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Do you call this capitalism?
Capitalism is advancing as it sheds its classical skin. Marxist predictions have been fulfilled -- at least in part, says Galal Amin*
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A century and a half ago, Karl Marx and Frederick Engels predicted the fall of capitalism. The capitalist system was in its prime: England and France had just completed a splendid industrial revolution; Germany and the United States were about to do the same; and UK economists were confident that the system, based on individual incentives and private competition, would enhance the wealth of nations.

Marx and Engels's basic argument focussed on the distribution of income. Yes, the capitalist system may double the wealth of nations, albeit through cycles of boom and bust, but the system would ultimately be defeated because of its tendency to create increasing poverty as well as incredible wealth. The inherent contradiction in the capitalist system would continue to grow, the two men predicted, until it bursts at the seams. Once this happens, socialism would take its place, they stated.

According to that line of thinking, the socialist revolution was expected to happen in the most, not least, advanced capitalist states, where the contradiction between poverty and wealth is greatest. What happened in 1917 was just the opposite. The socialist revolution took place in Russia, not Germany or Britain, as Marx had predicted. Marxists chose to ignore this small detail and for the ensuing 70 years maintained that the Bolshevik revolution was the culmination of the Marxist doctrine. Some still hold on to this belief. Anti- communists, of course, point out this historic anomaly, calling it a flaw in Marxist thinking.

In my opinion, both were wrong. The Russian revolution did not replace capitalism with socialism in the manner Marx predicted. But then, Marx's detractors were equally wrong when they denied that income inequalities could not bring down capitalism. True, capitalism did not end with the 1917 Revolution, but social systems do not often disappear -- as governments do -- through revolutions or sudden upheavals. Social systems tend to change slowly, gradually. Piecemeal changes occur all the time, and the outcome -- which people may not notice or even identify as such -- can be quite radical.

In the century following Marx's predictions -- 1850-1950 -- capitalism underwent profound changes, primarily due to the income disparities that developed in the latter part of the 19th century. Marx was right to predict that the disparities would put pressure on the system. He was even right when he foresaw the emergence of collective ownership. His mistake was that he imagined change would come as a result of a revolution, a political upheaval, rather than in a gradual way. He also wrongly assumed that collective ownership would emerge solely from acts of confiscation conducted by the state.

In reality, things happened in a different way. Shareholding companies, a form of collective ownership, became common, giving millions of small shareholders a chance to own capital. Through negotiations with labour unions, capitalists had to increase wages, shorten working hours, and generally improve working conditions. Keynesian economics called for the state to intervene in the market in times of depression. And the welfare state, a post-war concept, entailed income redistribution and the provision of a broader range of basic services.

Were classical economists to ponder the state of the industrial world in the mid-20th century, what would they say? In the century that elapsed since John Stuart Mill published the Principles of Political Economy and since Marx and Engels wrote the Communist Manifesto, history was already taking a curious course. Monopoly eclipsed competition, state intervention blurred the characteristics of free economy, and skilful advertising overshadowed consumer sovereignty. With giant companies engaged in long-term planning to recoup their extensive investment, what was left of the free market system? One may argue that business ownership is still private and investors continue to look for the highest rate of return. Yet, is the form of ownership (private versus public) more significant or the extent in which ownership has spread and come under public control? Business is still motivated by the maximisation of profit, but the dispensing of profits is no longer determined by shareholders. Company bureaucrats, who decide on the distribution of profits, have other things on their mind, several of which, such as the maximisation of long-term growth, are normally associated with socialist economies.

By the middle of the 20th century, capitalism had already undergone profound changes. Marxists as well as liberals discussed this phenomenon. The Marxist-leaning Sweezy and Baran wrote Monopoly Capital in the early 1960s, debating the manner in which capitalism had changed since Das Kapital, written a century or so before. Keynesian economist Galbraith wrote The New Industrial State in the late 1960s, offering his views on the same topic. None of these writers suggested that capitalism has fallen, or proposed that the capitalist system should go by a new name. Generally speaking, people continued to think that free competition, not monopoly, prevailed; that consumers, not producers, are the masters of the market place; and that capitalists are still free agents, not ones closely associated with the state apparatus. Enthusiasts of the capitalist system continued to exaggerate the differences between private and public ownership, portraying the conflict between the two forms of ownership as one between good and evil, right and wrong. On both sides of the ideological rift, the powers that be encouraged this line of thinking, while attempting to capture the higher moral ground in the debate.

It is important to note that the major changes introduced to the capitalist system -- although they did not take the form of revolution or upheaval, as Marx predicted -- resulted to a great extent from the same cause mentioned by Marx; namely, the growing disparity in income. Neither the capitalist system, nor any other one, can sustain more than a certain degree of income disparity, after which growth becomes impossible. The welfare state and increased state intervention in the economy -- for purposes of income distribution and allocation of resources -- were essential to redress and restrain income disparities, encourage growth, and attenuate economic fluctuations.

Over the past 50 years, more changes occurred in both the capitalist and socialist systems. This was primarily due to the emergence of globalisation. Means of production and communication improved to the point where production and consumption became more "global" as time went by. This led to rapprochement between the Eastern and Western blocs. The former needed the technology of the latter; as the latter avidly sought the markets of the former. Barriers disappeared, walls collapsed, and governments were replaced.

To what extent were these developments a sign of the triumph of capitalism -- in the Marxist sense -- over socialism? Has free market ended the state monopoly over the means of production and terminated the state monopoly over the decisions of production and investment, or has private monopoly replaced state monopoly? Have consumers won back from the state the right to determine the type and quantity of products, or have they forfeited their rights to private business? Has state-run central planning disappeared, or only been replaced by conglomerate vision? Has the role of the state diminished, or does the state still intervene in the economy to promote the interests of big business, such as arms manufacturers, even to the point of waging wars?

It is misleading to speak of the triumph of one system over another. The capitalism that invaded the Eastern bloc bears only a passing resemblance to the capitalism advocated by classical economists. Likewise, the socialist system that fell apart had little to recommend it to the socialism embraced by Marx and Engels.

Yet, enthusiasts of the current system, led by the West and the United States, still speak of the triumph of the free world against its socialist foes.

In reality, the Soviet Union collapsed for reasons that have little to do with social systems and much to do with the balance of military power. The Soviet Union disappeared because of the weakness of the state, not of the regime. Similarly, the United States brought Eastern Europe under its control for reasons having more to do with military power than the superiority of its economic and social system. Both victor and vanquished have little to endear them to the doctrinaires of 150 years ago.

* The writer is professor of economics at the American University in Cairo.
 http://weekly.ahram.org.eg/2003/653/op43.htm