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Mainstream, VOL LVIII No 40, New Delhi, September 19, 2020

Crisis of Capitalism | Govind Bhattacharjee

Friday 18 September 2020


by Govind Bhattacharjee *

Abstract: Despite its many flaws, capitalism has survived many challenges, showing a remarkable resilience for adaptation. But the current pandemic has thrown it into a crisis that calls for resetting its very premises. The pandemic that has mutilated economies, lives and livelihood across the globe and shows no sign of abetting as yet has also taught us that our needs are actually rather limited and that we do not need elaborate production machinery to produce things we do not need, but which forms the basis of the capitalist model of economic growth. We need to combine ethics with capitalism and restructure our companies so that they can consider profit not as the sole objective but only as a constraint to be satisfied in order to achieve the higher goals of an equitable and sustainable world in which they would share their profit for the welfare of the society, establishing an ecosystem-based not on a soulless market, but on ethics, morality and trust.


Before the 1776 publication of Adam Smith’s Wealth of Nations,the world believed that the productive capacity of economy, and hence the total wealth of a nation was limited by its resources. Even in a nation of abundant resources, the size of the pie was still limited and as population grew, the pie available to each would necessarily diminish in size. To ensure order and stability in society, the value system that evolved therefore associated wealth with vices and poverty with morality. Nations that did not have enough resources had to seek them elsewhere — often in overseas colonies at great cost — to increase the size of the total pie available to their people.

Wealth of Nations fundamentally altered the way people thought about economy and relations between the state, society and the individual by proclaiming that a nation’s wealth can be increased without any limit. The secret of abundant wealth lay in exchange and trade without any barrier leading to mutual benefit ensuring prosperity for all. As we all know, it is based on three simple tenets, pursuit of self-interest, division of labour and free trade, and underlying all the three is the use of capital which is nothing but surplus profits from any economic activity that needs to be recycled back into it to increase its scale to generate more profits, and so on in an increasing spiral, creating limitless wealth for a nation. As any economic activity requires the collective effort of a large number of people, everyone benefits. The logic of limitless collective wealth thus lies in the basic human instinct for furthering self-interest in the form of profit — some call it greed — but this greed is the primary driver of all economic activities. Higher greed begets higher profits and greater wealth for everyone. Smith thus gave wealth a new dimension - wealth is not something to be despised as immoral because it is capable of giving the poor a living and improving his lot. Capital is the ebb and flow of wealth and the yearning for more profit is not a vice but a benevolent force for society. A free market in which competition is free and fair is the sine qua non of capitalism - the “invisible hand” of the market being capable of solving most problems in a capitalist society.

The downsides of capitalism are too well known today to allow the market a free reign. Apart from inequality, capitalism has led to unbridled exploitation of labour. Through the establishment of cartels and monopolies, it twisted its own premise of a free market where labourers can freely sell their labour to competing companies. Markets do not provide protection against exploitation, it has no ethics or soul. It does not care whether profits are earned or distributed in a fair manner. The prospect of endless profit to satisfy the capitalist greed has killed millions with a cold indifference across the world, and all the time.

But capitalism works. And so, it had faced many crises but has always emerged stronger from every crisis so far showing remarkable resilience. It exorcised the ‘spectre of communism’ by inventing the welfare state, by devising the state owned enterprises and by establishing suitable regulatory institutions to keep the greedy multinationals in check. After the collapse of the Soviet Union in 1991, capitalism’s victory seemed to be absolute, when Francis Fukuyama wrote in his famous piece - “The End of History and the Last Man” (1992) - that with the dissolution of the Soviet Union, humanity has reached “not just ... the passing of a particular period of post-war history, but the end of history as such: That is, the end-point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” Unfortunately instead of that utopia, the world instead has seen a cannibalizing dystopia of unfettered greed and spiraling inequality plunging the world repeatedly into crisis after crises, as predicted by Marx. As Andre Gunder Frank (1971) has shown, exploitation also assumed a new form after the emergence of the globally mobile multinational corporations who could easily tweak the terms of trade in favour of Western nations who provided aid money to the resource starved poor countries conditional to the opening of their markets to transnationals. They developed a strong vested interest in keeping the poor countries poor and dependent so that they could exploit their raw materials and cheap labour.

While inequality was spiralling out of control and vested interests taking control of economy, market was no longer serving the interests of ordinary people. In their greed, the domestic and transnational firms paid no attention to the harm they were causing to environment and people’s livelihood, especially in developing countries. As the Nobel Laureate economist Joseph Stiglitz summed up the situation: “It’s rigged in the obvious sense: some—the rich and powerful and their children—have better opportunities than others, enabling the perpetuation of advantages. There is not the competitive, level playing-field described in textbooks..... Too many become wealthy not by adding to the size of the nation’s economic pie, but by seizing from others a larger share, through exploitation, whether of market power, informational advantages or the vulnerabilities of others.” He argued for a new social contract between the market, the state and civil society to usher in a new ‘progressive capitalism’ that will serve the people rather than only the rich and the wealthy, entail greater social protection to the poor and ensure larger government spending in health and welfare.

State intervention in the economy was almost negligible before the 18th Century - in the 17th Century, total British outlays accounted for only 5 percent of GDP. But as the German economist Adolph Wagner postulated, the activities and functions of the government increase faster than the economy, and by the late 19th century, all capitalist countries had increased their intervention in socio-economic activities requiring more taxes to be raised to finance these activities. In most European countries like France, Britain etc., the Government’s social spending had reached nearly 30 percent of the GDP, and marginal tax revenues were approaching 40 percent of GDP - in France, it reached 50 percent after the First World War. The Great Depression of 1930s highlighted the failure of laissez faire capitalism and led to large scale state intervention to regulate corporations and redistribute wealth. The new deal was to pool collective wealth to build just societies. In this process, welfarism emerged as a major instrument of state policy - gradually the welfare state became the accepted norm. The sectors identified as vital for attaining the welfarist objectives were increasingly brought under government control in public sector enterprises. In 1936, Keynes published The General Theory of Employment, Interest and Money. Though he strongly advocated the social democratic principles of regulating the market through macroeconomic means for correcting the distortions caused by the capitalist system, yet he accepted the capitalist market as the only reliable agency for generating wealth. Following his ideas, the West-European nations experienced prolonged periods of economic growth averaging nearly 5 percent between 1945 and 1970, leading to continuous improvements in the living standards of their people which pushed them to integrate welfare as an abiding principle of public policy within the capitalist structure of the economy. In the post-war period since 1945, states sought to establish ‘a cradle to grave’ welfare system for their citizens to be sustained by taxes, only to abandon it as unsustainable after 1975.

During 1970s, the situation changed radically due to the combination of various factors. Following the Arab-Israeli War in 1973, oil prices shot up, and the Bretton Woods mechanism of fixed exchange rates was replaced by floating exchange system. With the relaxation of capital controls by USA, private financial institutions emerged as the pivot of a new international financial order. The resulting exchange rate instability and other factors led to plummeting growth in most advanced economies — the rich OECD countries registered negative growth in 1975 compared to an average 2 percent growth the year before. Unemployment doubled during the next decade, and stagflation started taking a heavy toll on the advanced economies. Cutting taxes and boosting government spending were no longer working to solve inflation and unemployment, and Keynesian economics faced an unprecedented crisis as austerity measures, reduction of social welfare expenditure and privatisation of the public sector became the buzzwords for the neoliberal policies in developed countries. Post-1970, a morally bankrupt capitalism was left in a mess of declining growth, stagflation, shoddy nationalisation and ascendance of unscrupulous global financial intermediaries.


By the 1980s, most countries had buried the ideas of Keynes and were embracing globalisation by shifting the focus from unsustainable state welfarism to deregulation, accompanied by disruptive economic reforms. This new philosophy, the “Neue Mitte” (New Middle) was more neoliberal in outlook than social democracy. Government’s role was being redefined as a facilitator rather than an actor in economic activities, to improve people’s skill and knowledge rather than carry out social engineering through costly welfarism. Thus capitalism got further entrenched, piggybacking on technological revolution and on the internationalisation of the markets and relinquishing control of production back to the private sector by the progressive withdrawal of the state. But the integration of global financial markets driven by unending greed would meet its nemesis in the economic meltdown of 2007-09, again pointing to the inherent flaws of capitalism, but from which capitalism drew no lessons about bringing in some ethics.

Capitalism thrives on profit without responsibility, the sole purpose of a firm being to make profits, as Milton Friedman famously said. In The Future of Capitalism: Facing the New Anxieties, the British economist Paul Collier argued for a balance between freedom, profit and responsibility, and the replacement of ‘economic man’ by ‘social man’ for restoring the core values of a just society. “If capitalism is to work for everyone it needs to be managed so as to deliver purpose as well as productivity. But that is the agenda: capitalism needs to be managed, not defeated”, he said, by integrating it with an ‘ethical state’, ‘ethical firm’, ‘ethical family’ in an ‘ethical world’. The ‘bottom line’ —profit - being the sole focus of the companies, they have neglected their duties towards society and even their employees. This is what has earned universal contempt for capitalism as a synonym for greed, selfishness and corruption. Perhaps it is about time companies learn that their long term interests lay in turning their focus away from the ‘bottom line’.

For far too long, society has been obsessed with Utilitarianism to maximise the aggregate utility or well-being, focusing on the greatest good of greatest numbers to the neglect of the rights and interests of minorities. In place of a just and fair society, we got what Collier described a “Rottweiler society” — a society drifting away from justice and fairness, towards aggression, humiliation and fear, which can only “bequeath to the next generation a society sliding into the pit of entitled individualism.” This has created three distinct divergences or “social cleavages” - between metropolises and ‘broken cities’, between skilled and the unskilled, and finally between rich and poor nations, none of which cleavages can be healed by the market or individual self-interest. These cleavages can be linked directly or indirectly to the globalisation powered by an explosion in knowledge which “turbo-charged the old relationship between specialization and urbanization, leading to spectacular growth in the largest cities.” Though it has been instrumental for raising global living standards, yet it has also created the divide between highly skilled and less skilled, and favoured those nations that could leverage their advantages in technology and infrastructure to attract talent and capital.

The corrosive force of the market has progressively undermined the family, the firm and the state — “the organising structures of collective life” which have lost their moral compass. Collier does not believe that the State should “wither away’ as stateless societies are disorganised, chaotic and extremely impoverished. As he says, “We need an active state, but we need one that accepts a more modest role; we need the market, but harnessed by a sense of purpose securely grounded in ethics.” The active state must support those who fall victim to capitalism’s intrinsic process of creative destruction, ‘the very process that gives capitalism its astonishing dynamic’. A just society must be based on “reciprocal obligations” between members of family, the larger society and between firms and their employees, and also between nations, by forging reciprocal obligations via supra-national bodies. Before the advent of capitalism, communitarianism, a social organization based on small self-governing communities built around the concept of individual’s responsibility to the community and the social importance of the family, formed the basis of social interaction in ancient times. Society must restore its ethical foundations so that it does not get corroded from inside.

Capitalism has survived communism, the Great Depression and many other challenges. Collier believes it is suffering from “a damaging malfunction that must be put right.” Today Capitalism is making people lead “anxious lives” in divided societies, yet it is “the only economic system that has proved to be capable of generating mass prosperity.” Marxism is not the answer to capitalism, because, as he says, “It replaces mutual obligations with the assertion of the rights of one class to expropriate what belongs to the other. Like radical Islam, its version of enlightened self-interest invokes a distant paradise in which the state ‘withers away’. The actual outcome of Marxist ideology, which has been invariably proved, is social conflict, economic collapse and a state that, instead of withering away, imposes overweening and brutal power.”

The Covid-19 crisis has given the state an overarching, almost dictatorial authority over individuals’ lives and liberties. Governments needed that power to deal with such extraordinary situations, but may be unlikely to give up all these powers even after the crisis is over, despite assurances by the US President “The Government intervention is not a government takeover. Its purpose is not to weaken the free market. It is to preserve the free market.” The state needs to be restrained and both the state and capitalism need to reset their goals to usher in a happier communitarian society, no matter if it is less consumerist and less prosperous, but one that is based on mutual obligations, ethics and morality, in which the capitalist dictum of “Greed is God” does not hold, and obligations must eclipse our wants. It would be “an ethical capitalism that meets standards that are built on our values, honed by practical reasoning, and reproduced by the society itself”, Collier says. In such a society, profit is not the objective but a constraint that must be satisfied in order to make it achieve the larger objectives on a sustainable basis, in which the ethical bounds of the state will be dictated by the ethical bounds of society, which in turn will be determined by the alignment of our personal needs to societal needs. The focus on ethics and morality recalls Gandhi’s philosophy of “Trusteeship”, which may be relevant even now, despite, in Gandhi’s own words, “all the ridicule that has been poured upon it.” The world probably needed a cataclysmic event like Covid-19 to prepare to reset itself to the moral balance it has lost. Shaping of shared identities around shared values — not through nationalism - must form the basis of such resetting.

Gandhi’s wanted the rich need to understand that their wealth, after satisfying their ‘legitimate needs’, belongs to society and act as trustees for that wealth to be utilised for the larger benefit of society — otherwise they would run the risk of being overpowered by the poor in a Marxian class war. Abhorring violence, Gandhi wanted the power of the spirit to subdue the power of physical force. This would also abolish the eternal conflict between capital and labour, by levelling down of the rich and a levelling up of the poor through a peaceful revolution, which would be different from the State ownership or appropriation of private property. Based on non-violence, Trusteeship can transform the capitalist society into an egalitarian society, by reforming the capitalist class. Society may still permit private ownership but for its own welfare, not for individual’s “selfish satisfaction in disregard to the interests of society”. Gandhi was thus trying to address the inequalities of the social order which litter the pages of history —much like Marxian ideas, but by replacing violence with trust and using ethics and morality to seek social equality and justice. Without debating the practicability of these ideas, it may be recalled that these are very objectives which have inspired revolutions throughout history and brought the social, economic, and political changes that have shaped our world in which all democratic nations use public policy to bridge the gap between the rich and the poor.

The current pandemic is making us think a lot about the premises and consequences of capitalism and its illegitimate child, consumerism, while raising serious questions about its desirability and sustainability in the present form. The past few months have seen large scale government intervention in the economy to increase spending and provide fiscal and monetary stimuli. Central banks have taken unprecedented policy decisions to deal with the crisis, actions that are like revolutions in economic policymaking. Rich countries have poured in huge sums to their large and small firms as grants and cheap loans so as to preserve jobs, and also to the furloughed workers and the poor for their subsistence by way of direct benefit transfers. Central Banks the world over have injected liquidity into the depressed market to create fresh demand. Such measures are inconceivable without extraordinary expansion of Government control over the economy, but they are clearly unsustainable on a permanent basis.

Covid-19 is raising too many uncomfortable questions about our traditional notions and models of economic growth. For the first time since the Great Depression, most economies, advanced a well as emerging, are facing the spectre of prolonged and severe recession. For the first time probably in a crisis, besides manufacturing, even the services sector has contracted across economies with devastating consequences for employment. While advanced countries have taken substantial fiscal measures by transferring money to their people, the emerging economies, lacking sufficient fiscal space, have resorted mostly to monetary measures to increase demand. With economic activities grinding to a halt, as government spending surges and revenues plunge, public debt will swell requiring more taxes to be raised from citizens which they can’t pay, having lost their livelihood and drawing upon all their savings to survive through the crisis. To curtail the rising fiscal deficit, many economies will resort to monetising the deficit at the risk of runaway inflation. The world economies may again resemble the post-war period when huge debt burden forced the governments into austerity which undercut growth leading to further increases in debt, default and soaring inflation. Some governments resorted to financial repression forcing citizens to lend to the government at below market rates, capping interest rates to discourage savings, while others taxed the rich heavily. Firms across the globe today are staring at the falling cash flows and their ability to remain going concerns. In this scenario, it would be difficult to kick-start economic growth again.

As governments are increasingly resorting to deglobalisation, protectionism, and anti-immigrant nationalistic policies, the globally integrated economic order is collapsing on itself and does not know how to negotiate the unprecedented crisis, while the State takes the role of protector and provider of jobs. Post-crisis, we may see yet another New Deal, a more radical redistribution of wealth and income and the prospect of a Universal Basic Income for all. Governments may try a combination therapy of Keynesian demand management with fiscal and monetary sops to industries and basic income to households to revive the economy, but the question is whether the traditional capitalist model can sustain it. Capitalist production demands continuous expansion of capital in order to produce more and make ever more profits, leading to what Marx called “the epidemic of over-production”. To prevent the recession and other disastrous consequences that would follow inevitably, artificial demands are created by promoting consumerism, and being dependent on demands for products the consumers do not actually need, capitalism has an inherent vulnerability.

If the enforced lockdown has taught us one thing, it is that we need very little to survive and to add substance and quality to our lives. It has taught us that once we limit our consumption and activities pertaining to that, the environment becomes more sustainable and Nature rejuvenates. In our suffering and feeling of helplessness before a tiny virus, it has taught us the importance of empathy as much as the transience and meaninglessness of our wealth and accumulation of riches and possessions. It is teaching us that consumerism is probably not the best model for development, that there is a need to revisit our fundamental tenets of growth. Once the crisis wanes, we are likely to hear ever louder calls for a new social contract, for ushering in a world where global businesses are forced to restructure themselves with much lesser emphasis on profits, cartels and monopolies, while focussing on happiness, joy and harmony, climate, environment and Nature as the fulfilling objectives of life as well as business, much more than products, possessions and wealth.

Despite all its negative connotations, capitalism’s power to create mass prosperity to positively change lives remains undisputed. The question is: Can we have it rooted into ethics, morality and justice, and treat profit only as a constraint to satisfy, to look at it only as a means and not as an end? Can we transform capitalism to become socially more responsible, economically more equitable and environmentally more sustainable as it extracts and turns natural resources into profits?

If we can integrate the lessons that we have learnt from the crisis into our production processes, there is a chance that capitalism can redesign itself into a force for positive change in which businesses will continue to make profits but would care more for society. They would share a substantial part of the profit for the welfare of society, and build and disseminate a culture of trust and care, integrity and transparency, fairness and egalitarianism. It would then enable us to reconcile the individual objective of living with little with the social objective of moving towards a higher goal by establishing an ecosystem based not on a soulless market, but on ethics, morality and trust. Peace and prosperity will not come piecemeal, unless and until the time all the world becomes one place, thinks similarly and acquires more or less the same standard of living.

( * Dr Govind Bhattacharjee is Former Director General, from the office the CAG of India, New Delhi and currently a Senior Fellow at the Centre for Multilevel Federalism, New Delhi)

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