Pakistan Institute of Development Economics

Will capitalism eat itself?
Publication Year : 2020

THE period between 2008 and 2020 marks more than a decade of difficulties for the global economy. In 2008, the Great Recession struck, leaving a destructive trail of losses worth trillions of dollars and anaemic economic growths. In 2020, Covid-19 delivered another powerful jolt to the global economic order. Some statistics, however, paint a perplexing picture. In 2009, the wealth of Jeff Bezos (founder of Amazon) was $6.8 billion. In 2020, his wealth stands at $184bn! In 2009, the wealth of Mark Zuckerberg (founder of Facebook) was $2bn. In 2020, his wealth stands at $103bn! In the same period, the wealth of the 400 richest Americans increased from $1.27 trillion in 2009 to $3.2tr in 2020.Swiss bank UBS reported that at the height of Covid-19, from April to July 2020, the world’s richest saw their wealth climb by 27 per cent to $10.2tr. At the same time, the World Bank’s estimates show that for the first time since 1998, extreme poverty is set to rise with 115 million more people falling into that category. Additionally, the share of labour in global income has been falling since at least the 1970s.Something is rotten at the heart of global capitalism’s working, a system that has worked wonders for humanity’s progress over time. The gains are accruing disproportionately, more than at any time in the recorded statistics of earnings and wealth. Historically, pandemics have proven to be ‘great levellers’, ie they’ve lowered the gap in terms of rich and poor wealth. For example, the bubonic plague (Black Death) that ravaged Europe in the Middle Ages led to lower income inequality. But now, even a pandemic as brutal as Covid-19 has failed to lower the striking gap between the rich and poor. Pope Francis voiced his concern about the ‘new tyranny’ of ‘unfettered capitalism’, attacking the ‘idolatry of money’, and decrying the absence of economic equality, high joblessness and increasing misery.Why did something that worked (on aggregate) well for the global economy over centuries turn problematic, pitting Wall Street against Main Street (the 1pc vs the 99pc)? The answer, as you’d probably guess, is not straightforward, resting on historical factors and changing circumstances over time. Fortunately, we have enough research and written material to sketch a brief tale in terms of capitalism’s evolution.The gains are accruing disproportionately, more than at any time.For thousands of years, since the earliest civilisations, it was ‘commercial capitalism’ that drove the workings of economies. Commerce flourished with the advent of civilisation and empires, giving birth to innovative ideas for carrying out trade. Greek city states, for example, had insurance for ships carrying goods to other parts. Around the 9th century, paper money appeared as an instrument for facilitating trade between different parts of China. Similarly, the early signs of ‘industrial capitalism’ coincided with the rise of stock exchanges in places like Amsterdam.This journey, of course, was not linear, but had many ups and downs. Ferdinand Braudel’s magisterial Civilisation and Capitalism, 15th-18th Century, for example, eloquently describes how the pendulum of economic ascendancy sprung between various city states of Europe. Overall, though, the process was such that growth in the fortunes of the top tiers somehow found a way to filter to the bottom lot. This was acknowledged by none other than Adam Smith, widely regarded as the father of modern economics. In his relatively lesser known Theory of Moral Sentiments (not the well-known Wealth of Nations), Smith opines that “[The rich] consume little more than the poor, and in spite of their natural selfishness and rapacity … they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life …” (readers should note that the much-talked-about ‘invisible hand’ also makes its first appearance here).But the 20th century saw the rise of ‘financial capitalism’ with financial firms at its core. The products and their trade are based on complex computations and formulas underlying assets valuation. The main issue, however, with this particular evolution of capitalism is that not many understand its working. While commerce and trade have always been in the grasp of even the poorest, financial capitalism can be hard to grasp for even the brightest.Even more disconcerting is the fact that major gains accrue to only a very small minority. To put things in perspective, consider that it took the fall of empires like Rome to set off wide-scale economic repercussions. In the 21st century, it took the fall of only two firms (Bear Stearns and Lehman Brothers) in a corner of New York to set off a cataclysmic event that not only shaved off trillions of dollars from global wealth and GDP, but also led to widespread joblessness.Is there an alternative? Proposed alternatives range from the illogical to the thoughtful. Arguably the most illogical one calls for abolishing capitalism. The fault with such arguments is that they treat capitalism as homogenous. But the fact is that there are different varieties of capitalism practised around the world. We find, for example, a relatively laissez-faire form of capitalism in the US, but a state-administered form in China. Second, this argument ignores the fact that even the most ardent opponents of capitalism like Marx acknowledged the power of productive forces unleashed by capitalism’s working.Thoughtful arguments emphasise policies that could make the economic growth process ‘inclusive’, with the modus operandi differing from nation to nation. In Pakistan’s case, for example, the state needs to revisit its role in terms of regulating economic activity which usually results in creating (and sustaining) cartels (like the sugar cartel, benefiting from state subsidies).Let’s conclude by acknowledging that we do have a problem on our hands as far as the workings of capitalism go. But let’s also realise that when it comes to prosperity and growth, there is no alternative. Those who disagree may want to revisit the USSR’s collapse or Venezuela’s plight in recent times to realise that alternative ventures could have a frightening cost.