The "stages" of capitalism

I want to talk about the stages of capitalism, but "stages" is not quite the right word. Like the economy itself, and life, capitalism evolves.

Let me begin with the brief analysis I wrote a few years back on conditions existing at the beginning of the capitalist period, and those near the end, without first defining "the end" of capitalism.

Wealth is like matter: It has mass, and it responds to the force of gravity.

Matter accumulates until black holes form and the known laws of physics no longer apply. Wealth accumulates until black holes form and the known laws of economics no longer apply.

The accumulation of matter does not begin with black holes, of course. It begins perhaps by chance. But once the accumulation begins, it begins to accelerate. For the force of gravity depends on mass: The greater the accumulation, the greater the mass, and the greater the force of gravity.

The greater the accumulation, the greater is the force drawing additional matter into the accumulation. Adam Smith described the process:

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work...

Early on, the creation of output is a by-product of the process of accumulation. As long as it facilitates accumulation, the creation of output gives the appearance of being central to the process. It is not central to the process.

Late in the process of accumulation, little free matter remains in the universe. So the creation of output can do little to facilitate accumulation. Therefore, the process of accumulation evolves. The underlying force remains the same: The force of gravity attracts matter to matter, wealth to wealth. Late in the process, however, large accumulations attract large accumulations. Black holes consume black holes. Mergers and acquisitions serve the process of accumulation better than the creation of output ever could.

For those who have money, or for "some of them" at least, the goal is to accumulate more. As people accumulate more, and as more people accumulate, the process of wealth accumulation becomes an increasingly powerful force. This is the change that happens to capitalism, or one of the changes; and it happens from beginning to end -- not that capitalism necessarily ever ends.

Capitalism first arises when there are enough people with enough money they can use to accumulate more, just as Adam Smith describes. But of course there must also be enough people with enough money for the accumulators to gather up and accumulate, or capitalism isn't worth their while. At the beginning of capitalism, money is widely distributed and the accumulations are small.

Nearing the end of capitalism as we know it, almost all transactions are monetary transactions, and the accumulations are large. There is little left to accumulate, so normal business profits tend to be low for many businesses. Economic conditions are different at the beginning of capitalism than they are at the end.

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Let me look at this change in capitalism another way: as diminishing returns. TechTarget lays it out clearly: 

The law of diminishing returns is an economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase ... As investment continues past that point, the return diminishes progressively.

The return diminishes progressively. The return diminishes over time.

Paul Samuelson (Economics, fourth edition, page 580-581) observed that

the law of diminishing returns applies to Capital as well as to other factors...

Samuelson provided an abstract example. He reduced the concept of diminishing returns to a series of numbers representing the rate of profit falling gradually over time:

Gradually, through thrift, capital formation takes place and the community finds it has exploited all the 12 per cent projects; with total labor and land fixed, diminishing returns to the varying Capital have set in. The community must then invest in 11 and 10 per cent projects.

In 1958 when the fourth edition came out, "percent" was still two words, and "capital" was capitalized. Things change over time. The rate of profit also changes over time. As profit is the "return" the capitalist receives, and the rate of profit gradually diminishes, this concept is called "diminishing returns"

As the growing accumulations are invested and reinvested "to make a profit" (Smith's words), the rate of profit gradually diminishes over time. Samuelson makes this clear. Mankiw makes it unclear. Mankiw does not talk of "varying Capital" as Samuelson does. Mankiw (Macroeconomics, fourth edition, page 48) changes the analysis by holding capital fixed:

Most production functions have the property of diminishing marginal product: holding the amount of capital fixed, the marginal product of labor decreases as the amount of labor increases.

Mankiw goes out of his way to avoid saying profit declines over time. He goes out of his way to avoid talking about the evolution of capitalism. The story Mankiw tells could be the story of an entrepreneur who sets up several simultaneous experiments, each with a different quantity of labor. This is certainly possible. It could be done. But it would not prevent diminishing returns. 

Mankiw does not mention time or the decline in the rate of profit over time. He does not explain the decline in the rate of profit over time. He does not acknowledge that capitalism evolves through decline in the rate of profit over time. But it does.

Mankiw is not lying. Not exactly. But he is obscuring facts instead of presenting them. This is what's wrong with economics today. Things like this. It is not, however, what's wrong with the economy or with capitalism.

The point is that the economy changes over time. Capitalism changes over time. And the rate of profit falls over time. This is a most significant change, whether you think of it in terms of diminishing returns or in terms of the effect of gravity on wealth.

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Another change: As the great accumulations increase in size, the size of the investment and the size of the market must increase in proportion, to minimize as much as possible the effect of diminishing returns. But the greater the accumulations, the less wealth remains to be accumulated, and the more difficult it is to obtain a rate of profit that makes the effort worthwhile. At some point you have wealthy people choosing to bail out. Melania in AD 404, for example. And I remember Robert Latouche, in The Birth of Western Economy, saying the wealthy few in Merovingian times were probably descended from a wealthy few who came from Rome after the fall. Can't find the reference just now, but it makes sense that Melania was unlikely to have been the only one.

You don't see that happen when wealthy people are still able to increase their wealth by working within the capitalist system.

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Economic conditions are different at the beginning of capitalism from what they are at the end. At the beginning, capitalism draws people into a system of increasingly regular monetary payments -- people who may have been working the farm in exchange for food, shelter, and clothing, in a system where little money was exchanged. Hiring people for pay tended to increase the number of "people with enough money for the accumulators to gather up and accumulate" so that, in the early stages of capitalism, there is more to be accumulated, and more people can accumulate more. In this stage,  capitalism operates as a self-reinforcing feedback loop.

Economic growth itself is a process which increases income and output, increases the money available for accumulators to accumulate, and provides the trinkets that make consumers willing to contribute to the accumulation of capitalist wealth. 

There would have been a transition period during which the available "work force" grew as a portion of the population: slowly at first, then more and more rapidly as people came to see the new system as advantageous to them, and then less and less rapidly as a the work force became a relatively stable portion of the population. Thereafter, growth of the work force would depend on the growth of population. And late in the  cycle, with the evolution of capitalism having arrived at the stage of slowing growth, one would see what we are seeing: desperate and irrational calls for greater immigration as a way to enlarge the workforce, to reduce per-unit labor costs (which we call the average wage), and to boost capitalist accumulation.

If the capitalist makes a good profit on his investment, his accumulation increases and he has more to invest the next time. If he doesn't, he has little reason to invest at all, so economic conditions deteriorate and jobs become increasingly hard to find. That's early versus late capitalism, in a nutshell.