The spread, depth, and intensity of the global economic crisis has now occasioned radical critics of capitalism. The End of History sort of triumphalism after the collapse of rival, socialism has given way to deep-seated fears that the system is finally unravelling. Slower US growth, recession in Japan, Russia’s economic meltdown and above all, the spread of the Asian crises to Latin America have triggered such concerns, stated Chander Mohan in an article recently.
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When the likes of Mr. George Soros warn that the “global capitalism was coming undone”, matters must really be serious. Elsewhere in South East Asia, Mr. Mahathir Mohammad has been arguing that Asia is now haunted by ‘rampant capitalism’ blaming speculators for the woes of the region.
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What is ‘rampant capitalism’? Mr. Mahathir’s favourite targets are those like Mr. Soros who move millions across borders, thanks to Infotech. This new breed often erodes the sovereignty of nations by controlling exchange rates and short- term movement of capital which are inherently crisis-ridden. And they are different from the old capitalists who were confined to their own countries.
All this is rather similar to Mr. Soros’s ‘capital threat’ which targets not only currency speculators but presumably financials like himself also. He made billions betting against the UK’s pound sterling. Since then he has lost heavily with the US stock markets heading southwards and the Russian economy lurching from crisis to crisis. He has now returned to his favourite musings as a philosopher.
The threat of “rampant capitalism” in terms of a world of freer flow of capital has existed in the past as well. Way back in the eighties, its depreciations were witnessed when Latin America sank under the burden of a debt crisis.
The late 1990s, however, were quantitatively different as the sheer scale of the havoc dwarfed anything before: Surges of capital out of Asia devastated South Korea, Indonesia, Thailand, and Malaysia dragging down the world economy. The same thing is happening to India in 2008-09.
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Till then such economies exemplified the Asian version of state capitalism. Economists saw virtues in whatever these countries did. Their prices were right. Their economic fundamentals were sound. Their policies were outward- oriented. But when investors developed a crisis of confidence and stampeded out with their money, what remained was only a horror story of capitalism.
The Asian boom-bust cycle also signalled a complete retreat from reliance on market forces to a regime of controls. Mr. Mahathir took a radical U-turn from being an ardent votary of capitalism to clamping down exchange rate controls to stem capital flight. To shore up, other economies are also planning to follow suit.
Globalisation is thus attracting fewer starry-eyed advocates than before. The extent to which market driven capitalism is on the retreat is exemplified by the smugness expressed by India’s officials.
Overall economic growth slowed down to 7.5 per cent but they feel vindicated regarding its one step forwards and two steps backward reform agenda. They argue that India’s caution towards full convertibility has saved it from the Asian turmoil.
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The constituency for faster reforms and inviting FDI on a substantial scale now has narrowed considerably. Instead of allowing market forces a free rein, officials prefer to retain controls. There is a reluctance to scrap the Foreign Investment Promotion Board. There is an unwillingness to allow foreign players into the insurance sector. There is bold resistance to privitation agenda.
Interestingly, Mr. Soros too considered the spread of market forces as the biggest threat. An important characteristic of the global market economy in which goods, services, capital and even people move around quite freely was the dominant belief in the magic of the market place. However, this same market place that brought prosperity earlier went through regular boom-bust cycles, sending ripples of destitution which could trigger a totalitarian backlash in Western democracies.
To Mr. Soros, the problem with laissez-faire capitalisation was that its underlying economics had unrealistic assumptions such as the concept of ‘equilibrium’. A better approximation was ‘reflexivity’ in which the perceptions of economic agents determined reality: This was observed in financial markets where buyers and sellers discount a future that depended on their own decisions.
As a result, prices fluctuated in boom-bust cycles rather than tend towards ‘equilibrium’. Economics minus equilibrium was not a science.
For what made it so dangerous. The uninhabited pursuit of self-interest unleashed only excessive individualism. Too much competition and too little cooperation caused intolerable inequalities and instability. Unless a recognition of common interests took precedence over particular interests “our present system was liable to break down”, he argued. A repentant Mr. Soros now believes that the rule of Mammon is complete.
Back to ‘rampant capitalism’, this rule of Mammon is best exemplified by the US Treasury-Wall Street complex which is aggressively trying to push for an unbridled role for short-term capital to slosh around freely in the world economy. Despite the havoc that it is bringing in its wake, the capitalist interests oppose any form of controls even of the social net IMF variety. Instead of enabling the crisis-ridden economies to cope, these interests push for more openness.
The magic of the markets thus amounts to a brutal social Darwinistic process in which only the fittest survived. As the successful tiger economies fell like dominos, most countries today are less enthusiastic regarding this form of capitalism. The laissez-faire doctrine has become a bad word when the Asian contagion is spreading to Latin America and depressing stock markets around the world. Russia’s predicament only fuels such fires.
The pendulum is shifting towards unnecessary controls over the economy. Reliance on market forces is less important as the world economy hovers on the brink of & generalised depression. Not surprisingly, observers are drawing parallels with the 1930s when radical critiques of capitalism surfaced till the Keynesian revolution saved the system from breaking down completely.
With no such revolution in the offing, the world economy is passing through its gravest crisis. Each country is left to fashion its own policy response to save itself from the turbulence all around. Maybe a better mix between statism and reliance on market forces may emerge in the process.
Maybe technological change can provide renewed impetus for long- term growth. May be a European Union sort of coordinated policy response will find more adherents in the days ahead. Capitalism is under threat as never before.