Monday, November 30, 2009

An Obituary: The Invisible Hand

Capitalism has failed. Or, so it seems, standing in the middle of the worst post-war economic crisis. It is not about the house prices, which have started turning upwards, or the stock markets, which have recovered some time back. Precisely to the point, Capitalism has failed people. For all the talk of economic recovery, the unemployment is stubbornly high in many places. Carefully crafted careers have been wrecked, families lost their homes and a lost generation has been created. Capitalism as a system indeed failed all these people.

The funny thing is that it was always expected to fail. Despite all the hopes that we have finally beaten recession, economists knew all along that such cyclical changes are ingrained in capitalism. In fact, some of them actually celebrate it - creative destruction is what it is called. This is Capitalism's mechanism of wiping out the old and the inefficient, and create new efficiencies and businesses. The theory is - with progress, societies create vested interests and a rent-seeking class is established; the ones which do not contribute to productive enterprises anymore, but eat away the profits. Such cyclical downturns destroy the rent seekers and restore the enterprise economy, where hardworking individuals create wealth all over again.

Which is exactly what has happened over last couple of years. We know the rent seekers, banks which took away more than 40% corporate profits in Britain and America, and their cronies, the opportunists and middlemen who could access the funds easily and cheaply, and gambled with those in pointless enterprises. The markets, as it should, eventually went out of control - God acting Robin Hood yet again - and the stolen wealth got stolen again.

There are two problems in the script this time. The first, there were lots of little guys who got caught into this. The guys who lost their jobs and their homes. One may say that they were not sustainable any way. But, to work, capitalism must be humane. It does not work any other way. Consider slavery, which may have been economically efficient, but did not make the cut as far as moral or emotional standards are concerned. So, in our age of consensus, brought on primarily by democratic principles, such system will not survive.

The second, the problem is much bigger this time than we can see. The reason is that the recession was not allowed to play out in full precisely because of the democratic consensus. There is pain in a recession; but the redeeming outcome is that it destroys rent-seeking, at least for the moment. This time, that did not happen. Governments across the world stepped in and stolen wealth, primarily from future generations, and saved the rent-seekers. At the end, we have the worst of both the worlds. Little guys are still in pain. The rent-seekers still in their place. And, coming generations have lost whatever they had.

But, indeed, we all know that this will solve nothing, but we refuse to believe it. Wealth itself has a self-correcting nature. It is human endeavour, frozen, in a way. It evaporates even if it is kept in a bunker, if it is not worked upon daily. The rent-seekers, bankers in the West and their various private money clients, come out winners of this recession. At least, for the moment. Consider this a big steal, of public wealth. The countries have handed over their wealth to banks and have now become the ultimate sub prime borrowers. The same make-believe world continues. The credit rating agencies get paid by the banks and rates countries credit-worthy; the countries borrow endlessly and hand over that money to the banks. The rent-seekers have taken control of the information cycle, and bankrupted all of us of ideas.

However, we know the problems now. At the least, we know that the invisible hand is all too invisible, and one must get some regulation in place. The little guys know the real pain, and they are trying to figure what hit them. There is some kind of a pattern across countries: In France and Italy, the presidents' imperial excesses are all but plain. In Britain, the nation of middle-class shopkeepers, the MPs have earned themselves a name of stealing small things, including Adult DVDs and Duck Houses. In America, the hand-in-gloves arrangement with the bankers are all too apparent and suddenly, they are running the country with a British principle: Do not embarrass. The fools played on people for last hundred years or so is running out of time. A day of reckoning seems to be near.

We should be optimistic, though. Last few years have outed the Invisible Hand. It could have turned out to be the scandal of the millennium [though we have just started] - the bankers in deep embrace with our politicians, suddenly exposed to a rude awakening. We have now got a new principle - Too Big To Fail - one very suitable to our time. And, one which is wholly unprincipled. We did not seem to care that there are people who are 'Too Small To Hurt' and forgot the legitimacy of our system comes directly out of the votes, and the pockets, of those small guys. We kicked them. The good thing is - we woke them up now. They would soon want to see the Invisible Hand.

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