In this critical chapter of his world history, Neil Faulkner explores capitalism and what it means from the Industrial Revolution to the present day.

The Industrial Revolution has transformed the global economy as completely as the Agricultural Revolution once did. These are the only two transformations in human social development that have been all-encompassing in their impact.

The Agricultural Revolution ended an earlier existence based on hunting and gathering in the wilderness. It created a world of farmers in which people produced their own food.

Farming made possible huge increases in productivity and output. This in turn made possible the accumulation of surpluses able to support non-productive social classes.

The surpluses appropriated by ruling classes were used to maintain armies and engage in politico-military competition with other ruling classes.

Despite many great changes, there is, in this respect, an essential similarity between, say, Sumerian civilisation around 2500 BCE, the Roman Empire of the 2nd century AD, and Louis XIV’s France in 1700.

In each case, ruling classes appropriated the surpluses of agricultural producers in the form of taxes and tithes, customs duties and tolls, interest on debts, and rents and labour-services. These surpluses sustained armies and wars between states. They were also invested in palaces, great monuments, and the luxury trades.

Militarism and grandeur were competitive. The tension and rivalry between ruling classes made the system a dynamic one.

But they were also wasteful. War-chariots and temples, armoured knights and castles, royal cannon and the Palace of Versailles drained wealth out of the economy. Surpluses were not invested in technical innovation and improvement. Consequently, in pre-industrial society, increases in the productivity of human labour were slow in coming.

The contrast with industrial capitalism could not be more stark. Marx describes it in a famous passage in The Communist Manifesto:

‘The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form was … the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air …’

The world’s population reached an estimated 200 million about 2,500 years ago. It did not reach one billion until about 200 years ago. Since then, it has risen to seven billion. That means population growth has been 18 times faster since the Industrial Revolution.

The Roman Empire is estimated to have manufactured about 85,000 tonnes of iron per year. By 1900, the five main producing countries were turning out this tonnage every day. Today, the top five turn out the same tonnage every hour.

How are we to explain this transformation? The answer is given in Volume I of Marx’s Capital, published in 1867. This text is the indispensable starting-point for any scientific analysis of the modern world economy.

Marx begins with the commodity – the basic building-block of a capitalist economy – and explains that it has both ‘use-value’ and ‘exchange-value’. The use-value of a banana is its nutritional content for a hungry person. Its exchange-value is represented by its market price.

There is at once a potential disconnect: a contradiction-in-the-making between the use-value and exchange-value of a commodity. Bananas may be needed and available – but unaffordable to the hungry.

Use-value is dominant in pre-capitalist exchange. The merchant is simply an intermediary between the producer selling a surplus and the consumer with a need. A yeoman-farmer may sell his surplus grain in order to buy a new plough. A rich lord may buy the grain to feed his household retainers. The merchant makes a profit, but his social role is simply that of economic intermediary between other classes.

Exchange-value is dominant under capitalism. Merchants always buy only in order to sell at a profit. Their principleis exchange for its own sake. When the principle of the merchant becomes the general principle of society, we make the transition to capitalism.

The commercial capitalism of 17th century Holland and 18th century England was that of merchants accumulating capital through trade. But accumulations of merchant-capital could then fund investment in the canals, machines, and factories of the Industrial Revolution. And industrialisation made possible yet greater capital accumulation.

By 1800, capitalism was airborne. A self-feeding process of exponential growth had begun. What powered it was competition. Not the politico-military competition of ancient city-states and medieval kingdoms. But the economic competition of rival capitalists.

The spinning-jenny meant that one worker could produce as much yarn as eight working alone. The power-loom enabled one operator to do the work of six hand-loom weavers.

Capitalists who did not invest in new technology quickly found themselves priced out of the market by low-cost competitors using labour-saving machinery. They discovered the iron law of the market. The pressure of economic competition compelled each and every one to cut costs, increase output, and reduce prices.

The measure of success was profit. The most successful capitalists captured a larger share of the market and made bigger profits. These profits were then reinvested in the business to enhance competitiveness further.

Capitalism is, then, a system of competitive capital accumulation. It is the result of the dynamic fusion of three elements: the merchant principle of buying in order to sell at a profit; the transformation of labour productivity made possible by industrial innovation; and the division of the economy into competing units of capital.

It is a highly contradictory system. Economic competition is blind and anarchic. Surges of investment lead to overproduction, unsold goods, and waves of bankruptcy. Boom turns to bust. Bubbles burst and become black holes of bad debt. Wealth is wasted, and wealth-creation collapses.

Even when it booms, the system is deeply flawed. The source of all wealth is the labour of working people. The profits of the capitalist class therefore depend upon a process of exploitation at the heart of the system.

Marx’s special contribution to ‘the labour theory of value’ was to grasp that workers’ wages were payment not for their labour, but for their labour-power.

The point is this. Under capitalism, labour produces the wealth represented by both wages and profit. Therefore, wages cannot represent the full value of the labour expended in the production process.

What the capitalist buys in return for wages is the worker’s capacity to labour at a certain level of skill for a fixed period of time. What he expects to gain from this is value-added in production in excess of the value-paid in wages. The difference between the two is ‘surplus-value’ or profit.

The worker under capitalism is therefore ‘alienated’ by lack of control over the production process, and ‘exploited’ as the source of profit and capital accumulation. Endemic class conflict is the consequence. Capitalists and workers are locked in an eternal struggle over process and reward at the point of production.

Capitalism has transformed the productivity of human labour and created such an abundance of material wealth that a solution to humanity’s many problems has become a practical possibility.

Yet that promise is negated by the system. On the one hand, competition and free-market anarchy mean a highly contradictory economy subject to crashes, slumps, and mass impoverishment. On the other, the alienation and exploitation of the workplace mean that most people’s working lives are a treadmill of toil and stress.