Sunday, February 25, 2007


Capitalism is not Market Fundamentalism

While i am big fan of free-markets and competition, i am also of the view that "Unbridled" capitalism is bad in the long run. Yes, there are some self-correcting mechanisms in capitalism but I believe captialism cannot be some sort of American Football without a refree. There is a point-of-view which postulates that the "Market" is the most-efficient and final arbiter of everything. That the market is beyond criticism - the only pristine thing. This is Market Fundamentalism, which i seriously dispute.

My contention is that so long as intervention (Govt. or International) is benign to keep the ills of capitalism at bay - it should be fair and be allowed. In effect - Market Fundamentalism is not the holy cow that is made out to be.

I will give two fatal flaws of capitalism which describe how capitalism can be self-defeating :
Wealth Distribution : Take the cost of labour in overpopulated, badly governed countries (say India). Regardless whether a given commodity is human/inanimate, capitalism insists on putting a price to it. India is an overpolulated country. Consequently the marginal cost of labour tends to zero. Thus wages are kept at a subsistence level. This tends to a lessening of 'eqaulity of opportunity' (the poor who can barely eat at a subsistence wage cannot send their kids to school). Consequently the progeny of the poor remain poor in a global world. The example is common accross the world. So capitalism is focussed on creating more "OVERALL" wealth and does not have any incentives for "DISTRIBUTION" of the wealth. It's simply nobody's job. One may argue that wealth distribution is the Government's job. Fair enough. But then the govt (or any other agency) should have the power to intevene which may lead to some 'market inefficiency'. Communism, despite it's ideological garb was just a reaction to the atrocious conditions of workers in the nineteenth-century industrial hovels of Europe. Then, as now in India, the marginal cost of labour in Europe was near-zero. Capitalists took advantage of this as there was no incentive to distribute wealth. This lead to the temporary triumph of communism. Eventually communism failed as it took the pendulum to the other extreme where the incentive of individual profit was killed - with the forced central egalitarianism. It smeared over the diffrences of the innate capabilities of individuals and killed incentive and creativity. Such a system was bound to fail eventually. However it took a century and countless lives for capitalism to regain its ground.

No incentive to allocate "collective" costs : A very life-threatening example of this is - Global Warming. It is the biggest example of the failure of market fundamentalism. How so ? The costs of polluting the world should have been allocated to the industrial countries who polluted the world for the last two centuries. Nobody , then considered that the new gas-guzzling cars and the aerosols were harmful for the environment. Nobody was penalised as these costs were not borne by any one agency.* Now that we have reached the critical point, where further damage will be irreversible for EVERYBODY on the planet, the rich countries want the poor countries to stop polluting. The poor countries contend that they have as much right to pollute the earth as their rich counterparts in the past. They have as much right to be rich as them and if pollution is the way to do it - then so be it. This is a Hobson's choice and we are stuck. If the poor countries continue to pollute, the whole world self-destructs - and the blame must squarely lie at capitalism's door. Capitalism forces all countries to compete on cost of production - without anybody necessarily having to pay the collective cost of pollution at that time. If a producer uses cleaner technologies, albeit with a higher cost, it will lose out in a brutal global marketplace. Capitalism insists on the maximisation of the individual interest. So while everyone was fulfiling their own economic destinies - COLLECTIVELY we ended up destroying the only planet we have got. Again, in capitalism, there is no incentive to allocate collective costs efficiently so long as the costs are widely distributed.

Philosophically, the philosophy of balance - of duality is the only viable alternative. Capitalism is good but only so much. The moment it becomes a holy cow - which cannot be discussed rationally, it becomes like American Football without any referees - a bloody sport in which everyone eventually loses.

*Reminds me of the "Fate of the commons"

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