Bridging the Capitalist Gap

The main reason behind support for capitalism comes from optimism. We hope that someday, due to the greater productivity of capitalism, there will be sufficient resources for all. Data seems to support this belief. GDP’s are increasing and despite the vastly unfair distribution, poverty seems to be receding. Or is it? While many ‘advanced’ countries have eliminated poverty, some feel that they have merely pushed the problem around geographically and poverty has not reduced. Statistics cannot help us here, as different countries have different poverty standards rendering ‘global poverty’ a meaningless benchmark.

In this post, I argue that even complete elimination of poverty would merely be a temporary respite. Before we demonstrate that, we need to establish that the GDP of a capitalist economy grows exponentially. Let us look at how we can know this for certain.

The first indication comes from data. Just looking at the graph of GDP verses time gives us a feeling that it grows exponentially. Mathematically too, the very fact that we measure it in ‘percentage growth’ shows that it grows exponentially.  But is this pattern unique to capitalism, or is it a phenomenon that happens in every economy? For that, we will have to try to prove that GDP grows exponentially and consider the possible reasons.

In capitalism, a company produces products for profit. Some of this profit goes towards paying for the costs of production, such as employee’s salary, electricity, machine costs etc. The rest is re-invested as capital. This capital is used to increase the productivity by purchase of more machines or by hiring of new labourers.  Thus, the productivity of a nation grows with time, and with it, we assume, the financial abundance of its population. What is the trend of this growth? Let’s first write a simple equation.

(Amount of produce re-invested) = (Amount produced) – (Amount consumed).

Simple? Now, let us write it in a slightly different form:

=>  (Change in capital) = (Amount produced) – (Amount consumed)

=>  ∆C = P.∆t – X.∆t

C = Capital invested

P = Productivity

X = Rate of consumption

=>  ∆C/∆t = P – X               -------- (1)

To simplify this equation we must simplify the right hand side. Let us try to relate productivity and consumption. First, notice that consumption always happens at the individual level as after all we produce for human consumption.  Thus, we can equate the amount consumed to the amount of consumable goods produced (such as food, water, FMCGs, electronics, electricity (partly)…). In any economy, the size of industries producing these goods won’t change very fast. Thus, we can assume that over a short span of time rate of consumption will be proportional to productivity. I.e.

X = kP       ;where k is the constant of proportionality               ----------------(2)

From equations (1) and (2),

∆C/∆t = P(1-k)        ----------------(3)

We also know that productivity of an economy will be proportional to the amount of capital invested in it. Thus,

P = a.C      ;a is constant of proportionality

Combining with (3), we get,

∆C/∆t = aC(1-k)                ------------------(4)

For people who know calculus replace ‘∆’ by ‘d’ and integrate. Others, please take my word for it that we get the following:

=>  C₁ = C₂e^a(1-k)t

Thus, we see that theoretically too GDP grows exponentially and is caused due to reinvestment of capital. Does it mean that people did not reinvest capital before the advent of capitalism? Most probably not, as having capital certainly had its advantages. But there is only so much to invest in land and labour, for example a landlord expanding his estate would not lead to any overall increase in production (assuming the land was previously utilized). The advent of technology, however, has increased the scope for capital, which has made it possible to increase one’s productivity exponentially.

 It might seem then, that since capitalism has such huge gains in terms of productivity, it might be a good thing after all. For a short duration, maybe. But it makes it almost impossible for a system A to catch up with another system B which is ahead of A. Why? To understand that we must consider what exponential growth really means.

We say that a quantity Q is growing exponentially if the rate of growth of Q is proportional to Q. Note, that this is what is happening in equation (4). Now, if economy A has a higher capital investment (and a higher GDP) than country B, then the rate of growth of capital investment will also be higher than that of economy B. Thus, we see that, under normal circumstances, the capital investment (and thus the GDP) of economy B can never catch up with that of economy A.

Not only will poorer countries be unable to catch up, the difference in their GDP’s will also keep increasing. Already, the rich countries (such as USA) are engaged in poking their noses where they do not belong and bullying the poorer nations. This domination will only continue to increase until they are powerful enough to obtain direct political control over other countries, resulting in a second wave of colonization. History speaks of the disaster thereafter. Once colonies are established, the people there will be exploited brutally and no attempt will be made to help them come up. Thus, any reduction in poverty that capitalism may have achieved would be undone by the colonization that will follow it.