Not crony capitalism, not raw capitalism, not capitalism in the hands of wrong people but capitalism itself is the cause of the environmental degradation and social misery we see around us. Capitalism offers the rules if you like, the players play by those rules, and the results are what we see. If I am going to say something this bold, I need to be really specific and present good arguments. Let me attempt that, but you will have to bear with me through some details. This is not rocket science, but the whole subject area has many branching ideas so you will need to look hard to see the path through the subject matter.
Let us start with the workings of the firm by following the flow of money backwards. The diagram below illustrates that:
Customers pay for a product or service, and the money goes to pay workers and to pay suppliers for materials and services. Fine so far. But how does that production factor, the equipment and buildings etc. at the top, get paid for? No factory can deliver without machinery, and that machinery needs to be in place BEFORE you can deliver to the customer. The other factors, suppliers and workers could theoretically wait for 60 days. The money for the machinery needs to be found before operations start. Typically, this money comes from the owners or from lenders like banks, and it is put into the firm long before production starts.
There are other considerations, like customer demand going up and down. You need to think about having money aside to pay workers during slumps, and to amass inputs ready to meet increases in customer demand.
Maybe the owners can be content with their ownership share in the company as long as they can get money from the company as share dividend. And the lenders might be prepared to lend over a long time period, but they too demand interest on the loan and to be paid back. This money – to buy machines, buildings etc up front is the Capital part of Capitalism.
Anyway, a more complete diagram of money flow will look like the one below.
You will see three ways the firm’s owners can get money back is to:
1) put themselves on the payroll and take a salary
2) get interest on money put into the firm
3) get dividends on their ownership shares.
The diagram below that illustrates the options.
Let us suppose that owners and lenders want more money back on what they put in or are fearing slumps in customer demand and want to accumulate som cash. The options, laid out in the diagram below include:
- Paying themselves more
- Selling more
- Raising prices towards customers
- Reducing costs for inputs
- Reducing wage costs
This is shown in the diagram below.
There you have it: the “rules of the game” put you as owner (or representative of the owner) in the position where you are obliged to seek to lower costs of inputs including labour, raise the price of your goods and increase the size of the market.
I hope you are still with me. Remember, the object of this exercise is to illustrate how it is just the structure of the firm, this structure that is characteristic of capitalism, and it is the structure and rules of the game that drive environmental degradation and social misery.
Ways to increase money over after paying bills
Let me explain how come it is firm structure that drives this extractive and exploitative behaviour. The owner/owner representative is under a lot of pressure to keep the firm afloat where incomings are larger than outgoings. Many owners of businesses put their life savings into businesses so they need to keep the firm generating or they can lose everything. Let us look at several practical routes open to you as an owner or owner representative to ensure the firm generates money.
Legal ways to increase sales include creating a near monopoly, keeping competitors out. That means finding ways to ensure that shops only sell or mostly sell your product. You could buy up those shops or do a deal with the shop owners. This strategy is what Chinese firms pursued with Walmart. Doing a deal with Walmart gives you nearly full access to the buying American public as Walmart is all over the US.
Increasing sales encourages all kinds of approaches including things like advertising to create demand, changing packaging to only sell large quantities.
Reduce costs including worker costs
To reduce costs for inputs you can go to low-cost countries, or move to low cost areas, or extract the materials you need with the minimum of care for the environment – caring for the environment costs money.
Then you need to reduce worker costs. Automation, splitting the work up into small, unqualified steps, getting the customer to do most of the work, are all common strategies to reduce worker costs.
It is the firm structure that forces you do “bad” deals for everything but yourself
The art of the deal: a good deal for owners but not the other part
All of these strategies that the rules of capitalism encourage or even force you to use are exploitative. By exploitative I mean that you need to do a deal that is good for the business but not good for the other part.
A bad deal for Natural Resources
If the other part is natural resources – metals from mines or wood from forests or indeed fossil fuels – you will need to find ways to push costs down that almost certainly result in pollution of some kind or extracting the resource in a way that depletes the natural function of the ecosystem. Another way is to just dump waste so it cannot be used by anyone or anything else.
A bad deal for Workers
The same with workers, you need to find strategies to reduce labour costs that too are exploitative as you might be pressing wages down so far that your workers cannot live on their wages, or get better jobs.
A bad deal for The Customer
And finally, you need to find ways to sell a lot and often and that may include exploiting vulnerabilities of your customers through clever advertising. If you are a tobacco firm you will want more people to smoke more even though that is not good for their health. If you are an IT firm you want more people to spend more time in front of a screen even though that might not be good for them. And if you sell arms you are happy that conflicts appear even though your weapons kill people.
To summarize, under capitalism, the way firms operate drive practices that are highly likely to degrade natural resources by cutting costs connected to extraction, push worker’s benefits down to cut labour costs, and put customer’s health and well-being at risk by cutting product safety or ignoring the side effects of consumption.
This is not good from a social point of view. By more or less forcing owners and their representatives to just barely keep within the boundaries of law the system encourages less than good behaviour. This is dysfunctional and – I know this from talking to many professionals who have opted out of the worst forms of this – not good for your mental health.
Let me be clear that there are a lot of good people doing good things in firms, as well as many good people doing less than good things. The point is that the way it is set up it more or less forces firm owners and managers towards exploitation. In a way, the firm set up tests our character to the limit.
Still not convinced? Common Objections
Let us deal with some common objections to the idea that it is the firm structure that drives dysfunctional behaviour.
You can be a really good person and still drive good results for your firm.
This one is hard to answer. You can be a good person, but if you do not get results – money over to pay owners and creditors – you will be fired. Some manage by being the best they can under the circumstances and having that in their brand image.
This you are describing is not capitalism only but could apply to communism too.
True that communism had workers and “owners”. The owners did not have the same pressure to derive money from the firm and could in principle exert harder restrictions on firm behaviour.
Customers have free will, they do not have to buy your products.
Not quite true, they need a roof over their heads, food on the table and need to get around. If you have a near monopoly then they will have to buy your products or go through lengthy often near impossible processes to produce themselves, find ethical alternatives etc. After all, this is what firms do, they make sure customers are in a position where they will readily buy.
What about competition?
Well, firms compete with each other, but cannot undercut one another to the point where they cannot survive. So competition will not produce non-damaging products. On the contrary, competition encourages all of the cost -cutting and price raising detailed above.
So why were communism or other alternatives not successful if capitalism is so bad?
I don’t say capitalism was bad, just the structure of the firm encourages exploitation and depletion. It has its good sides, sure.
So is there a way out – are there ways of changing these rules so that firms, for example can make more money by taking care of the environment, customers, and workers?
Of course, all systems can be improved, all deals can be made better. A major system design is needed. But that is the subject for the next explainer. Stay tuned, sign up for updates from my blog (in sidebar) or Medium account.