Foreign Policy – usually an interesting magazine publishing refreshing articles came up with a sorry, very sorry article in its latest edition. Robert Reich’s published on: “How Capitalism is Killing Democracy” Tagline: “Free markets were supposed to lead to free societies. Instead, today’s supercharged global economy is eroding the power of the people in democracies everywhere. Welcome to a world where the bottom line trumps the common good and government takes a back seat to big business.”
Yet this terribly misguided article is a good excuse for me to get into a few clarifications on what “capitalism” is all about. Definitions of capitalism differ according to the ideological stance one has towards it. Just try to google the term… I for my part defend capitalism. I defend capitalism as an economic order based on market principles. What I don’t defend, however, is Big Business. This because I don’t believe Big Business is “proper” capitalism – it is not a system of “natural liberty” (term inspired from Adam Smith) . Wherever big business rules, and therefore undermines democracy, you can be sure to find that in fact big business does not mean free markets at all. German cartels in the late 19th Century went hand in hand with an authoritarian Prussian regime. Today’s “ultracapitalist” Russia is the rule of oligopolistic structures co-operating with an authoritarian regime. Burma’s case, with the issue of forced labour provided to oil&gas giant Total is an example of what is wrong: absence of even the most basic rule of law, and a monopolistic rent-extracting industry.
What the capitalist system requires to really function is:
1) Not only private property rights. Secure property rights. For all – not only for the elite. I recommend Hernando de Soto’s “The Mystery of Capital” on the need to provide safe legally recognized enforceable rights to the world’s urban slum-dwellers. This gives them a collateral to access, for example, financial services and invest in new activities. “Russia Inc”, as it is called, is all but a system of secure private property rights. No business however big is safe from arbitrary expropriation. The recent case of independent oil major Russneft being simply swallowed up by Putin’s favourite oligarch, Oleg Deripaska, is a case in point.
2) Not only markets. Competitive markets. Markets exist almost everywhere. What counts is to make them really competitive and contestable by newcomers, so that they spread the benefits as widely as possible. To foster competition requires very sophisticated legal and political systems that don’t let themselves be captured by the interests of “big business”. This is a very difficult task when we are confronted with heavy knowledge-based industries (such as pharmaceuticals), network-based industries (such as IT or telecoms), or capital-intensive industries, especially when they deal with “fixed assets” such as oil. But the Microsoft cases or the current talks of liberalisation of energy markets in Europe show that governments are not powerless. As Razeen Sally reminds us in his book dedicated to “Classical Liberalism and International Economic Order”, the market system is one of “individual choice. The market order, more than any competing economic order of any realistically conceivable political order, facilitates and vastly expands the individual choice of means and ends by recourse to ‘exit’ – in economic terms, the consumer rejecting the products of one supplier in favour of those of another”.
3) Justice and the Rule of Law. This is the basis of it all. Razeen Sally’s investigates an almost forgotten branch of market liberalism, the original, basic, “classic” one originating in David Hume and Adam Smith. It reminds us how much the likes of Adam Smith insisted on the need to have a strong legal system of justice to avoid predation between individuals or from the state. “Hence the supreme importance of an appropriate legal framework to mediate between clashing interests and reconcile individual self-interest with the public good. Classical liberals strongly believe in “liberty under the law” and therefore a qualified, not an absolutist, laissez-faire”
Let me conclude with a quotation from good old Martin Wolf’s “Why Globalisation Works” :
“The claims that companies are bigger and more powerful than countries is (…) misconceived. For lurking behind those claims is a wilful error: a refusal to distinguish power from freedom. Companies (…) are civilian organizations that must win their resources in the marketplace. They rely for survival not on coercion but on competitiveness”.