Reinventing the Capitalism

As per the classical economics, in capitalism Government has no business in the business. Buyer and supplier are aware of their interests and can take care of themselves. The Invisible Hand (Adam smith) of market will prevent any failure in the system maintaining the equilibrium. This Laissez fair theory had its popularity throughout 19th and 20th century and continues to be largely relevant.

However, during the great Depression in 1930s its limitations were visible and Government had to be brought back into the Business! Even though it was temporary intervention to restore the equilibrium in the market and were expected to back off later on (Keynesian economics). However, it highlighted the role of government as a restorer of equilibrium in economy and not just as regulator which classical economics had assigned.

Nevertheless, it led to the questioning of the fundamentals of the capitalism itself and its competence in resolving the issues of common people. During the same time alternative model in the form of communism was emerging and it gained popularity amongst intellectuals because of its egalitarianism. Hence tussle between the Capitalism Vs. Communism emerged during cold war & with the fall of USSR, Capitalism emerged victorious.

Victory of capitalism is mostly attributed to its principles which are in alignment with the natural tendencies of human beings like Liberty, Freedom & pursuit of excellence to be the best. It gave people sense of hope that if you work hard on your ideas then anyone can achieve anything. There’s no arbitrary intervention of government to stop you. Also, with the emergence of Neo-Classical economics, active role of government as facilitator of business is accepted. They are expected to make things favorable for private parties to compete on equal grounds, essentially ensure ease of doing business.

This Neo-classical model of capitalism had worked well but in last 10-15 years it seems to have developed fault lines leading to questioning of capitalism itself once again. Large scale bailouts of large corporations, writing off of thousands of crores of NPA by banks on government order, restructuring of loans essentially giving concessions, Unnecessary subsidies only to selected few corporations – all these events are clear indications of distorted form of capitalism wherein government had seemed to be overstepping its responsibilities.

It does send a wrong message to smaller players like MSMEs. Will the banks write off the loan of smaller borrowers ever? Or will there ever be loan restructuring negotiations with MSMEs? Or will there be any bailout package for them? Certainly NOT. Even though government has compulsion to protect these too big to fail corporates because their failure can lead to large scale impact on economy however, the sense of justice and fair play is important for sustaining the faith of the people in the system. So, what’s the solution?

It would be unjustified to hold government responsible entirely given their compulsions. Nevertheless, governments should increasingly exercise restraint in unnecessary intervention because every time they intervene it incentivizes others to take reckless decisions without fear. But the larger responsibility lies with the Corporates in this New Reinvented form of capitalism to contribute actively towards the society. It not only helps to build social capital but also improves the image of corporates as active participants in social development and not just greedy profit printing machines.

Going forward the test of capitalism lies in How well it can integrate the ESG goals with social upliftment & helps in minimizing the social inequalities. How well they generated a sense of empowerment amongst its employees and not considering them as just a replaceable asset. If it succeeds in this endeavor, it will be welcomed in its new avatar which in my opinion is indispensable. However, if it fails to reinvent itself then it’s silent ticking bomb bound to burst the faith of the people in Capitalism.