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The World is Broke – Blame Capitalism

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Jonathan Russell, partner at member firm Rees Russell looks at the impact capitalism and the financial markets have had, and continue to have, on the world.

I am a great believer in the free market and many would say that is what defines capitalism. I however would suggest that capitalism is maybe an extreme. Prior to the Industrial Revolution capitalism was based upon someone doing a day’s work producing something which another wanted and then selling that item. This then developed so that some people merely sold their labour to others who then sold the goods and paid them in return.

After the Industrial Revolution occurred the process was effectively just the same, but machinery started to replace and augment the provision of labour. Throughout the history of the civilised (?) world we have always had lenders and borrowers and even the bible talks of the ‘money lenders’. However, all of this activity revolved around goods and production.

When I purchased my first house I remember that all mortgages then had to have a basis for repayment and the formula applied was that the maximum mortgage advance was three times the main earners income or two-and-a-half times a couple’s joint income. This was what was commonly believed to be an affordable amount for someone to repay over the traditional mortgage period of 25 years.

Earlier this month, I was doing some research and found a statistic which suggested that world debt had now reached 2.6 times world income. This would therefore suggest to me that the world had borrowed the maximum amount of money it can realistically afford to repay and therefore if debt was to increase any more then it could only be on the back of an increase in world income.

So I return to the concepts of the free market and capitalism – where did it go so wrong? The principle of someone producing something and then selling it on at a profit must still work, but what if someone sells something on at a profit, which a) has not been produced in anyway or even worse b) doesn’t actually exist. This is where we blame the financial industry or the bankers. This is an industry where people make money by selling items without any value being added by them.

This historically started with the sale of commodities or more importantly the sale of the right to buy commodities – do we remember our history and the South Sea Bubble of 1720? The problem arises when the amount of commodity being marketed exceeds the actual supply – essentially printing money! This essentially is what happened, or at least came to a head, in 2008.

So what do we do:-

The sensible thing would be to accept that the world is at its borrowing limit and slog away for the next generation to bring that debt down or at least not let it increase any further.

However, the world has become an increasingly capitalistic economic model and the base greed of the human race, and in particular those in finance and possibly Government, will no doubt suggest we borrow further in the hope of growth.

The problem is if growth is created merely by increasing the value of assets that already exist, rather than physical production or labour, then that is not true growth.


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