Has the US capitalism failed? Sri Lanka wants capitalism or socialism?

 

I had the opportunity to read a book titled "WHAT WENT WRONG WITH CAPITALISM" authored by Ruchir Sharma and released last week. The CNCB and Bloomberg interviews with the author are attached here because they convey the key message of the new book (Click here for the CNBC interview).(Click here for Bloomberg interview).

The purpose of this article is to highlight the main message of the book and its relevance to Sri Lanka with the crashed economy at present.

Origin of Capitalism

As we all aware, it descends from the philosophy of Adam Smith presented in his book "The Wealth of Nations" in 1776 on human behaviour over the production and economic wealth. His view is that the society's economic welfare from free markets operating on self-interest is more than that of the economy regulated by the government. The invisible hand (or regulation of the market by market itself) is the natural force behind free markets to maximize the society's economic welfare. 

Therefore, his recommendation for governments was to confine their operations to maintaining law and order while keeping markets free for production activities. Therefore, fiscal deficits and debt are not traceable in this philosophy as the government's law and order is funded through taxes levied from orderly markets. This model of economic philosophy has been labeled as the capitalism.

The subject of economics is fundamentally built on free markets capitalism. The competition, profit maximization, market clearing prices and efficiency in mobilization and utilization of resources with alternative uses are the cornerstones of economic principles. Therefore, economics principles show how any government intervention in the economy distorts the market mechanism leading to economic losses.

Origin of Socialism/Communism

Socialism is a composite of ideas expressed by political leaders to control the income and wealth gaps/differences among people towards being more fair and equitable as determined by the governments. Therefore, this is the opposite of Adam Smith's free market philosophy. However, there is no single piece of economic philosophy on socialism. 

It appears that socialist ideas have been initiated from Karl Marx's philosophy on exploitation of labor by capital owners for their profit in the production process where this unfair system will collapse within itself in the future towards a system of fair shares to be distributed among labor and capital. 

However, Karl Max's economic philosophy never proposed governments to control people and production process in order to create an income and wealth equality through bureaucratic forces over markets or cause people to antagonize or fight each other on income and wealth disparities.

However, a set of country leaders labeled as leftists all over the world has been presenting different political movements against markets for a radical system change towards income and wealth parity. Social catastrophes created by these movements in low-developed countries are reported abundant. However, it is no secret that those countries after decades of catastrophe have moved to pro capitalism models looking for capital investment and modern business management models in pursuit of better living standards. 

Sharma's concerns over the US capitalism model today 

The US is known as the country of lead-capitalism while the rest of the world has been moving towards the US model with variations to look for better living standards through pro capitalism-based markets. As a result, countries such as China and Russia who fondly adhered to communism or specialism, the opposite of the capitalism, also have been pursuing pro capitalist models since early1980s. The social and economic progress achieved by those countries through new models is on record. Sri Lanka is no exception even with the currency crisis touched down in 2022.

However, the new book raises concerns that the younger generation in the US has begun to look for pro socialism-based governments. The author seems to point the finger at the heavy government intervention in the economy since the Great Depression in 1930s as the cause of this movement for socialism against the capitalist values long inherent in the US.

According to Sharma, capitalism is about equality of opportunity through competition in markets while socialism is for equality of income through government intervention outside markets.

As revealed from the two interviews, author's concerns that capitalism has gone wrong are as follows.

• Heavily regulated economy. Nearly 3,000 regulations are enforced annually while only 20 regulations were withdrawn in last 20 years.

• The cost of setting up new businesses has increased 10 times compared to 20 years before due to regulations.

• The US has become a bailout nation - a significant increase in business bailouts while business bankruptcies have gone down.

• The number of new start-ups has gone down.

• The bottom 50%-60% don't have any excess saving. They are not being able to spend much. There is a feeling that they are being squashed by what is happening in the top.

• The economic and social mobility has significantly declined and, therefore, there is a feeling that they do not have the equality of opportunity.

• The probability of becoming a billionaire or entrenched has gone up by 40%.

• Only 35% of Americans today feel they are better-off than their parents while it was 78% in 50-60 years ago.

• Business risks have become socialized.

• Heavy increase in government spending during last 100 years from 3% of GDP to 36%.

• 70% of Americans say that they want a major economic change. This is similar in the Europe too.

• The capitalism today is in its distorted form. It has become pro incumbent and pro big business.

• The democracy also shows an indication of the problem in the capitalism. In 50-60 years ago, the probability of getting reelected of an incumbent was 70%. It has now declined to 30%. This is an indication of the status quo is not what is working for people.

His conclusions are as follows.

• The capitalism in present distorted form does not work for the average person.

• The progressive intervention in the economy by successive governments towards a welfare and bailout economy is the cause of the problem.

• Therefore, it is necessary to diagnose the problem and fix it promptly.

Sri Lankan Context 

In reading of the views of Ruchir Sharma, Sri Lankan context at present can be highlighted as follows.

• Although terminologies of capitalism and socialism used by political leaders in Sri Lanka are different, the problem of the government's heavy intervention in the economy in an erotic manner is common for Sri Lanka too. 

• In Sri Lanka, it is largely the deep bureaucracy behind the political governance that has caused the problem of the economy not serving for the majority average people. As in the US, the economy works for the top business layer supported in all spheres, i.e., business licensing, tax concessions, credit and fiscal incentives provided by the bureaucracy behind the regulated economy. This is the crony capitalism commonly known in the world, which is effectively the bureaucratic capitalism.

• The gravity of the government intervention problem is well evident from the government's foreign currency default and ever increasing debt stock that caused the country's economic crash in 2022. It is not a crash of private markets but of erotic monetary and fiscal bureaucracy.

• However, Sri Lankan political slogans are largely pro-socialism for the recovery from the economic crash and center around a more regulated, bailout and welfare economy. This movement is so evident that even macroeconomic targets such as GDP growth, unemployment, movements of general consumer prices and balance of payments are prescribed in laws and regulations while relevant numbers are compiled by the government bureaucracy without any reference to market activity.

• Diverse terminologies for systems such as social market economy, socialist market economy and entrepreneur economy are coming up with promises to provide the public with happiness and prosperity. However, underlying visions, targets and strategies are not disclosed. All in common promise to fix the corruption problem as the path to the recovery. However, nobody seems to understand that the corruption is the price or the cost paid for the deep bureaucracy in heavily regulated economies operating against capitalist principles.

• Liberal leaders who were alleged to be representing the capitalism in the past seem to go undercover for the time being as they also talk of more and more economic laws and regulations.

• However, nobody proposes how they would finance newly regulated, corruption free system of economy. Now, the monetary system of credit creation has been left by a set of new landmark laws to an independent set of bureaucrats who have no binding what so ever with the government. Therefore, those political leaders will not bring money from homes to fund what ever the form of government they are envisioning.

• Therefore, what ever system changes promised by political leaders new or old will no doubt fail due to the dearth of funding in the present monetary system. There are no estimates for new revenue to be generated by the stoppage of corruption or whether it is sufficient to fund the new economy.

Some Remarks

• In his presentation, Ruchir Sharma has missed two important points attributable to the distorted form or pro state welfare capitalism in the US.
• First, Adam Smith's version of capitalism is attributable to all free markets including money and banking. Free markets of money and banking were the foundation for the early capitalism under the invisible hand. In that early period, currencies were private and produced by free banks. However, money and banking were nationalized beginning the 20th century and brought under the state central banking bureaucracy. As a result, the market mechanism was immensely harmed by the state monetary and banking system controlled by central banks. Economic crises and business failures are the outcomes of central bank money market controls where governments have to bailout them to coverup the failures of central bank/government regulations. Fiscal deficits and debt are the conduits used to create money in state currency-based monetary systems. Therefore, the capitalism will hardly survive in bureaucratically controlled money and financial markets without the government support. 
• Second, the pro capitalism value system of the US society has now been changed by the new generations of people migrated in large scale from pro socialism countries of the developing world such as China, India and Mexico. Therefore, new political leaders are attracted to them for votes. For example, present President Joe Biden's campaign in 2020 was the promise for upliftment of the bottom and middle class through jobs and income facilitated by the government. As he spoke "Trickle-down economics does not work for the US and what is needed is the government to bottom up and middle out". This is how the pro socialism became official in the US in its current form.

• Within the meaning of Directive Principles of State Policy set out in the Article 27 of the Constitution of Sri Lanka, the government has to be pro socialism as it has policy responsibilities for greater distribution of resources and production for realization of adequate living standards.

• Therefore, Sri Lankan leaders must clearly spell out their system vision for what ever the system of the economy with clear strategies and targets for living standards in line with the Constitution. The general public is not worried about whether it is pro capitalism or pro socialism or the theory behind what ever it is. What the general public want are the opportunities for employment and income for the labour force to enable them to enjoy a decent living standard inclusive of good nutrition and education provided to children comparable with living standards of newly developed countries in the region. 

• Anyhow, they all will fail definitely as proposed system changes would not be possible due to the deep bureaucracy led by the lawfully independent monetary control and fiscal restraints imposed by the IMF financial programme which are contradictory to the distributary policies required in the Constitution. Therefore, the Gotabhaya moment in Sri Lanka and Liz Truss moment in the UK are quite possible again in Sri Lanka in a matter of time.

• If Sri Lankan leaders governing the country and economy are not clear about the economic system desirable for Sri Lankan value system with performance evaluation, this country will never develop to levels of newly developed countries in the region.

This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures. All are personal views of the author based on his research in the subject of Economics which have no intension to personally or maliciously discredit characters of any individuals.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 12 Economics and Banking Books and a large number of articles published.