Every society is shaped by the way it organizes the production and allocation of life's basic necessities. Capitalism is a system in which virtually all goods and services are produced for and obtained from the market. Other societies have had markets, but only in capitalism is dependence on the market the fundamental condition of life. This unique way of organizing material life has had a relatively short history, emerging in the English countryside in the 16th or 17th century, though the word "capitalism" didn't appear till much later; and it reached its industrial maturity only in the 19th century.
In mature capitalism, the propertyless workers who supply goods and services live by selling their labour-power for a wage, while capitalists depend on the market to purchase labour-power and capital goods, and to sell what the workers produce. In non-capitalist societies, one class with superior power could directly appropriate the surplus labour of another-as, for instance, a feudal lord extracted labour services or rent from peasants. Capitalist profits are not extracted directly from workers. The relation between capital and labour is mediated by the market. Capitalists pay workers in advance, so to speak, and must realize their gains by selling what the workers produce. Profit depends on the difference between what the capitalist pays workers and what s/he derives from the sale of the products and services supplied by the workers.
Workers seem to be paid for all the work they do: eight hours pay, for instance, for eight hours work. This seems very different from situations in which peasants produce for their own consumption but are also forced to transfer surplus labour to landlords. There, the nature of the relationship is very clear, and it is fairly obvious that the landlord is exploiting the peasants who forfeit part of their labour to enrich him. In capitalism, it appears that just the opposite is taking place: the employer pays the worker, not the reverse. This is why it is easier for capitalists than for feudal lords to deny that they exploit workers.
But this appearance is misleading, because workers are paid for their labour power for a certain period of time, not for what they actually produce during that time. Whatever the workers produce belongs to the capitalist, and the capitalist appropriates the difference between what the workers are paid and what their products or services will fetch on the market. In that way, capitalists appropriate the surpluses produced by workers in the form of profit, just as the landlord appropriates surpluses from peasants in the form of rent.
Competition and Profit-Maximization
The fact that capitalists can make profit only if they succeed in selling their goods and services on the market, and selling them for more than the costs of producing them, means that making profit is uncertain. Capitalists must compete with other capitalists in the same market. Competition is, in fact, the driving force of capitalism-even if capitalists often do their best to avoid it, by means, for example of monopolies. But the social average of productivity that, in any given market, determines success in price competition is beyond the control of individual capitalists. They can't command the prices at which their products will successfully sell and don't even know in advance what conditions are necessary to guarantee a sale at all, let alone a profitable one.
The one thing capitalists can control to a significant extent is their costs. So, since their profits depend on a favourable cost/price ratio, they will do everything possible to cut their costs to ensure profit. This means, above all, cutting the costs of labour; and this requires constant improvements in labour productivity, to find the organizational and technical means of extracting as much surplus as possible from workers within a fixed period of time, at the lowest possible cost.
To keep this process going requires regular investment, the reinvestment of surpluses, and constant capital accumulation. This requirement is imposed on capitalists regardless of their own personal needs and wants. Even the most modest and socially responsible capitalist is subject to these pressures and is compelled to accumulate by maximizing profit, just to stay in business. The need to adopt "maximizing" strategies is a basic feature of the system and not just a function of greed-although it's certainly ture that a system based on market principles will inevitably place a premium on wealth and encourage a culture of greed.
Crisis and Contradictions
The need constantly to improve the productivity of labour has made capitalism exceptionally dynamic, generating constant improvements in technology and so-called economic growth. But the same market pressures that make it so dynamic also have contradictory effects. Capitalism is prone to constant fluctuations, not only short-term "business cycles" but long-term downturn and stagnation. The very fact of competition means that, as new competitors enter the fray, while old ones are likely to stay put as long as they can in order not to lose their capital altogether, there are constant crises of over-capacity and overproduction. At the same time, the pressure to reduce the costs of labour can also reduce the demand for goods and services, which require that people, not least workers, have money in their pockets. Capital must constantly expand to find new markets and resources, yet in so doing, it is likely to create more competition. It needs other more or less successful economies to provide markets for its exports, and if, inevitably, it seeks to obstruct the development of potential competitors, it is likely also to suppress its own markets. These are just a few of the many contradictions that plague an economy in which everything depends on the market.
But there are even more deep-rooted problems in capitalism. Despite its dynamism, it is not a very efficient way of supplying human needs. It is certainly true that capitalism has generated great material and technological progress, but there is a huge disparity between the productive capacities engendered by capitalism and what it actually delivers. Production is determined not by what is needed but by what makes the most profit.
Everyone, for instance, needs decent housing, but good and affordable housing isn't profitable for private capital. There may be a huge demand for such housing, but it isn't what the economists call "effective demand", the kind of demand with real money behind it. So capital is more likely to be invested in something like the production of computers, designed to be outdated as soon as they hit the market, so that people who can afford it will buy new ones all the time-even while others remain homeless. Where production is skewed to the maximization of profit, a society (the US is the prime example) can have massive productive capacities, sufficient to feed, clothe, and house its whole population to a very high standard, and yet still have massive poverty, homelessness, and inadequate health care.
There are other consequences too, for instance:
All these problems have certainly been aggravated by "globalization", with an increasing disparity between rich and poor and an alarming rate of ecological degradation. But global capitalism does what it does not just because it is global but, above all, because it is capitalism and because, local or global, capitalism is driven by market imperatives.
Ellen Wood is author of numerous books and articles. Her latest book is Origin of Capitalism: A Longer View, Verso, 2002.