The twentieth century has been characterized by a long-running debate between “socialism” and “capitalism.” But as the century draws to a close, it seems that the issue has been decided not by debate but by a kind of trial by ordeal in which one system has proved itself superior in practice. What we have witnessed is the definitive failure of socialism.
But this failure only faces us with a new question: what kind of capitalism? What we need from political leaders and social thinkers is a new, constructive, realistic critique of capitalism. This is vitally important in all countries, but since I am professionally concerned with promoting economic growth in the so-called developing countries through the private sector, I am particularly interested in the moral and social issues of capitalism as they arise in the third world. These issues are more difficult to grapple with in poor countries struggling to raise standards of living and reduce poverty.
The word capitalism can of course be used with varying meanings. So perhaps it is better to use the phrase “the market economy,” which I am glad to know has been blessed by the pope in his recent encyclical and I would define as properly regulated capitalism.
Before I return to what I mean by that, let us note the fact that the failure of socialism is a phenomenon of the third world as well as elsewhere. For most of the postwar period, developing countries generally have been more socialist, more etatiste, than the industrial West ever was, for various historical reasons. In former colonies, independence movements often formed alliances with parties of the left in the metropolitan countries (such as the Indian National Congress and the British Labour Party), which influenced their thinking. Nationalism was often a natural ally of state socialism—for example, many Latin American countries passed legislation, even before the Second World War, requiring that natural resources such as oil and minerals should be owned by the state, mainly for the purpose of preventing them from falling into foreign hands. Nationalist thinking often provoked hostility to powerful foreign companies. And in many poorer third world countries—in Africa, for example—there were more practical reasons for a socialist approach: governments, especially in the first flush of idealism after independence, wanted to get on with economic development and, since there was hardly any private sector to take the lead, decided that they had to do it themselves. A more cynical view (not without validity, sad to say) would be that state control of the economy appealed to some political leaders because it offered them power and the means to enrich themselves.
It is an interesting fact that international aid provided by the West often had the effect, whether intentional or not, of strengthening the role of the state in third world countries. The great international aid and development effort, which effectively started after the war and grew very strongly in the 1950s, ’60s, and ’70s, produced a massive and generous flow of resources to developing countries, rising from $14 billion a year in 1950 to $44 billion a year in 1985 (both figures in constant 1980 dollars). All this happened in a period when belief in the ability of the state to organize economic growth was widespread in the West, too. And the money went to governments, which encouraged governments to spend or invest it themselves and thereby to enlarge the public sector and create nationalized industries.
Even in the private sector, third world governments frequently directed and controlled what investments would take place, rather than allowing the market to do so. In many countries, the whole banking sector was government-owned and controlled, so that credit could be directed according to priorities fixed by the state. And state management was typically accompanied by barriers against imports, and by restrictions on foreign investment.
In the 1980s, however, things began to change. Even before the collapse of the command economies in Eastern Europe, a number of developing countries, disillusioned with the failure of state management to achieve their objectives, began to move towards market systems. Asia, Indonesia, Malaysia, and Thailand liberalized their economies (and, by the way, are now enjoying very rapid growth). India began moving slowly in the same direction and in 1991 took decisive steps toward a market economy. Latin America, struggling to free itself from the toils of the debt crisis (a crisis created by state borrowing), has also been transforming its economic policies. Chile, under a dictatorship, was one of the first to move to market-based policies which were so successful that the new democratic government is continuing them. Mexico, which nationalized all its banks in 1982, is now privatizing them all again and has privatized a large number of other companies. Tariffs have been reduced drastically, foreign investment encouraged, and restrictions on the private sector reduced. Venezuela and Argentina are following suit. Elsewhere, Morocco, Egypt, Turkey, and Pakistan are other countries moving away from state management of the economy. A good many African countries are doing the same.
It is significant that the leaders who are implementing these changes are for the most part not ideologues but practical men driven by the evidence of failure of state-managed systems in their countries; they still often face entrenched vested interests and ideological opposition. And the evidence that the market economy works better in developing countries is there. A study by Keith Marsden of the World Bank covering 17 countries in Africa and Asia over a 20-year period showed a strong correlation between overall rates of growth and the proportion of domestic credit going to the private sector. Countries with the largest private share in domestic credit had the highest rates of growth. Where the public sector claimed most of the nation’s savings, growth was either very low or negative.
Certainly, examples of the inefficiency of state-owned enterprises abound. In India in the mid-1970s, the state-owned power sector was operating, on average, at less than SO percent of its capacity, while the few private companies that were allowed to operate were doing much better. In Thailand, a study covering 1984-87 showed that the return on capital in the public sector was three percent and in the private sector nine percent. Throughout Latin America, state-owned industries became a serious burden on national budgets—in some years in Argentina the losses of state-owned industries amounted to as much as six percent of the GDP.
By the 1980s after decades of trying, there was no country in the developing world which could show a successful record for state planning. In Africa, failure to allow market forces to work was a major reason why growth was so low that standards of living fell steadily. Countries like Tanzania and Ghana drove themselves into economic collapse with such policies in the early 1980s, despite large amounts of aid. In India, GNP per head did rise very gradually during the 1950s, ’60s, and ’70s—at a rate which would take 57 years to double the standard of living—contrasting strongly with the achievements of countries in East Asia, such as Korea and Taiwan, which allowed competitive forces to work. Korea has doubled its standard of living four times in the last 30 years. In 1950 the average standard of living in Korea was about the same as in Ghana; now it is nine times as high—$3,600 in Korea compared with $400 in Ghana. The lessons of all this evidence are now being taken to heart in most of the developing world: even in China, where market forces are being allowed to work in a number of ways within a communist economy, with evident success.
And let there be no doubt that economic growth is vitally important if developing countries are to have any chance of relieving the grinding poverty which still afflicts more than a billion people in the third world. We now understand better that it is also vitally important to organize growth in such a way as to protect the environment, but developments in third world countries strongly suggest that we must regard the question of socialism versus the market economy as answered and turn instead to a different agenda. How do we civilize capitalism without losing its dynamism? The darker side of capitalism throws up problems which are more acute in poor countries. If we want developing countries to succeed in achieving higher standards of living, we need to help them in thinking through these problems. I propose to address these issues under four headings:
•the tendency of capitalism to develop monopolies
•the question of inequality
•the problem of unemployment and of the weak and vulnerable in society generally
•and, more generally, the moral and social aspects of a system which relies on the profit motive
First, monopoly power. There is a tendency in capitalism, if left to itself, to self-destruct, which Karl Marx recognized long ago. (Why was Marx so realistic about capitalism and so disastrously naïve about what would follow?) The driving force of the market economy is competition; the purpose of competition is to defeat your competitor and corner the market, if you can; then you have a monopoly. But monopoly leads to inefficiency and to the accumulation of profit on the basis of privilege, and so has to be prevented for reasons both of fairness and of efficiency.
Adam Smith, that great apostle of the market economy, noted this tendency in capitalism. “People of the same trade seldom meet together,” he wrote, “even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.” But the truth is that you really cannot fault businessmen for that: making sure there is fair competition is not the responsibility of business people, but of the government and the law. No one can be player and umpire at the same time.
In this respect, civilizing capitalism really means forcing it to obey the logic of the market economy, so as to make sure that the community does get the full benefits of competition. For competition to produce its benefits for society, it must be open and fair, and this calls for an umpire. For example, governments must make sure that financing decisions by investors and bankers are taken on a basis of accurate and comprehensive information, available to all participants in the market. So we need a good system of company law and company accounts, uniformly enforced; and so on. In enforcing competition by means of the law, the United States probably leads the world through the anti-trust legislation and institutions like the Securities and Exchange commission. But the rest of the world is learning. In Europe there are competing philosophies in this respect. We are seeing some progress through the creation of the single market in the European Community and the gradual development of the Commission in Brussels into an instrument which, instead of devoting all its energies to administering subsidies which distort the markets, seeks to remove obstacles to free and fair competition.
For developing countries to get the benefits of the market economy, there must be competition and this requires positive action by governments. One way is to open up domestic markets by eliminating trade barriers; but in a relatively backward economy this can be like giving a sick person a cold bath. Such changes may have to be introduced gradually, and yet a number of countries have been doing it recently with very beneficial results, including Chile, Mexico, and Indonesia. Some of the benefit comes from encouraging foreign investment. Bringing in companies with world standards of efficiency in management and technology can be a wonderful stimulus to domestic companies. Allowing free competition is also one way in which we in the West could help developing countries more. For example, if we allowed the market economy to work in sugar, all our sugar would come from tropical cane producers, and both we and the developing countries would be better off. Similar examples abound, for American markets are far more restricted to imports than the average citizen realizes.
When it comes to enforcing fair competition within the domestic economy, most developing countries have some way to go in developing the mechanism they need—systems for the regulation of markets, sound legal systems, and a modern financial system. This last is very important to efficient capitalism. Making companies compete for funds in a capital market on the basis of performance, rather than having to manipulate civil servants to get funding, raises efficiency. It is very important that capital markets should be built up and properly regulated in developing countries (By the way, interesting things are happening in this field, including the development of stock exchanges in many developing countries. India, for example, has more companies listed on its stock exchanges than any country in the world except the U.S., and over 15 million small investors.)
My second issue is the question of inequality. Rightly or wrongly, it is commonly believed that the capitalist system produces inequality and that it does so in more extreme form in poorer countries; when the great majority of people are poor, it seems more scandalous and unacceptable that some should be very rich.
Yet while the statistics are imperfect, there is really no good reason to assume that capitalism in itself produces more inequality than socialism. Within capitalism we see widely varying conditions suggesting that usually other factors are at work, influencing degrees of inequality in various societies. Distribution of income is generally more equal in the advanced industrial economies than in developing countries, but developing countries differ widely. At one extreme, the champions of inequality seem to be in Latin America. In Brazil, we see the greatest extremes of distribution of income. But Brazil cannot very accurately be described as a capitalist country, since over 40 percent of its productive sector is owned by the state, and government control of the economy has been heavy. India seems to have a more equal pattern of distribution. In the Far East, although statistics are limited, the general impression is that in Korea there is a relatively high degree of equality.
The question at issue here is not really one about capitalism but about the validity of the theory, first put about by the economist, Kuznets in the 1950s, who argued that during the early stages of industrialization a country must expect to go through a period of greater inequality as a preliminary to becoming more equal later on. The early history of the Western industrial countries—Britain, United States, and Germany—seemed to support this theory. Experience in the second half of the twentieth century makes it much less plausible. Japan does not seem to have gone through a phase of high inequality, nor does Korea. Indonesia has recently achieved rapid rates of industrial growth without (apparently) a sharp increase in inequality. The high levels of inequality experienced in Latin America are in countries which have been capitalist only in heavily modified form.
A great deal depends on how equality is to be achieved. When it is achieved by means of heavy government intervention, including control over salary levels and heavy taxation for the purpose of redistribution, there is a loss of efficiency in the economy and growth is slowed. When it can be achieved by means of a more voluntary social consensus—a consensus which can be quite consistent with the market economy, as apparently we have seen in the Far Eastern countries—then there is no reason why equality should have any adverse effect on economic growth. Clearly, some societies will tolerate more inequality, whether on a transitional or a permanent basis, than others.
Not Equality But Prosperity
To my mind, the important issue is not so much inequality in itself as how to deal with poverty. As developing countries move to a market economy, their governments must continue to be very concerned with ways of relieving poverty, and the main spearhead of the attack on poverty has to consist of finding ways to raise the productivity of the poor. A good deal has been learned about doing this in ways that are consistent with the market economy. The poor have to be given basic services, particularly health and primary education, which are an investment in future economic efficiency as well as a matter of social justice. While they remain poor, they cannot pay for these things. But for their sakes it is vitally important that the overall economy should grow as strongly as possible, both to provide markets for the products of the poorer sections of the community, and also to enable the government to develop a tax base strong enough to provide resources to fight poverty. If the tax system imposes excessive burdens on the wealth-producing parts of the economy, or if it is used mainly for the purpose of redistributing incomes, the result will probably be stagnation. But once a country is set on a track of strong growth, a tax base can gradually be developed which does not undermine growth, and which does increasingly provide the resources needed to improve the life of the poor.
The third question about capitalism is unemployment. In a market economy a flexible labor market, which is necessary for labor to be used efficiently, means that there will be periods when people are out of work, sometimes prolonged periods that can be very destructive of people’s lives and families. The capitalist system, in itself, does nothing for such people, any more than it does for the people who are unable to work for reasons of ill health or deformity or old age. In my view the only kind of market economy which is morally supportable is one in which society provides resources to protect such people (and in this respect I believe Europe is well ahead of the United States). But in poor countries this is obviously much more difficult.
The temptation to which some third world governments are prone is to deal with this problem by sweeping it under the carpet and simply prohibiting unemployment. In India until very recently, government permission was required for a company to close down or dismiss workers, and it was usually refused. The result was that a great deal of absurd game playing went on. Companies which were, in fact, bankrupt and did not have the money to pay their workers, nevertheless remained in being, sometimes enjoying subsidies from the government or getting help from government-owned companies. This kind of refusal to face reality was, of course, characteristic of communism which concealed unemployment by overmanning that encouraged inefficiency and reduced productivity. In the long run this obviously does no good either for the workers of an unprofitable plant, nor for the country which has to find the resources from elsewhere to prop it up.
But facing these realities can have rough consequences for some people, and in poorer countries there is usually no safety net in the form of unemployment pay. In traditional societies, the extended family substitutes to some extent, but with urbanization advancing rapidly in most developing countries, family links and support tend to weaken. The only real answer to this problem is to achieve the kind of virtuous circle of growth which will ensure that, as jobs are lost, new jobs are created in new enterprises or growing ones and that the country gradually produces enough resources to enable the government, by a balanced and prudent use of taxation, to put the necessary safety nets in place. Safety nets are not only a matter of social justice; a good unemployment safety net makes the labour market more flexible and the economy more efficient.
Here, too, the experience of the Far Eastern countries is highly interesting. Japan, throughout its period of extraordinary economic growth covering most of the second half of this century, has had virtually no unemployment. Companies regard themselves as responsible for the workers they take on and this is reciprocated by extraordinary worker loyalty. This only works, of course, when the whole economy is growing strongly, and thus workers do not need to be laid off. The kind of collectivist approach which makes Japanese capitalism so different from that of the West is rooted in Japanese culture and it is probably idle to talk of other countries imitating it.
There is, then, no easy or general answer to the problem of how third world countries are to deal with unemployment and the weak and vulnerable in society, and again, some cultures will deal with it more effectively than others. But in the long term, or even just in the medium term, there is no alternative to strong economic growth as a means of dealing with this problem, and only the market economy will produce that.
The final question about capitalism concerns the profit motive. Should we be worried that capitalism sanctifies the profit motive and thus tends to corrupt the morals and values of society?
There are those who idealize capitalism by speaking of it solely in terms of freedom. But let us give them their due: the profit motive is by no means the only driving force of capitalism. The human response to freedom—the ability of any vigorous and innovative man or woman, without interference from the state, to create something new—is a powerful force. (Keynes described this drive in slightly less exalted language as “animal spirits.”) And we should not forget that human motivations are tremendously mixed. Even in enterprises whose institutional raison d’être is profit-making, individuals are motivated by professional pride, a desire to earn the respect of their colleagues, and by a sense of service to the community.
Having said all that, it remains true that the desire to make money, a somewhat less noble motive, is necessary for the capitalist system to succeed. Capitalism is based on a kind of realism, and it surely behooves Christians to be realistic about human nature. The market philosophy not only recognizes some less admirable aspects of human nature, but seeks to use them for the common good.
This realism contrasts directly with the illusions on which communism was based, illusions about the ability or willingness of human beings to act unselfishly. The exposure of the hypocrisy, misuse of power, and sheer corruption of the communist systems in Eastern Europe demonstrated how unrealistic that view really was. Perhaps the most telling condemnation of communism was its extraordinary failure, in Eastern Europe and in the Soviet Union, to deal with the environmental problem. Here was a social system which purported above all to promote the communal good. Protecting the environment is a communal interest, and communism should have done better, precisely in that area, than the individualistic West, but the reverse was the case. The horrors of environmental degradation and pollution now being seen in the former communist world drive home the point that we do not succeed by building a society on illusions about human nature.
Historically, capitalism and democracy have by no means always gone together. In the third world, certainly one can think of countries which have been fairly successful capitalist economies under political dictatorships (Korea and Chile in the recent past). But there is surely a basic affinity between democracy and the market economy: they are both systems of choice and realism. By his choices as a consumer, the citizen determines what will be produced in the economy, and through his choice at the ballot box what sort of government he will have. Well regulated capitalism and political democracy are both based on realism about power, which is diffused and at the same time constrained. With all its imperfections, the most mature form of society that history has produced is the combination of the market economy with political democracy.
So what attitude are we to take to the profit motive? I suggest there are two dangers to be avoided. First, realism should not degenerate into cynicism. People who are not involved in business should be very careful about taking up an attitude of moral superiority about the profit motive. For the market system to work efficiently we need the profit motive. It is a powerful engine which can bring great benefits for society. Of course, we are right to condemn it when it takes extreme forms, when businessmen or stock market operators appear to be consumed by greed. Obviously it can and does corrupt some people.
But remember that a great deal of the time, in a mature capitalist society, the profit motive is more an institutional driving force than a personal one. As I said earlier, individuals working for companies aiming for profit may be activated by a great variety of motives.
The second and opposite danger is that of idealizing the profit motive. There are silly people who think that engaging the profit motive is the only way to get anything done efficiently. Common sense and experience tell us that many other motivations can also produce benefits to society. Are we to say that military service cannot be efficient because profit is not involved? And if the motivation of service can produce efficiency in the armed forces, why not elsewhere? I believe that harmful effects can be produced when the profit motive is introduced into areas where it is really inappropriate, and I would regard medical services as one of these. When this activity is seen mainly as a business there can be unpleasant results. At the same time, in countries where medical services are run mainly as a business, such as the United States, many doctors are quite obviously activated by motives of service, although they work within that system. There are other activities (for example, education or publishing newspapers) where the community can benefit from a form of organization which seeks enough profit to sustain itself, but when profit becomes the driving force, the institution is distorted and the community is not well served. The same is not true of producing and selling shoes or automobiles. We need to make these distinctions and confine the profit motive to where it is most useful and does not do harm.
How do we strike a proper balance in these things? Clearly, the law has a part to play in restraining excesses of greed, partly by making sure that the rules of fair competition in the market economy are properly observed. But probably more important is the public ethic. Public values are a powerful force: defining the sort of behavior that society respects and expects. Excesses of greed and the intrusion of greed into areas where it would do particular damage—these things are to be restrained not only by the law, but by the attitudes of society and society’s spokesmen. The civilizing of capitalism depends mostly on this.
Civilizing Capitalism in the Third World
How does all this apply to developing countries? I have said a number of things about the legal regulatory mechanism which developing countries need to make capitalism work acceptably. But when it comes to the public ethic, of course each society will have to find its own road. Many third world countries are the heirs of civilizations and moral traditions older than our own, but nowadays they find themselves struggling with problems which these inherited traditions do not equip them to deal with very well. Despite the variety of historical and religious traditions in the third world, I believe that the concept of what I have called the mature society, the market economy combined with political democracy, is relevant in developing countries too and becomes increasingly more so as levels of education rise. But there must be many variations in the way public morality and religious traditions can civilize capitalism, while still allowing the community to have the benefits of a market economy.
We already have enough experience to show that capitalism can be successfully integrated into very different societies. Even in the West, modern capitalism was not integrated instantly or easily. In Britain, which was the first industrial-capitalist society, the process of integrating capitalism and capitalists into the pre-existing society, based mainly on the land, was a slow and difficult one in the late-eighteenth and early-nineteenth centuries, and there was then no experience elsewhere to learn from. In the United States, without the rigidities of the old world society, the process was less troublesome. In Japan, Western capitalism seemed at first an extraordinarily alien transplant, but in the course of time we have seen capitalism successfully reconciled and integrated into that highly collectivist society with strong traditions utterly different from our own. The same seems to be happening in Korea.
As for developing countries, the situation is so varied that it is impossible to generalize. If I venture a few selective comments they will be mainly to illustrate that diversity and sketch out an agenda. In Latin America, the religious background is of course Roman Catholic but with influences from pre-existing native American religions still surviving. Mexico, besides this religious background, has its own particular socialist/nationalist tradition, but now appears to be moving fairly successfully towards a market economy. Argentina is essentially a European country which has suffered great harm from its own brand of populist socialist, namely Peronism; in the last two years it has taken such dramatic steps towards a market economy within a democratic framework that one can be relatively optimistic about the future.
On the other side of the world, India is a country with strong moral traditions rooted in a religion which does not seem basically at odds with capitalism except in the sense that it embodies a kind of fatalism. Nevertheless, capitalism is already vigorous in India, and I believe the country has a reasonable chance of reconciling the market economy with its own social values. A negative factor there (found in other countries too) is a tendency for people in the government and the professions to look down on businessmen as people who merely make money. It is not difficult to think of a number of outstanding Indian businessmen who have demonstrated a strong social conscience, but business leaders need to be better integrated into society and called upon to make a contribution in public affairs and the life of the community.
Much the same could be said of Pakistan, although of course the religious background is very different. There are questions about the compatibility of the Muslim religion with capitalism, a subject on which I am not expert. Modern Islamic fundamentalism, as seen in countries like Iran, Iraq, and Syria, has a strong nationalist-socialist flavor which is not friendly to the market economy. The prohibition of interest payments in the Sharia law, if applied in its full rigor, would make the market economy virtually unworkable, but it seldom is fully applied and has not stood in the way of capitalism at the very heart of Islam in Saudi Arabia. On the other hand, Egypt, with its ancient bourse, was a capitalist country which turned to socialism in the 1950s, more under the influence of nationalism than religion, and is now turning back to market economics. Countries like Turkey and Morocco seem to find less difficulty in reconciling a market economy with Islam.
As for China, this is surely a naturally capitalist country whose own special combination of pragmatism and collectivism gives it a good chance of managing the market economy, when it emerges—as I believe it will—in a socially acceptable way of its own. The Chinese of Taiwan, Hong Kong, and Singapore have demonstrated the keen entrepreneurial spirit of the nation. We are now seeing the same spirit thriving even in the communist homeland, in the south and in Shanghai, and it may be that the mother country will be better able to strike a good balance between the public and the private good.
In Africa, very little native capitalism exists yet, but there is plenty of evidence of entrepreneurship. In most African cultures the pressure on the successful businessman to share the fruits of his success with the extended family are strong and one might regard this as a means of constraining and civilizing capitalism—perhaps too much. Certainly, one of the benefits which Africa stands to gain from a market economy is a reduction in the opportunities for corruption offered by the exercise of arbitrary power. Building up the legal and political systems needed to improve the quality of government in Africa will take time, but there are some small signs of progress.
To sum up, capitalism in the form of a well-regulated market economy is, I believe, the surest way to rising standards of living in developing countries, as in the West. For that to be achieved the state has a key role to play—to ensure fair competition, protect the weak, and provide basic infrastructure. It is vitally important to define and limit the role of the state. Things go wrong when the state itself tries to do what the private sector can do better, as has happened in most developing countries in recent decades.
In all countries it is vitally important to develop a set of public values, rooted in native moral traditions, which both support a market economy and restrain the misuse of wealth and power. Such public values will be most effective if they are combined with democratic political systems, which will naturally take different forms in different cultures. Experience shows that the chances of success are better in societies that have achieved standards of living which support high levels of education, combined with public access to information by all the means that modern technology offers. In such conditions democratic political institutions have a better chance of success, and it is more likely that the civilizing of capitalism will be successfully accomplished.