CISF Exams Essay: Where Does Capitalism Go from Here?

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But where does capitalism go from here? Always a broad crunch, it seems all the broader now that the competing paradigm the command economy is dead. Will the various species of capitalism American, European, East Asian, to name but three come together or move further apart? Given the new demands that will be put on developed economies over the coming decades, will western capitalism of a recognizable sort even survive?

The main varieties of capitalism have always differed in significant respects. In America, for instance, shareholders have a comparatively big say in the running of the enterprises they own; workers, who are for the most part only weakly unionized, have much less influence. In many European countries, shareholders have less say and workers more. In Germany, for example, the representatives of unions serve on supervisory boards; the companies'principle bankers also have plenty of clout in the strategic decisions of management. On this spectrum, Japanese capitalism lies even further away from the American variety no role except to provide capital, managers have been left alone to run their companies as they see fit namely, for the benefit of employees and of allied companies, as much as for shareholders.

Despite these differences, all species of capitalism have had certain essentials in common. These are the things that will need to be preserved if liberal economics is to go on to further success. First and foremost, capitalist countries have separated, to a high degree, the realms of politics and economics. As a result, in capitalist countries it makes sense to think of each of these realms in its own right. Decisions about what goods and services are provided, by whom, to whom and for how much, are made for the most part in markets, by willing buyers and sellers. Governments in capitalist countries participate in markets, often in big way, either as buyers or sellers, or as regulators. But they do not except in certain narrow areas usurp the price system altogether. When they hire civil servants, for instance, they pay a market wage according to the kind of worker they wish to attract. Put it this way: In capitalist countries, the extent of government intervention is a matter of politics; the manner of its intervention is, by and large, a matter of economics.

Under communism as under feudalism, by contrast, the political and economic realms were essentially one and the same. Those in power exercised their claims over resources in fundamentally nonmarket ways. Illicit transactions aside, these systems left little scope for voluntary economic arrangements. Private ownership has usually been a feature of capitalist economies. Certainly, it is a natural counterpart, a reflection of the separation of politics and economics. But it is not in fact a necessary counterpart because, in achieving that separation, control matters more than the ownership does not guarantee control.

That is why you could argue, for example, that for much of the 1980s southern China was a more capitalist place than India. In southern China state ownership of property was and still is the rule, but enterprise managers like farmers throughout China were given increasing freedom to run their business themselves. Even without private property, a separation o£ politics and economics was achieved, and the price system began to direct the allocation of resources. India, on the other hand, has much more private ownership, but until the reforms of the early 1990s it also had a system of state control that rivaled that of the Soviet Union. A factory making bicycles needed permission to increase its output, or to reduce it, or to start making a new kind of bicycle. This license raj was so pervasive and intrusive that, in effect, it unified the realms of politics and economics, despite the existence of private property.

Capitalist economies, despite such institutional differences, also have much else in common. In the market system that flourishes when politics and economics are kept apart, decisions about the allocation of resources are highly decentralized. Instead of an explicit organizing intelligence, there is spontaneous and unwitting coordination the invisible hand. Instead of planned cooperation, there is competition. This competition extends far beyond the static rivalry of elementary economic theory that is, far beyond competition among existing producers and their products. It also encompasses competition among new, would be producers, ideas of the products yet to be invented, alternative means of production and different nodes of industrial organization.

Because capitalism is decentralized and competitive, it is especially good at conducting experiments. This may be its greatest strength. Experiments can be conducted on a small scale and at correspondingly small expense in resources. Successful ones reap big rewards. That, of course, provides the incentive to undertake the experiment in the first place. But profits are also the signals for others to follow, so successful innovations of product, service, method of production of mode of organization are quickly taken up elsewhere. Equally important, experiments that fail as the overwhelming majority do. Can usually be abandoned with comparatively little pain, and at no cost to the politically powerful.

These conditions offer the maximum encouragement for efficient innovation. It is unsurprising; therefore, that western capitalism has been relentlessly innovative. Rapid development in East Asia has already caused much tension over trade in America and European Community. As economic liberalization spreads, the pressure of competition on the west's low and medium tech manufacturers will increase. The US already runs large bilateral trade deficit with China, a fact the. weighed as heavily in last year's debate about what tariffs to set on China's exports as did protests over China's infringement of civil rights. Opponents of America's free trade agreement with Mexico emphasize the threat that cheap imports pose to America's manufacturers. In the same way, the European Community has been inexcusably slow to grant the reforming countries of Eastern Europe liberal access to the Community's markets. These are disturbing, if unsurprising, signs that the spread of capitalism in the poorest parts of the world may undermine support for the market economics in the countries where it has already worked well.

Against the pressures threatening to undermine capitalism in the coming years, the strongest countervailing force is likely to be technology, and especially the revolution in communications. In many industries technological progress has reduced the fixed costs of production, making it easier for smaller firms to compete with larger ones; or else it has developed new products that broaden the possibilities of competition in another way. The communications industry itself is a striking example. Where there was once a natural monopoly needing to be regulated, namely the telephone company, there will be competition in the future.

The same phenomenon is likely to become more common in other sectors. To deal with it, governments will try to cooperate with each other in devising new systems of international regulation for example, the BASLE capital standards for banks, or the harmonization of national rules in the European community. But this is difficult, as it is likely that technology will continue to move faster than governments. As these opposing forces work themselves out, governments of every political complexion ought to keep two broad choices in mind. One, in effect, is to give way to the pressures that will tend to impede the market system. That is, to favor more trade protection, help for declining industries, an eve: Expanding welfare state, and measures to limit cross. Border regulatory avoidance. This may well be the course that best responds to popular demands. But it is also the option that operates against change, and hence against growth.

The alternative is to continue the work of the 1930s, in both rich and poor countries, to extend the scope of the market. It means, among other things, free trade; policies to protect workers unlucky enough to be in declining industries, rather than policies to save their jobs; and a welfare state that helps the poor, not the middle class. This may be politically impossible; capitalism is held in low esteem in the countries it made rich. It is, nonetheless, the pro-change pro-growth choice.