Capitalism Divides

When the Berlin wall came down on a cold crisp morning in November 1989, one of the longest running political and philosophical struggles was seen to have ended. With the Soviet Union in ruins and the Communist Party-ruled China embracing capitalism, the ideological battle was finally seen as settled. Now, with demonstrators in London and elsewhere pronouncing capitalism dead and western governments plotting ways of resuscitating it, there is a new question mark over the future of free market.

 

Economists have advanced two narratives to explain the crisis, but neither questions the viability of capitalism itself, rather they find faults in its management. One suggests that the marriage of unalloyed greed to systematic deregulation has produced a hyper-leveraged bubble of complex financial derivatives that has finally burst. Culprits in this drama are mortgage-backed securities, collateralised debt obligations and excesses of the subprime mortgage. To that we can add a massive US budget and trade deficit fuelled by reckless government spending and burgeoning household debt. Lax regulations among other things have been responsible for fuelling the crisis. The solution, according to this analysis is: toughen regulation and enforcement, and rein in the free-spending ways of the US government and its consumers.

 

The other analysis lays the blame at the door of mercantilist trading by the export-driven economies of East Asia. While Americans have been on a spending binge, Asians and other commodity producers have been single-minded in their drive to sell to the US. In a normal situation, as their dollar earning grew, their currencies would have appreciated, eventually making their exports more expensive. Instead, these analysts maintain, Asian countries, China in particular, have kept their exchange rates low by manipulation. Instead of investing in their own economies, they have lent billions of dollars of surplus back to the US Treasury. This trick has kept their domestic currencies artificially low and their profits high. This ploy has further encouraged credit-fuelled spending in the US. The breaking point came, the theory goes, when the weight of the growing global imbalance finally became too great to bear.

 

By both theories, it would seem that capitalism is safe; it merely needs to be tamed. While these analyses do identify real problems and plausible solutions, they gloss over the fundamental challenge of sustaining capitalism: how to keep profit growing without limiting the very tools of this growth. The challenge has been to expand the market by increasing the purchasing power of the consumers and, at the same time, maximise profits. The dilemma has become obvious in the last three decades when global business profits have surged creating hundreds of millionaires all over the world. Real wages, however, in almost every country have stagnated, with low-cost manufacturers such as China helping to depress wages in the developed world as well. The result has been a growing income gap. In the US, the top 1 per cent of the population doubled its share of the total national income from around 8 per cent in the mid-1970s to almost 16 per cent in the early 2000s. In China, the income gap (as measured by Gini coefficient) doubled between 1980 and 2005, with 1 per cent of the population cornering 9 per cent of the national wealth.

 

A consequence of this growing income inequality in the US has been the rising indebtedness of Americans on the one hand, while on the other, the rich have sought to grow their wealth by investing in financial derivatives. On the other end of the trading world, globalisation has brought millions of Chinese out of poverty but Chinese workers, lacking a social safety net, have put their money in saving rather than splurge on the products of their labour. China’s capitalists have increased production capacities at home and have tried to expand their markets abroad. Low wages and minimal benefits to workers have kept China’s export machine lean, but vulnerable to shrinking foreign markets. Today’s capitalists would do well to draw lessons from the visionary Henry Ford — creator of one of the top automobiles. In 1914, after having launched the first consumer car Model T, Ford scandalised Wall Street by offering his workers a substantial wage hike. Ford’s reasoning was straightforward: “One’s employees ought to be one’s own best customers.” For the market to grow, capitalists cannot simply maximise their profits, they need to enable the workers to buy. To sustain capitalism one needs enlightened capitalists.