Capitalism, Efficiency and Equity

Capitalism, Efficiency and Equity

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar

Prasad Rao? Criticizing Capitalism? It must be the end of Time! Well, may be, but even in the US, the bastion of capitalism, economists, environmentalists and social thinkers have begun to question the Capitalism as the 'panacea for all ills' (See “Is Capitalism courting long-term disaster?”). True, capitalism embodies some of our most cherished values: competition and free markets (though, not exactly), incentives, innovation, and excellence; yet, one cannot wish away its fundamental problems as has been revealed over time. First, by trading the entire future of firms on the stock market, one of its primary institutions, capitalism encourages profit bubbles and short-trading that sucks away all future rents leaving behind, on one hand, a large group of long-term investors waiting decades for the growth that must materialize for them to realize profits and, on the other, managers who must find a way to realize growth for investors, even if at the cost of the environment, health, safety, and financial compliance. Second, the search for lower cost inputs brings about labor-saving technology and a flight of capital to low-income economies with lower labor cost and abundant natural resources. The underhand dealings with puppet regimes permit foreign capital to rape the resource-rich country and funnel profits abroad while impoverishing the country's future. Such capitalism only enriches the capitalists; it does little to promote the welfare of labor. Third, capitalism induces raw-material and energy-intensive industries to move toward less-expensive, lower quality raw materials and fuels, thus exacerbating local and global pollution in the search for lower cost and higher profits. (Just the other day, I read a news item about a cement company whose profits are expected to jump because they are fuel-switching into coal). Fourth, and as vividly explained by Krugman, capitalism fails at insuring the health of the masses. Insurance under capitalism encourages an unholy network of legislators, lawyers and health care providers in to increasing health care costs and siphoning away profits, even while it systematically discriminates against the poor and the unhealthy, unmindful of the possibility that some of them are the products of its own system. Fifth, capitalism is perhaps to blame for the wars that the US has fought in search of global dominance and secure sources of energy. (And I thought the US fought for democracy and freedom! Why, there is learning even in the 40s!). The nexus between capitalists and politics before, during and after elections, or for that matter, concerning religion and immigration or foreign policy is all too well known. As I have observed many times, capitalism exploits every resource, every right until it turns in to a luxury (and the consumers into slaves)!

This is not the first, or for that matter, the last time, that I point out that for capitalism to truly succeed, equal opportunity is a necessary condition. In its absence, capitalism brings out inter-generational inequality, wherein those born rich are endowed with access to worldwide resources and opportunities whereas those born poor lack even the basic services to grow up in to socially useful adults. This inter-generational externality is perpetuated, even exacerbated over generations under a blind capitalist society, bringing about a schism between the haves with financial, political and economic control, and the have-nots whose every right is stripped until they turn modern day slaves to the super-rich. This is no more a conjecture. The US is an example of a country with blatant inequity where the society is torn between the mutually exclusive goals of furthering equal opportunity and preserving the incentive to innovate, excel and succeed. So much so, in a large country with endemic inequity, the very act of furthering equal opportunity (using the private sector for building thousands of schools, for example) expands the income gap, at least in the short-term. Could it be that inequity, once brought about, is self-sustaining, even when sought to be reversed? Come to think of it, even imposing efficiency enhancements in an equity-distorted or unequal opportunity world in itself increases inequity. All these suggest that equal opportunity policies should be implemented ahead of efficiency enhancing policies in a competitive, capitalist framework.

So, where does that leave us Indians? I have claimed that Indian socialism is neither capitalist, nor communist - that it is the worst of both worlds, especially when couched as a coalition of the left and right. It is a system in which the rich, the investors, the politicians, bureaucrats, in fact all except the poor masses – the intended target of socialism - flourish. Those were the times when I advocated India merely replicate the policies of the US. Wrong as I was, I fear our businessmen, politicians, and investors are all too willing to follow the lead of the western world. It is the fashion of the day to make money by hook or crook in India, then send one's child to study MBA in the Western world or emigrate to Australia or New Zealand! The question is: Have we learnt our lesson? I fear not. Thankfully, international institutions are more circumspect of unbridled capitalism and 'unfettered reform' in their lending policies and prescriptions to developing economies. Perhaps they will restrain India from doom.