Friday, August 22, 2008

Capitalism, Socialism and the Way Forward for the World: A Global Debate

I WAS involved in a heated global debate on these issues at the creativecapitalismblog, launched to discuss global efforts to bring a better life to the people in the poorer counties, following the famous Davos speech by Bill Gates. These discussions took place following a few interesting posts made by Martin Wolf, an eminent economist and associate editor of Financial Times, London. There are references to some posts from a few others from various countries, like an economist-investor from Germany, who identifies himself as fh, and an entrepreneur-economist from the United States, Tracy W, in the following edited version, which mainly trace my own line of argument:

N P Chekkutty:

Martin Wolf writes: But the biggest destruction of capital in the last century, in peace time, occurred in the Soviet bloc.

Is it right to compare the command economy of the Soviets or China with the democratic system where the market economy has been in full flow?
Perhaps it would be more correct to describe the destruction and wastage in Soviet bloc as creative destruction because in the past decade Russia has grown at least ten fold compared to the time Putin took over. The growth should seem impressive in the light of the kind of problems they faced at the time of the collapse of the earlier system.

Same should be the case with East Germany. It was a mess when integration took place but we do not hear the same complaints we used to hear in the mid-nineties about the economic costs of integration. So perhaps, there is much substance in what fh says, that the US, in spite of its clear advantages, is making a mess of things for themselves and others.

Martin Wolf:

Russia hasn't grown anything like 10-fold since Putin took over. Real growth has been about 6 per cent a year, if I remember correctly: so you can do the maths easily. Actually, for what it is worth (not very much, I agree), Russia's measured GDP is just about back to where it was in 1990. I think you may be confusing real growth with growth in nominal dollars. But that merely reflects the fact that the rouble overshot downwards massively in 1998 and 1999.

I really don't think that a 74 year detour, from which Russia emerged a basket case, can be called "creative". It is worth remembering that Russia was the fastest-growing large economy in the world immediately before WWI. So if it had not been for the Soviet experiment, Russia would almost certainly be a rich country today, which it is not (particularly if you ignore the oil and gas windfall). This also ignores the gigantic human and political costs of the Lenin-Stalin experiment with totalitarianism, from which Russia has not, alas, recovered. It may never do so.

Also, no, I don't think fh is right on the US. The US has always been a boom-bust economy and it still is. It is after all a capitalist country. Just as it is senseless to expect Germany to become the US, so it is senseless to expect the US to become Germany (as I discuss above). But the US has been the preponderant source of global economic innovation since the late-19th century and particularly since WW II. Among large countries, it also has much the highest average income per head. The US is the global economic frontier. One has to be blind not to see that it has been astonishingly successful.

N P Chekkutty:

Fh writes: The German AWG (Aussenwirtschaftsgesetz) should be coming into force very soon. Broadly speaking, that law is designed to make it much more difficult for foreigners to take over German firms.

Fh, Can I take it that this is a major step in the direction of insulating the German economy from the global one? Put it more clearly, is it an indication of the German aloofness or maybe, a new surge of protectionism in one of the most important economies in the rich world?

And one more question: Exactly against whom are these measures aimed at? Is it the rest of west which has always been an alley since the Second World War, or is the new forces from the developing world that the law would try to keep out? I have seen quite a bit of parochialism in some European countries of late, like when an Indian steel firm, Mittal, made an effort to buy up the French steel-maker, Arcelor.


Why the AWG, NP? Well, Germans have seen the UK economy become a "hollowed out" one -- the auto industry, shipbuilding, hardly exist any more; GEC (once the No. 1 firm in the FTSE) no longer exists. ICI (Imperial Chemical Industry) another huge UK company shrank massively and was sold off to ...Norway?

And the once great civil engineering company Wimpey is now reduced to a house-builder, suffering from the construction slump in the UK.
When German managers look at the US auto industry, they have nightmares at the thought that such a fate could overtake German car giants like VW, BMW. That's why Porsche and one of the German states (Länder) fought tooth and nail to acquire the VW majority and will never let it go. The same applies to many other large German companies.

P.S. Yes, Mittal - but in my opinion, he acted just in time to get Arcelor.
I think Sarkozy has also tightened up against outside takeover attempts. I know Mittal Steel from the time when it bought a steel mill in Temirtau (in Khazakhstan)...

N P Chekkutty:

MW writes: Russia hasn't grown anything like 10-fold since Putin took over. Real growth has been about 6 per cent a year, if I remember correctly: so you can do the maths easily.

I am not going into an argument with a veteran economist like Martin Wolf on the figures with regard to Russia's growth. But I find that my figures were correct, on cross checking.

According to a report published in the major Indian newspaper, The Hindu, dated August 4, 2008, the Russian economy which was at $200 billion ten years ago, crossed $1.4 trillion in 2008. its per capita GDP quadrupled to $7000 in this period.
Of course this growth includes its oil and gas revenue too. But why should Russia count this revenue out while all others including the US count their oil revenues in GDP?

Martin Wolf:

As I said, the huge rise in Russian dollar GDP is mostly because of the nominal appreciation of the rouble, not real growth. The appreciation was itself largely the inevitable consequence of the overshooting after the 1998 devaluation, plus the benefit of large oil and gas revenues. Figures for changes in national income in a foreign currency (the dollar) don't mean anything very much. As I said, you are confusing real growth with growth in nominal dollars.

N P Chekkutty:

MW writes: If I were fh, I would worry a bit more about Germany and a bit less about the US.

This, I am afraid, does not actually answer the point raised by fh. He was referring to the failure of the US in meeting some key social responsibilities of an economy, like health care and professional training. If an economy fails to take care of these basic social demands, I do not know how far it's worth to speak of.

So it is welcome when someone speaks of socialism. The pre-90s model has been a disaster, but that does not rule out socialism as a way out for the future. This could be much more important for the third world, as without an effective public policy and state intervention, ensuring a semblance of decent and equitable distribution there could prove to be next to impossible.

And the search for non-Anglo American models, like the German social market, expands the scope of finding a better way out for the world because so far the entire debate has been monopolized by the Anglo-American model of free market. Why not look elsewhere too for a workable solution?

Martin Wolf:

If a country wants to be export world champion (a silly aim!), then somebody has to buy the products and if a country wants to run huge current account surpluses, somebody has to run the deficits. I make this simple point in a forthcoming book.
I agree there should be many models. That has been one of the points made in my various posts.
Anyway, that's it.


The American type of capitalism is too exclusive, in my opinion. Racial prejudice, lack of access to a good education, even living in the "wrong" state all combine to deny many Americans the chance of a better life.

N P Chekkutty is right, we can learn from other socio- economic models, seek out and analyse the reasons for others' successes and failures.

@ MW: Being Exportweltmeister just means that Germany is producing goods and services that other countries need or want to buy, at a price the latter are willing to pay.

Tracy W:

There's no reason to believe that socialism is necessary for a semblance of a decent and equitable distribution.

Why oh why are people so attracted to the idea of socialism that despite its massive failure, they still think it should be kept alive? Do they also advocate bringing back the Spanish Inquisition? And how about the habit of doctors going straight from autopises to attending childbirths without washing? Perhaps they spend their evenings plotting to blow up sewage treatment plants so we can check the theory that contaminated water causes cholera?

N P Chekkutty:

I think I need to explain why I still feel socialism needs to be taken once again into serious consideration.

I will try to do it later on, but right now let me tell you that when I speak about socialism, I do not mean the state capitalist system that Soviet Union experimented with disastrous consequences. Ever since the world War, there has been quite a bit of debate about what we do mean by socialism in a democratic polity.

N P Chekkutty:

Tracy W asks: What is the attraction of the word "socialist" that you, and other writers, find so valuable that you are willing to keep the word...

A considered analysis calls for a major attempt to understand modern history, politics and economics which is beyond the scope of this debate. I will confine myself to the limited scope of this forum where the primary idea was to locate which model is the best one to help those at the bottom of the pyramid.

I begin my search from where Martin Wolf left out in this note. He said, "that many social goals can only be met through political action. That is also where they ought to be met."

This leads us to which kind of politics. The contemporary experience, mainly in poor countries, make it plain that you will have to work with the poor and working class people to find a sensible way for human liberation.

I say this from a study of Marx and his concept about dialectical and historical materialism, a philosophical innovation from Hegel and enriched by the various strands of political and economic thought in Europe and elsewhere in the 19th and 20th centuries. In our times there has been a series of debates which enriched this world view and one cannot forget people like Antonio Gramsci, Mao, Deng Xiao Ping and Ho Chi Minh who gave new inputs. The fact is socialism is not just a few Russians who bungled their state control; it goes beyond to experiences in China, Viet Nam, and many newly independent countries like India where the communists and socialists helped develop and enrich political theory and practice. It also goes to the German, French and Italian left movement also which has a great history and tradition.

Look at the developing world: The contribution of socialist and communist parties to parliamentary democracy is immense. They helped bring in much more people friendly legislations, more equitable distribution and more public participation in governance.

Martin Wolf:

The view that communist regimes are responsible for the deaths of 100m people is not a cliche. The figure comes from "The Black Book of Communism: Crimes, Terror, Repression". It is controversial (since we don't really know how many died in China and there is dispute over whether the famines in the Soviet Union and China were deliberate, or not). But it is not unreasonable.

Tracy W:

Look, I agree that it is important to remember socialism. But it seems odd to focus merely on the failures of history and ignore the successes. And really really odd to pick the name of something with such a horrible history to call your new idea by. If the only reason you favour the name socialism is that it contributed to a series of debates, why not pick the name of a philosophical idea that also contributed to the same series of debates but didn't lead to millions of deaths, like libertarianism, or capitalism? (I would still prefer you to pick a name that was new, to avoid confusion, of course.)

N P Chekkutty:

What is in a name, after all? Right.

But it is not so easy or historical to forget the history and experiences of our times. Without a proper understanding and possibly appreciation of the contribution of the left politics, both socialist and communist, to the modern world I am sure we would never able to move on, to anything new and more meaningful for human endeavor.
Dear Tracy, let me say that there are some degree of unity of views between us, and some areas of profound differences. As far as I can see, the unanimity is about the value of capitalism as a vehicle for wealth production; but there is divergence over distribution or redistribution. You seem to think that the market would take care of it because it has its own means to ensure that wealth trickles down to every pore, to every nook and cranny of our universe. For me, we need special efforts to ensure that it reaches to large parts of humanity.

Now the question is how to ensure this? There were so many ideas including a direct transfer, say issuing cheques to all of them, to making things available at low cost, etc.

For me, all these are peace-meal and half-hearted. They are half remedies discussed half heartedly and without conviction. If we want to help poor, we need to empower them and empowerment takes a lot of social and political involvement and intervention, which has been the main idea Martin Wolf finally came up with.

I believe, and I have observed, that the forces that can act most effectively in this area are the political parties and other formations that belong to the poor people and working class. (Remember, I am talking about the developing countries now.) I belong to South Asia and in this region, (like others in other parts) I know that the political parties from the left have made immense contribution (you realize this when you contrast them with bourgeois parties) in bringing a better life to these people. (See for example, the National Rural Employment Guarantee Act in India, which helped millions survive in the days when thousands committed suicide in farm sector. There are many examples, but I can't write about all of them here.)This Act is the contribution of Manmohan Singh Government with the communist parties putting pressure.

But why can't we call them by some other name?

This involves the history of the left movement. In Communist Manifesto, Marx and Engels describe their political view as scientific socialism, to distinguish itself from the earlier utopian socialists. Unlike in Europe, where the Euro Communists in 70s abandoned their flag and name, in third world you can't be so utopian, to use Marx's own terminology. You need a strong and united working class movement to see that these sections are able to fight on for their rights. Once they reach the developed world's levels of growth, I am sure they may not need the red flag any longer. But that would take many many more years to come.

Tracy W:

Chekkutty, why are you saying this? What did I say that gave you the impression that I wanted to forget socialism? I said, in the comment you are replying to:
"I agree with you that we should not forget socialism. Just as we should not forget that hot things burn and that contaminated water can lead to cholera outbreaks. I hope that we can learn from history what not to do. "

I don't know how you can read that as a call to forget the history and experience of our times. Is there anything else I can say that can convince you I am entirely in favour of remembering socialism?

You say, Once they reach the developed world's levels of growth, I am sure they may not need the red flag any longer.

The Asian Tigers appear to have managed very well without the red flag.

And just to repeat myself, I am utterly convinced that we must remember socialism. I think the history of the left movement should be studied in schools. I just don't understand why you want to call your system "socialism". Why not call it "feudualism" or "slavery" or "religious intolerance"?

N P Chekkutty:

Memories do differ. And what you remember may not be what I would like to remember. As for those deaths of people, I agree terrible mistakes have been made. All sensible people say this. But which system has not been responsible for similar crimes? Who dropped an atom bomb on the people of Hiroshima after the Red Army had entered Berlin?

As for the dictionary definition of socialism, let me tell you I go by what the theoretical definitions of these terms are in the writings from Marx to contemporary Marxists and the party programs of various communist parties with which I am familiar.

Asian Tigers appear to have managed very well...

Asian Tigers? hahaha
Do you know how big are these places and who rule them? Fine examples for the victory of capitalism proper!

(This is an edited version of the debate.

1 comment:

Unknown said...

Dr V Santhakumar writes in an email:

I read your debate with Martin Wolf. I met/heard him first in a meeting at St. Petersburg in 2006. Extremely good speaker. He is a sort of star among the liberals. However probably he is reckoned more these days (after he left the bank 20-30 years ago) as a great communicator of economic ideas and proponent of liberal capitalism and probably not as a practicing economist (researcher, academic, consultant.)

I felt that you hold on somewhat inflexibly to your past. I do not think that the left mainstream parties have done anything spectacular than many other populist or benevolent dictators in different parts of the country. You may see Costa Rica, Botswana, and many other countries in addition to Asian Tigers. In fact some dictators too have drastically transformed the lives of the people. even look at Singapore region which may have a per-capita income similar to India probably in the late fifties.

Whether it is done by the left or right, there is no dispute that central planning and excessive social intervention in private goods are disasters. The transfer programmes designed usually by such interventionist governments sustain bureaucracy and not poor people. Due to the wastage of money on private goods and inefficient transfer, such governments do not have money for public goods, for which state action is needed.