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IS CAPITALISM DYSFUNCTIONAL?

IS CAPITALISM DYSFUNCTIONAL?

ABDUL GHAFOOR KASI

Capitalism is also known as market economy. According to Adam Smith 1776, in his book ‘The wealth of nations’ he gave characteristics of capitalism, being: Private property; freedom of enterprise; freedom of economic choice; self-interest; competitive market system. Though all the characteristics have vital role in market economy, the most important aspect is market system is where buyers and sellers interact, as market participants. This relationship between buyers and sellers drive and control the prices. Competition drives the organisation and commanding role of the market economy. Government is expected not to interfere, but we have seen recent interference in market economy in the US, UK and other countries. This act of interference diminishes the rationality of capitalism.

Economical rationale of capitalism is to buy and sell capital. Capital can be in the form of labour, money, credit, trade (material property and intellectual property) in a free market. Politically it is a social system based on individual self-interest and property rights. The origin of the term capital come from kapul, meaning head, based on the heads of cattle – The more heads of cattle owned, the more rich one was considered. Thus the word chattel refers to ownership of goods, animals and slaves in yesteryear’s. The Latin word is Capitalis. Modern capitalism has the characteristics of the business dynamics that existed before modern capitalism. In 1854, Tachery used the word capitalism for the first time – meaning having ownership of capital. Karl Marx called it Kapitalisten – meaning private ownership of the means of production.

The means of production is owned by the capitalist, even though capitalism has changed due to: complex price selling; importance of specialised technology; complexity of the reduction of production line and specialisation of labour. With all other changes capitalism also has an inherent creative destruction phenomenon according to Joseph Schumpeter. It destroys inefficient economic structure. In fact, it allows the destruction to take place. Over the years there has been numerous enterprises destroyed and new ones born by the dynamics of market forces.

The dynamics of market forces depends on the growth and movement of capital. For capital to grow it needs labour. Without labour power there can be no industrial production. Thus the ownership of means of production in the hands of capitalist is important characteristic of capitalism. A business needs capital for its overheads and payment for the labour force, to be able to produce commodities. The commodities are owned by the capitalist. Workers are involved from the production of goods and the sale of goods through retail outlets. If the workers refuse to manufacture and sell goods, the market economy will lose it’s dynamics. It is this vital relationship between the capitalist and the workers that generates wealth. The money from sales becomes property of the capitalist, who pays a portion of it to the labour and a portion goes towards the overheads cost. While the remaining money is kept by the capitalist as profits.

In industrialised countries the ratio between (GDP) Gross Domestic Product/Capita determines the standard of living. If GDP/Capita is high the standard of living is higher, good food, housing, clothing, health care, child care, and care for the elderly is free. That is the ideal scenario, but in reality some capitalist countries don’t go that far in providing free care to the infirmed, the children and the elderly population. Where the GDP/Capita is low there is poverty and starvation’s. In a capitalist society, opportunities for individuals are more freely available to rise higher in achieving a wealthy position. In a feudal and capitalist society wealth is in the hands of the few. Whereas, in egalitarian society wealth is spread or spend on social welfare and for benefit of the public, thus reducing the mobility of income. The capitalist society thrives on mobility of income, thus consumerism forms the back bone of capitalist society. If the innovation of new goods and sales are not maintained for increasing the mobility of income, the capitalist society will collapse. If the working people are paid to buy goods in the shops – that is fine. But the problem arises when distribution of wealth takes inequitable form. Usually more than half of production capacity is owned by 1% of the population – the wealthy few. Standard normal distribution has its rich area, the average area and the poor area – similar to a shape of a bell. This kind of distribution give birth to bias. Those who have more wealth can afford better education for their children and the children have better chances of inheriting wealth from their parents. Whereas, the ability and effort of the haves and have nots is not different. Though it is agreed that some children may not achieve their full economic potential for reasons of culture, climate, geography, natural resources and inequlity between nations, etc. Some form of inequality is inevitable – because to create wealth one needs incentives and some may lack incentives and decide to lead a cheap and cheerful life; and may not be interested in becoming wealthy.

Usually the wealth is stored in banks and invested in the financial markets around the world for more profits.The complexity arises when a business acquires a corporate entity and a legal authority – as a virtual personality. Corporations are capitalistic market place, which have dominant hierarchical bureaucratic structure. Their aim is to persue more profits and controlling economy, labour market and stock exchanges. They are less accountable and less regulated – like the edge fund operators. The darker side of corporate capitalism is that it has a wider influence over the governments. It fails to act in the interest of the public and can circumvent democracy. Thomas Jefferson desired to crush the aristocracy of moneyed corporations and, Franklin D Roosevelt warned: that growth of private power could lead to fascism.

The recent development in the US is moving in that direction. Recently we have seen that most markets of importance fuses with governmental apparatii forming financial conglomerate. These big corporations can operate most effectively by forming a legal and social network amongst themselves and aim to control the labour force. This way they not only have control over the market place they own the stock market too. If the labour cost is increasing they will outsource their production into other developing countries like China, Vietnam, Bangladesh, India, etc. China is a rising financial power the old US dominated financial world is dependent on China. It has to be seen, if US is going to from a defecto alliance with China to exit from the current situation or conflict with China leading to fragmentation of global finances.

Chinese economy was based on socialist principles, where the workers were controlling the means of production and their destiny. After Mao Zedong, economical changes were ushered by Deng Xiaoping with his doctrine of “Seek truth from the facts”. Since then China has adopted capitalistic economical policies, characterising state owned enterprises and stock market. Thus encouraging the growth of the joint state venture and capitalist private sector.

China has a stable economic growth and suffered less form the credit crunch. The recent credit crunch in the west has exposed financial and credit instability. China has been the economical crutch for the US. The cause of credit crunch is more and more coming to exposure. People have lost confidence and trust in the system, but are unable to do anything about it. When the capitalist need market stabilisation they increase debt finance thus enticing increase in household debt through mortgages and other credit incentives – whereas keeping the wages as minimal as possible. This inducement to increased household debt led to credit crunch. The sub prime mortgages were devised to increase more home ownership. Where the developers lend money to the buyers and thus controlled both supply and demand at the same time. A bubble was created, which had to burst sooner or later.

Capitalism is an economic system associated with democracy. It has been enriching the capitalists at the cost of the workers and the public. The credit crunch has cost $45 trillion, and the people have to bear the cost. 42 states in the US are facing bankruptsy and over 21 million are on food stamps and the numbers are rising. There is rise of racism as inequality grows. This is all due to the imminent tendencies of spontaneity in capitalism, which has implications on freedom. Capitalism will survive the financial crises and may be more enriched by it – but it is not out of the woods yet. What will be round the corner no one know! It does not matter, which party is in power. The elected party runs the same system. If the people can transcend the system. Fill the gap between the rich and the poor. Oppose every move and agenda of finance capital hegemony. By setting up democratic agenda, they can can avoid financial crisis and unemployment and subsequently racism and fascism. Otherwise the credit crunch will re-happen again and again and the rich will get richer and the poor will get poorer. Real democratic agenda is the only option to overcome the spontaneity of capitalism and save the society and the state from becoming dysfunctional.

Dr Abdul Ghafoor Kasi

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Discussion

2 thoughts on “IS CAPITALISM DYSFUNCTIONAL?

  1. Very well written

    Posted by Tariq Sohail | September 3, 2011, 3:40 am

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