This week there were a couple of readings that I had to go through in order understand two of the most pressing questions of the current times (apart from when will we have the vaccine ) is, “What is the future of capitalism” and also “Could free market economy help us mitigate the climate change crisis ?” The readings ranged from Munk Debates:The Future of Capitalism, NCERT 10th History textbook (yeah, you read that right) and anything about future policy proposal would be incomplete without a little back and forth of what Abhijit Banerjee and Esther Duflo’s research.
The Munk debates are a series of semi-annual debates that deal with some of the pressing issues of the time and this one in particular interested me because of the panel. The panel included Yanis Varoufakis, Katrina Vanden Heuvel, Arthur Brooks and David Brooks. Yanis’s work is something that I have mentioned in one of my earlier posts where he talks about birth of economy wherein the concept of surplus plays an important role. The debate is fitting to the time in order to address the questions that current form of capitalism raises. To begin talking about what does future of capitalism looks like, it would be important to understand how we got here in the first place.
How did we get here?
When we think about globalisation or the capitalist societies we go as back as 50 years in history but for me it was revelation that we have to back as 3000 BCE, which shows the establishment of an active coastal trade route between Indus valley civilisations and present day West Asia. This route helped in exchanging crops, goods, knowledge and money. The silk routes are fitting example of the time before what we termed as ‘globalisation’. The trade reduced when the Europeans found a sea route to Asia and also to America which prior to this had been isolated from the world. This discovery enabled America’s trade with the rest of world and sometime around 15th century China started withdrawing itself from overseas trade, This along with rise of America led to the shift the centre of world trade westwards. Further the 19th century saw the birth of a society out of interaction between flow of goods, labour and capital. These three factors till date shape how societies function.
The late 1800’s saw the formalisation of agriculture economy. This came about be as late 18th century saw a surge in food demand in Britain and to combat the increasing prices of the food it started importing from all around the world. As the food prices fell, consumption rose and this meant more food imports. The railways were laid to link various regions from where the grains were imported. It generated a need of more labour and this fuelled migration to countries like America and Australia which were major suppliers to Britain, The world trade is estimated to have become 25-40 times between 1820 and 1914. The trade dealt with primary products such as wheat, cotton, rubber etc. This expanding trade and colonisation induced extreme poverty in many parts of the world. The rinderpest plague along with political intervention of Britain that stripped African natives of their own economies is an example of that. India’s loss of wealth and rise of indentured labour was also an example of that. This portrays that wealth generation or profit making systems will never benefit anyone equally and will lead to unsurmountable poverty. But could this same model of wealth generation also be the solution for the problem?
Post-first world war, there was a shift in the powers and roles that the major economies played. When Britain was busy with war, industries developed in India and Japan. At the same time Britain had to borrow from the US to finance war. Hence, post war Britain was left in the position of international debtor and America had become international creditor. As Robert Solow’s growth theory suggests , post war there was an economic boom but when that ended production contracted and unemployment rose. At the same time US also moved towards mass production that led to an increase in wages and consumption. During this time the US had started lending out to a lot of economies but their withdrawal from giving loans crashed the banking system in Europe and the entire world felt the blow. The agricultural economy was as it is in crisis post war and the shortage of funds made it even harder to thrive.
The second world war led to more economic and societal disparities which was also pivotal in shaping the Bretton Woods system. Thus in order to achieve stability in industrial society, the economists thought government intervention had to be increased, with the government being in control of the flow of goods, capital and labour. The Bretton Woods conference in New Hampshire established the International Monetary Fund (IMF) to deal with external surpluses and deficits of its member nations. The International Bank for Reconstruction and Development (popularly known as the World Bank) was set up to finance post-war reconstruction. This system was based on fixed exchange rates.In this system, national currencies, for example the Indian rupee, were pegged to the dollar at a fixed exchange rate.During 1950-1970, incomes grew by 5% and the world trade by 8%.
Even though the world witnessed development but this weakened the strength of the dollar and the developing countries which could earlier borrow from the international institutions that were set under this system , were now forced to borrow from western commercial banks.This gave rise to debt and the collapse of the Bretton Woods system.
Broken Capitalist system:
The collapse of Bretton Woods system and advancement of technology was fundamental in shaping what we know of capitalism today. The rise of periodic debt has been an aftermath of the collapse. The same system that brought 2 billion people out of poverty is the same one that is leading the developing countries to take the biggest hit when climate change starts playing out its catastrophes.
In the debate that was mentioned at the start of the post, Yanis and Katrina are against the current system of capitalism and David and Arthur Books support it. Yanis mentions that the capitalism that we experience today is anti-democratic and is authoritarian in nature. Katrina frames the way we look at the current economic models in a very apt manner, as she mentions that we are often only offered two choices either it is ‘robber-baron capitalism’ or ‘freedom-zapping socialism’. If we think about it hard enough we often find ourselves doing the same, atleast I do whenever posed with this question. Does it have to be though? Why can’t it be somewhere in the middle where the wealth creation still exists but not in the solely in hand of the top 10 percent. The rise of B corporations in the world specifically in Canada and the US is an example of being profitable on the foundations of inclusivity.They recognize multiple stakeholders which is absent in most of the major corporations that attribute to highest wealth in the economy.
The interesting impact of capitalism that socialism cannot seem to offer is to incentivise innovation. In order to deal with the impending climate crisis, it has been found that the free market economies because of their ability to incentivise innovative technologies seem to better at handling it. It is mainly because the free market economies have their citizens pegged at an average income of a minimum of 6 times more than the least free economies. Hence, their spending power is more and they can afford to use climate efficient technologies which in India is still a far fetched dream.
Yanis mentions that with the rise of robotisation the consumers won’t be able to produce good that it produces and that’s why capitalism is broken. But as it has been argued time and again that any radical change such as this has created more opportunities in different fields that were deemed impossible before the process happened. To counter this David Brooke mentions that instead of refraining from capitalism we need in-fact more of it so that it trickles down to where it hasn’t made its way so far. Inequality has gone down in past 35 years , wherever capital made its way. This transfer could also help mitigate climate change as India’s middle class economy is one of the largest consumer base in the world and with their inability to afford climate efficient technology, it could drive the earth’s temperature to increase by 1.5-2 degree centigrade.
Whereas Yanis and Katrina talk about reforming the current capitalist system and to regulate it to a certain extent, David Brooks highlights one of the key principles of capitalism in attempt to counter this. He says that capitalism is all about price mechanisms, decentralised decision making and if there’s any sort of planning involved in this then the power winds up with the government. But is that entirely a bad thing per se ? As anyone who is familiar with behavioral economics knows that we as humans are not free of biases when it comes to making decisions. What we like to exercise as our preference has in-fact been shaped by countless propagandas that play out in the society that we live in. We often practice what is called as ‘hyperbolic discounting’ where we don’t account for future needs in the best way possible. So how will we when entrusted with complete power to shape the economies make it one that is deemed fit for the future generation that will inherit this.
‘Nudging’ for a better future:
Capitalism enables certain tools which would have been absent if we were devoid of that. The proposal of ‘carbon tax’ is an example of that. Also another one is the introduction of emission trading system to combat pollution. This essentially entails that companies are charged a high price for polluting the environment. It also enables the companies to buy the right to pollute from other firms that are actively curbing pollution. This incentivises the need to innovate. This is as far as companies are concerned but what about we individuals. How do we contribute towards the goal of climate change because we often find ourselves at crossroads when it comes to implementing this. Government could nudge the citizens into better habits of energy saving. A RCT that is mentioned in ‘Good economics for hard times‘ indicates that when smart meters plan that allowed for higher prices for electricity during peak time and lower prices for the same rest of the time was set as a default plan for randomly chosen group, and this led to a considerable decrease in consumption of energy. This without the initial nudge by the government was opted by less than 20% of users in Sacramento,California where this study was conducted. Several other RCTs conducted show that it’s a matter of habit and not choices that make us continue our existing patterns of energy consumption.
Wealth creation is necessary for the welfare state to function and with certain policy interventions the market could be relatively free of the traps that exist today. Since 1970s four-fifths of starvation-level world poverty has been eradicated and it’s the capitalist model that enabled that.The wages have increased by 4.5 % and that also means that purchasing power has gone up. With enough nudge for certain policies that could benefit the society as a whole , markets could become more responsible and not just be driven by the sole need to generate profit. It’s the incentive that drives innovation not altruism.
Weekly Musings 