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The Iron Law of Oligarchy

The Iron Law of Oligarchy
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First Published: Thu, Aug 19 2010. 12 23 AM IST
Updated: Thu, Aug 19 2010. 12 23 AM IST
Raghuram Rajan, currently economic adviser to the Prime Minister and earlier chief economist at the International Monetary Fund (IMF), has reiterated his fears about India’s oligarchic brand of capitalism in his latest book. The ties that bind India’s billionaires to the state are too close for comfort, he says. Too many of them have built their empires, not by honest competition, but through their connections with the state. That calls for, as the title of one of his earlier books puts it, Saving Capitalism from the Capitalists. The question is: Who’s to do it?
Will the state do it? But the state is part and parcel of that oligarchy. As a matter of fact, too many of us believe that the state is inimical to business. We often uncritically subscribe to the myth that India had a socialist period prior to 1991 and we are slowly and surely shaking off the fetters of the state. Recall, however, that the architects of the Bombay Plan after independence expressly pleaded for a strong role for the state in the economy so that the fledgling private sector could have its hand held. An alternative narrative could well be that India’s so-called “socialist” period laid the groundwork for liberalization, allowing time for Indian capitalism to become strong enough to take on the challenges of opening up the economy. The public sector banks, through their lending to small-scale industry, laid the foundation of an entrepreneurial class in the country. As for India’s so-called socialism, well-known Pakistani economist Mahbubul Haque once called it “10% socialism”, meaning that it was limited to 10% of the population while the other 90% in the unorganized sector were exposed to a brutal capitalism red in tooth and claw. So the state and the business elite have much in common. The oligarchy of business cosies up to the oligarchy of the state—indeed they may be the same.
But if the state won’t do it, should the working class rise up against the oligarchy? Unfortunately, communist revolutions have always led to the establishment of new oligarchies, the “New Class” in Milovan Djilas’ terminology. Perhaps more democracy is the best solution, then? That depends on what you call “democracy”. In the US, another former IMF chief economist, Simon Johnson, has said the country is at the mercy of a financial oligarchy. The revolving door between Wall Street and the US treasury is a fact of life. We also know about the crony capitalism of East Asia, with its incestuous relationship between government and business. This is true of Japan and Korea, of South-East Asia and China, where the Communist Party is nothing but an oligarchy. And Russia is the country that brought the word “oligarch” back into fashion.
So where in the world has capitalism been saved from the capitalists? In Europe? A review by Ernst and Young, quoted in Time magazine, said: “A mere 98 people control 43% of the voting power on the boards of the 40 companies comprising France’s leading CAC 40 stock index.” West Asia or Latin America? Those are places well known for dictatorships. After looking at existing capitalism around the world, it’s difficult not to conclude that capitalism is always and everywhere crony capitalism and saving capitalism from capitalists is as much a utopian dream as the dream of perfect communism under the Soviets.
Are we then condemned to oligarchy? Perhaps we are, if the scholarship of three political scientists in Italy in the early years of the 20th century is anything to go by. These gentlemen were Vilfredo Pareto, Gaetano Mosca and Roberto Michels. All of them were intrigued by the fact that the distribution of wealth has always been skewed throughout history, and they believed that it will remain so in future. In other words, the poor we shall always have with us. All three saw democracy as impossible and oligarchy to be inevitable. Michels formulated an “Iron Law of Oligarchy” which said oligarchy was a feature of all organizations, including nations. He carried out a detailed study of the German Social Democratic Party, seen by many as the most democratic of political parties of that time. His conclusion: even radical political parties needed a bureaucracy, which over time was reluctant to relinquish its hold on power and thus tended to become an oligarchy. The masses are often unable or unwilling to devote their time and energy to combat the bureaucracy and react by withdrawing or not attending meetings, or by being co-opted as followers of one leader or another.
Democracy, in their view, was hypocrisy, a show put on for the benefit of the masses. To Arundhati Roy’s comment about India being a fake democracy, they would point out that democracy is largely fake everywhere. With ideas like these, it was no wonder that at least two of these social scientists—Pareto and Michels—were sympathetic towards fascism.
Were these professors right? Many studies have confirmed the tendency to oligarchy in large organizations. But it’s interesting that Michels initially hoped that his analysis would help the rank and file of the radical parties seize power back from their leaders. That has been a recurring dream of radicals everywhere, perhaps the most famous example being Mao Zedong’s call to “bombard the headquarters”. We all know how that ended.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
To read all of Manas Chakravarty’s earlier columns, go to www.livemint.com/capitalaccount
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First Published: Thu, Aug 19 2010. 12 23 AM IST