SOCIALISM

Capitalism - how it works

Consider a simple economy in which goods and services are produced using capital (raw materials, plant, equipment, machines) and labour. The total value of goods and services produced in an economy is called the gross domestic product or GDP.

In order for the economy to reproduce itself - that is, continue functioning for another period of production - it must produce enough output to pay labour and maintain the capital used. Therefore, output can be divided into:

• the value of labour (V) : this is the goods and services workers need to consume in order to live. If workers receive less that "V" they will no be able to supply their labour power in the future
• replacement capital (C) : this represents the capital goods and raw material which are used to keep production going in the future. As machinery and equipment are used, they tend to wear out and need to be replaced. In addition, raw materials are used up in the process of production. These resources need to be replaced.

The part of the total output which remains after "V" and "C" are distributed is called the surplus (S). We can represent this model of the economy using the following equation: Output = C+V+S

A class society (feudalism, slavery, capitalism) is one in which one class lives off the labour of another class and controls the surplus produced in the economy. In a non-class society, the society as a whole makes decisions about what to with the surplus produced. They may use it to support children, the elderly, and the inform; to improve the quality of life; to invest in the economy etc...

Under feudalism, the two primary classes are the land owners and the serfs. The land owners have possession of the land and the serfs work on the land. The serfs work on their own lot of land in order to produce food to survive (V) and replacement capital (C). The serfs also work on the owners piece of land - called the demesne. The owner lives off the surplus (S) produced by the serfs. Traditionally, the owner owns the property and the serfs are bound to the land. If the land changes hands, the serfs remain on the property.

Under slavery, the two primary class are the slave-owners and the slaves. The slave-owners own the land, the equipment and the slaves themselves. The slaves own nothing, not even their own labour. The slaves work on the land or in a factory, producing goods which they need to survive, the replacement capital and a surplus. The surplus is owned and controlled by the slave-owner. Unlike feudalism, the slaves are owned directly and these property rights over human beings can be transferred from one owner to another directly.

Under capitalism, the two primary classes are the capitalist class and the working class. The capitalists own land and equipment (often called the means of production) and the working class owns its own labour power.

Because of the separation of the working class from the means of production, workers have no choice but to sell their labour power as a commodity in the labour market. In exchange for the sale of labour, workers receive a wage (V). The capitalists must produce enough to maintain their capital (C). The part of total output that remains after the costs of production are paid is the profit (S).

There are several features of capitalism that are important to note:

• Under capitalism, commodities are produced for exchange, not for use. For example, a car manufacturer produces cars in order to earn a profit, not to drive the cars herself.
• Capitalists purchase labour power from workers. There is a wage labour force
• There is private ownership and control of the means of production.

The above two sections describe the class structures of a capitalist economy. Now we want to consider the dynamics of a capitalist system and how economic growth can take place.

There are several stages in the circle of capitalist production:

1. Capitalists start out with money (called finance capital) in order to get the system going.
2. With the initial money, capitalists hire workers (purchase labour power in the labour market), buy raw materials, and purchase capital (plant, equipment and machines).
3. These inputs are combined using a particular technology and production takes place. This is called the production process. How workers are used in production is called the labour process (eg. Assembly lines, piecework, team production etc.)
4. The output of the production process is commodities
5. The commodities produced are then sold in the marketplace (production for exchange not for use)
6. Finally, if everything goes well, the capitalist should end up with more (the surplus) than the initial amount of money. Some of this money is put back into the system and the circuit of capital is complete.

One feature of a capitalist economy is the tendency to accumulate capital. A portion of the profits, or surplus, generated through exploitation are reintroduced into the cycle so as to purchase additional capital and to develop new technologies.

As capitalist firms accumulate, they will grow in size. The driving force behind accumulation is competition. If a firm does not accumulate - it does not grow larger or invest in innovative production processes - other firms will be more competitive. If a firm cannot remain competitive, it will not be able to sell its commodities in the marketplace and it will die.

This does not mean that all the surplus a firm generates will be accumulated in the form of an increasing capital stock. Some of the surplus could be taxed by government to support the public sector; some could be spent on consuming luxuries in order to project an image of wealth and privilege; some could be used for speculative investments, and some could be used to pay out dividends to the owners. Nevertheless, profits and accumulation are the drivers in a capitalist economy.

The process of capital accumulation leads to economic growth - expanded production and output. When there is a break in the circuit of capital, growth slows down, accumulation dies off and the capitalist system enters a period of crisis.

A central characteristic of capitalism is its tendency to develop internal crisis. The contradictions of the system itself, not some external influence, cause it to break down.