Posted in Finance Articles, Total Reads: 1959
, Published on 03 December 2012
Capitalism is an economic system that is based on private ownership of the factors of production and profit as the primary motive of production of goods and services. Other elements central to capitalism include competitive markets, wage labor and capital accumulation. Capitalism is the most dominant form of economic system today that has been adopted, in varying degrees, by nearly every country of the world. According to its proponents, capitalism gives an economy a much better shot at achieving prosperity, growth, transparency and efficiency for all its stakeholders than Socialism, which is characterized by social ownership of the means of production and co-operative management of the economy. The economic turmoil that the world has witnessed very early in the 21st century, though, has stirred up some soul-searching about this system among the decision-makers, policy-makers as well as intellectuals all around the globe.
The case against capitalism
Frank Borman, former NASA astronaut who led its first mission to fly around the Moon, famously said during his years as the chairman of Eastern Airlines that Capitalism without bankruptcy is like Christianity without Hell.
Whether hell exists or not may still be a subject of religious faith but it has been well established by now that bankruptcy is part and parcel of capitalism.Large corporations like Enron, WorldCom and Lehman Brothers have collapsed due to reasons ranging from accounting fraud and malpractices to greediness and financial imprudence of its executives. But bankruptcy is just one of the ills of capitalism which has been decried as the new imperialism by many of its critics. Throughout its history beginning from the middle ages in Europe right to the aftermath of the 2008 financial crisis, capitalism has attracted criticism and condemnation of those fiercely opposing it in favor of implementation of socialism.
Criticism of capitalism ranges from expressing disagreement with the principles of capitalism in their entirety, to expressing disagreement with particular outcomes of capitalism. In essence, the opposition is about the inefficacy of capitalism in achieving all-inclusive growth and prosperity for all sections of society. Detractors contend that capitalism creates very large concentrations of money and assets at the hands of a relatively small minority of the global human population, leading to large and increasing wealth and income disparities between the elite and the majority of the population. The following graph depicting the change in pay/wage in U.S. over 1990 to 2005 also lends credence to this claim.
Figure 1 (Source: Bloomberg)
Another concern cited is the rise of huge (often multinational)corporations causing a structural erosion of such basic human and civil rights as equitable political and socio-economic power representation and a destruction of economic freedom.
Critics of capitalism, particularly Marxists, identify market instability as a permanent feature of capitalist economy. Marx believed that the unplanned and explosive growth of capitalism does not occur in a smooth manner, but is interrupted by recessionary periods of overproduction in which stagnation or decline occurs. In the view of Marxists, several contradictions in the capitalist mode of production are present, particularly the internal contradiction between anarchy in the sphere of capital (i.e., free market) and socialized production in the sphere of labor (i.e., industrialism).
We have witnessed a multitude of recessions around the world and especially in capitalist countries like U.S. The most recent one i.e., the subprime mortgage crisis of 2008 was accompanied by a global financial meltdown affecting all the major economies of the world as well as small and seemingly isolated economies like Iceland. On the one hand, firms collapsed and millions lost their jobs while on the other, as if adding salt to the wound, the CEOs and CFOs of many of these failed companies walked away with hefty bonuses severance packages.
The road ahead
Nearly everybody agrees that a certain more responsible form of capitalism is in any case warranted. But the more important and contentious question which has got people on separate sides of the fence is that whether capitalism is in itself an inherently flawed system that needs to be discouraged and superseded by an altogether different system for conducting the world’s economy.
For answering this question, a distinction can and should be made between the various kinds of capitalism, including laissez-faire capitalism, welfare capitalism and state capitalism. Whereas the laissez-faire form of capitalism most logically constitutes the roots of the recent financial and economic crisis, state capitalism doesn’t come without its ills, given its tendencies to give rise to authoritarian forms of governance, most notably in nations like China and Russia. If there are pitfalls to both of these models, where then does the solution lie? A case can be made for the welfare form of capitalism which refers to the combination of a capitalist economic system with a welfare state. However, the basic approach which is advocated in this system, that of embracing capitalism with all its strengths and weaknesses and then funding the welfare measures through policies of re-distributionist taxation and the like, represent a sort of patch-up work being done to shield the lower strata of the society from exploits of the upper class.
In my opinion, more elegant ways of refining capitalism to fit the needs of the 21st century’s society can be envisaged. A country’s government, fortunately or unfortunately, must have a major role to play in that transformation. The challenge therefore is not just to capitalism but also to politics. Instead of facilitating predatory commercial activities such as those witnessed recently on part of certain too-big-too-fail corporations of the western world, government policies must aim for encouraging productive businesses that invest, invent, train, make and sell real products and services. Instead of nurturing enterprises seeking the fast buck through hostile takeovers, asset-stripping and leveraging on complex financial instruments that do not protect the interests of the shareholders, the employees or the economy at large, those enterprises which place an equal emphasis on job creation and overall development of the country’s economy as on creating profits for themselves should be fostered.
At the end of the day, governments must remember they are elected to serve the people, not the powerful lobbies which can pay for access or influence. Governments all around the developed as well as the developing world need to show much more leadership in piloting the economy of the world and all must participate in ensuring a safe and sustainable economic future for this world.
This article has been authored by Rohit Khattar from IIFT Kolkata.
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