Wednesday, November 18, 2009

Capitalism Redux

Sramana Mitra writes in Forbes about the flaws that she sees in Capitalism today, that it is not rewarding the right people, the innovators and the creators, and making money for the speculators and the middle men instead. She cites a comparison between Charles Kao and the likes of George Soros, and points out that the imbalances of reward between the two needs to be corrected; that we require Capitalism 2.0 once the veil of recession is lifted.




She writes beautifully, and passionately, about her faith in self-correcting nature of markets, and draws her inspiration from Ayn Rand. She reaches out to her past in Pre-liberalization India, where Ayn Rand's unforgettable characters appealed to her entrepreneurial mind and formed the basis of her faith in free markets. She points out that Rand's flaw is possibly in assuming that integrity is implicit in the character of the leaders, whereas the reality is far from it. And, this makes her muse about a new set of rules, an ethically constructed capitalism, which will save us from ourselves.




What triggers my thoughts is the intriguing reference to Ayn Rand. Ms Rand was indeed the high priestess of modern Capitalism. One key character in the modern economic policy making, Alan Greenspan, admitted being deeply influenced by her thinking: the self-correcting nature of the markets, the checks and balances inherent in the interactions of free agents, and in the 'invisible hand'. It was almost surreal watching Dr Greenspan, the epitome of economic wisdom in our time, keep his faith in the Atlasian Free Market and celebrate Schumpeterian 'Creative Destruction' in the middle of all the chaos. This mechanistic celebration of economic principles without regard to human miseries it causes, is possibly the modern Capitalism's biggest flaw. As this recession wrecks lives and families, subverts careers built over many years, destroys dreams and aspirations, the act of looking at all this with a philosophical detachment and celebrating the self-correcting nature of the markets is almost akin to Donald Rumsfeld's 'Staff happens' remark on the wake of looting in Iraq. Just that it does not outrage us any more.




Besides, Sramana's point about rewards being wrongly distributed is all but obvious. The fact that the banks actually pocket around 40% of all corporate profits in Western economies tells the story clearly. Banks are not like any other business: They are designed to be the enablers of value creation in the economy, and not value creators themselves. Their huge profits are actually a drag on the economy, which is bound to encourage conspicuous consumption but will invariably tilt the balance in favour of speculation rather than enterprise. Also, this concern about the justness of the reward mechanism is so strangely reminiscent of Marx's protests: He sat in the industrial era England and saw the creators of value, the industrial labourers, being rewarded unfairly. It is the different age and context that makes Charles Kao look unrewarded.




But, the lessons of the financial crisis goes well beyond just the unfairness of reward distribution. Alan Greenspan succinctly observed that the crisis was created by a 'global underpricing of risk'. Coming from the man who presided over the World's most powerful financial institution for more than two decades, this is a surprising admission of failure. The modern capitalism, with its all trappings and sophistication, is inherently reductionist, and is based on a naive faith of single-dimensional human rationality. It tends to systematically 'under price' the unknown, including human life, emotions and risks to our climate, among other things. A simple interaction with an insurance agent will possibly tell the story: the value of your life is reduced into the income you need to earn to maintain a certain lifestyle up to a certain time which you are statistically likely to live up to. At the individual level, it is a technical point; at the aggregate level, it is a mechanism failing the mission, a reductionism inherent in the ways we look at life and purpose.




A similar failure can be detected in our limitations to take cognizance of the climate risk. The climate was not priced and this limitation will continue to hunt us as we move forward. Despite all modern attempts of putting a semblance of price, the inherent assumptions are more difficult to fix. Is the life of an average American higher than the life of an average Indian? In our usual potential to earn scale, it certainly is. However, the same measure may not be acceptable or practicable, and should lead one to think whether 'pricing' is indeed the answer. All other alternatives, like voluntary conservation, are not in alignment with Capitalism's conventional wisdom - that human beings are self-interested beasts - and hence don't make the cut in the intellectual stress test.




Modern world is full of such cognitive failures. Daniel Airley makes the point: He believes while we were incredibly good at solving the problems of our physical limitations - designing cars, building planes and conceiving computers - we do very poorly when we deal with our cognitive limitations. Capitalism as a mechanism is designed to overlook the nuances of life, and to impose a few industrial age assumptions on our post-industrial life. One can point to, for example, the role of capital in the creative process. The current system of ownership and intellectual property rights is designed to encourage creativity and innovation, but instead morphed into a gridlock of legal complications and resulted in a middle-man economy. While the 'content factory' is a familiar concept, creation does not necessarily happen inside it. Wikipedia defies the logic of capitalism, beating the professional enclyclopedia like Britannica and Encarta hands down. It is not the system of rewards, but the sheer joy of contribution, which drives Linux, Moodle and countless other projects. A large volunteer economy is springing up all over the world, may be larger than the capitalist 'money' economy; alas, we have no way of measuring it with our limited tools, which can only measure such things in terms of monetized output. The commercial entertainment economy, while it excelled in creating an army of mediocre celebrities and one-book wonders, its output is disproportionately puny in encouraging sustained creativity and groundbreaking work.




The motto of the defenders of Capitalism is almost Churchillian: Capitalism is the worst form of economic system except all those other forms which have been tried from time to time. However, we have nothing better is a lazy argument, as is the currently fashionable 'corrupt agent' theory, the argument that it is a few rogue traders who caused so much misery by violating a perfect system. The truth is that the malaise is deep, and inherent in capitalism. It is an economic system we perfected over two centuries to deal with a world which is past. Yes, one crisis is not a good enough reason to discard a system; but, morally, one wronged life should be reason enough for us to examine our belief systems, and we now have so many.




I am not a German Philosopher, so I can't be expected to know the answers to all the questions I raise. But, then, I share the abiding faith in human inventiveness and our ability to surpass the trap of conventional wisdom, and hence believe that we shall create a system more just and less crisis-prone than modern capitalism. A system which will take a fuller view of life and respect individuals for what they are, individuals, and not just economic agents; a system which will adequately take into account human tendency to do good and be just above its own narrow self-interest. In short, a system which will not reduce our worth to a few small scrips of paper but allow us to reconnect back to life and measure ourselves by our contribution to the well-being of the community. I just know we are on a short leash: The time to start the conversation is NOW.

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I wrote this in response to the question posed by Sudhakar Ram in The New Constructs. The question he asked was - do we need Capitalism 2.0?

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