There is a fatal flaw in the basic capitalist model specially as it is practiced by the Anglo-American world. The flaw is that capitalism assumes infinite growth. The problem is that the world has finite resources. As a result, over the very long term, the capitalist model as it has evolved is inherently unstable.
Whenever I have postulated this thesis, I have encountered strong opposition. The immediate answer relates to the cycle of growth and recession. Ever since the industrial revolution, all capitalist economies have experienced regular periods of boom and bust. In nearly every boom period, the enabling factor has been either technological change or the discovery of a major source of a mineral resource that is in great demand. Examples in the former category are railways in the 19th century, automobiles in the early 20th, electricity in the early to mid 20th and internet in the late 20th century. Examples in the latter category are the California gold rush in the mid 19th century, the Alaska gold rush in the late 19th century, the Philadelphia oil boom of the mid 19th century and the Middle East oil boom in the mid 20th century.
The effects of technological change tends to leave economies and people better off than before. Railroads, to take an example, dramatically reduced the cost of transportation from coastal areas to interior areas. They helped form a uniform internal market in countries. by linking interior rural areas to major urban areas that are usually concentrated on the coastal areas. They helped to avert major famines by allowing rapid transportation of food items to affected areas from surplus areas. Similarly electricity made all of us better off by giving us superior lighting thereby extending the amount of time for work and leisure. Electricity also allowed the development of labor saving devices specially in the household arena for tasks which previously were done by hand. Electricity also allowed the development of refrigeration which vastly expanded the availability of food items at a reasonable cost and of course the computer and the Internet would not have been possible without electricity.
All of this is upheld to summarily dismiss my contention. Let me state at this point that I acknowledge the reality of boom and bust cycles in economies. I also know that companies like people have a lifecycle. Unlike people, a mature company has the option of reinventing itself when it finds its growth slowing thereby kicking off a new growth phase and a renewed lifecycle. But therein lies the nub of the problem. Notice an unspoken assumption. A mature company can reinvent itself to kickstart a new growth phase. The assumption here is that growth is necessary for a company to survive. What does it mean for a company to grow? There are two commonly held grounds for company growth. One is year on year increase in sales. The other is year on year increase in profits. Normally the two go together. However there is a possibility of increasing profits in the face of stagnating sales. This can be done by increasing prices and/or aggressively cutting costs. But again notice that the emphasis is on increase.
Whenever I have postulated this thesis, I have encountered strong opposition. The immediate answer relates to the cycle of growth and recession. Ever since the industrial revolution, all capitalist economies have experienced regular periods of boom and bust. In nearly every boom period, the enabling factor has been either technological change or the discovery of a major source of a mineral resource that is in great demand. Examples in the former category are railways in the 19th century, automobiles in the early 20th, electricity in the early to mid 20th and internet in the late 20th century. Examples in the latter category are the California gold rush in the mid 19th century, the Alaska gold rush in the late 19th century, the Philadelphia oil boom of the mid 19th century and the Middle East oil boom in the mid 20th century.
The effects of technological change tends to leave economies and people better off than before. Railroads, to take an example, dramatically reduced the cost of transportation from coastal areas to interior areas. They helped form a uniform internal market in countries. by linking interior rural areas to major urban areas that are usually concentrated on the coastal areas. They helped to avert major famines by allowing rapid transportation of food items to affected areas from surplus areas. Similarly electricity made all of us better off by giving us superior lighting thereby extending the amount of time for work and leisure. Electricity also allowed the development of labor saving devices specially in the household arena for tasks which previously were done by hand. Electricity also allowed the development of refrigeration which vastly expanded the availability of food items at a reasonable cost and of course the computer and the Internet would not have been possible without electricity.
All of this is upheld to summarily dismiss my contention. Let me state at this point that I acknowledge the reality of boom and bust cycles in economies. I also know that companies like people have a lifecycle. Unlike people, a mature company has the option of reinventing itself when it finds its growth slowing thereby kicking off a new growth phase and a renewed lifecycle. But therein lies the nub of the problem. Notice an unspoken assumption. A mature company can reinvent itself to kickstart a new growth phase. The assumption here is that growth is necessary for a company to survive. What does it mean for a company to grow? There are two commonly held grounds for company growth. One is year on year increase in sales. The other is year on year increase in profits. Normally the two go together. However there is a possibility of increasing profits in the face of stagnating sales. This can be done by increasing prices and/or aggressively cutting costs. But again notice that the emphasis is on increase.
The question then arises, how can a company keep increasing sales year after year indefinitely? This can only happen if the economy (or economies) in which the company operates grows indefinitely. This in turn means that there has to be an indefinite increase in the amount of goods and services that the economy produces. That in turn implies that end consumers have to consume ever increasing quantities of goods and services. We must keep in mind that all economic activity is ultimately geared towards end consumption. For example, take a rather specialized product like tobacco paper which is used in cigarettes. There are only a few companies in the world which make paper that satisfies the requirements of tobacco companies. But why would tobacco companies need to buy this kind of paper? The reason is that they need it to make cigarettes which are sold to end consumers. Take another example: the material used in manufacturing a Boeing (or Airbus) aircraft. This is ultimately sourced from mining companies. Why would Boeing want this material? Because it is needed to make the aircraft. But why make the aircraft? In order to sell to airlines. But why would airlines want to buy these aircraft? The reason is that there is a demand to transport people (and cargo) from point A to point B in a fast, safe, convenient fashion. So the end result is that there is a consumer demand which needs to be met which makes possible this entire chain. The point of quoting these examples (and there are countless examples that can be similarly quoted) was to show that ultimately there has to be end consumption and this has to grow indefinitely over a long period of time for the current capitalist paradigm to work.
Now, let me return to my basic thesis and the objections to it. As I mentioned earlier, my thesis is that capitalism (in its current form) is inherently flawed because it assumes infinite growth in a world of finite resources.
The first objection is that all capitalist economies experience boom and bust cycles and in the latter, there is a contraction in the output of goods and services in an economy and so therefore the thesis is flawed. I agree that there are boom and bust cycles. However, during a normal course of the cycle, the contraction is not sufficient to permanently depress economic growth. It is assumed that once the economy recovers, it will recover lost ground and forge on ahead. Consequently, when the next bust comes along, it will be from a higher level than the start of the previous bust. Thus over time, the economy will continue to grow.
The second objection is that organizations operating in a capitalist economy have definite lifecycles. There is a continuous process of birth, growth, maturity and death (or sometimes re-birth) of companies. The response to this objection is that I have never made any claims regarding a single company. My claim is about a system. Even if we take an individual company, there are many assumptions that are made. It is assumed that the company will exist forever. No assumption is made regarding the nature of an individual company's business. A company can start in one area and end up in a completely different area within a short time. But it is assumed that during the company's existence, it will show ever increasing sales and profits. Expand this assumption for the totality of companies existing in an economy and you have a situation where it is assumed that the output of goods and services in an economy will grow indefinitely over time. Contractions will occur but each contraction will occur from a higher base than the previous one and the lost ground will be more than covered in the subsequent recovery. As I also discussed above, this continuous expansion over time can only occur if the ever increasing output of goods and services are ultimately consumed.
Now, this assumption runs into the reality of finite resources. Modern civilization rests on a base of industrial agriculture and industrial scale mining. The real problem stems from the mining leg. We need to extract various resources from the ground for our civilization to function. These resources are non-renewable. A ton of aluminium extracted today cannot be extracted tomorrow. It is gone forever. Similarly a barrel of oil extracted today is gone forever. It doesn't help that existing financial models actually encourage maximum extraction for immediate gain. This is because of the concept of Net Present Value (NPV) which essentially states that a dollar today is more valuable than the same dollar tomorrow because of the effects of inflation. There is therefore a basic incompatibility between the inherent assumption of capitalism (infinite growth over time) and the reality of finite resources. Thus the current capitalist system is flawed and ultimately doomed.
Final Point: An immediate objection to this conflict is the effect of technological change. This is a very important factor in mitigating the reality of finite resources. Better extraction and waste reclamation technologies allow us to stretch available resources. But that's the point. The available resources are fixed. They are not increasing. At some point, no improvement in extraction and waste reclamation technologies will enable us to extract any more.
Now, let me return to my basic thesis and the objections to it. As I mentioned earlier, my thesis is that capitalism (in its current form) is inherently flawed because it assumes infinite growth in a world of finite resources.
The first objection is that all capitalist economies experience boom and bust cycles and in the latter, there is a contraction in the output of goods and services in an economy and so therefore the thesis is flawed. I agree that there are boom and bust cycles. However, during a normal course of the cycle, the contraction is not sufficient to permanently depress economic growth. It is assumed that once the economy recovers, it will recover lost ground and forge on ahead. Consequently, when the next bust comes along, it will be from a higher level than the start of the previous bust. Thus over time, the economy will continue to grow.
The second objection is that organizations operating in a capitalist economy have definite lifecycles. There is a continuous process of birth, growth, maturity and death (or sometimes re-birth) of companies. The response to this objection is that I have never made any claims regarding a single company. My claim is about a system. Even if we take an individual company, there are many assumptions that are made. It is assumed that the company will exist forever. No assumption is made regarding the nature of an individual company's business. A company can start in one area and end up in a completely different area within a short time. But it is assumed that during the company's existence, it will show ever increasing sales and profits. Expand this assumption for the totality of companies existing in an economy and you have a situation where it is assumed that the output of goods and services in an economy will grow indefinitely over time. Contractions will occur but each contraction will occur from a higher base than the previous one and the lost ground will be more than covered in the subsequent recovery. As I also discussed above, this continuous expansion over time can only occur if the ever increasing output of goods and services are ultimately consumed.
Now, this assumption runs into the reality of finite resources. Modern civilization rests on a base of industrial agriculture and industrial scale mining. The real problem stems from the mining leg. We need to extract various resources from the ground for our civilization to function. These resources are non-renewable. A ton of aluminium extracted today cannot be extracted tomorrow. It is gone forever. Similarly a barrel of oil extracted today is gone forever. It doesn't help that existing financial models actually encourage maximum extraction for immediate gain. This is because of the concept of Net Present Value (NPV) which essentially states that a dollar today is more valuable than the same dollar tomorrow because of the effects of inflation. There is therefore a basic incompatibility between the inherent assumption of capitalism (infinite growth over time) and the reality of finite resources. Thus the current capitalist system is flawed and ultimately doomed.
Final Point: An immediate objection to this conflict is the effect of technological change. This is a very important factor in mitigating the reality of finite resources. Better extraction and waste reclamation technologies allow us to stretch available resources. But that's the point. The available resources are fixed. They are not increasing. At some point, no improvement in extraction and waste reclamation technologies will enable us to extract any more.
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