Global Capitalism’s Four Fatal Flaws

There are four inter-related defects inherent in global capitalism. The first fatal flaw is great concentration of wealth. Greed is the excessive and selfish pursuit of wealth or other material things, without concern about whether one’s actions deprive others of necessities. Rather than controlling this instinct, unregulated capitalism encourages it. Some proponents of free market capitalism go so far as to argue that greed should be considered a positive trait because the race to maximize profits propels the global economy forward. As the character Gordon Gekko in the film Wall Street said, “Greed… is good!”

"The world needs a powerful “wake-up call” to make everyone realize that to survive, we have to change now."

Though the wealth of the world is steadily increasing, the world’s richest people are hoarding almost all of it. And because of this huge, increasing gap between the rich and the poor, common people can afford to buy very little.

For example, the chief executive officers (CEOs) of multinational corporations are paid salaries with stock options that Fortune magazine describes as “outrageous!”[1] In 2009 Aubrey McClendon of Chesapeake Energy received US$114 million, Lawrence Ellison of Oracle received US$130 million, and H. Lawrence Culp Jr. of Danaher received US$141 million.[2] On average the CEO of a Standard & Poor’s 500 index com- pany was paid US$9.25 million in compensation in 2009.[3] During the same year, millions of U.S. workers lost their jobs, their homes and their retirement savings in the worst financial crisis since the Great Depression.

The disparity between rich and poor continues to grow. The wealth of the world’s 51 richest people more than doubled during the last eight years, to more than US$1 trillion.[4] This is more than the combined annual income of half the world’s population–three billion human beings.

When wealth is concentrated in the hands of a few and not circulating productively, ordinary people have less and less purchasing power. As Australian artist Angela Brennan wrote in one of her paintings, “Every morning I wake up on the wrong side of capitalism.”

Poverty and suffering on our planet is increasing. Currently, over half of the rural population in Latin America and the Caribbean is poor and almost a third lives in conditions of extreme poverty.[5] The World Bank estimates that in 2008, 1.4 billion people suffered what they call “absolute poverty,” living on less than US$1.25 a day, and 2.7 billion lived on less than US$2 a day.[6]

Richard Wilkinson and Kate Pickett, in their book, The Spirit Level: Why More Equal Societies Almost Always Do Better, demonstrate the “pernicious effects that inequality has on societies: eroding trust, increasing anxiety and illness, and encouraging excessive consumption.”[7] They claim that in more unequal rich countries, results are substantially worse for each of eleven different health and social problems: physical health, mental health, drug abuse, education, imprisonment, obesity, social mobility, trust and community life, violence, teenage pregnancies, and child well-being.

The greatly unequal distribution of wealth throughout the 1920s is now viewed as one of the main causes of the Great Depression. According to a study done by the Brookings Institute, in 1929 the top 0.1 percent of Americans had a combined income equal to the bottom 42 percent.[8]

Yet mainstream economists did not predict that depression, nor did they foresee the global financial crisis that began in 2007, because they do not consider wealth concentration a chronic and fatal problem of capitalism.

Speculation instead of production

The second fatal flaw of global capitalism is that the vast majority of investments are now made in speculation instead of production. The tremendous wealth held by the richest people is rarely invested in start- ing companies, paying salaries, or producing goods. We can understand why this happens by observing what motivates big investors. To start a new enterprise takes capital, careful planning and constant work. Many people have to be hired; managing them and confronting the daily problems that arise is a big responsibility. Most new enterprises fail; even the successful ones generally make no more than ten or twenty percent profit during the first few years of operation.

Wealthy individuals have the capital to invest in new enterprises, but few of them are interested in all that work for such a small profit. Instead, they prefer to gamble on ventures that offer the chance to earn big profits quickly, such as the stock market, the futures market, real estate, currency trading, derivatives, etc. This has been termed the financialization of the economy, in which financially-leveraged wealth surpasses that of the industrial economy. Consequently, the majority of people lose out as these speculative investments create only a few new jobs and tend to concentrate the wealth of the society in the hands of fewer and fewer individuals.

This results in the grossly inflated “bubbles” of speculative capital, when prices that investors are willing to pay soar far higher than the intrinsic value of the product. Economic bubbles burst from time to time and place to place, causing economic depressions with widespread unemployment and suffering.

About $3.98 trillion per day is shuffled around in this great casino of speculation as investors gamble in foreign exchange and related markets and try to get rich quick.[9] The prices of stocks, real estate and other markets have grown into speculative bubbles of incredible proportions, completely based on investor confidence–a misplaced confidence.

Sadly, more than half of U.S. households have invested their savings in the stock market, sometimes involuntarily through their employers’ retirement programs. Families should not have to risk losing all their savings in the inevitable downturns of the ever-volatile stock markets.

What significance do the investments of the super-rich have for the rest of the world? A lot! Today the capitalist economies of most nations are ever more interconnected and interdependent. If the New York Stock Market falls, or the value of the dollar falls, within minutes the world’s other stock markets and economies will also begin to fall.

The International Monetary Fund in 2009 estimated the total value of the world’s economy to be US$70.21 trillion.[10] And yet the total world derivatives market in the second half of 2009 has been estimated at about US$615 trillion, more than eight times the size of the entire global economy![11] This explosion of financial assets destabilizes and endangers the world’s economic health.

Debt

The third fatal flaw of global capitalism is debt, encouraging consumers and businesses to buy on credit. Corporations spend hundreds of millions of dollars on advertising campaigns to make debt sound desirable and risk-free. Their sophisticated global ad campaigns and direct mail programs are aimed at every age group, from young teenagers to the elderly. The largest credit card companies have launched campaigns such as “Life Takes Visa,” MasterCard’s “Priceless” and Citibank’s “Live Richly.” The insidious goal of each of these campaigns was to eliminate negative feelings about going into debt. The creative director of MasterCard’s campaign, Jonathan B. Cranin, explained, “One of the tricks in the credit card business is that people have an inherent guilt with spending. What you want is to have people feel good about their purchases.”[12]

American consumers have dug themselves into a terrible debt trap. In March 2010 the total consumer debt was US$2.45 trillion, which aver- ages US$16,046 for each household.[13] The effects of debt are terrible on families. A 2010 survey in Great Britain found that debt problems have a negative impact on people’s close relationships, their health and their ability to carry out their jobs. The majority of respondents hid the fact of the debt problems from their partners, their friends and their parents, expressing they felt “shame” and “embarrassment.”[14]

It gets nastier, because financial companies prey on people who urgently need loans to pay for health care and other necessities. Lenders use unfair, deceptive, or fraudulent practices to induce people to take on more and more high-interest debt. To squeeze more profit from borrowers, U.S. credit card companies increased interest rates from 17.7 percent in 2005 to 19.1 percent in 2007, a difference that gave them billions of dollars in extra profits. Average late fees rose from less than US$13 in 1994 to US$35 in 2007, and fees charged when customers exceed their credit limits more than doubled from US$11 to US$26 a month.[15]

The lucrative lending practices of these merchants of debt have led millions of North Americans — young and old, rich and poor — to the brink of disaster. And yet in 2005 the U.S. bankruptcy laws were changed, making it much harder for consumers with modest incomes to escape their debt by filing for bankruptcy. The new laws encouraged more reckless lending on the part of lenders, because they could more easily force poor borrowers to repay. Still, more than one-and-a-half million Americans filed for bankruptcy in the 12-month period ending June 30, 2010.[16]

What is true for individuals is also true for countries. The largest debtor nation is the United States, with US$13.6 trillion national debt. The government constantly issues new bonds, bills and notes to finance this debt, borrowing an additional US$3.8 billion every day. In 2009, the budget deficit was US$1.4 trillion.[17] It is estimated that 48 percent of the federal budget is devoted to current and past military expenditure.[18] The goods trade deficit in 2009 was US$517 billion.[19] If for any reason the confidence of the world’s investors in the US economy were to fail, the largest economy in history would come tumbling down like a house of cards.

Exploitation of and ignoring the natural environment

The fourth fatal flaw of global capitalism is its tendency to exploit and ignore the natural environment. In addition to causing terrible human suffering, capitalist greed and mismanagement are destroying the environment. Unsustainable by its very nature, capitalism strives for ever- expanding markets, increasing consumption and production on a finite planet. The insatiable drive for profits results in corporations wielding their influence, money and power to get around or limit environmental laws and regulations. U.S. industries publicly admit to releasing 2.2 million tons of toxic chemicals a year,[20] and many companies open factories in other poorer countries with less strict laws about pollution.

Petroleum is one of the main problems. Our modern economy is very dependent on cheap fossil fuels, driving all transportation and much of industrial production, including all plastics. Corporations make great profits extracting oil from the earth, but they externalize the costs. For example, the companies externalize the cost of pollution caused by burning the petroleum. In 2007, due to the burning of fossil fuels and cement manufacture, China emitted 6.1 billion tons of carbon dioxide into the atmosphere, 21.5 percent of the world’s total, closely followed by the United States, at 5.7 billion tons, 20.2 percent.[21]

Air pollution kills people–2.4 million each year, according to the World Health Organization.[22] Yet the costs of those deaths and other problems caused by fossil fuels are paid for by individuals and society, not the petroleum corporations.

Carbon dioxide and other pollutants contribute to global warming. This puts at risk unique ecosystems and endangered species, causes sea levels to rise, and increases the frequency and intensity of extreme weather events, wildfires and famine. Millions of poor people living in the tropical regions are in the greatest danger. The planetary ecosystem is also at risk of reaching “tipping points”, such as the melting of the permafrost releasing methane gas, or the slowing of the Gulf Stream Current in the Atlantic Ocean, beyond which change progresses much faster and is largely irreversible.

BP’s Deepwater Horizon oil spill, from April 20 to July 15 2010, released 4.9 million barrels of crude oil into the Gulf of Mexico. The causes of the explosion and ensuing leakage, according to the White House oil spill commission’s final report, were the efforts of the corporations to work more cheaply. The report states: “Whether purposeful or not, many of the decisions that BP, Halliburton, and Transocean made that increased the risk of the Macondo blowout clearly saved those companies significant time (and money).”[23]

The disaster was also related to peak oil. This refers to the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters a terminal decline. Whereas scientists have warned of this approaching crisis for decades, it is well understood that the only reliable way to identify the timing of peak oil is in retrospect, after the fact, due to the unreliability and inconsistency with which petroleum companies estimate the capacity of known reserves.

The situation is further complicated due to the discovery of new reserves (which happens rarely now) and changes in consumption patterns. In other words, we cannot really know when it happens, until afterwards.

The BP corporation found that out of 54 oil-producing countries and regions in the world, 30 have definitely passed their production peak, and ten more appear to have flat or declining production.[24] Because of peak oil, and the global economy’s addiction to oil, BP and other companies drill in ever-deeper waters, squeeze oil from the tar sands of Canada and do hydraulic fracturing of shale rock, at ever increasing environmental costs.

The International Energy Agency finally announced on November 9, 2010 in their World Energy Outlook report that the milestone of peak crude oil already passed in 2006.[25] And in 2012 the International Monetary Fund predicted “…a near doubling, permanently, of real oil prices over the coming decade… In that case the macroeconomic effects of binding resource constraints could be much larger, more persistent, and they would extend well beyond the oil sector.”[26] As oil demand and prices rise, the global economy, so heavily dependent upon petroleum-based export agriculture and global shipping, will come under greater and greater strain.

Crisis and Opportunity

We do not live in a world at peace. The systemic violence of the global economy kills nearly 50,000 of the poor every day, through hunger, preventable infectious diseases and AIDS.[27] This genocide goes on even though the planet has enough food and basic necessities for every- one. Sadly, popular campaigns such as Great Britain’s “Make Poverty History” have failed to significantly impact the power structure of global capitalism.

Today’s multinational corporations are so big and powerful that they are out of control. Their structure and practices increase the gap between the rich and the poor, a gap that is dividing humanity. Because most investments are speculative instead of productive, and because of rising debt, the global economy is in serious trouble. Greed, the engine behind global capitalism, is a mental disease.

Even though the majority of the scientific community is well aware of the dangers of environmental destruction, climate change and peak oil, they have no means to compel nations to sacrifice comforts and take the radical and costly steps necessary to properly deal with these problems. The world needs a powerful “wake-up call” to make everyone realize that to survive, we have to change now.

Clearly, we require an economic system that is democratic, protective of the environment, and that offers a higher quality of life to all. We should not wait for the next economic disaster, depression or financial collapse, though any of these might strike tomorrow. Let us start building an alternative economy today to help our communities, our countries and the world overcome economic depression and minimize the suffering it causes.

Notes

1 Scott DeCarlo, “Big Paychecks”, Forbes, May 3, 2007.
2 Scott DeCarlo, “Special Report: CEO Compensation”, Forbes, April 28, 2010.
3 AFL-CIO analysis of 292 companies in the S&P 500 Index. CEO pay data provided by salary.com.
4 “World’s Richest People”, Forbes, 2010 list.
5 ECLAC, “Poverty Among the Rural Population in the Region
Increases Their Vulnerability to Climate Change”, 10 November 2010.
6 “Measuring poverty”, Wikipedia http://en.wikipedia.org/wiki/
Measuring_poverty
7 Richard Wilkinson and Kate Pickett, The Spirit Level: Why More Equal Societies Almost Always Do Better (London: Allen Lane, 2009).
8 Gusmorino, Paul A., III. “Main Causes of the Great Depression.”
Gusmorino World (May 13, 1996). http://www.gusmorino.com/pag3/
greatdepression/index.html.
9 April 2010 report, Bank for International Settlements
10 IMF World Economic Outlook, April 2009 http://www.imf.org/
external/pubs/ft/weo/2009/01/index.htm
11 “OTC derivatives market activity in the second half of 2009”, Bank
for International Settlements, 11 May 2010 http://www.bis.org/press/
p100511.htm
12 Gretchen Morgenson, “Given a Shovel, Americans Dig Deeper Into
Debt”, The New York Times, July 20, 2008.
13 The U.S. Federal Reserve “Monthly G.19 Consumer Credit Report”,
May 7 2012 and U.S. Census Bureau “State & County Quick Facts”, Jan 17, 2012.
14 Consumer Credit Counselling Service, press release 21 Jul 2010
http://www.cccs.co.uk/Portals/0/Documents/media/pressreleases/
Human-impact-of-debt-survey-press-release.pdf
15 Morgenson, op cit.
16 Administrative Office of the U.S. Courts, “Statistical Tables for the
Federal Judiciary”, 2010.
17 http://www.federalbudget.com and Congressional Budget Office, “Budget and Economic Outlook: An Update”, Aug. 24, 2011.
18 This includes Current Military ($965 billion) and Past Military ($484 billion), which includes veterans’ benefits plus 80 percent of the interest on the debt. War Resisters League http://www.warresisters.org/ piechart.htm
19 U.S. Census Bureau, Foreign Trade Statistics, Annual 2011 Trade Highlights http://www.census.gov/foreign-trade/statistics/highlights/ annual.html
20 U.S. Environmental Protection Agency, Toxics Release Inventory, http://www.epa.gov/tri/
21 The data was collected in 2008 by the U.S. Carbon Dioxide Information Analysis Center (CDIAC) for the United Nations.
22 “Estimated deaths & DALYs attributable to selected environmental risk factors, by WHO Member State, 2002”. http://www.who.int/entity/quantifying_ehimpacts/countryprofilesebd.xls.
23 “US oil spill: ‘Bad management’ led to BP disaster”, BBC, January 6 2011.
24 BP Statistical Review of World Energy 2010.
25 IEA World Energy Outlook 2010
26 Jaromir Benes, Marcelle Chauvet, Ondra Kamenik, Michael Kumhof, Douglas Laxton, Susanna Mursula and Jack Selody. The Future of Oil: Geology versus Technology. IMF Working Paper WP/12/109 (New York: International Monetary Fund, 2012).
27 http://www.starvation.net/

Excerpted from After Capitalism: Economic Democracy in Action by Dada Maheshvarananda (Puerto Rico: Innerworld Publications, 2012): www.aftercapitalism.org

2 thoughts on “Global Capitalism’s Four Fatal Flaws”

  1. I was hoping to find fundamental flaws to capitalism, but I only found descriptions of current flaws in capitalist practices.

    Just to make sure did you mean that our current global capitalist system is doomed for failure or capitalism as a general system is inherently doomed to fail?

    Just in case you meant that capitalism as a system is doomed to fail, let me explain why I don’t think that is the case.

    I feel that the four fatal point you brought up can be rectified within the framework of capitalism, but I would like to hear your rebuttal.

    First, the problem of greed is very significant in capitalism. I feel that an effective progressive tax on the rich and the resulting transfer of wealth to the lower classes would largely rectify this problem. Theoretically, do you feel that this is incompatible with capitalism?

    Second, if there were a sales tax on every economic transaction (including the buying and selling of securities like stock, bonds, futures contracts, etc.) that would dramatically reduce these types of activities, especially day and short-term trading. Far less people would thus be able to profit from such activities.

    Third, debt is probably the biggest structural problem that will doom our current capitalism. However, such a problem could be eliminated through the use of debt-free currency, as explained in detail in the video entitled “The Money Masters”.

    Fourth, not valuing the natural environment will always be a problem in virtually any economic system. It is imperative that all negative externalities be incorporated into the cost of doing business. I don’t feel that anyone would think that this is physically impossible. Even though we do not have perfect knowledge of how the world’s environment work, we do know enough to to identify most of its major human disruptors.

    OK, I understand that these proposed changes would be dramatic indeed, but even after their implementation, the system would still be capitalistic.

    What are your thoughts?

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