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Mainstream, VOL L, No 21, May 12, 2012

Can Democracy Survive Capitalism?

Friday 18 May 2012, by Shyam Chand


Another name of economics is political economy; hence it is very dangerous to leave it in the hands of economists, especially neo-liberal economists who in the name of free market advocate privatising and downsizing government functions.

‘For we all are capitalists now, are we not? These days the victory of the market over the state is quite taken for granted,’ wrote The Economist, September 20, 1997 (p. 17).

The market theory of Adam Smith was grounded in carefully articulated fine assumptions:

• No buyer or seller is big enough to influence the market.

• Complete information must be available to both.

• Seller must bear full cost.

• Trade between countries must be balanced.

Savings must be invested in the creation of productive capital within national borders.

George Soros, the world’s most famous financial speculator, observed in The Crisis of Capitalism: ‘Economic theory is an axiomatic system. As long as basic assumptions hold, the conclusions follow. But when we examine these assumptions closely, we find that they do not apply in the real world.’ The question is: why?

Money as a medium of exchange serves a useful social function. But it becomes an anti-market and anti-democratic instrument in the hands of financial speculators who lure people to invest it in the stock market which is a sophisticated gambling casino or betting on a number on Las Vegas roulette wheel.

Over $ 2 trillion change hands daily in the world’s currency exchange market but about one per cent of that money is used for goods, services and manufacturing activities.

Not only does money change hands, it shifts national values. We have seen rapid shifts in the social commitments of the 1960s; materialism of the 1980s; cynicism of the 1990s; greed at the advent of the 21st century when we waited with bated breaths; and scams and scandals of the present decade!

The most advanced form of capitalism’s pathology is known as financial capital. In financial capital, the ownership of capital is separated from its application. Here power shifts from producers to financiers and rentiers who subsist on the income generated from capital or fluctuations in the currencies’ values.

Proponents and practioners of capitalism, who prided themselves to have accomplished the ancient alchemist’s dream of turning baser metal into gold, are witnessing on a global scale that dream turning into a nightmare much like the Great Depression of the 1930s.

The financial miracle of the Asian Tigers suddenly turned into the Asian meltdown which spread like falling dominoes through Thailand, Malaysia, Indonesia, South Korea and Hong Kong. During the miracle phase of the late nineties, large inflow of foreign money rapidly increased the value of real estate and stocks and created the illusion of economic prosperity with-out any increase in creative prosperity.

When the bubble burst, the IMF under pressure from the Clinton Administration provided a bailout under the presumption that investors would again enter those markets. Take the case of South Korea. The IMF provided a bailout of $ 57 billion. Its stock market rebounded for a brief period. The speculators ran with IMF money. The Korean market suffered a 50 per cent drop and the country was left with an IOU to the IMF for $ 57 billion plus interest to be paid in foreign currency.

The same happened in Japan, Mexico and Brazil. Then came the Russian crisis. We have still not forgotten our own Mehtas and Parekhs.

Bernard Lieter, an international money mana-ger and a designer of the single European curr-ency, rightly says that the distortions (holding money) be corrected by charging demurrage for holding financial assets and short-term capital gains be taxed higher than the earned money so that money is invested for productive purposes.

THERE is another way to make money out of nothing without making any contribution to the creation of real wealth. This is to create a financial bubble, a sophisticated version of the Ponzi scheme. We cannot exactly estimate how many thousands hedge funds are there in the world. Earlier long-term capital’s gambling habit was financing with $ 25 in bank loan for every dollar of equity. Now some hedge funds have

$ 100 in financial loan for every dollar in equity. Gambling with borrowed money is a bad idea under any circumstance. Unfortunately for Yuddhishtira, there was no banking system in those days!

George Soros startled the world with his article ‘The Capitalist Retreat’ (Atlantic Monthly, January 1997) in which he ‘denounced the self-destruction ideological rigidity of capitalism’ and labelled it ‘a threat to the open society’.

The Centre de Jeunes Dirigeants d’ Entreprise, a 2300-member French association of young company directors and execuctives, in its 150-page report in 1996 says: ‘We are convinced that unregulated capitalism will explode as communism exploded unless we seize the opportunity to put men at the heart of the society... The greatest misery in our society is social and spiritual rather than material.... What is needed is a fundamental rethinking about the way work and society are organised.’

Start Taking the Backlash Against Globalisation Seriously, authored by Klaus Schwab and Claude Smadja, the founder President and Managing Director respectively of the World Economic Forum, made the following points:

• Globalisation is causing severe economic dislocation and instability.

• Although conventional wisdom says that technological change and increased produc-tivity translate into greater jobs and higher wages, in the last few years technology has eliminated more jobs than it has created.

• Globlisation leads to ‘Winner-take-all’ situations; those who come at the top win big and the losers, lose even bigger.

• Globalisation tends to delink the fate of the corporation from the fate of the employees. Higher profits no longer mean more jobs, security and better wages.

They went on to warn that ‘unless serious corrective action is taken soon, the backlash could turn into open political revolt that could destabilise the Western democracies’. Recently we have seen demonstrations throughout the US and Europe.

In a recent report, Mis-measuring Our Lives, Why GDP Doesn’t Add Up, two Nobel Laureates, Joseph E. Stiglitz and Amartya Sen, and a distinguished French economist, Jean-Paul Fitoussi, have suggested measures of economic welfare and well-being of the soceities.

In the Foreword, French President Nicolas Sarkozy, who appointed this Commission implores that ‘we must change the criteria governing our social organisations and our public policies for our future and future of our children and grand children’.

Save democracy from capitalism!

The author is a former Minister, Haryana.

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