Deconstructing Capitalism

There was a time in my own lifetime when it was “common knowledge” that Communism was evil and Capitalism was good. History, it seemed, vindicated this narrative when the Berlin wall fell in 1989, ending with it a bitter geopolitical contest that lasted more than 70 years. Arguably the greatest financial crisis in history came to remind us thirty years later that things are not quite as simple. 

With the benefit of hindsight, one wonders whether the struggle ought not to have been seen rather as the bad versus the worse. Six years after the bankruptcy of Lehman Brothers, the world still staggers as if seeking for the certainty it once knew, even if unfolding events have proven that the erstwhile certainty was in fact spurious. Nevertheless the question must still be answered – is there an alternative to capitalism as we have come to know it?

The question is weighty and will surely be answered by the great minds that occasionally grace the stage of history. Meanwhile I will be content to reflect on some of the flaws of capitalism that were unmasked so brutally by the Financial Crisis, along with its ubiquitous and lamentable tendency to exacerbate the gap between the rich and the poor. This might help in thinking clearer about how to construct a more sure economic foundation. 

Capitalism won the battle of ideologies for no reason other than the simple fact of it being considerably more aligned to reality than Marxism. The basic flaw of the latter consists in its idealistic conception of human nature evidenced in the absence of in-built incentives for personal initiative, industry and innovation. The Great Russian famine of 1921 effectively sealed the fate of the incipient project, replacing it with Marxist-Leninism, a system much more egregious than anything Capitalism could be accused of. Its collapse in 1989 was truly one of the great human triumphs of the 20th century. 

Although Adam Smith is regarded as the father of what came to be called capitalism, his immortalised tome, “An inquiry into nature and causes of the wealth of nations”, was essentially a codification of his observations of practices in societies that were wealthy relative to those that were not. His great contribution was not so much the invention of the free market system as much as a genius to define a system that had already differentiated certain societies from others. Modern Capitalism’s roots are traceable to the mercantile system developed by Dutch traders who predated Smith’s work by well over a century. In fact one could even go back as far as the Middle Ages. Adam Smith’s thesis on the merits of the division of labour was revolutionary in its promotion of specialization that led to greater efficiency in production and the possibility for greater depth in skill and innovation. 

The real problems emerged with the economic system that took shape with the advent of the industrial revolution in late 19th century England, that became the ugly face of human depravity, where exploitation of the weak was the order of the day. This economic system came to be called Capitalism by Karl Marx. Indeed, the birth of Marxism a century later was but a misguided response to the injustices that he and his contemporaries observed in the appalling social conditions that emerged in many European cities following the outbreak of the Industrial Revolution. Although some of the earlier inhumane practices were significantly alleviated in the West, its rise across the world has never failed to be associated with a trail of similar social outcries, from China, to Vietnam, to Bangladesh. Some of its flaws, not least its tendency to accentuate economic inequality, contain seeds that might one day account for its eventual downfall. 

Among the intellectual pillars of Capitalism is the Rational Choice Theory, which takes it for granted that human beings are rational. What worries more than the disputable factuality of that presupposition is the problematic way in which the theory came to redefine rationality. Its assimilation into Western popular thought coincided with the reinterpretation of rationality to refer to the human proclivity towards narrow self-interest. What was always known to be a social vice was effectively sanctified into something akin to a virtue. To be selfish thus came to be accepted as not only rational but socially acceptable and even desirable if not laudable. 

The idea that to be rational is to be selfish defines much of what is wrong with Capitalism. The financial services sector for example, one that is characterised by the spirit of modern capitalism in its most avaricious, is known to be highly financially rewarding not least for its lucrative bonus incentive culture. Predictably it draws to itself the best brains in society as gnats to light. The societal imbalances created by this inordinate concentration of society’s most talented in one-sector are a subject for another time. The focus now is the entrancing allure of the bonus that is known to blur the moral consciousness of people across the corporate hierarchy. The generous financial reward becomes the overarching imperative that invariably leads to a flouting of responsibility to fellow human beings both within and without the organisation, a mindset that is reinforced by what we have come to accept as a normal order of business – the unbridled pursuit of self-interest. 

It is no coincidence that capitalism usually coincides with yawning economic inequalities. Precisely because it cannot exist without them. According to the Capitalist worldview, economic profit is the primary pursuit and usually the quicker it is earned the better. Anything, including human beings, must be sacrificed to this insatiable idol. Thus people become nothing more than a line item on the financial statement, a factor of production or an easily expendable cost that must be lowered as far as possible. Indeed, there is no stopping insatiable Capital on its global expedition from one corner of the globe to the next, seeking the lowest labour “costs”. Accordingly, we have come to accept it as a matter of fact that unless we lower our labour costs, we will fail to attract or retain the Capital we need for “higher economic growth”, the content of which is not always specified. And thus society has come to be ensnared by the specious promises of Capitalism.

The reality is that for this “high economic growth” to occur people must necessarily earn low wages, sometimes pitifully low wages, along with a multiplicity of untold indignities while the owners of capital and the managerial elite live large and make a killing. This effectively defines the socially untenable economic inequalities we have come to see, without which Capitalism, as we have come to know it, cannot survive. Something must surely be amiss in a system that depends on the perpetuation of injustice for its survival. The proponents of capitalism, in other words its beneficiaries, are nevertheless at pains to convince us that this should be accepted as the workings of a normal society.

Our challenge is not so much to change human nature as much as to design a socio-economic structure that rewards what is good and disincentivises what is socially undesirable. The current orthodoxy of Capitalism certainly leaves much to be desired in this regard. It creates a parallel universe with values that are many times at odds with what is known to be right, just and decent by the common person. The interests of posterity are gleefully sacrificed at the shrine of short-term gain.

Among the primary causes of this is the typically impersonal ownership structure inherent in what is known as the “public ownership” of shares. Where the owners are numerous anonymous individuals and professional fund managers whose sole concern is the extent to which the share price will rise and usually nothing more. Managers are appointed on the basis of this narrow measure and are rewarded and punished according to the extent of their success in fulfilling it. They, in turn, soon learn how to dance to the tune of the multitude of faceless investors. The environment is thus created that promotes an inordinate preoccupation with short-term profitability. This is can only be the inevitable result when managers possess minimal long-term ties to the companies they manage. The system abets the untenable incentive systems I have referred to, along with famously Darwinian corporate cultures characterized by a fear of failure that is ultimately inimical to true innovation. 

The answer must surely lie in the de-emphasis of the public ownership model, which is the driver of much of the ills of Capitalism. Some of its touted advantages such as the supposed efficiency in the allocation of financial resources are overstated if not overshadowed by its glaring weaknesses that render it fundamentally unstable. Among these flaws is a typically inordinate reliance on debt, which is a natural outcome of a system that belligerently demands short-term results. The diminution of the public share ownership system could be achieved in a number of ways including gradually raising the tax rates of some of these corporate behemoths until they become unsustainable. The funds could then be channelled into the promotion of small to medium family owned enterprises. 

The advantage of family-owned small to medium enterprises is their inherent multigenerational scope. Because of their association with family honour and close family management, the values that govern them are much more likely to be aligned with universal virtues such as the promotion of what is right, just, equitable and decent. This lends itself to business principles that uphold the interests of the communities in which they function. A company that seeks to exist in a 100 years, as family businesses are inclined to, will surely prize a good reputation and act accordingly. 

Thus an alignment will result between corporate and community values and interests, which are usually mismatched in a Capitalistic system. The long-term perspective is also associated with low financial gearing where growth is financed by savings from profits rather than debt. The resulting low debt culture can create the added advantage of de-financialising the economy, reducing the power of far-flung unscrupulous financiers to destabilise our lives and ensures the distribution of talent across the economic sectors for balanced socio-economic development. The low debt environment would also counterbalance the pressure to pursue unsustainably high and inequitable growth rates, usually at the behest of rapacious bankers, which serve to corrupt the corporate culture and contribute to accelerated environmental damage as natural resources are consumed unsustainably. 

It can never be denied that the cause of the creation of wealth and the achievement of general socioeconomic progress are much better served by the free market than a centrally planned economy ever could. The verdict of 1989 could hardly have sent a clearer message to ages. It should be clear, however, that capitalism is no synonym for the free market. The need to find an alternative to it should ultimately be driven by its incompatibility with the ideal of a sustainably free market. From the industrial revolution until now, capitalism has been consistently associated with yawning economic asymmetries where the powerful invariably use their dominant market position to obstruct the development of a more sustainable spread of wealth. The socio-economic inequalities that result come with the looming threat of revolution and tyranny along with untenable, speculative and highly costly socio-economic experiments like Marxist-Leninism. All of which render capitalism fundamentally unstable, unsustainable and self-defeating.