The Collapse of Capitalism. 

Written in 2010

On reflection, capitalism has done quite well for some. Generally in the UK, we're better off, have more stuff, are more comfortable and less happy - all signs of prosperity.

That was until a year or two ago, when the system went seriously off track.

There was no avoiding it, as I will try to show, the system is flawed and will eventually break down, it has to, you simply cannot have infinite growth in a finite system.

In the following explanations I am running the risk of over-simplification but it's about the best, or even only way, I can explain this. And I don't pretend to fully understand the system, I am relying more on common-sense and intuitive understanding. You can lecture me all you like about why I am wrong but unless it makes real sense, you're not going to convince me.

So here are the basics.

Money goes around. This is a closed system, there can only be so much money. If more money is invented and introduced to the system, it is balanced by the devaluation of all the existing money, this is called inflation.

Example: I'm a business that makes toasters. I sell my toasters to people such as bakers who sell bread. I pay my workers wages so that they can buy bread. Money circulates. But if I want to make more money, I have to put the price up on my toasters. To buy a toaster, the baker has to put up the price of bread. To buy the bread and feed themselves, my workers demand more money, which of course I have to pay them or they'll starve.

That's inflation. No one is actually better off because no money has entered the system, the numbers have increased but the value stays the same. This is a very small example but effectively represents the World, it's just the World has a lot more people within the circulation, but the process remains.

Capitalism works by having greater economic growth than inflation. If an economy grows by 3% and inflation by 2% then we are all better off by 1%.  But where does that 1% come from?

It can only come from two places; it can come from other people being made poorer, or it can come from debt.

Whilst it is an unpleasant fact that there is a transfer of wealth from the majority less well off to the minority rich, it doesn't adequately account. For example, if the UK economy grew by 3%, less the 2% inflation, then another country of similar sized economy would have to lose that 1% to make us richer.

No, we now know that it is debt which underpins capitalism. The bank lends me 'invented' money to make toasters, I sell my products making me more money with which I repay the banks more money than I borrowed. That's how extra is entering the system, but to prevent inflation matching growth and therefore no one being any better off, increasing levels of debt have to be swilling around without anyone being able to actually spend it.

All those 1% per year have been totting up to a huge, imaginary bubble of non existent dosh.

This bubble finally burst when people at the bottom of the debt ladder could not repay their loans. Banks suddenly didn't have the money they thought they did and could not service their creditors. Governments had to bail out the banks and carry the debt themselves.

Now the governments are struggling to come up with the money and it's the people who are having to deal with the austerity.

Essentially, it's inflation making a huge claw-back and redressing the balance and we end up no better off.

There is another important flaw in capitalism. Allowing the markets to naturally develop has resulted in companies being bigger and more powerful than the organisations with the responsibility to regulate them. The law of this jungle means eventually one business entity will come to the top, take charge and eliminate competition. Ultimately, only one company can survive and they will rule the World.

A scary and fantastical theory but that is the only possible outcome of the current system. It may take many years, but if extrapolated to a scenario which we probably will never reach, then that is the result.

Why will we probably never reach it? Because of yet another flaw in the system. Everlasting growth, apart from being fiscally and numerically impossible, requires ever increasing resources. Take for example oil, demand is now outstripping supply, wars are being fought for it, food is being replaced by it and the environment is being sacrificed to it, just so the system can be propped up. How much longer can it continue?

My conclusion is that capitalism has served many people well, for some considerable time. In comparison with other systems, it''s not done too badly. But the flaws are now coming to the surface, it's starting to break down. I guess something else will come along to replace it, but the legacy it has left us with will make the transition a difficult one. It is a form of evolution, but are we humans up to the challenge?