Crony Capitalism or Capitalism? 6

“Capitalism is Evil and you cannot regulate Evil. It must be eliminated.”

That’s the conclusion noted American Documentary maker Michael Moore draws from his career of making documentaries. While that’s a view from someone who is referred to as a leftist; it is a view that is getting increasing media attention.

Earlier in February; the political discourse in India was dominated by what is held as a shining example of Crony Capitalism – The Reliance Industries & Gas Price hike saga. I do not claim to be an expert on pricing of natural gas but fully empathize with the view that the Government of India must get its pricing strategy right on this. As ex-Delhi Chief Minister Arvind Kejriwal noted; Natural Gas impacts the pricing of essential commodities and hence it is essential that we are not ‘over-paying’ for this commodity. While I do not have a clear view on this but I would certainly have to think more given the opinion from Surya Sethi who was the former Principal Adviser (Power & Energy) to the Government of India. His rebuttal in this report about the fundamental flaw in the Rangarajan Committee report is logical.

This isn’t the first instance where policy makers have allegedly favored big business & certainly will not be the last. Capitalism is defined as ‘an economic system based on the private ownership of the means of production and distribution of goods, characterized by a free competitive market and motivation by profit‘. It is this basic principle called the ‘Profit Motive‘ that has been much criticized by most anti-Capitalists. I believe singular focus on the profit motive makes companies & managers make decisions that hurt their employees, their customers, the communities they operate in & eventually their own companies in the long-run.

Ayn Rand with her theory of Objectivism took a clear stand on what some regard as ‘Extreme Capitalism’ – I would think of it as Laissez-Faire. She argued in favor of Capitalism at a much more ethical level.

“The objectivist ethics holds that the actor must always be the beneficiary of his action and that man must act for his own rational self-interest. But his right to do so is derived from his nature as man and from the function of moral values in human life—and, therefore, is applicable only in the context of a rational, objectively demonstrated and validated code of moral principles which define and determine his actual self-interest.”

Rand, Ayn, The Virtue of Selfishness (Signet)

Ayn Rand has always suggested that a man should act for his own ‘rational self-interest’. Even Adam Smith cited as the father of Modern Economics believed that when an individual (and by corollary an entity) pursues his own self-interest; he indirectly promotes the good of the society. John Nash inverted that principle somewhat when he proposed that the best results are achieved when each individual acts in his self-interest and the interest of the group he belongs to. This principle was mainly part of his contribution to Game Theory. It has many further applications; just like Game Theory itself has many applications for societies and economies. Paul Krugman too argued that an individuals’ pursuit of self-interest leads to bad results for society as a whole – This was mainly in the context of Market Failure.

I am suggesting that when individuals & corporations act in their own self-interest they might not achieve the best results. If they act in a manner that is beneficial for them and all their stakeholders (including customers, employees, community & even the nation); they will produce the best result. I am not a Utopian Socialist but I would not discard what Charles Fourier or other contributors of Libertarian Socialism proposed as their philosophy.

Can we actually act for the ‘Greater Good’?

The answer seems straightforward; except it isn’t – even for large corporations run by some of the most brilliant minds. Ask a CFO if he is willing to make a longer term bet with potentially large returns in the long-term at the risk of missing his current quarter targets. The answer is likely to be a ‘No’. (I draw this conclusion from a survey which stated that 55% CFOs would not make that call. This was quoted on Bloomberg Radio but I am unable to provide the exact source of the survey). If CFOs are hesitant to make a long-term call which has potential returns on investment in favor of short-term gains; they are expected to be even more hesitant to make calls which are for the ‘greater good’ and could impact their financial targets. This is underlined by Paul Farrell‘s article about the ‘Capitalist Gene‘. He pointed out that it is this ‘Capitalist’ nature that is so inherent in us that it doesn’t allow us to think beyond the immediate needs of ourselves.

One could argue that feudalism was the precursor to Capitalism; albeit stripped of the moral authority of the modern-day capitalism (which is claimed to be beneficial for the world). Eric Wolf in fact applied this principle even further to Imperial Chinese & Incan societies. Capitalist & Socialist countries worldwide seem to be turning into Plutocracies; and hence the problem doesn’t seem to be Capitalism. It seems to be something more inherent in human nature – Greed. Capitalism only seems to promote greed in a certain sense that it is taken as the moral authority to make the wrong decisions. It is almost Machiavellian where the ends justify the means. The widespread misuse of Consequentialism motivated by greed seems to be the key driver of making decisions that are not made with the larger good in mind.

“… it is now well-known that capitalist development leads to the concentration of capital, employment and power. It is somewhat less known that it leads to the almost complete destruction of economic freedom.”

Horvat, BrankoThe Political Economy of Socialism (M.E. Sharpe, Inc.) p. 11

Can any other form of Capitalism exist?

Large corporations will continue to influence policy for their own short-term gains driven by their singular focus on the profit motive. They will continue to circumvent principles of democracy or avoid acting for the greater good. Why do Governments allow their policies to be influenced? Because the Government is run by the elected officials & bureaucracy – A group that would act for their own short-term goals rather than acting for the greater good or long-term benefits. It is the Capitalist Gene at work again!

“Experience has shown, that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny.”

Thomas Jefferson

By some measures Crony Capitalism isn’t an appropriate way to define big businesses being favored by the government as it only encourages one to think that this is an offshoot or derivative of Capitalism. Neither is it Corporatism as Ron Paul would call it. This is only a natural outcome of perhaps the most debatable economic system in the world – Capitalism.