The Current Crisis of Capitalism

The Current Crisis of Capitalism


The ongoing crisis of capitalism that emerged in 2008 and continues in various degrees and manifestations has caught up the whole of the western economic landscape. Very recent shocks, or aftershocks for some, can be witnessed in Greece, Spain, Italy and Portugal, making it the most discussed issues in the present day discourse. While it is true that North America and Western Europe were the epicenter of this economic tumult, its multifaceted implications and consequences are felt in all parts of the world. Many divergent perspectives regarding the current crisis are floating among the intellectual circles, where some would call it a ‘financial and banking crisis’; some other would term it as ‘the crisis of economy’; several others would take it as the crisis of capitalism—the very paradigm on which the contemporary world economic system is founded; yet many would see it as the crisis of economics—the fundamental philosophy and science of modern economy.

It is very significant that in the last 40 years, the world has witnessed two major economic ideologies of modern times in shambles: the collapse of communism in Moscow after swaying over almost one fourth of the world, and crumbling of capitalism in New York, short after having been claimed as “a single sustainable model for national success.”  Without denying the positive aspects and lasting effects of capitalism, the weaknesses of the ideology on which the whole system was founded as a central guiding force have been exposed. When the South East Asian crisis emerged, it was looked upon as ‘the crisis of the other world’. Then the crisis shifted to the heart of capitalism, the United States of America, and shook the big economies to their core.

The way the science of economics failed to foresee, foretell, warn and, in the post-crisis scenario, could not provide a way out of the turmoil, a great many economic scholars and thinkers are reflecting upon the current crisis not merely in terms of crisis of economics but a crisis of civilization.
In this context, it becomes pertinent to delve deep into the fundamental philosophy of capitalism, the flaws in the empirical and applied dimensions that gave birth to the current crisis, possible alternatives to come out of it in the short and medium term, and long-term solution to the perennial economic and financial miseries of global world.

Zafar Iqbal•

Scholars differ on the precise definition of capitalism. At one extreme are philosophers, such as Ayn Rand , who take capitalism as synonymous with libertarianism and consider it as a comprehensive social system consisting of a set of moral-political-economic principles embodied in a society’s laws, institutions, and government, which guarantee each person freedom to forming aims, objectives, allegiances, commitments, relationships, and plans of action in accordance with some overall conception of good that he/she chooses to value rather than someone else opts on his/her behalf. As Sen  elaborates, as such the emphasis of libertarianism is on the process aspect rather than the opportunity aspect of freedom. The former in turn consists of two elements: autonomy of individual choices and immunity from interference by others.

The crucial issue in case of autonomy is whether choices are being made by the person concerned rather than by other individuals and institutions on his behalf. For immunity, the focus usually is on ‘negative freedoms’ i.e., the absence of obstacles external to a person—coercion and legal prohibitions—that prevent willful action. This libertarian stress on negative freedoms then translates into a number of rights to life, liberty, property (and that includes protection against theft, fraud, and breach of contract), the right to defend against violation of these rights, and the right to punish transgressors against these rights.  In a nutshell then, capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned and all human relationships are voluntary and contractual in nature.   

The ethical theory underpinning the capitalist social system, according to Rand, is objective theory of values, which construes good neither inherent in certain things or actions, regardless of their context nor a matter of arbitrary, subjective, emotional states of mind (which respectively refer to the intrinsic and the subjectivist conceptions of good), but rather the good is an aspect of reality in relation to an individual, which must be discovered according to a rational standard of value, not invented.  Here, the capitalism’s emphasis on individual rights is a case in point. It implies that the good is to be rationally conceived by an individual in relation to his/her living conditions and is not to be derived from some ineffable abstraction in a transcendental dimension divorcing the good from its beneficiary. Accordingly, concepts such as ‘the common good’ or ‘the public interest’ are considered as meaningless and untenable: individuals alone ought to be taken as a basic unit in the analysis of social phenomenon (methodological and normative individualism). In Rand’s words, “Nothing can be good for the tribe as such; ‘good’ and ‘value’ pertain only to a living organism—to an individual living organism—not to disembodied aggregate of relationships.”   

Market exchange then becomes the cardinal mechanism of governance in the libertarian conception of a social order since free market represents the social application of an objective theory of values. To wit, the market value of a product or service is neither an intrinsic value nor a subjective one but instead a socially objective value i.e. a value incorporating the individual judgments of all the persons involved in trade at a given time. Second, the market provides unfettered opportunity for people to translate their knowledge into a tradable product or service, indulge in a voluntary exchange of their products or services, and be responsible for the outcomes—be they good or bad. Third, a freely competitive economy requires minimal government intervention as it is regulated by the ‘invisible hand’ of the law of supply and demand. Sovereign consumers regulate a free market by selecting the goods and services offering the greatest value. Producers compete for consumers’ business by providing the highest quality goods at the lowest possible prices. From the pursuit of profit—narrow self-interest—by individuals, comes the ‘greatest good for the greatest number of people’.

The economic implications of the above social arrangements are worthy of note. First, distributional consequences of economic arrangements depend on existing allocation of property rights. Thus resource distribution as starting point has to be justified in some normative sense. Second, procedural rules for further entitlement have to be clarified in order to lower transaction costs, encourage investment, and mitigate socially wasteful effort. Third, the pursuit of certain economic goals has to be ruled out.  These requirements are catered by rules of entitlement.

John Locke (1632-1704 CE), for example, considers natural resources as the common property of mankind but grants rights of entitlement to those who mix their labor with these resources. First-occupancy is implied. However, spoilage and destruction are prohibited as enough good must be left for the rest. Above all, each person has a right to subsistence when others are living in plenty.  However, in the footsteps of Nozick,  contemporary capitalists are unwilling to concede the right to subsistence. Also, the rules of acquisition are re-interpreted to mean that an act of appropriation must not worsen the situation of others in terms of using (not owning) what they could previously do.

This opens up the way for concentration of resources in few hands on grounds of higher productivity. Rectification of past unjust acquisitions is limited to living generations. And, voluntary transfers through bequest, gift, and trade are freely permitted. Nevertheless, certain important issues remain unexplained. According to Musgrave, these are: why earnings from capital have an entitlement claim pari passu with earnings from labor.  Also, whether voluntary exchange of rights alone—and not through a competitive market—is a sufficient condition for legitimate entitlement? What about transfers at death which do not constitute the fruit of the recipient’s labor? Finally, how should externalities be dealt with?

From a libertarian standpoint, given initial property rights and a procedure for further entitlements, protection cannot be left as everybody’s business. A civic society/government must be established to protect property and prevent coercion, fraud, and deception in contractual arrangements that are primarily entered into on a voluntary basis. This creates scope for police and judiciary, which is extended to defense against external aggression, period. Persons join in, on their own accord, as free and equal. Financing of protection costs is on a quid pro quo basis. Such a ‘night-watchman state’ indulges neither in the provision of public goods nor in redistribution and any taxation for purposes other than ‘minimal’ state is condemned as ‘forced labour’.  Here comes the challenge to the puritanical vision of the establishment of a capitalistic social system. Can negative freedoms be of any value to a person without the positive guarantee of the fulfillment of basic needs?

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