In Defence Of Capitalism
Capitalism may not necessarily be sexy in the era of online activism, but a deeper look at the numbers shows that only capitalism can create the prosperity we all desire.
Dean Brooke

Dean Brooke

Dean Brooke's economics & financial column brings you news, in-depth analysis, research, occasional gossip, and more. You can email him at dbrooke@rogueeconomics.net.
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Introduction

It has often been stated that, under the Western model of open markets and free enterprise, the poor are the ones who shoulder all the burden and it’s the working person who is the most exploited.

Another popular accompaniment to this criticism derives from the Communist critique of market economies (which, by extension, even gets read in many of the more moderate and mainstream Social Democrat, Liberal Democrat or various other Socialist and Leftist viewpoints). This pretty much argues that it must be something worth doing away with, due to its frequent crises and recessions (with the occasional depression).

Indeed, the question of the best method for guaranteeing national growth and provision for the general population has been around since the rise of the English Parliament and the ultimate end of Serfdom under Queen Elizabeth I.

Criticisms of Capitalism

The modern Left generally argues (in part derived from Marxist critique of Capitalism and market economies) that, because Capitalism is generally somewhat unstable, it must ultimately be done away with and replaced with a planned economy (conveniently controlled and mandated by those who argue for it).

Ultimately, there’s very little point looking at the specifics of the Left’s criticisms of Capitalism, because they all amount to the same basic proposition:

“Capitalism exploits the working classes for the profit of the upper classes, thus creating instability in the process.”

The problem with the narrative of instability is that, ultimately, it is what we call a short-term perspective”.

That is, this criticism tends to focus on very short timeframes, which are characterised by particular crises (e.g. the dotcom bubble). This is one of the worst ways to actually look at any hard data, because of course it divorces the data from the wider context and its own particular trends.

One reason for this is that de facto crises (e.g. recessions such as the 1992 Black Wednesday disaster, or the housing bubble collapse in 2008) tend to be only 3-5 years long or thereabouts and, as such, the window where we can actually observe meaningful deterioration in living standards and productivity and so forth takes place within relatively short timeframes. Although these are still relatively significant to individual people and their particular needs, they still do not violate the overall outlying macro-trend of improving living standards.

Another reason (which ties into the previous one) is that, if we think about it, a majority of economic and demographic statistics are incredibly slow-moving (often moving by far less than 2% per annum – think about modern growth statistics for example), and of course as a result you can only pick out the important trends by looking at them across multi-decade timeframes, factoring in both contractions and expansions to produce aggregated figures for the total window of time. This is not least because economic statistics are prone to being very noisy (due to their small movements) on the short-term views.

As someone who relies on longer, more substantial time series (often over the course of 10-year timeframes or more – I normally focus on what we call “business cycles”)  to make business and trading decisions, I find the focus on single points in time a little perplexing. Of course, when I do macro-economic analysis, I have to look over longer time periods to make sense of any particular factor.

That’s precisely what we’re going to do in this article. Not look at whether Capitalism (as per the Marxist analysis) is prone to crises – which it undoubtedly is – but rather, we’re going to look at how Capitalism has performed per capita (i.e. per person) over very long time frames to actually create wealth for people and improve their standards of living in spite of it’s semi-frequent crises.

Living Standards

One of the main points of contention with the free market model of how the UK organises its economy is, of course, the living standards of ordinary working and middle-class people and of course, the left generally argue that working class people are exploited under the capitalist mode of production.

Lets look at some raw data from the Bank of England and see what we can make of this supposition.

Here is a chart of Real GDP Per Capita between 2006 and 2016.

At first glance, then you might be forgiven for thinking that the 2008 recession pretty much destroyed the UK, and that things got worse for the poor and middle-earners; that living standards flatlined and that the free enterprise economic model of the UK ultimately is not working for the poor (or indeed anyone else, really).

The Left made huge political capital out of this (yes, I sense the irony in that statement) because, of course, it was a severe recession which was compounded by the sheer fact of how out of control public spending was at the time under Gordon Brown’s government.

As such, the economic crisis, compounded with the cuts to public spending under the Cameron administration, gave the Left a PR gift by allowing them to spin the situation as though the short-term decline in living standards (which were fundamentally a product of the recession) were somehow becoming entrenched as a new overlying trend.

This is effectively how the Left use data:

  1. Focus on the short-term crises;
  2. Ignore the long-term context;
  3. Suggest that the short-term crisis personifies the long-term context;
  4. Ignore the subsequent recovery and return to trend.

So let’s now expand this chart into a much longer time series to show the context of it and to demonstrate this point:

Take note of the red highlighted segment of the time series.

That tiny little blip, is actually the Great Recession of 2008.

You know, the exact same one pictured in the previous short-term chart which we examined just a minute ago?

That’s right. The seemingly huge crisis of the 2008 recession is just a tiny blip in a huge explosion of growth in personal wealth and living standards, which started after the end of the Great Depression.

As such, the lesson here is that historical context is very important.

In fact, since the emergence of Capitalism around the year 1650 during the Elizabethan era, there has never been a period where wealth and living standards per-person did not improve from one generation to another. Indeed, crises tend to be 10 years or less in length which means that usually every generation can expect to experience a better standard of living than their parents.

We can also see how the triumph of the free trade model throughout the 1800s (during the Disraeli and Peel governments) further amplified this trend.

This flies against the pre-Capitalist era in the UK, which saw frequent declines in living standards (often due to factors such as civil war, disease, scarcity of resources or the simple fact of how society was structured with unaccountable Lords and Monarchs holding absolute power). This is not even to mention Serfdom, of course, which held the majority of people back from doing anything meaningful to improve their situation or to generate wealth for the nation as a whole.

Of course, this thoroughly disproves the ideas which are spread by the left who frequently attempt to mislead people into believing that living standards have declined or have not improved since the end of the post-WWII boom.

Again, without getting too much into the history, this shows why you cannot rely on a Marxist analysis of what the Left term “Das Kapital” to decide how our capitalist economy is performing when it comes to actually providing for the people who live and work in the UK.

This is because what we are analysing here works in terms of decades and centuries, and not mere months or a couple of years.

In summary, under the UK’s Capitalist economy, living standards have risen consistently over the medium to long term since at least 1650 AD, in spite of the semi-frequent crises, and have always bounced back stronger after a crisis over the course of a few years.

The short-term perspective which is natural to humans (ultimately, we only tend to live for around 75 -80 years and this has some bearing on our perception) does not pay much attention to this. Most individuals are on this planet for less than a century in real-terms, whereas the underlying economic trends of our work, productivity and improvements to our lifestyle resulting from these gains move far more slowly and  tends to function in terms of generations..

How Capitalism Provides For Society

This is, of course, an important point, not least because we are a democratic society and the Left like to spin the idea that Capitalism does not deliver for those on average and below-average incomes as a means for winning electoral support for their ideas at elections.

There are a few angles we can look at here, including the performance of the private sector and the public sector in terms of provisions for the poor. This is especially because public sector funding must, sooner or later, be levied from the private sector via the taxation system and of course, if the private sector does not provide opportunities for the poor to transcend their own poverty and perhaps even their own class, capitalism tends to stagnate and die.

1. State Provisions Under Capitalism

One of my favourite points of contention here, for example, is who benefits the most from the status-quo of public spending.

Public spending in the UK currently stands at £9,895 per head according to parliamentary research briefing SN4033.

This means that nobody really has a living value of less than £9,500 per annum, because the UK government is currently spending around this figure per head in terms of the services and benefits it provides for people every year which are naturally paid for through taxes levied upon the products of our capitalist economic system.

We must also factor in that this spending metric is weighted most strongly towards low-earners, because low earners (and indeed non-earnersare the most reliant upon state services and benefits and pay the least tax, as opposed to the middle and upper-classes (who do not rely on state spending to nearly the same extent those on below-average incomes do, and also pay the lion’s share of the national tax burden).

Effective Public Spending Subsidy Vs. Income Group

I have covered this point in another piece which explores this issue in more detail, but ultimately, people on low incomes are wringing a fairly hefty subsidy out of the status-quo wherein the products of our capitalist system are taxed and redistributed via the public spending system.

Thus, it’s very difficult to see how the working classes and those who are dependent upon benefits are not ultimately being well provided for by the economy of the nation, when we consider the history of the UK’s individual wealth and earnings growth.

In fact, those on below-average incomes are the ones who are receiving the largest subsidies from the redistributive system which has been put in place by the state.

As such, I would say that the working poor are actually making a fairly hefty killing out of the status quo (though I naturally disagree with people’s reliance upon government spending at the same time).

When it comes to the private sector, the main point is how good Capitalism is at providing opportunities for the poor and low-paid, and again, there are a few factors we can look at.

Income Group Effective State Subsidy
£10300
£9450
£15500
£11240
£18800
£10240
£21700
£8880
£27500
£5550
£32800
£3590
£38800
- £1820
£47800
- £7120
£60200
- £13510
£60200
- £13510
£101300
- £28410

2. Employment Under Capitalism

Employment has always been a cause d’être for the Left, because ultimately their primary concern is (or at least used to be) the working classes. But let’s not get into that argument, and instead let’s look at how good Capitalism is at providing employment and opportunity for working people.

Now, this chart is interesting because, of course, Thatcher took the line that controlling inflation was more important than controlling unemployment and, due to the vast state bureaucracy which Thatcher effectively gutted, unemployment rose substantially.

However… if we look at the peaks of UK unemployment here, then regardless of the causes, we can see that unemployment has rarely ever exceeded 10% and it takes a significant cross-generational crisis to drive it above this number and even then only for short periods of time.

Additionally, we can see that the surge in unemployment during the Thatcher years (when the government was shedding public sector workers en masse) was actually much smaller than the unemployment surge after WW1, when successive governments pursued a deliberate deflationary monetary policy aimed at driving up the value of the pound against the dollar, shortly before the Great Depression.

This unfortunate folly was the reason behind the 1920s unemployment spike when naturally, the economy realistically should have been booming (and I know it’s a cliché to blame the governments’ interference in the market for unfortunate incidents that transpire, but indeed this was the de facto cause).

Of course, this left us vulnerable to the Great Depression, which hit just a few years later and exacerbated the scale of the unemployment surge.

By contrast, if we examine the post-WWII peacetime economy between 1945 and the IMF Crisis in 1979, we can see that unemployment stayed well below 5% (which seems to be the benchmark for the “natural rate of unemployment” within a functional economy between recessions).

Indeed, even when the 2001 dot-com bubble burst, there was no serious spike in unemployment in the UK and, crucially, the 2008 recession and subsequent austerity drive never managed to drive unemployment past 8% irrespective of how the crisis escalated and, no matter how many public sector jobs the government shed during the subsequent austerity drive, the private sector successfully absorbed the majority of them back into gainful private sector employment.

Nowadays, Eurostat quotes UK unemployment as being lower than 4% for 2019, in spite of the panic about Brexit and the austerity drive which has been ongoing for the last 10 years (showing that the private sector is not actually panicking nearly as much about Brexit as the BBC and the print media would like us to believe – after all, if they were panicking, they would be shedding jobs en masse to save money on wages, or as a result of widespread bankruptcy).

These statistics hardly provide evidence of capitalism failing to provide employment opportunities because the UK has seen single-digit unemployment for most of its modern history, even in spite of austerity drives and suchlike.

A certain percentage of this unemployment also has natural non-recessionary causes (which are the driving factors behind “natural rate of unemployment” as I referenced previously).

For example, there is floating residual unemployment from factors such as people changing jobs, shifts in consumer spending habits driving the reallocation of capital and human resources, and so forth. All of which we would see in any healthy evolving economy no matter how big the boom.

I should hardly have to point out that, if this is the so-called “reserve army of the unemployed” which the Left like to accuse the establishment of “keeping on the back-seat”, then it’s a pretty ineffectual “reserve army” considering we are currently seeing just 4-5% unemployement.

Indeed, there is zero evidence that the private sector has failed to mop up the jobs from the public sector bloodbath considering the performance of private sector job creation since 2008, which has been on an impressive winning streak and has provided countless employment opportunities in the UK as a result.

3. Worker Compensation From Capitalist Employment Models

With this in mind, there are a few factors to look at with regard to what workers actually get out of the private economy in terms of the compensation they receive for their labour.

The most obvious is simple raw wages per worker, but this is a complicated set of statistics due to the simple fact of wages varying across the employment market, along with regional variations in relation to the general cost of living. It’s actually very difficult to compensate for the staggering variety of employment opportunities that are available which, of course, have various necessary training and qualification levels, compensation models and employee perks alongside wages, and so on and so forth.

As such, we need to take a broader view of what workers are actually getting out of the economy.

We can examine GDP to help us take a broader view of this by examining what percentage of GDP is allocated to labour, and this factors in both wages and other forms of compensation, such as employee share schemes, company perks and so on.

This is shown on the chart above (figures are again from the ONS), and as such we can see that total employee compensation taken as a percentage of GDP means workers are taking well over 50% of national GDP output home with them in the form of pay and associated job perks.

This hardly seems like an unfair deal.

After all, think about it…

If we embark on a venture and agree to split the output of it between us on a 50/50 basis, with me providing the facilities while you provide the labour, is this really an unfair deal?

A 50/50 split between oneself and whatever labour market opportunities you’re taking advantage of hardly counts as anything exploitative, in spite of Marxist insistence about modern-day “wage slavery” (which is a ridiculous notion at the best of times).

I realise that many of my readers will undoubtedly be intellectually committed to Socialist agendas but, putting ideology aside, I’m afraid all that matters to me are the hard numbers of what mode of production and what economic system actually delivers for the nation and its people.

Capitalism is undoubtedly the winner at providing raw growth and opportunity but, more than this, the statistics and figures we have examined in this article demonstrate that it is also perfectly capable of providing workers with a fair share of productivity, while also generating the wealth necessary to provide public services and facilities for the nation as a whole.

Social Mobility Under Capitalism

Social mobility is one of my own personal causes d’êtres.

For those not familiar, the term ‘social mobility’ broadly refers to the opportunity for a worker to improve themselves, i.e. to ‘change their class’ and migrate from lower classes on the ladder to higher ones.

This is important, because without strong social mobility, Capitalism tends to stagnate and die.

It’s also important because social mobility is a necessary factor in financially enfranchising the general population (i.e. ensuring they actually have a stake in the economy and responsibilities) and ensuring that our status quo actually delivers for the nation.

Social mobility in the UK has enormous problems for sure, and I intend to address one of these in a future piece. For the time being, however, let’s look at how Capitalism has done at providing opportunities for people to improve their standing in life.

1. Socio-Economic Stratification

This chart from the GOV.UK State of The Nation 2018-2019 report shows how the total labour market was stratified by socio-economic classification. We can make several important observations from this.

  • Only around a quarter of the UK workforce is actually made up of de facto working-class people.

Note the relatively small (24% in the chart) percentage of workers who are classified as ‘working class’.

This means that, even after the 2008 recession hurt the middle class and brought many of them back into working-class employment, working-class people are still a minority of the total workforce.

This flies in direct opposition to what we’re told by the media – specifically by the Left-wing media – as well as many of our wider social expectations. This is because we’re constantly told that Capitalism is some sort of bizarre pyramid in which the working class is the largest by population, which is being oppressed by some tiny spider-like entity at the top (the mythical 1%) – consider, for instance, the sloganeering of the Left, such as “for the many, not the few” in this respect.

Actually, nothing could be further from the truth.

  • The gap between ‘professional/managerial’ and ‘intermediate’ is growing due to a mirrored movement between the two (e.g. intermedials are shrinking while professionals are growing), while the size of the working-glass grouping is stable, suggesting that Intermediate employees are experiencing success migrating into professional/managerial groupings.

Indeed, things have certainly got worse in this respect since 2008, but at the same time – as we can see from the above – the main casualty has actually been intermediate workers (i.e. independent employers and professionals).

This shows that, frankly, intermediate-level workers are in a state of terminal decline.

The Left like to spin this as though Capitalism is simply eating its own middle class, impovishering people downwards into more menial classes. However, the picture is far more complicated than this.

For example, if we look at the highlighted part of the chart, we can see that although there is a short-term uptick in working-class demographics at the expense of a certain percentage of the managerial and intermediate class, the broader chart also shows a sustained trend of the intermediate class migrating to the managerial class.

To this end, yes, it can be argued that Capitalism may be eating intermediate-level workers. However, many of these workers are migrating upwards into managerial and professional-level roles within the large-scale workforce, rather than downwards into blue-collar demographics (as demonstrated by the inverse-correlation I highlight in the chart). In fact, managerial and professional positions now occupy a massive 45% of the labour market, with so-called working-class positions occupying merely 24% (even after the uptick in this number following the 2008 crisis).

If this trend continues, then it is my hope that eventually the private sector will simply run out of intermediate-level employees to promote. Eventually it will have to learn to take more risks and offer a broader set of opportunities to the de facto working class, shifting its emphasis away from examining ‘bits of paper’ (i.e. the generally useless qualifications with which many graduates leave full-time education) and more towards personal merit, ability and work ethic (which, let’s face it, is what matters most when it comes to workers who actually provide useful and productive human capital for an employer).


2. A Broader Global View of Social Mobility Under Capitalism

Taking a broader view, we can also look at what happened to ex-Soviet and agrarian economies that adopted Capitalism and allowed themselves to become more economically liberal.

The most well-known examples of this are the likes of China, Russia, India, Brazil and other developing market nations.

This chart from US Global Investors and Ernst & Young aptly demonstrates this shift over the last 20 years with India and China.

In short, the Chinese and Indian adoption of Capitalist principles is fuelling an explosion of the liberated middle classes.

Thus, the typical Leftist mantra about people being locked into the economic stratifications they were born into is, at best, seriously exaggerated and is in fact arguably quite Western-centric (something that Leftists love to accuse other people of).

This is another primary reason why Capitalism will always be better at liberating the poor than Socialism.

Again, Socialists love to chime about the ‘reserve army’ of labour kept in the Third World (and traditional Marxism focuses heavily on global labour chains in parts of its outlook), however what the Left likes to ignore is how, ultimately, Capitalism is actually liberating the poor and creating value for the general population in developing nations – which, Marxist doctrines aside, is ultimately all that matters when we assess the worthiness of Capitalism.

Summary

One of the reasons why Capitalism is seen as something that is fundamentally immoral by the Left is the fact that it relies on competition between businesses and entrepreneurs, along with other economic actors, in order for the system to work. The Left obviously object to this because, of course, in this system there has to be a ‘loser’ (i.e. the businesses that fail to survive).

What is missing from this argument is, of course, the fact that everyone, no matter what level of society they have been stratified into, tends to win over the long run under the Capitalist mode of production, due to the benefits of economic growth and opportunities for self-improvement and innovation.

More broadly, living standards rise strongly under integrated Capitalist economies as a result of both economic growth and, of course, the sheer fact of innovation as one of the factors that helps to drive living standards higher and higher.

This piece should by no means be seen as an apology for some of the excesses of capitalism.

Rather, we know it has issues and all of us – even those of us among the Right and among conservatives – can think of at least one reform we’d like to make to the economic order in the UK.

However, this is no reason to throw the baby out with the bathwater, because no other model for organising society has proven capable of delivering the kind of growth and provision for the working and middle classes that Capitalism has done over the past few hundred years.

Most importantly, the statistics I’ve examined over the course of this series generally show that the ideas and myths that prevail regarding Capitalism’s ‘exploitation of the working class’ or the elite’s ‘exploitation of the majority’, and so on, have very little basis in reality.

In short, if you are of a Left-wing political persuasion and you really want to liberate the working classes… then you should be helping to foster the health and strength of the Capitalist economy at home, by pressing for more market access for the working classes and more open markets across the board.

Give it a few decades, and open markets and Capitalism will liberate more people from poverty than Socialist bookshops and trade union protests will ever have done.

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