with debt are going to struggle to compete with our capitalist. They have interest to pay after all. Eventually most will go out of business. We can imagine that we end up with our original capitalist farmer with four farms and our debtor big farmer who has gradually built up to 7 farms. However, our debtor farmer cannot compete easily with our original capitalist because he has a lot of interest to pay.
At this point our two pig farmers can continue to compete until it's last man standing (the American Dream?) or they can decide that further competition is not worthwhile. The risk vs reward ratio is not good. They form an informal cartel. We do a lot of these in the UK - supermarkets and mobile phones perhaps?
Left to its own devices capitalism will drive out all competition, force down wages but keep prices up (Notice that the purpose of competition was never to decrease prices - it was always aimed at increasing wealth for the winner. After the initial 10% discount on prices the consumer never saw another discount, even with improving efficiency at the farms). In the end all the real wealth - the production capacity - ends up in the hands of a very few. Everyone else is dirt poor (just like Ethiopia). It looks a bit like feudalism but without the guns. The wealth merely passes down in the same families. But did these families deserve such wealth? Our original capitalist merely inherited good fortune. He had no special skills or talents. That wealth stays in the family for ever, since the ones with their hands on the means of production are in an unassailable position. The Duke of Westminster's family have been wealthy for a 1000 years, despite being nothing special. Of course they have blue blood allegedly - but if ever there was a pathetic self-justification for clinging to wealth you don't deserve, that must be one of the best.
Capitalism as a system does have a major flaw. If everyone who works in the capitalist system is dirt poor, who do the capitalists sell to? Well this started to become a problem in the latter part of the industrial revolution, and the answers to this conundrum spawned socialism and consumerism. I'll discuss these another day.
Now you may think that if I'm anti-capitalist I must be a Communist. But this is based on a false dichotomy. Communism is even worse than capitalism, as we shall see in my next post. But in the meantime it is worht reflecting that capitalism sprang up in this example by accident. The free market gave birth to it. It was an inevitable result of the free market, but it rapidly developed a life of its own. No-one person really controlled it. Deus Ex Machina? The god of capitalism created from the machine of the free market.
Lets consider ten pig farmers. They are all farming the same size plot of land with the same pigs. They live far from each other but brings their pigs to be auctioned at the town market every so often, which is the only time they meet. The auction is a "free market". Note that it has certain regulations but acts as a legal framework within which certain specified goods can be traded openly. The pigs are sold at market at competitive rates. The pig farmers struggle to make a living, because the market place has many things to sell and because the pig farmers compete against each other. The customers are also struggling because they have to pay more for their meat - ten pig farmers serving one market may not achieve maximum efficiency.
For the sake of argument we will assume that one pig farmer has some good fortune. He inherits some land. His pig farm is now twice as big as before. He can relax a little and sell the surplus meat at auction. He has no interest in driving out the competition - he just uses the extra wealth from selling more meat to have an easier life. Whilst he complains about his competitors he has respect for them. He knows they have to work hard and that he has just been fortunate.
Amongst other things he spends some of his extra wealth on an education for his eldest son, so that he can be sure that his beloved son will have a good start in life. His son learns about all sort of new-fangled ideas, one of which is called "capitalism".
Years pass and the pig farms are now all in the hands of the sons of our original farmers. Our capitalist pig farmer is eager to prove that he can achieve everything his father did and so much more! He intends to use "capitalism" to demonstrate just how big and important he really is! He starts selling his pigs at auction for 10% less than the usual price. His competitors are thrown into disarray. How can they manage to compete? Not realizing that the supply of cheap pigs is stricty limited, they cut their own prices. This cut-throat competition is too much for one pig farmer. He decides to throw in the towel. He needs to sell his farm - but no-one wants to buy it. They don't have the money you see. All except one. Our capitalist pig farmer was already wealthier than the rest - so he buys the pig farm that is for sale. And since he is the only buyer in town he gets it for a knock down price too. Now he has a pig farm three times as big as the nearest competition. The process repeats again, and another pig farmer gets driven out of the competition. We now have one capitalist pig farmer with 7 others. Notice that our capitalist pig farmer has only a small proportion of the total market. Nevertheless he has an effective monopoly. Not only does he set the price of pig meat at auction, he also puts the squeeze on his suppliers eager to get his high volume business. He also sets the price of pig farms, as he is the only one that can afford to pay for more land.
The 7 others are getting worried. There are mutterings at auction. Four of the pig farmers decide to get together to form one big farm. Fantastic! Now they have a farm big enough to compete with our capitalist pig farmer. This is called "consolidation". Sadly they still have 4 farmers living off the same farm so their costs are not competitive. Consolidation seldom works. Unless one of the pig farmers takes the deeds of the other farmers and then throws the other farmers off their land (asset stripping) then they won't be able to compete with our capitalist. So they go out of business too, leaving 4 more farms for sale.
Now we have four farms for sale, a capitalist pig farmer with four farms and three other small farmers. But there are another four farms for sale. All four pig farmers decide they have to snap up these remaining farms. The three small pig farmers haven't got any money to buy these farms, so they go to the bank. They all go to the same bank to take out the debt to buy the farms. It may seem strange that the bank is happy to lend to all three - after all, it looks like only one of the farmers has much of a chance of being succesful - but the bank doesn't care about this as we shall see in a later blog post.
The remaining four farms do not sell for a knock down price like the first two. Now we have more money in the system in the form of debt so that means the demand side for the farms is awash with liquidity causing asset inflation. Nevertheless we assume that the four farms are sold to the farmers that have taken out debt. The farmers with debt are going to struggle to compete with our capitalist. They have interest to pay after all. Eventually most will go out of business. We can imagine that we end up with our original capitalist farmer with four farms and our debtor big farmer who has gradually built up to 7 farms. However, our debtor farmer cannot compete easily with our original capitalist because he has a lot of interest to pay.
At this point our two pig farmers can continue to compete until it's last man standing (the American Dream?) or they can decide that further competition is not worthwhile. The risk vs reward ratio is not good. They form an informal cartel. We do a lot of these in the UK - supermarkets and mobile phones perhaps?
Left to its own devices capitalism will drive out all competition, force down wages but keep prices up (Notice that the purpose of competition was never to decrease prices - it was always aimed at increasing wealth for the winner. After the initial 10% discount on prices the consumer never saw another discount, even with improving efficiency at the farms). In the end all the real wealth - the production capacity - ends up in the hands of a very few. Everyone else is dirt poor (just like Ethiopia). It looks a bit like feudalism but without the guns. The wealth merely passes down in the same families. But did these families deserve such wealth? Our original capitalist merely inherited good fortune. He had no special skills or talents. That wealth stays in the family for ever, since the ones with their hands on the means of production are in an unassailable position. The Duke of Westminster's family have been wealthy for a 1000 years, despite being nothing special. Of course they have blue blood allegedly - but if ever there was a pathetic self-justification for clinging to wealth you don't deserve, that must be one of the best.
Capitalism as a system does have a major flaw. If everyone who works in the capitalist system is dirt poor, who do the capitalists sell to? Well this started to become a problem in the latter part of the industrial revolution, and the answers to this conundrum spawned socialism and consumerism. I'll discuss these another day.
Now you may think that if I'm anti-capitalist I must be a Communist. But this is based on a false dichotomy. Communism is even worse than capitalism, as we shall see in my next post. But in the meantime it is worht reflecting that capitalism sprang up in this example by accident. The free market gave birth to it. It was an inevitable result of the free market, but it rapidly developed a life of its own. No-one person really controlled it. Deus Ex Machina? The god of capitalism created from the machine of the free market.
Labels: asset, capitalism, communism, consolidation, consumerism, socialism
posted by Schadenfreude at
11:45
3 Comments:
Hmm.. But where is invention and investment? A farmer who got more use from his land could compete better? A new breed of animal. A better marketing plan.Another market etc.
I realise that your example is a simple one for explanation purposes, but there is more to it.
Ford no longer own the motor industry, but they once very nearly did.
And even in pig farming i'm sure there are market forces, diseases , natural catastrophe, taxes etc that will show that either talent, cunning, corporate mindset, greed intelligence or all of them and more are also necessary to create sustained success.
Also our history shows that the corporations don't really go much beyond 50 years. Triang owned model railways.. gone.
C and A? Had the clothing market in the UK for a decade, shared with M&S.
M&S survived but C&A is long gone.
Wealth handed down is no guarantee of continuing market success.
But you have made me think... and want a bacon sandwich.
Hi Bill,
Yes it is simplified, but it is roughly speaking true. And yes the people that rise to the top of the capitalist system do change faces - but they are more or less the same as far as the ordinary working man is concerned.
Some capitalists do get to the top from innovation. Henry Ford was an innovator. But then he left his company to his descendents. His descendents tried to innovate, but failed. Nevertheless they keep hold of the company despite having little positive contribution to it. It is difficult to get the wealth off the kids once they get their hands on it you see. It buys them advantage, but they don't necessarily deserve that advantage. Even if a corporation fails there is no reason to believe the children of the rich have not simply taken their wealth out of that corporation and invested it in something more profitable run by someone that knows what they are doing. They own the land, perhaps, but get someone else to slave, sorry, farm on it. In that case the innovation springs from the employees, not the employers.
The fact is that the real wealth, such as land, is rather limited in supply. If the land is owned by the likes of Persimmon Homes and the Duke of Westminster, you can be sure as hell the ordinary man will be made to pay through the nose for it. In fact, it may be that ordinary people CAN'T get their hands on any of the wealth, because parts of the system happen to prevent such a thing occurring. That may be why the people, generations after the Norman Conquest, are still acting like serfs. Most of them still don't actually own the homes they live in. This is something that I want to investigate in this blog. Why is it that ordinary people like my grandfather, who worked for 50 years, worked as a coal miner, fought on the front line during WWI, were left with nothing? And does it matter?
Your point about 1066 chimes. Many changes of handle and blade, yet the axe is the same. I have often thought that the attitude of the managerial class in this country is descended from invasion and conquest; contrast with Germany.
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