Wednesday, August 3, 2011

Capitalism vs Communism

Capitalism vs Communism

The above comparison stands alongside other dichotomies such as good vs evil,God vs Devil, victory vs defeat, with us vs against us, as a notorious example of framing a debate in terms of a silly binary choice. Needless to mention, this approach is incredibly wrongheaded not merely because it does not consider a third alternative, but more importantly, confines you to think about the issue in very narrow terms. It already establishes a narrative for confronting the original issue that led to this false choice being presented as a genuine option. Of all these misleading binary divisions, this one is amongst the most dangerous of all in the modern political milieu.

Why must it this be so? To begin with, it is really asking you to make a choice between two economic systems (strictly speaking, one is also a political system) without addressing what the basic motivations are? Imagine if you knew nothing about the history of the world, or the economic paradigms that have existed, but you have some basic sense of what is right and wrong (yet another dichotomy!), and if faced with a choice as this, how would you react? Most certainly with confusion and bewilderment. What must be even difficult to understand is how people are able to declare their allegiance to one over another without much thought to how it actually relates to the basic questions of right and wrong. What are the reasons behind their ideological inclinations. Either they find one or the other appealing as an economic system, or they use history as evidence to choose between the two. It is very important to observe here is that these two approaches are almost completely unrelated to one another i.e the theoretical foundations of the politics and economics that are espoused by these systems is very different from what their actual realizations were. That is not taking into consideration the various strains of thought and varying ideas - sometimes leading to contradiction- that exists even at the theoretical level. Thus, if historical examples are compared to determine political orientations, then the debate is about the realizations of these ideological systems and not their original formulations. Then we have already stepped away from thinking through from basic principles about what is the best system to adopt and merely used the historical precedents to arrive at a decision. I consider this an intellectually lazy attitude that fails to question the basic mechanisms behind the structure that built on (ostensibly) these ideological systems. But, as some defenders of such thinking will will argue, the principles, ideas, and guidelines laid out by their respective political philosophies will, inevitably, naturally lead to the kind of monsters that we normally associate with them. This is untrue.

Capitalism, as an economic system in theory(and whatever liberal-democratic political philosophy it accompanies) , does not require or accept sweatshop labor as a fair system just as communism as a theory does not call for forced labor camps to send dissidents. Neither does capitalism - as a political philosophy, again- ignore environmental destruction regarding it as a burden for future generations to be worried about nor does communism suggest ignoring victims of famine and callously allowing millions to perish. Capitalism does not call for integrating the economic system with military imperialism or any other asymmetrical relationship enabling domination and oppression of the weak. In much the way communism does not require every singly political party in the world to abandon independent policy and follow the line of some megalomianiacal leader. Capitalism does not imply state corporatism and communism does not imply bureaucratic nightmare. Capitalism does not demand violently crushing labor movements and communism does not demand complete censorship. Capitalism does not require state terrorism to impose its system elsewhere and communism does not need agent provocateurs and propaganda to sustain it. Inequality does not follow from capitalism much like economic stagnation does not follow from communism. Capitalism does not need right wing dictators maintain order and likewise communism does not require their - equally brutal - "left wing" counterparts. The principle of "invisible hand" does not imply (according to Adam Smith, mind you) leave-everything-to-the-market-and-we'll-all-be-happy-ever-after and "dictatorship of the proletariat" was never meant to be understood as we do so today. Capitalism does not promote individualism anymore so than communism. The list goes on...

It is simply unquestionable in the light of these facts that we have to separate the theoretical underpinning of these philosophies from the real-world materialization of political and economic systems either devised by individuals or organizations at their inception and/or metastasized into the complex forms they have assumed. If of course we refuse to be confused and dismiss these false associations, then the only other rational way to choose one system over another is for us to consider their basic premises, their various assumptions,the arguments and reasoning that are employed to construct a social, economic and political theory based on those premises. All of this comparison is meaningful only if, at the end, it complies with some core principles. What would those core principles be? Would it be the "liberty" to drive a gas-guzzling vehicle when it is responsible for speedy destruction of the environment and depletion of limited natural resources? Would it be that education and basic health services must be available only to those who can afford them? Would it be the principle that the market should always determine the wages even if those wages are criminally low and creates enormous disparity in wealth? Or, on the other hand, do you want a giant bureaucracy that involves inefficiency and waste? Do you want the state to adopt a completely protectionist policy and ban all imported goods ? Do you want hard-earned money to be simply given away to maintain that same bureaucracy? Do you want to navigate through tons of regulation before you get an innovative idea to translate to a successful enterprise? The answer, I hope to ALL, is no. What do we want then? Although there will always be disagreements, we can spell out a few of what these core principles are. These include upholding fairness and justice for all and protection of fundamental liberties. Just to be clear, what I have stated in one line as some unambiguous fact, has been extensively debated by philosophers, political scientists, legal theorists and economists for ages. I am not going to pretend that they all just missed some basic point. I can acknowledge that and at the same time claim that there are several cases where the reasonable and fair position is more-or-less clear. As an example is the assertion that everyone born into this world has equal opportunities (or, more accurately, equal consideration). This is an ideal that has found universal acceptance and you will hear lip service to that even from the worst tyrants on this planet. Now consider a situation - a fairly common one - where we have evidence that children born into families with lower socio-economic status have much fewer opportunities in their life, thereby not only violating our principle but also creating generations trapped in the same status. It would of course lead to a heated debate on what exactly the approach must be but it must be obvious that the existing situation cannot be acceptable. Consider another case - also very prevalent- where your income is taxed significantly but there is extreme secrecy about how that revenue is allocated, its accountability, oversight, and audit. The ostensible reason for taxing is the greater common good and that includes at the minimum, ensuring safety from crime and vandalism, protection of basic liberties, fending off external threats to the society, arbitrate cases of alleged violations of law. If these are the stated aims, then it is again obvious that much of the dealings of the authorities and agencies handling the public money must be open to review and answerable to the taxpayers. This would be a legitimate case where the "fairness and justice" requirement demands greater transparency. The same arguments can be furnished for secularism, civil liberties – no discrimination of racial or religious minorities, reproductive rights, consensual sexual relations with any adult and even treatment of such cases under law, freedom from arbitrary arrests and detention, assumption of innocence before proven guilty, protection of privacy, defence of free speech-, independent and free media, proper procedures for copyright, protection of environment and natural resources, long-term sustainability of projects etc. There are many more but the general idea must be clear. We need to ensure that individuals are treated as such -as entities in and of themselves,and when sacrifices are necessary for the common good, the burden must be fairly distributed. A government requiring the poor to bear the brunt of savage cuts to heal the financial health that was brought into disarray by the wealthy cannot be considered a fair society, whether it proudly calls itself capitalistic or communist. The point then is what kind of broad economic and political system must be adopted by the political entity -which can be safely assumed to be a nation-state (idealistic visions of anarchy,aside) - in order that these ends are met?And this ought to be the question you should ask and whatever narrative is constructed must be based upon these ideals, and those narratives must never assume greater importance than the ideals themselves leading to absurd abstract binary choices like "Communism or Capitalism?"

Still, it worthwhile to to consider in some more detail what the precepts of each economic system would entail in different scenarios. This would highlight even further how ridiculous it is to talk in terms of such misleading choices. A typical example of ideological posturing is taking sides on the question of free trade vs protectionism. We consider two situations: in case A, we have two nations X and Y, and X is most efficient in production of electronic goods and Y manufactures automobiles at the lower price. If we allowed free trade, then X can focus on electronics and export them while simultaneously importing automobiles from Y. Doing so would benefit both economies and we have a fine example of Adam Smith's principle. If you stubbornly reject free trade, then nobody stands to gain from it - productivity is reduced in both nations and inefficiency is being promoted. In case B, we introduce a third nation Z, which is largely an agricultural society and is able to produce food crops at the most competitive price. Now, consider free trade between Z and Y. Proceeding along the same lines as in the previous instance, we are tempted to declare that a free-trade arrangement would be best choice for both nations. However, there are other factors we have to consider that were not as important in the previous case. The amount of food crop traded for a single automobile would clearly be quite considerable. Now, depending on the size and output of the two countries, there is a good chance that this kind of agreement would lead to annual trade imbalances in favor of Y -the total value of food traded exported would be less than the value of the automobiles imported. This situation would mean that the national debt of Z would grow steadily and that make its position less powerful and vulnerable to unfair policies and practices against it. More significantly, this would imply that Z would be never develop the technology to manufacture automobiles and as a consequence not only become dependent on Y for it, but also possibly never cultivate industries that are connected with automobiles – iron and steel, material sciences, assembly line standards, research in mechanical or chemical engineering. If this status were to be maintained Z would permanently remain an agricultural country without any industrial capacity or production facility or high-tech research. Its people will have little option other than having to do the same farm work forever. Obviously, I have simplified things here to focus on an important issue - the necessity for the state to intervene and impose certain protectionist measures to develop indigenous industries. Thus, it may be necessary for its citizens to pay more for a product produced locally but it is a required sacrifice if in the long run the country needs to remain competitive in global marketplace. In other words, in this case, insisting on free trade without paying attention to the specific details of the economic structure would be impose unfair conditions between nations. These two cases illustrate that one cannot take a simple-minded universal approach and apply that unconditionally in all situations.

Another example is the debate surrounding minimum wages: is it required? Again consider two cases, one where a company can employ N workers. If the total number of people who are seeking this job is of the same order of N, say 1.5N or 2N, then it would be reasonable to assume that the wages can be fixed by the market. If in case a job-seeker is greedy and  demands more money than what is fair, then a more reasonable person will be prepared the same work for less, and that person is eventually employed. This would be a fair system for both the company and the workers. However, considers a variation where many people are out of jobs- and this can happen for any number of reasons, and so several more (say 10N) are applying for the limited number of openings available.If then the wages were to be still determined by the market, then the company can easily exploit the people's desperation and make them work for a lot less than what is fair. This situation calls for some kind of minimum wage because otherwise these market-equilibrium low wages can easily become standardized and the exploitation will continue. So we have to evaluate the conditions of the economy before we can arrive at a decision. In other words, taking an a priori position on it, without reference to empirical facts of the situations would be wrong-headed.

A third example would be regulations on businesses. Do we require them ? Like in the previous two examples, we can think of the first case where the government imposes several rules on running the business. For definiteness consider the business here is to be a  restaurant. The constraint can include entry into the market,  quality control of the food, commercial building laws, complicated liquor licenses, heavy taxes, various consumer protection laws, labor laws to protect employees, employment mandates and holding the business liable for a number of different scenarios. If that happens, there is strong disincentive to even start such a business, not least because of the paperwork, government interference and the possible bureaucracy and corruption accompanying it. This would raise the price of the food served, decrease competition, create inefficiency and generally slow down the economy. So it would be in the best interest of everyone to minimize the restrictions and even provide additional incentives for such businesses to thrive. In the second case, instead of a small family owned restaurant imagine you have a giant corporation that uses assembly line methods to produce cheap, unhealthy - possibly dangerous -fast food while polluting the environment, exploiting cheap labor, using predatory pricing to drive out competition, using economy of scale for the same purpose and effectively transforms entire eating patterns of the region -possibly entire nation and beyond- to create obesity and cholesterol problems, which increases treatment costs of the people (possibly government). What needs to be done here is obvious. But, oh wait! The smart ass free-marketer will step in, and tell me there is simple solution :you always have the obvious option of eating better food. This 'simple solution' ignores several things – possibility of said corporation outlets driving out other high-quality businesses serving better food, its cheap products obscuring quality of ingredients without full disclosure of the health risks involved, misleading promotions and advertisements and consumer's unwillingness to be worried about environmental costs or labor issues. Nothing can rein in such cancerous growth other than some control by the state. Again here, we see that we cannot employ a one-size fits all policy to regulate the economy. Empirical evaluation is key.

The same is true when it comes to globalizationas well. People are usually split between two reactionary camps: (1)globalization is an utopia that can reach the remotest parts of the world and expose them to a plethora of new possibilities or (2) globalization destroys economies, people's livelihoods, promotes neo-imperialism/colonialism. First of all, much like capitalism or communism or even a giant energy conglomerate, globalization in theory– as an idea, in and of itself – is not predisposed towards (1) or (2). It is merely a description of an global economic framework where economies of nations are integrated with each other. Just like everything else, this integration can be mutually beneficial or it can be asymmetrical or it is just more bureaucracy  or – as it mostly the case in practice – it benefits the financial elite in each of these nations at the expense of the majority. To those taking position (1), we need to point out the tremendous risks that arise from economic arrangements between small, poor underdeveloped nations and large industrialized counterparts. Large international corporations can easily bribe corrupt government officials in the third world and take complete control of a certain field where oil reserves are discovered and make immense profit out of it, without giving a penny back to the people on whose land it was extracted from (this happens regularly, by the way). On the other hand, shunning the global marketplace can be equally dangerous as globalization can enable export driven sectors to expand and can also provide a measure of economic stability by increasing valuable foreign exchange reserves.
It can also create the right environment for growth in certain sectors, which can in turn stimulate the economy and sustain it. Yet again, everything depends from case to case and holding to some rigid ideology would prove counterproductive.

The same simplified binary thinking accompanies debates on such abstractions as: privatization vs nationalization, regulation vs deregulation, supply side economics vs demand side economics,
market economy vs command economy, welfare vs no welfare, monetary vs fiscal policy etc. This way of framing questions is deeply flawed because it does not address the primary principles of fairness, justice and liberty that I have talked about. Choosing a command economy or a market economy should not be an ideological battleground and the debate should focus on reforms that can make the system more fair while curbing waste and inefficiency. Of course, there are no clear mathematical theorems  that can maximize some fairness-based utility in all situations but one thing is certain. Empirical evidence is infinitely more important than mere ideology. Macroeconomics is very complex for no reason other than the fact that there are so many factors involved, and on top of that, we have human irrationality – that makes people eat in those cheap, shitty, dirty fast food chains -that makes it all the more difficult to be prescribe correct policy. Still, if we stick to an empirical methodology and then constantly make changes to existing policy based on periodic evaluations we'll do much better than sticking to some misguided abstract thinking.

End Notes:
a. I have conflated economic system with political philosophy and that is not correct, but the context should make it clear.

b. It would be more accurate to discuss this as “capitalism vs socialism” but I just wanted to point out how ridiculously battle lines are drawn in politics and the general associations that are made.

c.China of course combines market economy with a single-party authoritarian regime and it has achieved a lot. No wonder many people who indulge in such ideological posturing don't refer to it.

d. Not everyone thinks this way but it is really pervasive.Couple of economists who I consider as being above this are Amartya Sen and Joseph Stiglitz.

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