Notes to slides of Lecture 2 (Rough draft):

This lecture attempts to accomplish three tasks:

1. We want to understand that capitalist social relations are historically specific. In that sense,
the need to make profits, rewarding greedy individuals, rapid technological change, rapid
pace of environmental destruction are not universal – they are the outcome of the
underlying structural necessities of the way we organize our way of living. And, we should
not forget that given the millennia of human history, fully-fledged industrial capitalism
emerged only 250 years ago! We often take how things work as natural or given because we
do not situate them properly in their historical context.
2. We want to figure out, how that system (the underlying social structure on how we produce
our livelihoods) leads to exploitation, technological change, geographical expansion
(globalization) and uneven development.
3. We are going to see how the production of space needs to be understood in the context of
capitalist social relations. The creation and transformation of cities, transportation networks,
IT and communication technologies that allow us to do business over long distances, etc. are
not just happening, they are required by the need of firms to make profits.

The slides start out with some basic time series plots to illustrate a key juncture in human history
around 1750: high rates of economic growth; a change in the structure of the global economy
(Europe and later the United States start dominating the global economy while China and India
decline in importance). This is linked to the Industrial revolution and more generally, the
reorganization of European societies (starting in Great Britain). Various social changes resulted in a
fundamental restructuring of how people made a living (there are a lot of books written on this topic
– see a summary of discussions in the “Brenner Debate” by Bob Brenner and others). There was no
single cause that ushered in this change, but a number of interlocking changes such as the rise to
political power of the merchant class, changing consumption habits of the aristocracy, higher
productivity in agriculture requiring serfs to find work for survival somewhere else, the enclosure
movements (privatization of public land - taking away parts of the means of subsistence from serfs),
etc. The details do not need to concern us here – what is important is that it happened, that Europe
was the place where the transition took place first and that Europe through that obtained a
competitive advantage over regions where Feudal or other forms of social organization existed. In
order to understand that though, we have to understand why capitalism is more efficient than other
systems, we have to know what the underlying structural features of capitalism, the underlying logic
that structures our everyday lives, are.

For that we first look at the conceptual building blocks. We adopt a materialist perspective and
assume that the material practices in how we organize our livelihoods shape the way we think. To
simplify, we do not exploit others because we are naturally greedy and mean, but because the way
we organize our economies (transform nature to meet our needs) rewards certain kinds of behavior
(eg. Greediness, profit-seeking,…). So, how do we organize our survival.
Let us call these organizational forms modes of production. A mode of production consists of the
forces of production (labor power (LP), means of production (MP) (machines, buildings, tools,..),
nature (land, air, water, raw materials,…). In any mode of production we will use combinations of
those to produce goods that we need to survive. The way we organize socially the production
process is called relations of production. This is what changes over time.

Historically there were different modes of production, some lasting longer than others (Feudalism,
Communism, Hunter and Gatherer societies, Slave ownership). They are all characterized by specific
relations between dominant social classes (slave – slave owner, landowner-serf, etc). These different
classes have different rights and responsibilities, the dominant class tends to control access to the
means of production, etc.

Here we want to figure out what capitalism is and what makes it so dynamic. Notice that this is a
rather abridged summary of a rather very complex topic. But the point is to develop a general
framework that allows us to understand some of the basic features of our socio-economies: rapid
pace of technological change, inequality, globalization and uneven development.

On a very abstract level (it is much more difficult to identify them empirically), a distinction is usually
made between those that own the means of production (capitalists – in the past that would usually
have been a firm owner) and those that do not own them (workers). As worker have no longer access
to the means of production (which they need in order to produce goods for their survival) they need
to sell the only commodity that they possess, their labor power. Labor power is available in labor
markets and can be hired by a capitalist for the production of commodities (a commodity is a good
that is produced for sale on a market not for own consumption). The following formula captures, at a
high level of abstraction, the value creation process under capitalism

 LP
M  C .... P....C '  M  m  etc.
MP
At the beginning of the value creation process, firm owners, financiers, etc. invest a certain amount
of money, M, in the hope to produce and sell a product that can be sold at the market for the original
amount of money invested plus a profit. The more profit the more money can be invested in the next
round of value creation. Zero profit would mean that investment in the next round of value creation
would decline (as the firm owners will need to consume part of the money, M, to buy food, clothes,
shelter, etc.). So making a profit becomes imperative. Now the question is how this can be done. For
this we look how profits are made.

Firm owners or investors, buy a set of commodity inputs, C. These are the means of production (MP)
(land, buildings, machines, raw materials) and labor power (LP). They need to be brought together in
place (eg a factory) to start production, P, of new commodity C’. Once C’ is finished it can brought to
market where it is hoped to be sold for the original amount of money M plus the profit m. This is all
very trivial but there are few things to consider here.

The dots…. Are important. They signal that it takes time to produce. This means that investment in
value creation and realization of this investment is separated in time (and usually in space). If we
 are talking about steel plants, car factories, etc. the delay can be substantial. If it takes 2-3 years to
bring an idea to the market, the risk increases that others have produced better products or
produced more efficiently by the time we get our commodities to the market. There is no
instantaneous adjustment of supply and demand, there is fundamental uncertainty (not only risk)
that is inherent in any investment decision.

So, accepting that profits need to be made to remain in the game, what options do we have. Let us
look at LP first. What is important here is that firm owners buy labor power, not labor (worker)
(buying labor would be a slave-owning society). This means that for a particular agreed wage the
worker will provide his labor power. With the wage, the firm owner buys the right to use the labor
power in a way she or he thinks best and has the exclusive right to the final product, C’. Because the
value of the final product added by labor is generally more than the value paid to the worker in form
of wages, profit can be generated. This is called exploitation. But notice, that this does not mean that
workers get paid little!!!!! According to this definition you could earn millions and still be exploited .
So how can we increase profit rates: We could make workers work longer hours for the same wage.
There are natural limits to that. Workers need to go home, eat, sleep, recover. The second option
would be to make workers more productive (we increase their labor productivity through better
incentives, threats, better machines or better organizational routines). Notice that working hours
per day and week have been reduced significantly since the industrial revolution but now seem to go
up again (12 hour day). Why is that? What determines the length and intensity of work?

Another possibility opens when we think more carefully about MP. We can make labor more efficient
if we buy better machines (process innovation), if we improve the work flow/organization, if we
come up with a new product (product innovation). In general, technological change should increase
profits.

The third possibility has to do with geography. We can try and open up new markets, find better or
оцей абзац в
частину про cheaper raw materials and/or workers in other parts of the world. In this sense, globalization is a
глобалізацію
вже
necessary outcome produced by the underlying structural features of capitalism. In order to take
advantage of those conditions in other places we need roads, shipping containers, airports, IT and
або краще і
туди, й сюди communication equipment to offer access to those places. Better infrastructure also shortens turn-
over time of capital, ie. the faster I can recover my investment the quicker I can re-invest it (and
make profits again).

So where is the crux here? Just invest in technology and then sit back and relax, no? Why is that not
possible in capitalism? In order to understand that, we have to recall that production is for sale on a
market and not for subsistence (as primarily the case in Feudalism). So workers need to be able to
work (no matter what wage they get) and capitalists need to sell the final product on the market (no
matter what price they get). This means that markets exert a disciplining power in capitalism but not
in Feudalism (at least not to the same extent). Why is that? In Feudalism the main purpose of
виживання, існування
production is for subsistence. If there was extra labor time available, people could use their talents
for other purposes (making cloth, tables, chairs, etc.) and attempt to sell their products at a local
market. It may be the case that at a particular market day lots of producers with the same product
show up. Some of them may be more efficient than you and hence, they may accept lower prices for
the product. What option do you have? You could also accept a lower price or you could just go
home and try again the next week – it does not matter, because your survival does not depend on it.

As your survival in capitalism depends on the sale of the commodity, you generally do not have this
choice and you will need to face competition. Prices are the result of many producers with different
production functions where prices will fluctuate around average production costs plus markup (for
the sake of argument let us keep it that simple). If you are more efficient than average you make a
larger profit, if you are less efficient, you make lower profit (or probably even zero/negative profit in
which case you are likely to go out of business).

The problem is that, because of the inherent uncertainty that you confront as investor, you will
never know what price you will actually get once you are ready to sell (as the price is dependent on
the efficiency of all other producers and you cannot know all their production functions). The only
thing you know is that everybody else will try to be as efficient as possible (and hence innovate) so Хоча це призводить
до створення
that you are left with no choice but to innovate continuously yourself. This is why capitalism is the надзвичайно
technologically most dynamic mode of production in human history. While it results in the creationвеликої кількості
нових технологій
of an exorbitant number of new process and product technologies, it also means that old процесів і продуктів,
це також означає,
technologies become redundant and firms producing or using them go out of business. Josef що старі технології
Schumpeter (who studied at the predecessor at WU) calls this process “Creative Destruction”. стають зайвими, а
фірми, які їх
виробляють або
Globalization and the production of space, two other key features of capitalism are discussed in використовують,
detail in the Coe et al. chapter. The fact that globalization is one channel to increase profits seems припиняють свою
діяльність.
obvious. What is probably less easy to understand is how uneven geographic development is
produced. This will become clearer when we talk about agglomeration economies and cities, but at
the moment it is important to know that investment of capital in space in form of transportation and
communication infrastructure is necessary to enable globalization. Access to transportation hubs,
etc. improves the accessibility and so reduces transportation costs for firms in particular cities. When
transportation networks are replaced and reconfigured, the competitive advantage of particular
places changes (see for instance cities along canals during the canal age becoming less important or
irrelevant once railroads replaced canals as main mode of transportation, etc.).

The second important insight from a geographers point of view is that LP and MP have to be
assembled in a particular place (eg. City or even neighborhood). This means that factories, suppliers,
customers, workers often have to co-locate. During the industrial revolution, when urban and
regional transportation networks were not well developed, workers had to be able to walk to work –
they had to live very close to factories. Not surprisingly we saw a massive increase in city sizes during
the industrial revolution. Because firms and workers need to collocate in close proximity, investment
will flow into the development into those places while it will move out of places further away. This
generates uneven geographic development. Once places get ahead, there usually are set in motion
positive and cumulative feedback mechanisms that result in even further relative growth. That does
not mean that growth needs to go on forever. Why?

The built environment (or local resource system) that has been created reflects the needs of the
industries and firms at a particular moment at time – it is built to maximize profits given the
conditions of its time. With technological change (allowing for globalization but also new industries
to replace old ones,…) the requirements for infrastructure investment may change. In this case, old
infrastructure can form a barrier to change and because of that, formerly successful places may
decline. Whether places are able to adapt or not has a lot to do with the kind of industries it hosts,
what position in the spatial division of labor it occupies and what kinds of institutions and cultural
practices dominate in particular places. Culture often emerges around particular industries. Miners
and old industrial workers build their identity around particular gender roles linked to the work in
those industries, etc. IT workers in Silicon Valley think very differently about risk taking than large IT
corporations on the East Coast, etc. Some are easier adaptable to changing conditions than others
such that success or failure of a particular place can explained often only through very particular case
studies not general, theoretical arguments or models (they help to understand why uneven
development occurs, but not why particular places grow or decline).

Jürgen Essletzbichler, March 16, 2020