The title of this article by Edmund S. Phelps and Saifedean Ammous is Blaming Capitalism for Corporatism. I just reworded the title to sound similar to the 2003 book written by Raghu Rajan and Luis Zingales – Saving Capitalism from Capitalists.
First some basics of capitalism system:
The future of capitalism is again a question. Will it survive the ongoing crisis in its current form? If not, will it transform itself or will government take the lead?
The term “capitalism” used to mean an economic system in which capital was privately owned and traded; owners of capital got to judge how best to use it, and could draw on the foresight and creative ideas of entrepreneurs and innovative thinkers. This system of individual freedom and individual responsibility gave little scope for government to influence economic decision-making: success meant profits; failure meant losses. Corporations could exist only as long as free individuals willingly purchased their goods – and would go out of business quickly otherwise.
Capitalism became a world-beater in the 1800’s, when it developed capabilities for endemic innovation. Societies that adopted the capitalist system gained unrivaled prosperity, enjoyed widespread job satisfaction, obtained productivity growth that was the marvel of the world and ended mass privation.
This crisis (like many previous ones) questions capitalism. However, the problem is not with capitalism but corporatism where large firms are dictating the markets and policies:
Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.
In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”
This curious case of firms vs markets was best raised by Ronald Coase in his landmark paper – The Nature of firm. In economics, most economic decisions are organised in the market. Why do firms exist then? His analysis showed that firms exist as transaction costs of doing everything via the market was high. Hence firms arise to internalize these costs and produce things using economies of scale/scope etc.
How firms fit into an economic system becomes the crucial point. In Capitalism, rules of game were specified under which firms operated and entrepreneurship, new ideas etc flourished and profits was the main goal . Socialism/communism thought private ownership will lead to profits for the few and took most industries under government ownership. Second system did not work barring in few countries in absence of proper rules and realisation that government cannot do business. Capitalism had its flaws but became the best alternative amidst all the bad choices.
However what has become interesting over the years is rise of crony capitalism which is nothing but corporatism as authors point. This version of Capitalism made rules but rules were tilted greatly in favor of large firms. The earlier rule of profits and losses belong to owners became profits are mine and losses of the society. This was found rampant in emerging economies but is now seen as a common thing even in developed economies.
This shift in thinking from rewarding merit/talent to rewarding size and connections has created a lot of damage. For another superb perspective read this Luigi Zingales piece
The duo point damage from this shift is widespread:
The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.
This shift of power from owners and innovators to state officials is the antithesis of capitalism. Yet this system’s apologists and beneficiaries have the temerity to blame all these failures on “reckless capitalism” and “lack of regulation,” which they argue necessitates more oversight and regulation, which in reality means more corporatism and state favoritism.
They say real world should take example from the cyber world where no such practices exist:
It seems unlikely that so disastrous a system is sustainable. The corporatist model makes no sense to younger generations who grew up using the Internet, the world’s freest market for goods and ideas. The success and failure of firms on the Internet is the best advertisement for the free market: social networking Web sites, for example, rise and fall almost instantaneously, depending on how well they serve their customers.
Sites such as Friendster and MySpace sought extra profit by compromising the privacy of their users, and were instantly punished as users deserted them to relatively safer competitors like Facebook and Twitter. There was no need for government regulation to bring about this transition; in fact, had modern corporatist states attempted to do so, today they would be propping up MySpace with taxpayer dollars and campaigning on a promise to “reform” its privacy features.
The Internet, as a largely free marketplace for ideas, has not been kind to corporatism. People who grew up with its decentralization and free competition of ideas must find alien the idea of state support for large firms and industries. Many in the traditional media repeat the old line “What’s good for Firm X is good for America,” but it is not likely to be seen trending on Twitter.
This could be also be because governments don’t really understand the business of internet!!
Authors are hopeful that true capitalism will come but wait could be longer with more pain:
The legitimacy of corporatism is eroding along with the fiscal health of governments that have relied on it. If politicians cannot repeal corporatism, it will bury itself in debt and default, and a capitalist system could re-emerge from the discredited corporatist rubble. Then “capitalism” would again carry its true meaning, rather than the one attributed to it by corporatists seeking to hide behind it and socialists wanting to vilify it.
A superb perspective. Also read the comments on the article below. Some people do not agree.
Even in India there is large-scale rise of corporatism. They decide what reforms are good and need to be done. Wide-scale scams corruption and bailouts show how the close linkages between government and private sector.
Interesting times…War continues…
