The federal budget announced earlier this year in Pakistan, which exponentially increased the salaries of public-sector functionaries while only infinitesimally raising spending for development, has stirred debate on the nation’s political economy. It has also concomitantly reignited a wider debate on whether capitalism can deliver broad-based economic growth, or whether it solely proliferates and props up privilege for those at the top.
Even historically, debates of this sort abounded. Yet capitalism stood the test of time. It was present in proliferation during the Roman era. The medieval and early modern periods also witnessed free markets for labour and capital, both in the cities and the countryside. Barring the rarest occasions and intervals in history, belief in the institution of private property was almost universal. Eventually, in the 18th century, it was given its modern exposition by Adam Smith in his path-breaking The Wealth of Nations.
Thereafter, it had its vicissitudes until the late 20th century, when the collapse of the Marxist-Leninist Soviet empire made belief in its utility almost biblical. But catastrophic events such as the Great Depression of the 1930s and the Financial Crisis of 2008 shattered the convictions of those who unreservedly believed in its prowess. Leaders, intellectuals and ordinary people alike clamoured for reform, arguing that power imbalances in society must be redressed through vigorous government intervention to make capitalism inclusive. Some even questioned whether it was capable of being reformed at all, or whether it is by its very nature foredoomed to perpetuate inequities and deepen class schisms.
I opine that it can work for everyone. It is neither an uncontaminated virtue nor an unadulterated vice. If reasonably regulated and supplemented by a well-established institutional framework, it can result in growth that is inclusive and broad-based.
Those who argue otherwise by pointing to China miss the crucial point that China staunchly practises state-driven capitalism while euphemising it as socialism.
For that to happen, three things are indispensable. The first is to shed the Panglossian view that markets are efficient on their own. They are not — and if left to themselves, they allocate benefits to those who hold the most economic and political power. Instead of hard work and competence, it is parental privilege and political power that determine where the predominance of national income goes. Those endowed with either or both will claim the largest share, while those deprived of both will subsist on whatever is left behind. Given this, it is scarcely surprising that whereas the public sector in Pakistan has seen an exponential rise in budgetary allocation, the amount earmarked for development spending remains grotesquely low.
Secondly, once we purge ourselves of this naïve belief in markets, we can then focus on what is needed to make them function effectively. It is, as Amartya Sen puts it, “a visible hand of government supporting the invisible hand of markets”. However, this optimism must be tempered with caution. A hugely disproportionate hand of government in an economy, as argued by Friedrich Hayek in his Road to Serfdom, runs the risk of making the state an over-regulating leviathan. It is for this very reason that there is a compelling need to avoid the extremes of unbridled markets on one hand and an over-regulating state on the other, and instead to find a meaningful balance that fuses the benefits of both.
Thirdly, the visible hand of government should manifest itself through strong market institutions. Though there are many, I confine my discussion to three. The first is robust anti-trust enforcement that fosters true and meaningful competition, dismantles monopolies, and ensures that those with the most economic power are not allowed to prey upon new and small businesses. The second is an effective labour rights framework that empowers workers and improves the quality of human capital. This should be supplemented with generous government spending on education, healthcare, and upskilling initiatives that enhance productivity, strengthen labour’s position vis-à-vis capital, and enable workers to appropriate a greater share of national income than they otherwise would. The third is a robust and impartial rule of law regime that upholds legal norms, enforces contracts aggressively, and prevents the economically and politically powerful from sidestepping them with impunity. This, in turn, facilitates small businesses and thereby leads to growth that is broad-based and inclusive.
More importantly, one further reason why capitalism should be made to work for everyone is the absence of better alternatives. Others may disagree, but alternative economic systems such as Marxism and its regional variants have either outrightly failed or have given the world famines, gulags, and party dictatorships. Those who argue otherwise by pointing to China miss the crucial point that China staunchly practises state-driven capitalism while euphemising it as socialism.
Therefore, it has less to do with intrinsic flaws in capitalism itself than with external factors that concentrate the benefits of growth, rendering the system unequal, unfair and exclusionary. However, if bolstered with the right set of institutions, it can deliver prosperity that is both inclusive and broad-based.