On 9 November 1989, the Berlin Wall fell. And with it fell an era of communism that had begun with the Bolshevik Revolution. With the bankruptcy filing of Lehman Brothers in 2008 and the consequent global financial crisis, confidence in an unbridled capitalist system frayed fatally.

These two systems dominated the world for much of the 20th century. Even though living standards under Soviet communism were only protected, not enhanced, there was significant scientific and technological progress. At the other end, the era of open markets and trade that followed World War II resulted in substantial improvement in living standards, great scientific and technological progress and remarkable poverty alleviation in some developing countries. Partly due the technological progress and partly from inherent imperfections both systems created a disadvantaged class of citizens—disadvantaged either through a lack of jobs, unaffordable healthcare or inaccessible education for their children.

The political systems in these countries are having to respond to these deficiencies and are doing so in a decidedly mixed way by casting economic orthodoxy aside and choosing pragmatic (sometimes knee-jerk) policies. The multilateral cooperation and rules-based institutional architecture that had served the world well after WWII—through the World Bank, International Monetary Fund (IMF) and World Trade Organization—has itself had a crisis of identity and confidence in the era since the collapse of Bretton Woods but most particularly in the last few years.

Economic thinkers are patching together these “mixed" policies into a quilted framework that is probably best described as “inclusive capitalism". Semantically, there is a difference between welfare economics and inclusive capitalism. Welfare economics as practised most famously in Nordic countries combines free market competition with an element of (state-led) universality and collective bargaining particularly for health and education. Inclusive capitalism, on the other hand, is emerging to be much more mixed with some role for the private sector in holding out a helping hand to disadvantaged sections but with dollops of paternalism and nationalism thrown in by the state in an unscripted way.

The origins of both welfare economics and inclusive capitalism can be traced back to Jeremy Bentham, Otto Von Bismarck and John Rawls and captured in the Benthamian idea of the greater good of the greatest number. The annual reports of the IMF for both 2016 and 2017 appear to have rediscovered this and are a worthwhile read to understand this emerging trend. In a section entitled the challenges of world trade (imagine the IMF saying that!), the annual report for 2017 says “for all its benefits, trade has had a negative impact on groups of workers and communities particularly in Europe and the United States." According to IMF Annual Report 2017, real global trade from 1960 to 2008 grew at roughly two times the rate of growth in real GDP. Both trade and GDP have slowed sharply since, most particularly due to a decline in both labour and total factor productivity (TFP) in developed and developing markets. It also says that in developed economies, from 1980 onwards, the wealth of the top 1% has increased at approximately three times the rate of the other 99%. IMF annual reports that had a prescriptive nature a decade ago, have decidedly become descriptive. And in so describing, the IMF appears to be sanctioning a “do what you can and must" approach to economic policy for the developed markets.

For the record, I must state that I believe that a rules-based capitalist system is the least imperfect system the world has known and is likely to be able to effectively practice. Having multiple objectives and sanctioning ad-hoc interventions to target outcomes is unlikely to produce results. Enabling equal opportunity is desirable, targeting equal outcome is folly. For instance, if you add inclusive growth to a central bank mandate, you are likely to create more rather than less confusion. That said, the winds emanating from the desire to bridge this unequal income distribution are very strong and it is rather likely that this wave of inclusive capitalism will continue for quite some time.

Look around you and you will see this mixed capitalism at play—trade tariffs from the US (don’t forget that India is one of the highest tariff countries), technology moats in China, agricultural subsidy in Europe and extremely restrictive immigration policy in Japan. Of late in India, the government is using a technique I call “voluntary mandatory" —voluntary for constitutional purposes but mandatory in practice. Aadhaar card to live, die and everything in between, bank accounts forced down the channel, formal overreach by income tax officials (the informal reach continues), search without probable cause by local police and much else besides. These targeted interventions can work if you have good intent and extraordinary competence. The lessons of history suggest that neither the public nor the private sector can be fully trusted on intent or competence. An enabling system of rules and enforcement, nurtured by institutions and without overreach is second to none. It may produce distortions, but a mixed system that relaxes the rules and allows possible consequences of authoritarianism, majoritarianism, arbitrariness and sheer incompetence can be much, much worse.

P.S. “Every law is an infraction of liberty" said Jeremy Bentham.

Narayan Ramachandran is chairman, InKlude Labs. Read his earlier columns at www.livemint.com/avisiblehand.

Comments are welcome at narayan@livemint.com

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