Capitalism. Where did it all go wrong? The most obvious place to start is Das Kapital, Karl Marx’s great explanation of how capitalism works and why it’s likely to collapse as workers seize power (probably violently) from the controllers of capital.
It has been 25 years since I last slogged through it and I’m afraid it has become no easier to read. It is badly organised, very repetitive and horribly over-complicated, given that Marx’s ideas are really very simple. His analysis boils down to the question of who creates value and who reaps the rewards of that value. For Marx, all value is created by labour (nothing is anything without it). Yet labourers don’t get paid all that value. What he called ‘labour power’ creates more than it costs and the surplus goes to the owners of the means of production, aka ‘capitalists’. All assets belonging to these evil, top-hat wearing cut-throats have effectively been seized from labourers by paying them less than they deserve.
It gets worse. Price competition forces down wages and puts smaller firms out of business. As the number of companies falls, so does the number of capitalists, who have to join the labouring classes as they are stripped of their assets. The result? A world ruled by a smaller and smaller number of huge firms, controlled by ever more ruthless robber barons, who become ‘vampire like’, sucking the blood from an increasingly anaemic proletariat.
This analysis still makes sense to some modern politicians. John McDonnell has described himself as an ‘unapologetic Marxist’ and told the BBC last month that ‘there is a lot to learn from reading Kapital’.
Marx got some things right. The share of income going to labour rather than capital has been falling across the world since the 1980s. As a proportion of GDP, American corporate profits are at their highest since 1929. The average listed firm in the US is three times the size it was in 1997 in real terms, and it looks increasingly as if a small group of super companies are indeed taking over the world: Amazon and Apple dominate the global economy in the same way that firms such as Standard Oil did in the early 20th century. Too much market share, too much power, too much money.
But when you look deeper, most of Marx’s predictions were hopeless. Wrapped up in the drama of the forthcoming war between workers and capitalists, he ignored the third actor — the state. If he were around today I suspect he’d be impressed by social democracy and the way it redistributes both income and wealth across populations: via minimum wages, workers’ rights, education, health, public transport… and so on. He’d be amazed, I think, and rather thrilled by the UK’s tax credit system. Unscrupulous companies might still pay low wages, but they can’t go too low, and society steps in to top them up with tax credits anyway. He would find France’s 35-hour week interesting. Writing of the ‘struggle for a normal working day’ he assumes a 12-hour day, six days a week.
He’d also be pleased with the democratisation of capitalism via the stock market. Companies are run by managers answerable to shareholders and obliged to return profits to them. There are no evil villains in top hats; or, at least, very few. And the falling share of income to labour and the rise of the new super firms? They definitely represent the kind of overreach Marx fretted about. But the state is on to them. Mrs May’s manifesto, with its mutterings about ‘untrammelled free markets’, was jam-packed with measures to deal with them. Too many, perhaps, but you get the point. Capitalism hasn’t gone wrong at all. It is just evolving (again) and that’s what the sturm und drang in today’s politics is all about.
The kind of capitalism Marx was writing about was indeed not sustainable, but it has long since evolved into something that is. There aren’t many lessons for investors from all this. But I will offer one word of warning. A lot of analysts are currently suggesting that you invest in the type of super companies I mention above on the basis that they are so powerful. I wouldn’t touch them with a bargepole — on the basis that they are so powerful. Too much corporate power doesn’t work for governments (or for workers). The state will soon step in.