Home > Uncategorized > Has capitalism failed the John Rawls rest?

Has capitalism failed the John Rawls rest?

 

We are not born equal at birth. We are not made equal in our schools and colleges. Nor can we have equality thrust on us by an artificially created social order. Nevertheless, a yearning for equality is basic to our sense of justice and fair play. To argue otherwise is akin to setting the clock back. Does the Left have any new answers beyond the shibboleths of the past? Occupy Wall Street (OWS) continues as an inchoate cry in the wilderness, attempting to draw attention to a problem that it is unable to articulate. It is time to move beyond the accepted parameters in which the problem is framed in the US into a larger framework that takes in the rest of the world. The issues in this larger framework look a lot different from the way they look now.

 
The first impression created by OWS is that the inequalities that have shown up in the US represent a failure of capitalism. Much ink has been spilled trying to justify inequality as something inherent in nature forgetting that most human attributes are tightly clustered around a normal distribution curve with few outliers beyond three standard deviations. Does the ratio of the wealth of top 1 percent to mean in wealth distribution match that in a standard normal curve? Obviously, going by this norm, not only do we start unequal but also our system further exacerbates inequality! Given our deeply ingrained sense of justice that demands equality, these attempts to defend the indefensible are misplaced.

 
The second of the arguments advanced in justification of inequality is John Rawls’ proposition that the least advantaged under capitalism must do better than the mean under an alternate system. That is a difficult test to apply in practice, as there are not comparable alternate systems. Rawls’ formulation implies that even if we start out as unequal, acquired attributes such as education combined with equality of opportunity, should produce less inequality than we start with. OWS activists have argued that capitalism has failed to produce less inequality over time and is hence unsustainable.

 
Both these formulations miss the big point about capitalism, which is that capitalism is an economic system of production and wealth creation that is not confined to any specific geography. True, Adam Smith talked of the Wealth of Nations when most production and consumption was local. In today’s context, to talk of the US economy without talking about its trading partner China is utterly meaningless. In a modern economy, that is as tightly integrated as ours, goods are produced in various geographies and consumed in geographies just as diverse. To examine if capitalism has failed, as a first approximation, look at the US and China combined as a unit. Has capitalism really failed?

 
From 1990 to 2007, as US Inc discovered the virtues of cheap Chinese labour, and equally cheap manufacturing infrastructure, factory after factory shifted production from the US to China. What did that mean for labour? Obviously, high cost labour in the US, usually senior in years, was laid off, and younger workers, more in number but at a small fraction of the cost, were hired in China. The combined workforce increased, not decreased, and the combined costs were lower than before. Were the Chinese workers cheated? Far from it, they were happy, they prospered and the marginal utility of every dollar paid to them was greater to them than to the US worker they replaced. As a result of lower costs, profitability of capital increased and those who put up the capital thrived. In short, capitalism worked fabulously, seeking out efficiency and sharing out prosperity to those who grabbed the opportunity. It would be far better if worker mobility was as fluid as capital across national barriers. But the lack of it is not capitalism’s fault.

 
Was this great relocation of factory production from the US to China of no benefit to the US and its people? The US was the single biggest beneficiary of the shift in manufacturing to China. Firstly, it is US capital that reaped the profits and continues to do so. The recession in the US has hardly dented corporate profitability. Secondly, US consumers benefitted from lower costs and wider choice. The dislocation in the US labour markets was claimed to be temporary. Free markets, it was argued, would create higher paid, high value jobs more suited to the US workforce in things like design, engineering, law, finance, etc. While this remains true, the number of such jobs has not proved to be sufficient. Nor has the US education system proved equal to the job of creating such skills. Retraining labour and reorienting education are much more difficult to bring about than thought earlier. Hopefully, these should correct if recognised as urgent problems.

 
If capitalism is not to blame, what accounts for the present US woes? In my view, it is nothing more than the normal excesses of capitalism in two related industries — housing and finance. However, one needs to better understand the genesis of the problems in these two industries before the remedies become obvious.

 
The housing boom was driven to bubble levels by an underlying factor that should not be missed. Senior labour was the first to be displaced by low cost Chinese workers. Such seniors received lump sum payments in compensation that they prudently sought to invest in housing; an asset of immediate use and capable of preserving capital. Housing has a huge multiplier in the national GDP of the US, and the kicker given to housing by senior labour camouflaged falling manufacturing GDP in the last 15-20 years. But for the need to preserve capital by seniors, the housing bubble would have burst much earlier. Housing was joined in its excesses by the finance industry.

 
Two factors drove overcapacity and overreach in the financial services industry. Firstly, the real boom in housing meant a growing mortgage portfolio that had to be financed in the secondary markets. Secondly, there was the need to recycle growing Chinese surpluses from manufacturing to finance consumption and housing in the US. The problem with recycling was that China gathered all the dollar surpluses in government hands and refused to invest them in anything but US government debt. In a bid to make these surpluses available to US households, the US government used its housing finance institutions to feed the housing market with cheap money. Banks thus borrowed cheaply from Uncle Sam to put on housing assets and the liquidity bubble insured prices kept going up lending a false illusion of well being to all involved in the bubble till it burst in 2007.

 
The great manufacturing shift from the US to China was a historic opportunity driven by new transportation, communication and computing technologies. Far from being a failure of capitalism, it was a roaring success. As always with free markets and capitalism, the least advantaged benefitted the most; they just happened to be in China and not the US. And while the US is taking longer than desirable to adjust to the new challenges and opportunities, there is nothing to suggest that its unique dynamism will not prevail again. OWS needs to distinguish between gaming of the system by bankers from the working of the capitalist system. The former was a barely legal fraud made possible by lax regulation. The bankers themselves would love nothing more than to conflate the two. Bending free market rules is not part of capitalism.

 

The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

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