Capitalism and planetary limits

Capitalism as an economic system: an attempt at definition

The term capitalism, which first appeared in the ^mid-18th century, is not easy to define. ⁵ both because its definition explicitly or implicitly refers to fundamental disputes, and because it is multiform: it would be more rigorous to speak of capitalisms. ⁶

In this fact sheet, we won’t venture into the sociological, political and historical terrain of Karl Marx and his successors. In a nutshell, Marx’s definition and analysis of capital and capitalism focused on the relations of domination between social classes, with the capital-owning bourgeoisie exploiting the wage-earning class. Not addressing these issues here does not mean that they are of secondary importance, nor does it mean that in our view the economy can be “disengaged” from the institutions that frame it and the relations of power. It is clear that the capitalist system was built and continues to evolve as a result of these movements.

An attempt to define capitalism

In economic terms, capitalism can be defined as a system in which one party (usually a majority, but this share can vary greatly ⁶ ) of the means of production is owned by companies with private financial capital.

These companies own machines, equipment, buildings, stocks, etc. They use subordinate labor, mainly salaried employees since the ^19th century. ⁷ They buy what they need to produce and sell goods and services. Finally, they use “resources” or “natural capital”, without accounting for them. ⁸

Decision-making power in these companies – including with regard to distributed income ⁹ – is given to the holders of this capital, who, a priori, will look after their own interests, which are primarily to accumulate more financial capital (we’ll come back to this point later). In some countries, this power is attenuated by the presence of employee representatives on the highest decision-making bodies (boards of directors or supervisory boards). ¹⁰

There’s obviously a difference between small bosses, whose strength lies mainly in their own work, and financial shareholders (or wealthy individuals) whose power derives solely from the ownership of capital. The adjective “capitalist” is more apt to describe such people than “small businessmen”.

Within so-called “developed” economic systems, capitalism is distinguished from collectivism, in which the means of production belong to the state. According to this definition, the Chinese economy has gradually become capitalist. ¹¹ since the reforms launched by Den Xiaoping in 1978.

Capitalism has many variants

These variants depend on a number of factors:

• the way in which the rights attached to ownership of a company’s financial capital and those granted to other stakeholders ¹² are defined in company management (for example, “Rhenish capitalism” is characterized by co-determination ¹³ between employees and shareholders);
• the relative weight of the public sector in services, insurance and social transfers (rather high in France and Northern European countries, lower in Anglo-Saxon countries);
• the relative weight of the associative sector and, more generally, of the social economy (including mutuals);
• the role of political power over the economy (obviously omnipresent in China).
• the role of financial power (stronger in the Anglo-Saxon world, and which has grown considerably over the past 40 years in the West, as we show in the module on the role and limits of finance).

Capitalism is inseparable from the market economy

The market economy is an economic system based on the decentralization of decisions concerning the setting of prices and the production and exchange of services and goods.

Throughout history, there have been non-capitalist or pre-capitalist market economies, such as the European societies of the Middle Ages. Today, one cannot exist without the other. It can therefore be said that one of the essential characteristics of capitalism is that decisions concerning the prices of traded goods and services are not taken by a centralized planning body, but by economic players (more or less concentrated depending on the case). The aim of this fact sheet is to discuss the advantages and limitations of capitalism in a market economy.

Capitalism has evolved over time and in different countries around the world.

It is possible to distinguish five broad periods in the West:

• From its birth (see box) in Italy in the ^14th century to the Industrial Revolution in England at the end of the ^19th century: these were the beginnings of capitalism. It was during this period that capitalism was defined and built. ¹⁴ legal instruments relating to property, the “labor market” and the land market were progressively defined and constructed. ¹⁵ accounting, competition, money, financing mechanisms and the institutions needed to operate them (banks, stock exchanges, regulators, etc.);
  
• From the end of the ^19th century to the crisis of 1929, this was the classical, ideologically liberal period. The economy was supposed to regulate itself spontaneously, and the state was not to intervene either socially or politically. ¹⁶ The state should not intervene either on the social level, or to deal with crises (which allowed the “dead wood” to fall off, i.e. unprofitable or weak companies). This is the idea of “laissez-faire, laissez-passer”. ¹⁷
  
• From the 1929 crisis to the 1970s, the period was Keynesian and dirigiste. ¹⁸ Capitalism became “social-democratic”, with the generalization of the welfare state. ¹⁹ Roosevelt, President of the United States after the Great Depression, was the political embodiment of this new conception of the economy. He did not hesitate to limit the power of finance and launch major social programs, notably in response to the 1929 crisis, which also had an ecological dimension, with the Dust Bowl . However, Nature was largely forgotten in this period, as in the next.
  
• Since the end of the Bretton-Woods agreements ²⁰ in the early 1970s, capitalism has become “neo-liberal”. ²¹ globalized and financialized. The state must be at the service of business. The “free play” of markets is supposed to lead to an economic optimum (as in the first economic period, but this time on a global scale). As we show in the module on finance, this period was marked by the liberalization of capital markets, the deregulation of banking activities and the decline in the power of public authorities (who lost control of the monetary instrument, and were forced to finance their deficits on the markets in order to submit to the healthy discipline of the markets). Another characteristic feature is the promotion of world trade and free trade at all costs. This ideology, which permeates the construction of the European Union, accords a fundamental place to the four freedoms of movement (of people, goods, services and capital).
  
• Since the financial crisis of 2008-2009, there has been a slowdown in globalization and free-trade ideas. The COVID crisis, and even more recently Russia’s war in Ukraine, seem to be closing this period, with a renewed focus on industrial policies and sovereignty issues.

The role of capital accumulation in the dynamics of capitalism

For Karl Marx and his successors, the driving force behind capitalism is the accumulation of capital (in the sense of money invested with a view to its “fructification”). Producing commodities is merely a detour to this end.

This view is somewhat simplistic: many capitalists are first and foremost entrepreneurs, even visionaries, driven by a “mission”. For them, capital is a means to an end, not an end in itself, even if some of them are also or become owners of capital, or even build “dynasties” of their own.

But it is undeniable that the dynamics of capitalism are linked to the fact that capitalists devote their energy and skills to making their financial capital bear fruit, either in industrial ventures or in financial operations.

This desire for fructification, which needs the accounting to measure and manage it ²² is undoubtedly linked to the capitalist’s thirst for enrichment. ²³ It was gradually freed from religious and moral constraints in the Middle Ages, when theological debates on the “lawfulness” of profit and interest (in the sense of interest-bearing loans) were intense. ²⁴ Bernard Mandeville’s Fable of the Bees can be seen as the first turning point in this emancipation.

Financialized capitalism

After the financial liberalization of the 1970s and 80s, an even more uninhibited form of capitalism was born, in which the unlimited enrichment of corporate executives is justified by the “value” created for shareholders.

This is how huge fortunes were built. In 2021, according to the World Inequality Lab, the wealthiest 10% of the world’s population will own over 75% of the world’s wealth. Conversely, the poorest 50% (3.8 billion people) will own just 2% of the world’s wealth.

This neo-liberal, financial and globalized capitalism, the latest incarnation of capitalism, is much more unequal than its predecessors. ²⁵ than the capitalism of the Keynesian period (see above), creating a global balance of power unfavorable to workers and wage earners. ²⁶ through so-called “free and undistorted” competition ²⁷ a generalized opening-up of international trade (in goods, capital and services) and an uninterrupted process of mechanization/automation/computerization/robotization, which puts workers under permanent pressure.

It demands higher returns on the capital invested in companies, and thus shortens the horizons of business leaders (starting with listed multinationals, which impose this short-termism on their suppliers, subcontractors and, in turn, on all companies). In fact, the quest for high returns translates into the discounting of financial flows at high rates, which reduces the weight of distant financial flows, and therefore the weight of the future in economic decision-making. It’s an iron law. ²⁸ This short-termism (and the short-termism shown by politicians in today’s democracies) is at the root of the “tragedy of horizons” highlighted by Mark Carney, which makes the fight against climate change so desperate.

It is one of the powerful gas pedals of the ecological crisis as a whole, the effects of which are distant and unaccounted for in corporate management accounts, as we explain in the module on corporate accounting.

What’s in it for the company?

The central issue in current discussions about capitalism revolves around this question: what should be the purpose of the company and the motivation of shareholders and the managers they appoint?

Does it have to be purely financial? The “law of profit ²⁹ the main compass for decision-making?

In other words, the question facing capitalism today is whether it is possible to reconcile the irreconcilable, the subject of a “theological” debate already mentioned. ²⁴ which ran through the Middle Ages in Europe, and which is based on this famous “aphorism”: “No one can serve two masters: either he will hate the one and love the other, or he will cling to the one and despise the other. You cannot serve both God and Money”. (Gospel of Matthew, 6, 24-34)

As mentioned in the introduction, there are three opposing theses:

1/ For Milton Friedman, winner of the Nobel Prize in Economics, there is no doubt:

“There is one and only one responsibility of business: to use its resources and commit them to activities designed to increase its profit.” ( The Social Responsibility of Business is to Increase its Profits , 1970)

Let’s also quote these trenchant words from economist Branko Milanovic, a specialist in social inequalities:

“If the dominance of the capitalist mode of production is unchallenged, so is the ideology that making money is not only respectable, but also the most important goal in people’s lives (…) We live in a world where everyone follows the same rules, speaks the same language of the quest for profit”.(Le capitalisme sans rival, 2020, p.19)

2/ Should we instead bring other stakeholders, including Nature (according to specific modalities to be defined, of course, as Nature is not a legal entity), “at the table of the decision?

If so, can we ensure that capitalists pay as much attention to natural and human capital as they do to financial capital? How can we ensure that the “law of profit” doesn’t reduce the interests of other stakeholders to the bare minimum, despite “good intentions” and “fine words” to the contrary?

3/ Last option: should we “capitalism”? ?

This option is often mentioned, without its exact meaning being specified. Does it mean nationalizing all companies (even small ones)? Capping capital gains? In-depth changes to the rules of governance, for example, by extending the co-determination of decisions, or by generalizing the associative model? ³⁰ Depending on the version envisaged, this exit may be confused with the previous option.

Before giving our answer, let’s take a detour into the contributions of capitalism and the market economy.

The contributions of capitalism and the market economy

Capitalism has had many positive and negative effects. Let’s start with the positive.

It has enabled the emergence of know-how, social organizations and technologies beneficial to human societies. The massive increase in productivity in just a few centuries has put an end to the inevitability of famine for the majority of human beings. ³¹ It has freed some of them from the physical effort required to survive.

Capitalism lifted Europeans out of poverty and, from the end of the ^20th century onwards, many Chinese… ³² although this is not to be attributed to neoliberalism, as Chinese capitalism is very different. Let’s take a closer look at the “virtues” of capitalism.

It helps to have motivated, focused “entrepreneurs ³³ on precisely-defined activities that best satisfy their customers

Entrepreneurs seek to satisfy a need or desire (present or future, solvent or potentially solvent) by developing, producing and selling a product or service.

They have several functions: raising financial capital, launching and managing their business and its projects, ensuring that it is profitable or will become so, hiring, organizing work, innovating and stimulating innovation, finding customers, suppliers, service providers, bankers, possibly associates, partners… All this while respecting the constraints imposed by the legislator, and benefiting, in return, from the “means” made available by society (educated, trained and healthy staff, legal system, energy, transport and communication infrastructures, security, etc.).).

To embark on and pursue such an “adventure”, the entrepreneur needs to be motivated. In general, there are several types of motivation:

• he feels at home (he doesn’t obey a boss) and free;
• he hopes to earn money commensurate with the risks (financial, moral, legal…) taken, the energy expended and the results obtained;
• In some cases, he wants to have an impact on the world, sometimes to bring about or even impose a certain vision of it.

The “alignment” of these different motivations is a quality of capitalism. It ensures that financial recognition is consistent with symbolic recognition.

It’s useful to have mechanisms for decentralizing exchanges

The “market” is the institution that makes this decentralization possible. Every day, billions of products and services are exchanged between billions of people around the world. There are two advantages to using a decentralized price whenever possible:

• An interest in distribution: production is de facto distributed via purchases; in this case, distribution is decentralized, not decided by a central authority. This maximizes economic freedom;
  
• An interest in the efficiency of the production process: when prices are fixed on a competitive market, the buyer exerts pressure on the producer to adapt to his wishes, lower his prices and generally his costs; this encourages him to make productivity gains. The “producer” (farmer, industrialist, service company) knows, can know, or at least has information about his customers’ needs, their willingness to pay, his own costs and their structure (fixed costs, variable costs), as well as his production methods. It can therefore act to improve the service it provides to its customers, innovate, produce differently, etc.

Financial innovation within capitalism has several benefits

The development of capitalism has been accompanied by numerous financial innovations (see box and, for more recent examples, the sheets on derivatives and securitization ). These innovations have made it possible, among other things, to provide “dematerialized” money, to mobilize the savings of some to finance the projects of others, and to develop methods and systems for managing risks of all kinds.

The birth of capitalism is linked to that of the great voyages organized by the masters of Italian cities. Pierre-Noël Giraud’s remarkable book ³⁴ the importance of financial innovation in these great commercial expeditions. The detailed distribution of responsibilities, risks and rewards was an essential skill in the face of human initiative and creativity.

In the same way, the art of collecting savings from some, and knowing how to assess the credit risks of others, enables, if not an optimal allocation of capital, at least its “recycling” and potentially socially useful money transfers.

Business law is highly inventive and highly adaptable to the multiple configurations of interests of the parties involved in a project.

Since capitalism places the interests of economic players at the heart of its “agenda”, it takes great care and creativity to ensure that this is the case: contract law, and more generally business law, is immense and can deal with many original situations. All this enables “stakeholders” to assert their interests in a detailed manner, which contributes to the first of capitalism’s assets that we highlighted above. Paradoxically, it is within capitalism that different types of company status have also developed, and structures are possible in the world of the social economy (cooperatives, mutual societies, foundations, etc.). Capitalism can therefore take on interests that are not strictly financial.

Why do these mechanisms need to be supplemented and regulated?

While capitalism, driven by the lure of money, has had positive effects and intrinsic qualities, as we have just seen, it leads to excesses that can become intolerable. Capitalist dynamics have been accompanied by considerable pressure on colonized populations, workers and planetary resources.

Crossing planetary boundaries ³⁵ is still not a problem for some capitalists, who are driven by a sense of omnipotence (“technology will save us”) and, beyond money, by the desire to surpass all limits, as demonstrated by transhumanist ideology.

The fact that monetary capital can grow without limit (money has become entirely dematerialized, being created ex nihilo, as we show in the module on money) is obviously not unrelated to this lack of restraint.

As Marx saw, capital gives capitalists considerable power not only over wage-earners, but also over Nature.

Regardless of these excesses, capitalism needs to be regulated for clearly identified reasons. Let’s look at the main ones.

Public infrastructures and facilities are needed for knowledge creation and acquisition

A company is not born and bred out of the ground. It needs :

• natural resources (a habitable planet with a breathable atmosphere, an acceptable climate, materials, energy and water used in all processes…);
• sufficiently educated and trained workers who can integrate socially into the company;
• public (i.e. financed by redistribution systems based on various compulsory levies) or private “external” services: security, a healthcare system, a right that can be respected (because it is fairly well constructed and the mechanisms for enforcing it are fairly effective), roads and other logistical resources, communication networks and so on.
• available knowledge and know-how, and therefore industrial or service ecosystems, as well as research that works;
• a sufficiently stable society, where there is a minimum of trust between people and institutions.

This last point (the need for a fairly stable society) is open to debate: it is possible to make a fortune during a war (which enriches arms manufacturers, black-market “débrouillards”, etc.). The extension of lawless zones can contribute to the arrival of a “strong” power that can allow business to develop; we know of examples of countries with very high levels of social injustice where business “works” well.

On the whole, these arguments are short-sighted. Alain Peyrefitte, in his book La société de confiance, shows just how useful this value (trust) is for business and its development. There’s no need to demonstrate that generalized mistrust (born of a noxious climate) complicates and slows down everything. ³⁶

Clearly, all or part of the services and infrastructures described above must be public. ³⁷ Companies need them in the country where they operate, and are generally not attracted to countries where these services are lacking. On the other hand, the private sector cannot provide many of these services because they are not, or not sufficiently, profitable. ³⁸ without government intervention.

Common” management systems are needed at various scales

The natural commons

From watercourses to the climate, business depends on common goods. Their deterioration (through pollution, for example) and/or over-exploitation can “benefit” some (in the sense that they can be a source of income) and harm all.

This risk is intrinsic to the spontaneous functioning of the free market. Nature doesn’t get paid for the services it provides, nor for the damage we do to it. Within the free functioning of the market, and in corporate accounts, Nature is not counted.

It is only felt through its “physical”, “concrete” effects. Economists speak of externalities precisely because these effects are not directly monetary, and are therefore considered external to the economic system. ³⁹

It is therefore up to the public authorities to ensure that these effects are taken into account by economic players, so that they can prevent, limit or mitigate them. In some cases, public authorities must make these effects impossible. It can do this by various means (prohibitions, regulations, taxation, etc.).

Accounting can be thoroughly reformed in this direction, leading to a redefinition of “profit” that would integrate these “externalities” into its construction.

Generally speaking, these commons cannot be managed efficiently by privatizing them. ⁴⁰ and not necessarily by “nationalizing” them. Again, history teaches us this: during the (economically) communist periods in Russia and China, local pollution could be severe.

In the majority of cases, it is desirable to develop hybrid arrangements, involving the various stakeholders, particularly local ones, whose interests are most directly linked to the preservation of this common good. The Drugs for Neglected Diseases Initiative (DNDI) is an emblematic example of this hybrid format. ⁴¹

When it comes to national or international common features, the French government is the only player with the legitimacy to create or promote these systems, and the only one with the necessary fiscal and budgetary tools.

The currency

Currency is an indispensable institution in modern market economies, both within and between countries. Created from a simple set of bookkeeping entries, it must be subject to strict regulations. In particular, the management of monetary policy (including the “lender of last resort” function), crucial to the rule of law, is necessarily public.

Find out more in our Money module.

The “commons of the mind

Ideas, scientific theories, language and its words cannot be privatized, since they belong not to the person who first discovers or patents them, but to everyone, forever.

We need systems that prevent the creation of a caste of rentiers and limit social inequalities.

“Money goes to money”, “the winner takes all”, etc. These empirical observations have been demonstrated mathematically by Nicolas Bouleau and Christophe Chorro. ⁴² Thomas Piketty has popularized an obvious arithmetic fact: if the return on wealth is higher than the growth rate of the economy (i.e., higher than that of average income), the richest of the “rentiers” (wealth holders) will eventually become hyper-rich, by virtue of the exponential property: a growth rate greater than 1 causes wealth to grow very rapidly (see the “exponential property” box in the module on natural resources).

In this case, capitalism becomes caste capitalism. The rentiers are not (with a few exceptions) entrepreneurs, but conservatives, and their only aim is to preserve their privileges.

As far as social inequalities are concerned, their level of acceptance in a society depends on numerous sociological, cultural, anthropological and historical factors…

In economic terms, efficiency is not independent of equity (contrary to popular belief). ⁴³ ) For example, Tancrède Voituriez and his co-authors:

“IMF and OECD studies show that rising inequality is unsustainable from a strictly economic point of view, insofar as it acts as a brake on growth.” ⁴⁴

On the other hand, exceeding the “tolerable level” can lead to situations of social disorder, or even more, which are generally undesirable. There is no reason why the market should spontaneously avoid exceeding this level. The public authorities therefore need to get involved through appropriate measures, such as income caps. ⁴⁵ a highly redistributive tax system on income, capital and inheritance. ⁴⁶

Market regulation mechanisms are needed

The creation of monopolies

The “theorems” that claim to demonstrate that a free-market economy equilibrates spontaneously and leads to an economic optimum are based on the hypothesis of diminishing returns. ⁴⁷ rarely encountered in “real life”.

When returns are increasing, the formation of monopolies and the risk of abuse of dominant positions are inevitable, without public intervention. Such monopolies are sometimes desirable: this is clearly the case with rail, electricity and digital networks, which are “natural monopolies”. ⁴⁸

In other cases, they clearly aren’t: think of banks and non-bank financial players, the Gafams, and so on. ⁴⁹ and the risk of simultaneous ownership of shares in competing companies by institutional investors, known as “common ownership”. ⁵⁰ Think of the power of agrochemical companies to control the regulator in areas with vital consequences for biodiversity and human health. ⁵¹

Risks of recession and crisis

Not only do markets not spontaneously balance (i.e., the supply of goods and services does not spontaneously equal demand), they are in fact always out of equilibrium. When (solvent) demand is too weak across the board, this imbalance automatically amplifies, culminating in a major crisis. The state must therefore ensure that this spiral is avoided through appropriate policies, and intervene massively if such a crisis occurs. This is what we explain in our fact sheet on the economists Hyman Minsky and Irving Fisher, who helped to make the mechanism of economic crises understandable.

Conclusion

If humanity is to avoid going off course, it is clear that the balance of power between capitalists, states, “civil society” and Nature must be powerfully rebalanced. Here, we argue in favor of an in-depth reform of capitalism, without suggesting its abandonment – a project that is as vague as it is uncertain in an overly constrained timeframe.

Seen from a distance, there are four obvious ways to get there:

Take significant steps to adjust the existing system

The first is to bring about changes in social, economic and financial policies, making it possible to limit anthropogenic pressure on Nature and reduce social inequalities, without profoundly calling into question the current framework (by pursuing the advances of the Pacte law in France, for example). This path must be followed in all cases – it’s a minimum – and particularly at European level, in the face of the perilous persistence of the framework of thought that presides over the conduct of budgetary and monetary policies. The measures to be taken are, in any case, significant: an ecological reconstruction plan incorporating binding measures to achieve carbon neutrality and halt artificialisation, financial regulations, reform of the property market, tax reform (new income and wealth tax), etc.

Strengthening the legitimacy and power of public authorities in the face of multinationals

From a certain point of view, it’s a question of “turning back the clock”. “Demondialization”, “demarchandization”, banking separation (which was implemented by Roosevelt between the wars, then abandoned at the end of the ^20th century), rehabilitation of a strategist state, possible nationalizations… This path is more ambitious and, if taken, would facilitate the measures proposed in the first. The COVID crisis and the war unleashed by Vladimir Putin make it more acceptable. ⁵² by the elite who have never ceased to advocate free trade and the illusion of soft trade to justify globalization.

Changing accounting rules by going the triple capital route

Accounting rules are binding on economic players. If they have to include expenditure on “repairing damage to human and natural capital” in the calculation of “profit”, they will be prompted to make decisions adapted to this double constraint, which at this stage is, in their eyes, only a very loose one. If they have to preserve natural and human capital in the same way as financial capital, this will have a profound effect on their trade-offs. Multi-capital accounting (which takes into account not only financial capital, but also human and natural capital, so that they can be better preserved) remains capitalist, but completely transcends the still largely dominant vision of capitalism.

National accounting, based on business accounting, would be reformed accordingly. We could expect an in-depth reform of GDP and social “well-being” indicators.

This path needs to be explored without delay. Barring a major crisis, it will take several years and will require international cooperation and a very strong political will.

Transforming the institutional framework

The fourth path consists of a parallel development :

• the governance of companies by including employees (co-determination) and, where appropriate, representatives of Nature in management bodies;
• democratic institutions, such as the creation of a “chamber of the future”. ⁵³

This route would obviously have a greater impact as a complement to the previous one. The possible timetables are not the same, since this fourth path is accessible at national level, whereas accounting reform can only be envisaged at European level, at least.