Friday, 22 May 2015

Dirge of capitalism….

Untrammeled capitalism is disastrous…Marx in his classic more than 200 years ago had prophesied that the free market mechanism left to itself would lead to sharp inequalities leading to social unrest which would result in the breakdown of the fabric of free market society giving rise to a new egalitarian society. Today what we are witnessing in most countries…is an eerie reminder of Marx’s writings.

Piketty in his magnum opus Capital has basically surmised that long term post tax return on capital is higher that growth rate of gdp and that of wages, based upon an empirical study of 20 countries over 300 years. Piketty summarizes: “The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted , capital reproduces itself faster than output increases. The past devours the future.”

Hence in capitalistic societies, the inequalities between the owners of capital and those only earning wages will inevitably increase over time. I would like to add a third class apart from capital owners and wage earners, the white collar class who get high salaries and also invest in capital markets. This class too increases its wealth over time.

The inequalities in US have compounded since the 80s…ever since the b grade movie star from California became president. Reagan immediately brought in as his treasury secretary henri Paulson, ex ceo of goldman sachs. This was the first time a head of the biggest investment bank took over as treasury head. True to his pedigree as a blue blooded investment banker, Paulson took up the cudgels on behalf of the rich in usa and started reducing their tax rates. This fundamental anomaly has haunted us till today. This paved the way for the rich to pay less tax and get richer. This went against all cannons of sensible taxation principles. The republicans began an era of plutocracy.

These moves along with other crony strategies have pushed usa to the precarious position as it finds itself in today. Today even the respected warren buffet, one of the wealthiest persons in the world, has pointed out that the tax regime in us is skewed and favours the rich. Along with this, us started pushing all retail low value manufacturing out of the country. This gave a chance to china to set up an ever increasing and improving manufacturing. Today china is rightly the manufacturing hub of the world. The us in its desperation to stem the recession has now reverted to manufacturing.

But the basic figures for the world’s richest nation do not inspire confidence. The average salary of country is around 51k $. Out of the population of 320 mn, about 151 mn are able to work for only 15 hrs a week at minimum wage levels. Out of the low income class (those below 15k $ pa), the average income is about $ 6k pa. the top 1% earns above 100k pa. in terms of wealth the distribution is far more stark. The top 1% owns over 50% roughly.  

Effectively what happened with the shunting of manufacturing to china, the middle class gradually disappeared in us. It’s basically the middle class which propels growth of an economy because it’s the largest market for consumer durables, clothing and food. One of the reasons why japan did not face any serious economic issues since the early 90s is that it has a solid middle class which kept the economy afloat in spite of stagnation. Europe too has a middle class though economically they are floundering. Large lower class fuels the higher probability of social violence.

Today the tip of the iceberg is the simmering violence among the poor. The series of shootings culminating with the Baltimore shooting of Freddie Gray is indeed a dangerous signal that things are going out of control. Even yesterday 5 people were shot in Baltimore. Huge portions of large cities in us are out of bounds for the police. The number of black poor who are killing each other is not recorded. The police discrimination against poor is rampant which borders on racism.

Elsewhere in other countries similar schisms are present and are widening dangerously. India after 68 years of independence is also a sharply divided society. About 35% of the population is still mired in abject poverty predominantly in rural areas. There are about 170 districts, ie 33% of the country, where the extremist political parties are in control and even the police have been marginalized. Its akin to the large swathes of us urban ghettos where the poor are in total control and killing each other where the police have no say. However in india there is a huge middle class which is driving the effective demand and fueling economic growth.

The inequality story is holding true even in other large brics nations like china and Russia, though in china the huge middle class is steamrolling growth. Other large economies with sharp divides are Nigeria, mexico, Pakistan.

The best countries in this regard are the Scandinavian economies which have extremely egalitarian societies. Strangely enough these societies are some of the happiest in the world with high literacy and extremely evolved people.

One of the distinguishing features of a deeply capitalistic society is the cronyism and nexus between the banks, credit raters, regulators, central banks, stock markets. Having said that, it’s evident today that even in non capitalist economies like Russia there is total state control and a similar nexus and coordinated actions between all the financial sector arms mentioned earlier. Hence today capitalism is not restricted to only so called free societies. Its traits are found across all types of societies like dictatorships, totalitarian, socialistic, communist, etc in its avatar state capitalism.

Another fundamental character of capitalism has been the profit motive. This search for profit has resulted in hyper competition. As profit margins shrink, companies resort to unethical accounting subterfuges and window dressing to look more profitable in order to appease the stock markets and shareholders. Capacities are being ramped up desperately in all sectors based upon products with incremental improvements which are garbed as innovations. The consumers’ minds are bombarded with too many options and choices. Eventually most sectors and products are being sold on sale and discount.

The crazy race to increase top line also leads to unwarranted exploitation of precious natural resources often at the cost of the environment. Demand for some minerals fueled by high demand of china lead to soaring commodity prices. Now with the slowing of demand there a global glut has been created. But the more worrisome aspect of all this has been the devastating impact on the environment which has lead to irreversible climate changes.  

To cap the woes of free markets and capitalism, most of the western world has been reeling from unemployment, stagflation, and recession, increasing debt and declining effective demand. As a result most economies are desperately trying through various economic parameters to improve their health including zero to negative rates of interest . A direct offshoot of this has been the gyrating currency values. Overall the major economies are slipping deeper into comatose states in ICUs which no magic economic wand can resuscitate.

Hence capitalism has entered another dark tunnel with no light at the end.  In order to identify countries in various stages of decay in the worsening global economic crises, a simple model has been built to grade the degree of crisis. Under the model we can group the countries of the world into the following categories. This is only a basic outline of the model which has more parameters and sub parameters which can be also added in stages.

Per cap GDP
Eco Gr Rate
Int Rate %
Inflation rate %
Debt / GDP
% below poverty line
Cost of living PPP

If there are any interested institutions or universities which would like to collaborate in developing the model for a clearer x-ray of global economic crisis with possible solutions, New Grammar of Living would be only too happy to participate. 

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