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