If perfection were really an available option, the choice of economic and political system would be irrelevant. In an imperfect world, with limited resources, [the basic problem of economics-scarcity!], the choice is not between capitalism and socialism but imperfect capitalism and imperfect socialism. Note that no country can be purely capitalistic or purely socialistic in nature. [See Notes at the end of the article if you want to know what exactly capitalism, socialism & communism mean]
Despite all its faults, if we were to closely observe the disordered picture of economic progress that we have made in the 20th & 21st century-capitalism as the choice of economic system is the clear winner.
Indian Scenario
First let us look into the Indian scenario. Our country has been steadily becoming more capitalistic in nature over the years. In fact, capitalism accounts form 3/4th of our GDP. A sector wise analysis substantiates this.
Crops are planted & produced in our country according to expected prices/profits. Of course, other variables matter such as rainfall, irrigation and fertilizer use. But the driving force is profits. Capitalism, therefore, defines 17 per cent of India’s GDP, namely agriculture.
Services account for 55% of GDP, if you deduct the government’s share-there is still 40% of the GDP contributed by the private sector.
Some 2/3rd’s of the manufacturing sector/industry which accounts for 28% of GDP, is purely private. That is another 18% approximately. Moreover most PSU’s are more profit oriented than ever.
Therefore we can comfortably say that capitalism accounts for approximately 75% of our country’s GDP.
Strength of Capitalism
Strength of capitalism lies in the incentive structure mechanism that is integral in a capitalist society. A simple example would help explain why capitalism is better than socialism.
Suppose, there are 4 students in a class- Rahul, Vishal, Aakriti & Tejas. They are awarded grades according to their performance.
The grades awarded were: Aakriti: “A”, Rahul: “B”, Vishal: “C”, Tejas: “D”
According to new rules, the college authorities decide that each student shall be given the same grade i.e. “C”. The new move de-motivates high performers like Aakriti and Rahul as they don’t have any incentive to perform better. Lack of incentive mechanism reduces everyone’s performance and efforts as they know irrespective of how they perform; they are going to get the same grade. Anyone who complained about the new system was chucked out of the chool or suffered severe punishment.
The earlier performance based incentive mechanism represents capitalism in real life, while the new system stands for socialism.
The case of Soviet Union and China-Transition from Socialism/Communism to Capitalism
Prior to 1991, the soviet economy was the second largest in the world, but during its last years as USSR, it suffered huge budget deficits and severe shortage of food, which ultimately resulted in its collapse.
From 1949-1978 China was a soviet style planned economy, during the Era of Mao’s regime. After the death of Mao Zedong, Deng Xiaoping began to reform the economy and transformed into market oriented economy-this started from 1978. The rest as they say is history-China’s meteoric rise as an economic powerhouse pulled millions out of poverty and its economic muscle is only next to U.S.
Even Fidel Castro in a recent interview has admitted that the Communist model has failed in Cuba!
SOCIALISM-The Big Lie of the 20th Century?
Many term socialism as the big lie of 20th Century. The strength of capitalism over socialism can be attributed to basically 2 reasons:
(a)Profits & Losses (b) Prices determined by Market Forces
Profits and Losses: In a centrally planned economy there is no way to accurately determine the success or failure of various programs. Which programs should be expanded or which should be contracted/terminated? –cannot be determined in a socialist economy.
In capitalism, since the firms operate with profit motive, there is greater efficiency and competitiveness to deliver superior customer service. Take for example: the telecom services sector in India,there are numerous competitive players in the market like Airtel, Vodafone, Reliance, Tata etc. offering so many different schemes to woo the Indian mobile phone user.
Prices determined by market forces: Capitalism ensures that market prices transmit information about relative scarcity and then efficiently co-ordinates economic activity.
Example: Take the example of OPEC oil crisis of 1970’s. OPEC countries restricted the supply of oil, hence the oil prices increased drastically. Consumers started driving less, car-pooling more, and started using public transportation for commuting. Producers in turn got the incentive of exploring and developing alternative fuels of energy resources.
In Socialism, since price of commodities are set by the government, they are either too high or too low- [in most cases] which leads to constant shortages or surpluses. The commodity prices do not change with the market forces of demand and supply which leads to problems.
Not all is right with Capitalism
Ill effects of capitalism are not due to capitalism but due to corruption of capitalism. There are numerous examples- right from Enron, WorldCom, Satyam to the recent BP oil disaster.
Obsession with the “bottom line” means that the broader concerns of stakeholders are sacrificed for the narrower interests of shareholders.
What we don’t need is “Crony Capitalism” where success of a business is dependent on favoritism-shown by ruling government in the form of tax breaks, government grants and other incentives. Take for example: the recent Vedanta controversy-if Anil Aggarwal had managed to strike a deal with the government for expanding its operations in tribal-occupied Orrisa through favoritism shown by the government-it would have been an example of crony capitalism. {But we must commend the firm stance taken by Jairam Ramesh, the environment minister and PM Manmohan Singh against the issue}
We need Sustainable Capitalism: is a new brand of capitalism which takes into account the long term view includes socio economic development and environmental sustainability.
Fall of Lehman Brothers and the Financial Meltdown-Is Capitalism to Blame?
Contrary to the popular perception, 2008 financial crisis did not take place primarily due to the ill effects of capitalism but due to seriously flawed monetary policy put in place over 2 decades ago by former fed reserve chairman- This encouraged the era of consumerism in America-people began consuming beyond their means as credit was easily available on artificially low interest rates. It increased the risk taking propensity of the average American consumer. However, one should note, that the seriously flawed monetary policy was the primary reason, not the only reason behind the financial collapse.
If Keynesian economics were to work, the current global meltdown would be shallow and short lived-the massive infusion of stimulus capital would have turned around the US economy in a short time. [Keynesian economics-advocated the intervention of central banks via fiscal and monetary policy to undo balances]
But U.S. economy is still deep down a rabbit hole-U.S. will take at least a couple of years to fully recover.
Lessons to be learnt: Many economists worldwide are preaching a new brand of Capitalism called “Controlled Capitalism”, in controlled capitalism-we need limited but controlled interventions in the free market, leaving to self regulate for most market.
From the above discussion we conclude that imperfect capitalism which is sustainable and controlled is the best choice amongst all other systems.
Note:
To put it in simple terms:
Capitalism means the economy in the hands of private sector
Socialism means the economy in the hands of public i.e. Government
Communism: is a broader term than socialism, it includes both the economy and the political system.
However the objectives of socialism and communism are largely the same.
The only exception is China-which has a Communist Government and a imperfect capitalist form of economy-
- Political System: China has a one party system i.e. the People’s Party of China (PPC) controlling the political system. China’s media is highly controlled-In a report released by “Reports without Borders” in 2005-China ranks 159th out of 167th in its annual freedom world index. Censorship of Media is a common practice to silence criticism about the government.
- Economy: After the era of Mao Zedong came to an end mainly from 1949-1978, China has largely been a capitalist economy and has become an economic powerhouse over three decades of market oriented reforms and becoming a more globalised and liberalized economy.
I leave you with this a deep thought- a quote by Winston Churchill
"The inherent vice of Capitalism is the unequal sharing of blessings, the inherent blessing of socialism is the equal sharing of misery!"
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By: Tejas Singh
1 comment:
great one...really informative and intersting
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