THE DANGERS OF FREE-MARKET CAPITALISM
V.S.Gopalakrishnan
Capitalism has many forms, and “free-market capitalism” has brought the USA and even Europe to the present financial crisis. I have just finished carefully going through a book titled “23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang (of S.Korean origin). It fascinatingly demolishes the case for Free-Market Capitalism (that ruled the USA for 3 decades) in which there is over-dependence on supply-demand factors with inadequate regulations and correctives. Capitalism should go with regulations.
The free-market idea has to be debunked. Historically the free-market theorists even shouted hoarse when child employment was banned. They shouted hoarse when 60 hour work per week was reduced. Author says that today’s free-trade economists would have hated to buy things made by their own grand-fathers who put in very long hours of work in inhumane conditions. Total free-trade is meaningless. The British Government foolishly hung on to free-trade in opium and the war with China happened.
Modern capitalism was made possible by the device of Company with limited liability. Earlier to it, there was no limit on liability and promoters were afraid to invest. Adam Smith who advocated free-markets opposed the concept of the Limited Liability Companies on the assumption that the managers would play havoc with the Capital due to limited liability! Karl Marx supported the idea of Limited Companies since large capitals could be collected and invested. However, the professional managers (ex: Jack Welch of GEC), from 1980, while managing the company’s capital well, went in for “shareholder value maximization” (giving maximum dividends) and ignored building of surplus/reserves from the company-profits for re-investment. Industrial investments came down and the growth rate in USA came down. Jack Welch later admitted that share-holder value was the “dumbest idea in the world”. So, good economics means a good balancing act, without too much favour to one actor/factor.
Free-market economists/advocates sometimes don’t see the consequences of their advocacy. If there is totally say a free migration of labour from India to the USA, will they accept it? They don’t realize that there are Immigration Laws implemented right under their nose, which mock at their ideas.
The author ridicules the prevalent over-enthusiasm of the free-market advocates for the idea of “globalization”. The globalization has meant the shifting of manufacturing industries from the West to the cheaper Orient. The West has thus become a “post-industrial society” giving practically all the room to service sector. Jobs have been lost and an imbalance has set in.
The author believes that the present “internet revolution” is nothing compared to the “washing machine revolution” nearly a century ago. With the washing machines that save time coming into one’s life, women took to working in office. With both husband and wife working, the opportunity cost for having children rose up! This brought in more far-fetched changes in society than the changes due to internet! So it seems that we can blame broken marriages, divorces, increasing old age people and reducing youthful population, on the hapless washing machine!
The author goes to great lengths in attacking Adam Smith’s observation on selfish butcher, brewer and baker. Smith said that these guys are there to serve you not out of altruism but for their selfish interest. I came to my own conclusion that the correct term is “survival interest” and not “selfish interest”. If it were selfish interest, the butcher or the baker will not share his income with family members.
One very interesting thesis the author adduces is that free-market in the world cannot make a poor country rich. He says that protectionism alone made USA, UK etc rich. Having become rich, they want to capture other markets through free-trade and free-market. Only partially is this stand correct. The East Asian tigers (South Korea, Taiwan etc) do demonstrate the fact that “freer-trade” (and not “free-trade”) is what is responsible for their prosperity.( There is no such thing as “free trade” -we have only “freer trade” under WTO regime-as free trade would mean zero restrictions on the movement of capital and labour across the world.)
Economists and Governments of many developing countries seem to think that their countries should pass from agricultural economy straight to service economy skipping the manufacturing stage since in the rich West it is the service economy which has ultimately become preponderant. In India manufacturing is much less compared to China. The author emphasizes the danger in belittling the role and importance of the manufacturing sector. Productivity growth is faster in manufacturing than in service. Services are also much less tradable than manufactured products. It will be thus wrong to think that India could also go into de-industrialization as has happened in the West. India should, I too feel, welcome huge investments in manufacturing as happens in China, instead of hugely relying on software production.
The free-market economists would like Governments to play the least role in national economies. That means that Government should be a mere onlooker. These economists forget that computer, semi-conductors, aircraft, internet and bio-tech industries have all arisen from Governmental efforts. Huge moneys have been spent by the US Government in R and D in these areas.
The author says that the individual entrepreneurship capacity of the nationals in a poor country is much more than in rich countries. That explains how these poor individuals are managing to survive. Yet, why are these people unable to make their country rich? The author blames the Governments of the poor countries for not properly channelizing the entrepreneurship capabilities of the citizens. However this is easily said than done. I should think that regulated capitalism is the only panacea here. Companies should be formed, they should invest, they should resort to recent technologies, they should employ people, they should make profits which should be mostly reinvested and so on. The Bangladesh model of individual entrepreneurship through Grameen bank loans has failed. The workers should be “collectivized” in a sense.
THE PRESENT ECONOMIC AND FINANCIAL CRISIS BEGINNING 2008:
As per the author, reckless free-market operations over two decades led to the big crisis beginning 2008. The Government of the USA went into huge budget deficits year after year. The citizens borrowed freely with no thoughts on how they would repay. The financial market, in fact, had a major role in the recession. Financial instruments and products went on multiplying so much that the banks and Financial players themselves failed to understand them properly. Warren Buffet had the premonition to say that financial derivatives were going to be “weapons of financial mass destruction”.
But for the US Governmental intervention in saving many Banks, the motor industry etc, by pumping billions of dollars, the extent of the downfall of US would have been great. This is still not being appreciated and accepted by free-market economists. These economists believe that a sick person (say, sick industries) must be allowed to die rather than tax payers’ money spent on his medication. The role of Governmental intervention and regulation has never been more important at any time than now in the crisis-situation. Mitt Romney is all for free-market and his prescriptions that keep governmental action at bay, may not help the USA economy to revive in case he becomes the President.
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V.S.Gopalakrishnan
Capitalism has many forms, and “free-market capitalism” has brought the USA and even Europe to the present financial crisis. I have just finished carefully going through a book titled “23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang (of S.Korean origin). It fascinatingly demolishes the case for Free-Market Capitalism (that ruled the USA for 3 decades) in which there is over-dependence on supply-demand factors with inadequate regulations and correctives. Capitalism should go with regulations.
The free-market idea has to be debunked. Historically the free-market theorists even shouted hoarse when child employment was banned. They shouted hoarse when 60 hour work per week was reduced. Author says that today’s free-trade economists would have hated to buy things made by their own grand-fathers who put in very long hours of work in inhumane conditions. Total free-trade is meaningless. The British Government foolishly hung on to free-trade in opium and the war with China happened.
Modern capitalism was made possible by the device of Company with limited liability. Earlier to it, there was no limit on liability and promoters were afraid to invest. Adam Smith who advocated free-markets opposed the concept of the Limited Liability Companies on the assumption that the managers would play havoc with the Capital due to limited liability! Karl Marx supported the idea of Limited Companies since large capitals could be collected and invested. However, the professional managers (ex: Jack Welch of GEC), from 1980, while managing the company’s capital well, went in for “shareholder value maximization” (giving maximum dividends) and ignored building of surplus/reserves from the company-profits for re-investment. Industrial investments came down and the growth rate in USA came down. Jack Welch later admitted that share-holder value was the “dumbest idea in the world”. So, good economics means a good balancing act, without too much favour to one actor/factor.
Free-market economists/advocates sometimes don’t see the consequences of their advocacy. If there is totally say a free migration of labour from India to the USA, will they accept it? They don’t realize that there are Immigration Laws implemented right under their nose, which mock at their ideas.
The author ridicules the prevalent over-enthusiasm of the free-market advocates for the idea of “globalization”. The globalization has meant the shifting of manufacturing industries from the West to the cheaper Orient. The West has thus become a “post-industrial society” giving practically all the room to service sector. Jobs have been lost and an imbalance has set in.
The author believes that the present “internet revolution” is nothing compared to the “washing machine revolution” nearly a century ago. With the washing machines that save time coming into one’s life, women took to working in office. With both husband and wife working, the opportunity cost for having children rose up! This brought in more far-fetched changes in society than the changes due to internet! So it seems that we can blame broken marriages, divorces, increasing old age people and reducing youthful population, on the hapless washing machine!
The author goes to great lengths in attacking Adam Smith’s observation on selfish butcher, brewer and baker. Smith said that these guys are there to serve you not out of altruism but for their selfish interest. I came to my own conclusion that the correct term is “survival interest” and not “selfish interest”. If it were selfish interest, the butcher or the baker will not share his income with family members.
One very interesting thesis the author adduces is that free-market in the world cannot make a poor country rich. He says that protectionism alone made USA, UK etc rich. Having become rich, they want to capture other markets through free-trade and free-market. Only partially is this stand correct. The East Asian tigers (South Korea, Taiwan etc) do demonstrate the fact that “freer-trade” (and not “free-trade”) is what is responsible for their prosperity.( There is no such thing as “free trade” -we have only “freer trade” under WTO regime-as free trade would mean zero restrictions on the movement of capital and labour across the world.)
Economists and Governments of many developing countries seem to think that their countries should pass from agricultural economy straight to service economy skipping the manufacturing stage since in the rich West it is the service economy which has ultimately become preponderant. In India manufacturing is much less compared to China. The author emphasizes the danger in belittling the role and importance of the manufacturing sector. Productivity growth is faster in manufacturing than in service. Services are also much less tradable than manufactured products. It will be thus wrong to think that India could also go into de-industrialization as has happened in the West. India should, I too feel, welcome huge investments in manufacturing as happens in China, instead of hugely relying on software production.
The free-market economists would like Governments to play the least role in national economies. That means that Government should be a mere onlooker. These economists forget that computer, semi-conductors, aircraft, internet and bio-tech industries have all arisen from Governmental efforts. Huge moneys have been spent by the US Government in R and D in these areas.
The author says that the individual entrepreneurship capacity of the nationals in a poor country is much more than in rich countries. That explains how these poor individuals are managing to survive. Yet, why are these people unable to make their country rich? The author blames the Governments of the poor countries for not properly channelizing the entrepreneurship capabilities of the citizens. However this is easily said than done. I should think that regulated capitalism is the only panacea here. Companies should be formed, they should invest, they should resort to recent technologies, they should employ people, they should make profits which should be mostly reinvested and so on. The Bangladesh model of individual entrepreneurship through Grameen bank loans has failed. The workers should be “collectivized” in a sense.
THE PRESENT ECONOMIC AND FINANCIAL CRISIS BEGINNING 2008:
As per the author, reckless free-market operations over two decades led to the big crisis beginning 2008. The Government of the USA went into huge budget deficits year after year. The citizens borrowed freely with no thoughts on how they would repay. The financial market, in fact, had a major role in the recession. Financial instruments and products went on multiplying so much that the banks and Financial players themselves failed to understand them properly. Warren Buffet had the premonition to say that financial derivatives were going to be “weapons of financial mass destruction”.
But for the US Governmental intervention in saving many Banks, the motor industry etc, by pumping billions of dollars, the extent of the downfall of US would have been great. This is still not being appreciated and accepted by free-market economists. These economists believe that a sick person (say, sick industries) must be allowed to die rather than tax payers’ money spent on his medication. The role of Governmental intervention and regulation has never been more important at any time than now in the crisis-situation. Mitt Romney is all for free-market and his prescriptions that keep governmental action at bay, may not help the USA economy to revive in case he becomes the President.
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