Friday, December 04, 2009

Capitalism 2.0: How To Do Better

Despite all the ongoing conversation about Capitalism 2.0, and my enthusiastic participation in this, I am not sure we are done with the kind of neo-classical lessaiz-faire capitalism that dominated our thinking and policy-making for last thirty years. This crisis was a big shock, and the very fact that it was a big shock was a big surprise to a number of economists and social thinkers, because they have been predicting such a breakdown for a number of years. But, I would argue that this is still not a big enough crisis to force a fundamental rethink about the economic system.

When I asked to write about the recession with a futurist perspective about a year back by an independent magazine, I ended up comparing this crisis with the great war of 1914. The First World War was a brutal, long war and forced the whole world to rethink the assumptions about the Golden Age, but it was still unfinished business. Despite its terrible human consequences, it was not big enough. It was just a pre-cursor to an even deeper, bigger and more terrible crisis, the Second World War. And, the reason why such a relapse happened was because policy-makers treated the First World War as an aberration, an unnecessary war brought about by the arrogance of the Kaiser and a few Serbian nationalists, and wanted to restore the pre-war system. They did not want to acknowledge that the system was broken. And, by doing that, they paved the way of rise of Hitler, the Soviet consolidation and finally the tragedy of the Second World War. [You can see My Memoirs of The Great Recession]


What we are doing now is somewhat similar to what we did at the end of First World War. We are blaming a few rogue traders and delinquent borrowers, the sub-prime, for this crisis. The big new expressions of our age is 'Too Big To Fail' and 'Bail-Out', and governments have tried overtime to keep propping the system as it is. The whole system stood on the ability of the Western governments to raise credit, and hand out that money to be squandered again. So, what we had was a sort of bail-out of the system, an emergency treatment, but not a cure. But, the business is not finished [Read about oncoming deficits and the dollar] and we may just be heading towards another, bigger, crisis.


However, a discussion about Capitalism 2.0 is both necessary and relevant at this time. Because, there is an underlying sense that the things have to change. The economists who were talking this are now being invited to the mainstream. [To get a sense, read this eloquent Fast Company profile of Noreena Hertz, one of my heros, here] The business-as-usual is being questioned by some of the players, as all the assumptions that govern us suddenly look dodgy. However, it is exceeding difficult to create a consistent image of what Capitalism 2.0 would be like, for two reasons.


First, because as this crisis shows, the world can not be reduced into a model. The human behaviour that governs it is invariably chaotic and inconsistent. The key problem of the era just past was our assumption that we can clearly see the future and uncertainty can be reduced into a probability.


Second, as our previous experiences have shown, the alternatives to capitalism did not do too well. Marx anticipated many of the problems that we see today, but he got his visions for the future wrong. He was too optimistic in one way, and in the good tradition of German philosophers, he wanted to solve the problems of the world by discovering one Meta-theory. And, as we were to find out a century later, meta-theories don't work too.


But, economists like Noreena Hertz and various economic and social thinkers [Charles Handy and Peter Singer for example] have been pointing the alternative to our current form of capitalism is inherent in the capitalist economic thinking itself. They were primarily point towards three major shortcomings:


(a) The Unjust reward mechanism, which rewards the middlemen, who handle the money, way out of proportion than the value-creator. This is almost same as what Marx wanted to say with his labour theory of value, but he, in love with his meta-theory, failed to make space for the innovator and the entrepreneur. But, today, economists are increasingly worried that unjust reward mechanism is creating a Rent Economy rather than Enterprise Economy, and the vitality and dynamism, which has made the system successful, are going to be lost. Banks today pay most money, attract best graduates and siphon out 40% of corporate profits in Britain and America. That is a disproportionate share going towards just the provision of capital.


(b) The inadequacy of measurement mechanism, as we mentioned before. The capitalist system necessarily assumes Man as Homo Economicus, thus reduce its behaviour into a straightforward economic equation. However, human nature proved to be diverse and full of surprises, and thus the measurements fall short. Besides, such reductionist thinking, when applied to a broader scale, leaves out too many variables which are important for well-being. The recent French initiative, the Stiglitz-Sen-Fitousi report, points to the skewed and limited nature of the Gross Domestic Product. However, GDP is now taken as the principal sign of progress and achievement across the world, and developing countries are now consumed in a GDP fetishism and they vote governments in and out of power on the basis of their showing on GDP.

(c) The Social Insensitivity of Capitalism, as any considerations for the less successful is seen as a ninny thing, not to be entertained in a man's world. This is a significant departure from Adam Smith's vision, who saw the Invisible Hand correcting the demand and supply, but human beings providing one necessary input that such a system needs to work: sympathy. As another observer puts it, the Invisible Hand is meaningless without an Invisible Handshake. Instead, the current model of capitalism is based on the mistaken reading of the natural phenomenon, survival of the fittest [Read my earlier note on Darwin and the history of the term], and in effect, a sort of a Cannibal Capitalism has prevailed.

These objections point to what an alternative capitalist model may look like. A society based on cooperation, not competition; where a more holistic approach to measurement is adopted, and the costs, including the cost to the climate and to the future, are somewhat factored in correctly; and where we have a greater understanding of value, and create a mechanism for a more just reward for value creation. This is no utopia, and we know that survival, of life as usual and of our species in general, depends on our ability to think differently and adopt a different paradigm. However, as I observed before, we only learn at the precipice; we may need another, bigger, shake-up before we wake up and start thinking.

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