Photo: Mint
Photo: Mint

Opinion | Capitalism needs reinvention to see off its political challenges

Its current form has given us capital accumulation in the hands of a few at the cost of the majority

Some two months ago, the Business Roundtable, a club of big business CEOs in the US, declared that corporations should have a larger purpose beyond maximizing shareholder wealth. They said a corporation should invest in employees, deliver value to customers, deal ethically with suppliers and support communities.

This recast of the corporate purpose comes at a time when politicians are targeting large companies for their selfishness. With threats of heavier taxation and income redistribution looming as a US presidential election approaches, only the tone-deaf CEO would say that he cares two hoots for anyone other than shareholders.

Worldwide, capitalism and market economics have never seen such a political challenge since, possibly, the times of Karl Marx. Not without reason. The economic problems of the world can be summed up in one line: the lopsided accumulation of capital in a few hands at the cost of the majority.

This concentration affects both rich and poor economies. This is probably why most presidential hopefuls in the US sound like socialists stuck in the wrong century rather than stout defenders of market economics. Communism, though, remains discredited. In the knowledge era, the primary conflict is not between capital and labour, but between different types of capital.

Financial capital rules supreme and the problem can be defined as inadequate investment in other kinds—such as physical capital (infrastructure), social capital (education and health), human capital (skills and knowledge) and governance capital (state capacity to govern). We must develop channels for the flow of financial capital and knowledge into other kinds of capital for capitalism to be restored to health.

In the absence of these channels, financial capital is destroying human capital by replacing it with other kinds. The focus of capitalism needs to shift from replacing labour to making technology work well alongside human capital, so that the strengths of humans and robots (or software and Artificial Intelligence) complement each other.

Another mandated shift is from debt to equity. Those who control huge amounts of money are turning risk-averse, and investing in safe debt (such as US Treasury bonds and German bunds) and this is why returns in global debt markets are trending towards zero. This is a tragedy. Not just poor countries but even the US needs that money to invest in physical and social infrastructure. It can’t be done with just debt.

The old capitalist system is broken not because capitalism has failed, but because new methods haven’t been devised to channel financial capital surpluses into other forms of capital.

Another deficit area is governance capital. The state capacity to grasp challenges and implement effective policies is diminishing. With technology and capital flows shifting dizzyingly fast, governments seem ill-equipped to take the right decisions. Corporate expertise is thus vital to governance.

The old global trading system is also in disrepair, as capitalism clashes with culture and the nation-state. This could have been foreseen, but trade theorists ignored the human cost of disruptions. Any system which ignores the reality that trade produces unequal outcomes, with winners and losers, will ultimately fail. Trade pacts that lack mechanisms to identify losers early and help them succeed will fall apart. The Regional Comprehensive Economic Partnership (RCEP) is unlikely to benefit countries such as India, as it does not live up to its name. It is difficult to call it a “comprehensive partnership" when it effectively excludes services, thus denying India an opportunity to balance merchandise trade deficits with service surpluses. India would be foolish to join the RCEP when its overall trade deficit is more than $100 billion with its partner nations, especially China.

Capitalism is failing because it clashes with culture and human xenophobia. If human capital is not allowed to move easily to the place of its maximum return, how will it work effectively?

Traditionally, governments have used taxation to tap surpluses generated by financial capital, and invest in human, social and physical capital. However, high personal taxation is unsustainable in countries with highly diverse populations such as the US and India. In monocultural countries (as in Scandinavia), citizens accept high levels of marginal taxation because they know that their money is going to grandma, or a neighbour’s child who is like their own. However, put people from other cultures in the population mix, and the willingness to pay those taxes drops. High personal income taxes in diverse countries often result in high evasion.

The rebirth of capitalism depends on how we solve its current problems. Large surpluses of financial capital need to be reinvested in social, physical and human capital. Ways need to be found to compensate losers from trade and technology by investing in their competitive capabilities. Risk-averse debt capital needs to shift to equity, especially in places where it is most needed,including India and depressed parts of the rich world.

Capitalism hasn’t failed. It just hasn’t found the right formula for investing its surpluses in other forms of capital.

R. Jagannathan is editorial director, ‘Swarajya’ magazine