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Capitalism vs Democracy or Capitalist Democracy?

The current financial crisis has created a very interesting situation where not only the government and quasi-government institutions have underperformed, but more importantly, the different founding principles of a modern western state have been at odds with each other.

Lack of regulation enforcement

While the businesses were doing what they were supposed to do – maximize profits – the law and standards enforcing agencies were not doing their job properly. In several sectors the regulations were either not there or were very poorly enforced.

There are certain criteria that have been followed in giving loans in saner societies and business environments. Those principles were abandoned in order to maximize profits. These were standards and guidelines and not laws.

Formal laws and Guidelines

In a democracy, in order to function properly there are certain contractual elements that are always laid down as laws and some are added as “guidelines” (or standards). While laws and formal regulations tend to add red tape and bureaucracy and hurt flexibility, the standards stand on the willingness of the various players of the society to voluntarily follow them in as “gentlemen rules”.

Some agencies are there to add penalties but most of the times, their authority and powers are limited. When a “guideline” is flouted blatantly, then the society responds by creating laws to compensate for them. This movement of a “rule” from the realm of Guidelines to the Law realm restricts the ability of a society to function and respond to emergencies promptly and flexibly.

The success of Guidelines as a useful element of the society’s “Rule infrastructure” is predicated on voluntary action and a basic foundation of trust in the bona fide intentions of the “other”. It can be said that the societies in which the “Trust factor” in voluntary action is high have lower red tape and better economies and vice versa. It is no wonder that the countries which have high corruption also have high red tape and also very low “Trust factor”. For a democracy to best succeed, this “Trust Factor” is absolutely essential!! Otherwise its slide to either dictatorship or complete anarchy (and soon both) is a certainty, for Red Tape “grows up” to become dictatorship.

Notwithstanding the wiping out of people’s wealth, in my view, the biggest tragedy and loss of this financial crisis has been the erosion of a substantial amount of “Trust Factor” – which will, in all certainty be sought to be enforced by Laws and Regulations instead of the erstwhile Guidelines. The world of “Trust Factor” is a one way door. You never come back. The move to higher red tape, more bureaucracy and higher controls and therefore more corruption. Why corruption? Because the motivations and aspirations do NOT reduce in proportion to the hurt to flexibility, but the means do. The motivated find ways to beat the laws to keep the prosperity and means of it at the same level.

Wealth can be earned back. Trust and Honesty cannot.

Capitalism

One of biggest culprit of the current crisis has been identified as “Greed” and there are analysts who say that Greed has somehow put Capitalist ideals at risk.

Nothing could be farther from truth! Capitalism is NOT a system which decries “Greed” but acknowledges it. It presumes (as a going in position) that humans are by nature greedy. But this greed can be harnessed for the good of the society if it can be “managed”. It is the Greed to earn more profits that led Henry Ford to create an assembly line to bring out hundreds and thousands of cars and not just a few! It was greed that led Bill Gates to create a “Toll Gate” business out of an Operating system. THAT was the successful harnessing of the basic “Human Greed”.

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On the other hand, Socialism abhors “Greed” and seeks to curb it and divide everything equally amongst all. Profit is a sin.

Capitalism, therefore, thrives on individualism and – its corollary – greed. To deny Capitalism the benefits of Greed is to deny a plant the critical sunlight.

And, that, to me has been the most surprising revelation. That, people and thinkers who were brought up in a Capitalist society – Lou Dobbs and others like him – have virtually forgotten the basic elements of their economic system.

Democracy

This is another important principle of the modern society. But what is it? In the last decade or so, democracy has been mocked many times and shamelessly.

“Democracy is by the people, of the people, and for the people” said a wise man (Abraham Lincoln) many decades back. In a very succinct way he brought in all the important elements of this system of governance. Democracy is a system of governance that needs the ovum of freedom to be fertilized by the sperm of acceptance and diversity. If any of these two players are missing, then you may kid yourself and call it a Democracy, it is however anything but!

It is this reason why, when the leaders of today’s “greatest” democracies give a call for “Installing Democracy” in a country where fanatical temperaments rule the lives, that I am amused. If Democracy is indeed “by the people” then, pray, how does one “Install” a democracy??

Installing Democracy is the Oxymoron of a millenia!

India-Pakistan are two case studies as close to a “laboratory conducted” experiment in the factors that contribute to thriving of a democratic political system as it can possibly get.

Both came to existence at the same time and had the same sample to choose people from but very different histories since!

The initiation of the independence struggle was a very instructive one. In my view, it is NOT the usually cited protagonist Gandhi who was responsible for sowing the seed of India’s democracy but his predecessors!

Dadabhai Naoroji, WC Bonnerjee and others – who created the first platform, the Indian National Congress, were the ones who brought about a new paradigm. They suggested that instead of fighting, let us Indians work “along” with British to create a system of governance within overall Autocracy and one day bring about the transition when the time comes. They had a belief that it is NOT the fighting and throwing out the British that was crucial for Indian freedom but also getting the ability to manage ourselves in a civilized manner that was to be the most crucial element of our longevity as a nation.

In that journey, came the idea of “Two Nations” based on religious difference. One group felt that in a system that was based on equal rights to all with equal votes, majority will obviously have a greater say. The acceptance of this equal vote – that was the central element of democracy – became an anathema to that section. That was the birth of idea for Pakistan. Pakistan as an idea was therefore, an anti-thesis to the very basics and foundations of democracy. After eliminating the foundation, you may keep on calling that corpse as democracy but it is futile.

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While India continued on the journey of a multi-ethnic, multi-religious and multi-group society with “mutual acceptance” as the basic foundation of the governance, Pakistan decided to form a society for a few – despite the aspiration for a similar system. The first step to Pakistan was the last step of its masses on the ground of democracy.

Systems based on acceptance – not “tolerance” – like democracy cannot survive without that essential element. This is precisely also the reason why democracy cannot survive in Middle east.

Let us come back to the US democracy. The success of US democracy is that the individual voice is given credence. Notwithstanding its two-party and electoral college aberrations, still this adherence to individual voice has been unequivocal!

This adherence to individual voice also brings a certain “noise” and a cost. Democracies have to assume that cost. To deny or try to eliminate that cost and noise is to invite dictatorship and bury democracy.

Capitalism vs Democracy in the current crisis

When the Financial Rescue bill was brought to the table to be passed – it was the sum total of the individual voices along with the noise that they generated. It was not what a dictatorial society would have passed and be done away with the issue of the crisis in a jiffy, but it was the BEST that a democratic system could afford and come up with!

The so-called Capitalists (who kept decrying greed) kept riling against it. They completely forgot that they were citizens of US and US is a Capitalist Democracy! Both the adjectives are essential to its very definition! To erase one is also to erase the other.

The financial rescue plan therefore, was NOT an expression of a Pure Capitalist society… and also NOT an expression of a Socialist Democratic society… rather it was an expression of a Capitalist Democracy.

What is intriguing is that every society – whether Communist or Capitalist or Religious or Democratic – has its own journey of maturity. This journey unfolds a continuum where every stage brings a new complexity and it requires unique answers. What, however, cannot change are the central fundamental tenets. If you tamper with those, then the answers based on presumptions of continuation of that same system keep addressing a system that has moved on!

So, either change the fundamental assumptions that underline your answers or keep the fundamental tenets as sacrosanct. For any of those, you have to first appreciate and be RUTHLESSLY honest to yourself about what are those tenets?!! If there is even an iota of hypocrisy in your admissions and introspection, the rest will be irrelevant.

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Desh Kapoor

The panache of a writer is proven by the creative pen he uses to transform the most mundane topic into a thrilling story. Desh - the author, critic and analyst uses the power of his pen to create thought-provoking pieces from ordinary topics of discussion. He writes on myriad interesting themes. Read the articles to know more about his views and "drishtikone".

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8 thoughts on “Capitalism vs Democracy or Capitalist Democracy?”

  1. To – Mr>Desh Kapoor

    I am a graduate of IRMA (81-83) batch. I think I have contributed a couple of times earlier?

    Your analysis was a very good attempt to understand the problem. But having done the IRMA courses in macro economics (atleast this was taught during our days?) one would expect more nuanced analysis!

    There is probably not sufficient evidence now, to precisely state where the American financial system collapsed? No one predicted the magnitude – and when it happened, all the major players, both American and international seem to have gone into a deep shock? The fundamental economic rationale of the rescue package, is not clear? As apart from a general problem related to “sub prime loans”, one is not clear as to the extent of the damage?

    It would be interesting to attempt to get some more facts, on what actually happened? How did the rating agencies, who certify the loans for the large players, fail to spot such a huge hole in the balance sheet? What was the percentage of exposure to this market, and the associated pieces of paper, as compared to the whole portfolio? Which are the other banks and financial institutions, which are under risk? What is the exposure of Indian financial organisations? Now that the Indian stock market has tanked (Sensex coming down to 10,000 odd which is half of what it was a few months ago?) what is the implication for the Indian economy? And how does this all matter to “Apna Bharath” stuck in semi subsistence agrarian economy with low or zero growth rates?

    Regards

    S.Ananthanarayana Sharma

  2. To – Mr>Desh Kapoor

    I am a graduate of IRMA (81-83) batch. I think I have contributed a couple of times earlier?

    Your analysis was a very good attempt to understand the problem. But having done the IRMA courses in macro economics (atleast this was taught during our days?) one would expect more nuanced analysis!

    There is probably not sufficient evidence now, to precisely state where the American financial system collapsed? No one predicted the magnitude – and when it happened, all the major players, both American and international seem to have gone into a deep shock? The fundamental economic rationale of the rescue package, is not clear? As apart from a general problem related to “sub prime loans”, one is not clear as to the extent of the damage?

    It would be interesting to attempt to get some more facts, on what actually happened? How did the rating agencies, who certify the loans for the large players, fail to spot such a huge hole in the balance sheet? What was the percentage of exposure to this market, and the associated pieces of paper, as compared to the whole portfolio? Which are the other banks and financial institutions, which are under risk? What is the exposure of Indian financial organisations? Now that the Indian stock market has tanked (Sensex coming down to 10,000 odd which is half of what it was a few months ago?) what is the implication for the Indian economy? And how does this all matter to “Apna Bharath” stuck in semi subsistence agrarian economy with low or zero growth rates?

    Regards

    S.Ananthanarayana Sharma

  3. You are quite right that the greed can be harnessed for the good the society. But you missed one further point. Unregulated or poorly regulated greed can play havoc. And that is what happened in the US. It was not capitalism vs socialism. It was was greed vs unprotected or poorly protected consumers. In oreder to improve or perhaps window dress their own balance sheets finacial institutions gave each home buyer a poor balace sheet the day he/she purchased the home. It does not require a financial genius to figure out that this is speculative at best. If I am not mistaken it is not very hard to regulate against this kund of transaction. But these guys are obsessed with deregulations. That is exactly the opposite of harnessing the greed. That is letting greed loose.

  4. Dear Sir – In this article my main intent was to bring out the contradictions of Democracy and Capitalism as they played out against each other during the vote in the US… and the subsequent debate that went on. That just kept me amused.

    I think sub prime loans were the underlying factor. The rescue plan was primarily brought to address the Credit Squeeze… nothing more.

    I think the current situation has hit at some of the most basic and foundational principles of Macroeconomics – because one thing was missing… Trust (and as Morris said right regulations that could be implemented).

  5. You are quite right that the greed can be harnessed for the good the society. But you missed one further point. Unregulated or poorly regulated greed can play havoc. And that is what happened in the US. It was not capitalism vs socialism. It was was greed vs unprotected or poorly protected consumers. In oreder to improve or perhaps window dress their own balance sheets finacial institutions gave each home buyer a poor balace sheet the day he/she purchased the home. It does not require a financial genius to figure out that this is speculative at best. If I am not mistaken it is not very hard to regulate against this kund of transaction. But these guys are obsessed with deregulations. That is exactly the opposite of harnessing the greed. That is letting greed loose.

  6. Hey Morris – I tries to bring out the regulation bit in the second para but I guess I didnt do a good job. 🙂

    My point on the regulation was that there are always two ways to run the regulatory platform – one through formal laws and other through guidelines. Mature and intelligent countries use a fair share of both. As the formal laws become the main source of regulations, flexibility suffers. THAT is where the corruption also increases. This movement of regulations from guidelines side to the formal laws side is a one way street in the cases that I have seen.

    My contention is that THIS is the biggest loss of the American economy from this entire financial mess

  7. Dear Sir – In this article my main intent was to bring out the contradictions of Democracy and Capitalism as they played out against each other during the vote in the US… and the subsequent debate that went on. That just kept me amused.

    I think sub prime loans were the underlying factor. The rescue plan was primarily brought to address the Credit Squeeze… nothing more.

    I think the current situation has hit at some of the most basic and foundational principles of Macroeconomics – because one thing was missing… Trust (and as Morris said right regulations that could be implemented).

  8. Hey Morris – I tries to bring out the regulation bit in the second para but I guess I didnt do a good job. 🙂

    My point on the regulation was that there are always two ways to run the regulatory platform – one through formal laws and other through guidelines. Mature and intelligent countries use a fair share of both. As the formal laws become the main source of regulations, flexibility suffers. THAT is where the corruption also increases. This movement of regulations from guidelines side to the formal laws side is a one way street in the cases that I have seen.

    My contention is that THIS is the biggest loss of the American economy from this entire financial mess

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