Saving Capitalism From Capitalists

By Prakash Chandra Lohani

The idea of destroying capitalism with the aid of the capitalist remains one of the essential characteristics of Marxist theology. Now two leading professors of Finance from the Graduate School of Business, University of Chicago have come up with an interesting book full of insightful concepts and ideas to save capitalism from the capitalists. The 325 page book with the title “Saving Capitalism From The Capitalists” written by the two professors, Raghuram G Rajan and Luigi Zingales clearly indicates that one does not have to be a Marxist to understand the fact that the political economy of capitalism has an inherent tendency to create obstructions in the operation of a free market, an open economy and a competitive economic system. This logic has relevance in the developed countries of the West and more so in the developing countries that are trying to tap the potentials of a competitive market economy. Thus if capitalism based on free markets is to retain its dynamism and efficiency in the enhancement of wealth and income for the vast majority of people in the society the nature of forces trying to obstruct its path and their invisible links and connections with the political forces both on a national and international scale need to be understood for corrective solutions. This is indeed a big task and the two professors do an admirable job in analysing its various dimensions.

Rajan and Zingales make it a central point to emphasise the fact that a competitive market system, especially the financial system rests on a fragile political infrastructure whose norms and values have kept on changing even in advanced democracies depending upon the ability of the economic system to generate employment and distribute the national pie on a broad and equitable scale. In the first part of the 20th century inspite of the first world war, a generally booming economy based on the concept of a minimalist government, the acceptance of gold standard for international transactions and the free market concept provided a value framework of economic decisions that encouraged financial development and made it easy for new enterprises to create wealth and income in the society.

The depression in the late 1920’s changed this generally accepted framework. The notion that the free market system was unfair to the workers and the new middle class gained strength. Politicians were quick to capitalise on this new trend and promote a new value framework that justified government intervention in investments decisions. The authors quote a lot from President Roosevelt’s speeches during the period to dramatise the shift. The pendulum swung from a minimalist to an interventionist government that included the suppression of the financial system and the closing of cross-border capital flows. Here was a case where economic disturbances quickly translated into political decisions that gave a new thrust to restricting competition and openness in international economic transactions. There was, however, more than politics involved in these decisions.

Restricting competition was also in the interest of large corporations and other industrial establishments because it served their interests to protect profit and avoid internal adjustments that may have been necessary in a more competitive environment. The interests of the incumbents—those who stand to gain from the status quo or an interventionist set of policies—did play a major role in the continuation of the domineering role of the government because it helped to maintain profit without much effort. The message is clear that in both the poor and the rich countries the incumbents who are better organised and stand to gain from an active dominant government will use their political connections to promote their interests even though it is detrimental to the general public. The policy tends to continue because the need for organising a countervailing force to challenge is not felt seriously, especially during times of fast growth in output and employment for two reasons.

First, in times of rising employment people are less concerned about the inefficiencies or inequities of the system that may include various forms of corny capitalism captured in its new incarnation as “relationship capitalism”. Second, the cost of inefficiency is distributed widely with the result that for most people rational ignorance is seen as reasonable response. During times of economic strain, however, “rational ignorance” can easily turn into irrational anger against the incumbents and generally against the philosophy of free market and an open economy. Politicians are of course more than willing to tap these sentiments if it leads to power. Here is a situation where political interests and economic thinking reinforce each other to restrict capitalist competition and suppress the operation of the free markets.

The last quarter of the 20th century has seen a progressive decline of relationship capitalism. It was a system supported by the Bretton Woods framework that discouraged free cross-border movement of capital. Changing technology, greater reliance on the market and increasing liberalisation of cross-border capital flows have posed an effective challenge to the coalition of forces that thrived on relationship capitalism. On the other hand, it is also becoming clear that the “invisible hand” theorem if it is to work reasonably in real life needs the visible hand of the government to assure competition. The authors emphasise the not so obvious fact that “a competitive form of market” is a public good that ironically needs the visible hand of the government for maintenance. On this count, communism as an economic and a political system is at a double loss since it allows competition neither in politics nor economics. State capitalism and one party dictatorship combine together to produce a system that goes on to internalise a set of political and economic values that are completely against the humanitarian vision that Marx presented as his utopia.

The maintenance of competition is not easy or simple. There will always be forces arrayed against it since they see their privileges and position being threatened by new entrants claiming for a piece of action. In the context of a rapidly changing technology this logic applies to both the traded and non traded sectors. A worker in a call centre in a developing country can easily be projected as threatening the job of computer operator in a developed nation. There is therefore an inherent possibility to restrict competition with the slogan that you are protecting “your” people, thus preserving the gains available to the few from a restricted economic environment. In politics what is often apparent may not be real. High-sounding slogans projecting national interests in this context can easily become a veil for protecting some people’s vested interest. Ultimately, if people are not careful the evolving coalition of interests against a competitive market in goods and services can easily degenerate into an economic system that is controlled by the few for the benefit of the few. Once the concentration of productive assets in a few hands gains momentum the forces against a competitive system become increasingly assertive and strong.

To promote a competitive economy it is necessary to create an incentive structure that encourages competition. This is especially true in the financial sector where informal and cozy arrangements between the banks and large business houses may put them in same wavelength on the question of competition and liberalisation. A more competitive and open financial market on the other hand could be expected to reduce the cost of capital and encourage new entrants in the economy. This may weaken the power of the vested interests and force them to think of new strategies of change and innovation.

The concern for a competitive economic structure is not just the concern of the developed nations; it is vitally important for developing countries as well. Most developing countries and for that matter the so-called transition economies have a fragile political structure that is often incapable of checking the monopoly tendencies of old and new vested interests that thrive on highly skewed distribution of assets, legal uncertainties regarding property rights and similar other risks that increase the transaction cost of doing business for the small and medium sized entrepreneur and businessmen. The lack of opportunity for the small man on the other hand strikes at the very root of a liberal democratic system and can easily lead people to seek for solutions that could very well be a new model of corny capitalism.

A liberal democratic framework should therefore be able to create incentives for competition and it could well mean among other things, a vigorous growth of the financial sector on a broad scale so that it opens opportunities for new entrants in the economic system. If this is missing a liberal democratic framework could easily end up as a new variant of constitutional formalism where the gap between prescription and practice continues to remain wide as ever. In this setting, competition as a public good becomes the casualty and the capitalists become the adversaries of capitalism.