Despite its many flaws—which became most apparent following the sub-prime crisis of 2008—capitalism remains virtually intact. Cries of anguish and disdain on the streets by a growing number of young people, especially, for its failures remain that—cries on the streets. A veil seems to have shielded the senses of mainstream academic economists who, for as long as Paul Samuelson’s textbook Economics has been in print, have shown little to no proclivity for socialism or, for that matter, any other form of an anti-free market system. There is a very clear reason for this.
Modern economic theory and policy, as ubiquitous as it is today, have derived their core principles from one man’s philosophy. In the ‘Wealth of Nations’, written in the 18th century, Adam Smith on observing the vast changes Britain was going through during that early period of the First Industrial Revolution felt it necessary to point out to an astonishing paradox when it appeared that the baker and winemaker in performing their tasks for the sole reason of making an earning seemed to bring forth far greater good to society than if they had, as their first interest, done so out of Agape (benevolence is the term Smith used).
The reasons for this are, to me, more complex than one might want to utter. Individual interest and desires when respected tend to yield tremendous benefits that might have never occurred had it been that that individual was to account for the other party’s gain as well. Were he given the option, we can be sure that the baker would be absolutely delighted to take home his wages without having to produce any bread at all. But in the real world he does produce bread. In that process, he is rewarded for his service by a customer who is, in turn, rewarded for the payment he makes for the bread. In this story the only reason both sides willed to a transaction was for the sole purpose of benefitting themselves and not the other. And if each side is selfishly benefitted, provided the transaction was fair, all sides are jointly benefited. And here we see a union (into a field of study) of two longstanding Western ideas: Individualism, and the Rule of Law.
But this sounds too textbookish, right? The real world has much more than bakers. It has bankers too. True. So what? The progress made in finance, like those made in almost every other field, are reasons to celebrate for what the human mind is capable of. To emphasize the rise in the standard of living across the world brought about by capitalism over the course of the last century or so would be superfluous, almost cliched. If you, like me, grew up during the early 2000s in the northeastern part of India, you will no doubt recollect the major shifts in our way of life when from barely being able to afford traveling to a nearby town, we were witnessing, by the mid-2010s, a new and different time when families were allowed the benefit of planning a vacation abroad. From the early days of spending the better part of our Saturdays prying through second-hand clothes, we now observe not only the absence of holes in our shirts but, in addition, a fancy brand’s tag. Literacy rates, life expectancy, child outcomes, have all shot up. These results, mind it, are robust across countries and ethnicities. The free-market encourages competition, diminishing the power of monopolies. It is this competition that further drives innovation and upward social mobility.
But what was different for us, say, prior to the economic reforms to what we see today in our part of the world? Under the socialist regime in which we operated for close to half-a-century, the means of production were tightly regulated by the State. Redtape, as the regulations and bureaucratic entanglements were called, were rife. In other words, the State felt it had what was required to replace individual decision-making with a much controlled and contrived method, directing what to produce and how much to produce. Trade was shut out to virtually zero. As Narayana Murthy lamented, it would take them (Infosys) over a year to import one computer. There existed little incentive to start a business; jobs were but a privilege. A vast chunk of the population struggled through their lives. Then came massive economic reforms in the early 90s (led by Manmohan Singh and Narasimha Rao) and India opened up its economy to the world having stripped most of the regulations that had enslaved business for decades. An economic miracle of sorts was ignited. The United Nation Development Programme reports that in just 10 years, from 2005 to 2015, India lifted 271 million people out of poverty. These are not naive opinions, dear readers, they are well-established facts. The numbers are even more impressive for China where the free market operates far more vibrantly.
Now let us be fair to note that my entire rhetoric rests on one fundamental claim: Poverty is undesirable, even immoral; and a want to better oneself, if done so fairly, is noble, or at worst, not immoral.
Let us then take up the topic at hand and introduce Ms. Arundhati Roy, a social activist and novelist for whom I have, strangely enough, given our opposing stance, much abiding respect. Ms. Roy draws her ideologies from the teachings of Chomsky and Proust. Naomi Klein adores her writings on capitalism; Cornel West has branded her “one of the great revolutionary intellectuals in our time.”
Ms. Roy’s most emphasized critique of capitalism is its inherent nature of being able to be exploited by a few (corporations, in her case) at the cost of the rest (landless farmers and other poor working-class people). She constantly brings up the Ambanis and the Tatas and the Jindals and Mittals, accusing them of having enmassed so much power over India’s resources for themselves. She is against the construction of any type of dam or mine. She uses the 2G spectrum scam as a case in point. But readers, this isn’t a failure of capitalism in the strict sense. It would instead be far more prudent and honest to call it a failure of regulation and institutions. Let us go back to what we had spoken of earlier. There is a mutual benefit in a transaction provided it was done fairly. If the baker cheats the customer, the latter must be able to avail of law enforcement to correctly handle the injustice. Say, a policeman is called to resolve an accusation by the customer and in that process, the baker, because of family connections to the policeman, happens to win favor. Would you criticize the free market for this mishap? Much wiser would it be to correct the flaws of the legal system; even better still to instill strong moral values among citizens. Honesty, like I emphasized earlier, is key to the functioning of capitalism. This may sound disproportionately naive on my analysis here but hear me out a bit more. I would like for Ms. Roy to make the same case against Japan Inc., with her countless, thriving multi-billion dollar corporations. Have they worked for the better or worse for the vast lot of the Japanese population over the many post-war decades? The answer is obvious. So has capitalism succeeded in Japan? Why, of course! This is because the Japanese made it very clear to themselves that if they were to adopt capitalism they would have to establish a sound rule of law. The Ministry of International Trade and Industry placed careful regulations making sure firms were put in check, while at the same time ensuring a healthy business environment. In simpler words, good regulations and sound institutions helped capitalism thrive in Japan. From a war-torn nation in the mid-40s, they rose in about 30 years to become one of the most prosperous countries ever on earth. What if Arundhati Roy happened to be the first Prime Minister of Democratic Japan in 1946? With her anti-capitalistic stance (and who knows, she might have commanded rousing support given the lack of hindsight) she would have driven the country of then 60 million into misery and continued poverty.
So you decide how fair it is to blame the 2G scam on capitalism rather than on a failure in ethics and institutions? There is only one explanation—Ms. Roy has never taken a course in Economics. Every single model in economics, whether proposed by a leftist or right-leaning scholar, arrive at one fundamental conclusion: The best outcome is one in which there is least interference by the State, an outcome often called “the first-best outcome.” But economists are not that stupid to believe that such an outcome is always attainable. Hence the need for a state. But this need is restricted to manners related to regulation and fairness, not in the State directing the means of production.
She will agree that good education is a fundamental right of all citizens. But education provides skills and ambitions. Young graduates demand well-paying jobs, and with an average population of just 25, what proposal does she have to adequately provide decent jobs to the millions who have and will be leaving universities? This takes me to yet another bizarre claim she places before her readers when she writes, “But by now we know that the connection between GDP growth and jobs is a myth.” Ladies and gentleman, this is a revolutionary thought in economic thinking. It produces an insult before young economics graduates like myself who spent the better half of a semester deriving the equations that yield a positive relationship between GDP growth and employment. Every Central Bank in the world relies on this rather fundamental relationship. Perhaps she is right, and we have much to learn. Perhaps there does exist somewhere in her postmodern mind a downward sloping production curve.
Another point worth emphasizing is the blatant hypocrisy on her part. She never, for instance, said “No” to the half a million GBP advance she received for her novel. She never says no to the royalties she receives for it, or the speaking fees she charges for her talks all across the world. As Samanth Subramaniam noted as well, “she did not, it should be noted, turn down her Booker purse, when it was still being sponsored by a British company that grew rich by using indentured labor in its Guyanese sugarcane plantations.” She wears ‘Aneeth Arora’ and ‘Rina Singh’. Would those brands have ever thrived in pre-reform socialist India? You decide. In other words she is a beneficiary of the free market. And good for her for being rewarded for her efforts and talent. And good for her for all that “capital” she has accumulated over her life. It is true that Ayemenem, the town on which her novel is based, may provide a sound life for an upper-class Syrian Christian family with a pickle factory, but for us who do not own that luxury we have only good inclusive capitalism to emancipate us, as it has over the last two decades. When she was born at Nazareth hospital in Shillong in 1961, the average local was no better off than the average European in the 15th century perhaps. Today in 2019 the average local gets up from bed knowing he will live almost twice as long and will not later go to bed hungry. Let us remind ourselves that our communities are from from a perfect one. But at least we have moved in the right direction. What we lack is in attaining the right magnitude.
Capitalism is an astonishing achievement. But like any other potent idea, there is a vital need for individual responsibility and proper State intervention and stable independent institutions. Wealth inequality is a feature that seems intrinsically embedded in its functioning. It is prone to booms and busts. But to date no other system comes close in ensuring human freedom and innovation and jobs and poverty eradication. Finance and trade and capitalism can make everyone better off if practiced rightly. With capitalism the vast chunk of profits do go to capitalists. But with socialism or communism, the profits go to bureaucrats. As the old Soviet joke went, we pretend to work and they pretend to pay us. In fact, to criticize capitalism because it risks bringing about injustices is akin to criticizing the idea of consuming food because we risk getting obese.
Ms. Roy has her credits due, and for the troubles she has and still endures for the poorest we thank her. But because she remains perhaps one of the most influential thinkers of our times it might be more useful to be nuanced and deliberate about the true nature of the problems rather than fixate on antiquated ideological priors.
Author: Resem Makan
Resem Makan is an Economics PhD student at the University of Washington. Before this, he was at the Indian Statistical Institute (Delhi) where he studied Quantitative Economics. He grew up in Nagaland, Aizawl, and Shillong, and thus feels a part of everywhere.