The Future of Capitalism | UPSC Mains Essay Preparation PDF Download

The Future of Capitalism

structure

(1) Opening    —    The collapse of communism in Eastern Europe and the former Soviet Union.

    —    The spread of market economies in the Third World.

(2) Body    —    Capitalism marks the economic and political liberation of hundreds of millions of people.

    —    Where does capitalism go?

    —    The main varieties of capitalism.

    —    Private ownership.

    —    Capitalist economies have much in common.

  —    Today it is inconceivable, unless war intervenes, that any western democratic government would abandon capitalism as an act of policy.

    —    Diminishing support in the west for open markets and free trade.

   —    As economic liberalisation spreads, the pressure of competition on the west’s low and medium-tech manufacturers.

   —    Threat to capitalism—the strongest countervailing force is likely to be technology, and specially the revolution in communications.

(3) Closing    —    Try to cooperate with each other in devising a new systems of international regulations.

    —    Two broad choices are there: one, in effect, is to give away to the pressures that will tend to impede the market system. Second, in both rich and poor countries, to extend the scope of the market.

In the past few years the world has seen two profoundly significant events: the collapse of communism in Eastern Europe and the former Soviet Union, and the spread of market economies in the Third World. The first, a gropping news story with immediate implications for Western security—the end of the Cold War, if not quite the end of history—has been more than adequately reported. The other has made less riveting copy and its meaning for the west is taking longer to sink in. Conceivably, however, it may change the World even more over the coming decades than will the revolutions in Eastern Europe.

The two events are closely related. Although economic reform had been under way in parts of the Third World since early in the 1980s, the collapse of communism was well timed to harden the resolve of reforms and weaken their mainly Leftist opponents: the model that many anti-market thinkers had drawn on for inspiration (though few were crazy enough to want to copy it in detail) had vanished. Some countries—India for instance—had followed aspects of the Soviet model more faithfully, and had tied their economies more intimately in trade to the communist countries. In such cases, the link between the events of 1989-91 and the adoption of more liberal economic policies was more direct. These connections make it all the more plausible in these two transformations one larger thing: the triumph of capitalism.

Some in the West, unimpressed with the achievements of market economies, see hubris in such a claim. Liberal capitalism, they might say, has little to boast about. It has failed to deliver rapid material advance for everybody; poverty remains unconquered, and, in the midst of abundance for some, seems all the more reprehensible. This verdict is absurdly wrong. If any of history’s great turning points is worth celebrating, this one—which marks the economic and political liberation of hundreds of millions of people—surely is Capitalism and economic growth it has fostered in the West have freed countless people from poverty, and created the means (given the will) to help the others. No other economic system even comes close to matching its achievements in any aspect of economy or social progress.

But where does capitalism go from here? Always a broad church, it seems all the broader now that the competing paradigm (the command economy) is dead. Will the various species of capitalism—American, European, East Asian, to name but three—come together or more further apart? Given the new demands that will be put on developed economies over the coming decades, will Western capitalism of recognisable sort even survive?

The main varieties of capitalism has always differed in significant respects. In America, for instance, shareholders have a comparatively big say in the running of the enterprises they own: workers, who are for the most part only weakly unionised, have much less influence. In many European countries, shareholders have less say and workers more. In Germany, for example, the representatives of unions serve on supervisory boards; the companies’ principal bankers also have plenty of clout in the strategic decisions of management. On this spectrum, Japanese capitalism lies even further away from the American variety. Until recently shareholders in Japan played virtually no role except to provide capital; managers have been left alone to run their companies as they see fit—namely, for the benefit of employees and of allied companies, as such as for shareholders.

Despite these differences, all species of capitalism have had certain essentials in common. These are the things that will need to be preserved if liberal economies are to go on to further success.

First and foremost, capitalist countries have separated, to a high degree, realms of politics and economics. As a result, in capitalist countries it makes sense to think each of these realms in its own right. Decisions about what goods and services are provided by whom, to whom, and for how much, are made for the most part in markets, often in a big way, either as buyers or sellers, or as regulators. But they do not (except in certain narrow areas)—the price system, altogether; when they hire civil servants, for instance, they pay a market wage according to the kind of worker they wish to attract. Put it this way: in capitalist countries, the extent of government intervention is a matter of politics, the manner of intervention is, by and large, a matter of economics.

Under communism (as under feudalism), by contrast, the political and economic realms were essentially one and the same. Those in power exercised their claims over resources in fundamentally non-market ways. Illicit transactions aside these systems left little scope for voluntary economic arrangements.

Private ownership has usually been a feature of capitalist economies. Certainly, it is a natural counterpart, a reflection of the separation of politics and economics. But it is not in fact a necessary counterpart, because in achieving that separation control matters more than ownership—and ownership does not guarantee control.

That is why we could argue, for example, that for much of the 1980s Southern China was a more capitalist place than India. In Southern China, state ownership of property was (and still is) the rule, but enterprise managers (like farmers throughout China) were given increasing freedom to run their business themselves. Even without private property, a separation of politics and economics was achieved, and the price system began to direct the allocation of resources. India on the other hand, has much more private ownership, but until the reforms of the early 1990s it also had a system of state control that rivalled that of the Soviet Union. A 

factory making bicycles needed permission to increase its output, or to reduce it, or to start making a new kind of bicycle. This “Licence Raj” was so pervasive and intrusive that, in effect, it unified the realms of politics and economics, despite the existence of private property.

Capitalist economies, despite such institutional differences, also have much else in common. In the market system that flourishes when politics and economics are kept apart, decisions about the allocation of resources are highly decentralised. Instead of an explicit organised intelligence, there is spontaneous and unwitting coordination—the invisible hand. Instead of planned cooperation, there is competition. This competition extends far beyond the static rivalry of elementary economic theory—that is far beyond competition among existing producers and their products. It also encompasses competition among new, would be producers, ideas for products yet to be invented, alternative means of production and different models of industrial organisation.

Because capitalism is decentralised and competitive, it is especially good at conducting experiments. This may be its greatest strength. Experiments can be conducted on a small scale and of correspondingly small expense of resources. Successful ones reap big rewards. That, of course, provides the incentive to undertake the experiment in the first place. But profits are also the signal for others to follow. So successful innovations (of product, service, method of production or mode of organisation) are quickly taken up elsewhere. Equally important experiment that fail—as the over-whelming majority do—can usually so abandoned with comparatively little pain. These conditions offer the maximum encouragement for efficient innovation. It is unsurprising therefore that Western capitalism has been relentlessly innovative.

Today it is inconceivable, unless war intervenes, that any Western democratic government would abandon capitalism as an act of policy. If market economies retreat, it will not be because the boundary between the political and economic realms all of a sudden disappears, but because governments shift it gently over a period of years, perhaps inadvertently. Certain forces are indeed pushing that way; others are acting to cancel them out.

The past 150 years of material advance in the West has shown beyond doubt that social change is tightly linked to economic growth. In fact they are nearby, if not quite, the same thing. Yet throughout the period, people have feared change as much as they have wanted growth.

It has become an axiom of modern democratic politics that governments will be held to account for any process that creates losers. Capitalism at its most fruitful is necessarily such a case. In the long term everybody has gained. In the short term the process is one of “creative destruction”. With wealth, perhaps comes an increasing reluctance to tolerate the instability and uncertainty that change (growth) requires electorates to accept. This is one way—utterly different from the one foreseen by Marx—in which capitalism could be said to carry the seeds of its own destruction.

A growing preference for stability may help to explain diminishing support in the West for open markets and free trade, and periodic outbreaks of anxiety in the rich countries over “deindust- rialisation”—i.e., falling employment in manufacturing. In what would be a sad irony, these fears are bound to be increased by the prospect of faster growth in Eastern Europe and the Third World.

Rapid development in East Asia has already caused much tension over trade in America and the European community. As economic liberalisation spreads, the pressure of competition on the West’s low and medium-tech manufacturers will increase. America already runs a large bilateral trade deficit with China—a fact that weighed as heavily in this year’s debate about what tariffs to set on China’s export as did protest over China’s infringement of civil rights. Opponents of America’s free-trade agreement with Mexico emphasise the threat that cheap imports pose to America’s manufacturers. In the same way, the European Community has been inexcusably slow to grant the reforming countries of Eastern Europe liberal access to the Community’s markets. These are disturbing, if unsurprising, signs that the spread of capitalism in the poorest parts of the world may undermine support for market economics in the countries where it has already worked well.

Against the pressures threatening to undermine capitalism in the coming years, the strongest countervailing force is likely to be technology, and especially the revolution in communications. In many industries technological progress had reduced the fixed cost of production making it easier for smaller forms to compete with larger ones, or else it has developed new products that broaden the possibilities of competition in another way. The evolution of communications has already helped to topple regulation in another major industry—financial services—and will increasingly have the same effect on others. It is becoming ever easier for firms to evade national regulators by moving their production to less regulated places. As such possibility began to be exploited, the West’s finance industries were substantially deregulated in the 1970s and 1980s. The same phenomenon is likely to become more common in other industries. To deal with it, governments will try to cooperate with each other in devising new systems of international regulations. But this is difficult, and it is likely that technology will continue to move faster than governments.

As these opposing forces work themselves out, government of every political complexion ought to keep two broad choices in mind. One, in effect, is to give away to the pressures that will tend to impede the market system i.e. to favour more trade protection, help for declining industries, an ever expanding welfare state, and measures to limit cross-border regulatory avoidance. This may well be the course that best responds to popular demands. But it is also the option that operates most powerfully against change, and hence against growth.

The alternative is to continue the work of the 1980s, in both rich and poor countries, to extend the scope of the market. This means, among other things, freer trade, policies to protect workers unlucky enough to be in declining industries, rather than policies to save their jobs, and a welfare state that helps the poor not the middle class. This may be politically impossible: Capitalism is held in low esteem in the countries it made rich. It is, nonetheless, the pro-change, progrowth choice.