By W.A Wijewardena –
Bastiat Society in Colombo
“Is capitalism immoral?” This was the question which Tom G. Palmer of Atlas Network – a US-based non-profit organisation that networks liberty and free enterprise promoting think-tanks world-wide posed to a select audience of the newly-formed Sri Lanka Chapter of Bastiat Society in Colombo last week.
He answered his question with a resounding negative, “Not at all”, and went onto justify his stand. Formed in 2004, the Bastiat Society takes its name from French Economist, Philosopher and Lawmaker Frédéric Bastiat who lived between 1801 and 1850. Bastiat, like his British counterpart Adam Smith who prelived him by a few decades, was famous for his scathing attack on the popular economic wisdom of the day.
Among his many treatises, two were published in long pamphlet form just before his death in 1850: The Law and Selected Essays on Political Economy. They took the philosophy of Adam Smith forward making a strong case for liberty and free enterprise. Palmer liberally drew on Bastiat but did not confine his arguments only to the latter’s economic and moral philosophy.
To many, capitalism is inherently immoral
To many in Sri Lanka, and also many elsewhere in both the developed and the developing worlds, the question posed by Palmer is irrelevant. That is because, for them, capitalism is inherently immoral and therefore there is no need for probing it any further. Then, why should one ask the question again when it has already been answered with a firm ‘yes’, they might argue.
The line of popular argument presented by them goes on as follows: Capitalists who wield both the economic and political power are guided by a life philosophy that all others exist for their benefit. Hence, they believe that there is nothing wrong in exploiting ‘all these others’ no matter what would happen to them as a result of such exploitation. Their motive is that of extreme selfishness and that extreme selfishness does not augur well for the future of this planet. As a result, what society should do is not the promotion of capitalism but the elimination of capitalism, the critics argue.
Capitalism and neoliberalism
A recent development on this line has been the attempt at taking both capitalism and neoliberalism as synonymous. An example is the open condemnation of neoliberal economic policies by former President Mahinda Rajapaksa and his top economic policy advisors.
Accordingly, Mahinda Chinthana, the election manifesto of President Rajapaksa, declared that he would not follow neoliberal policies that have failed even in developed countries. This rejection of neoliberal economic model was more markedly pronounced in the Budget of 2012 claiming that it was as destructive as the brutal terrorist movement that was resolutely defeated by his government in 2009.
The new Government that defeated Mahinda Rajapaksa did not want to risk its political future by supporting capitalism or neoliberalism. Taking cue from the openly growing animosity of the electorate against the two policy models, it has rebranded itself a Government of ‘social market economy policy’ in the country thereby distancing itself from its past ideologies. Hence, even the political leaders do not dare to support capitalism or neoliberalism in public because there is no sympathy in Sri Lanka for either one of them.
Palmer seeking to change the course of the tide
In this background, Palmer’s public lecture in Colombo on the Morality of Capitalism was a bold attempt at changing the course of the tide. He took his audience, apparently a selected crowd of like-minded people, through the philosophy of Bastiat, Adam Smith, John Locke and J.B. Say who had spoken of liberty, human entrepreneurship, prosperity of society and free exchange in 17th to 19th centuries.
He commenced his lecture quoting Bastiat from Selected Essays on Political Economy in which Bastiat had distinguished between a bad economist and a good economist. Bastiat had said that any given action – maybe an act, a habit, an institution, or a law – leads to some effects which can immediately be seen and a subsequent series of action that cannot be seen but has to be foreseen. The difficulty is to foresee those subsequent effects.
The job of a good economist is to see both the seen-effects and the effects that have to be foreseen. A bad economist, to the contrary, according to Bastiat, will confine himself only to those effects which can only be seen. This is a criticism which Bastiat had levelled against those economists who had been aplenty in his time and who would just jump into conclusions without analysing the whole gamut of the effects which a policy action or an intervention of the government would bring about. Such economists are aplenty even in the modern times.
The need for knowing beyond the eyesight
This analysis by Bastiat is not new and it had been known even in the Buddha’s time. As this writer presented in a previous article titled ‘Market Economy System: Human or Inhuman?’, a story relating to Prince Siddhartha has been as follows: “King Suddhodhana is reported to have once questioned Shakya princes whether they knew how rice was made available to them. One Prince had replied that when one sits at the gold-plated table, rice would come to the gold plate. Then another prince had disputed him and said that rice had to be served to the gold plate by using a gold spoon. A third prince had disputed both of them. He had said that for rice to be served with the gold spoon, it had to be brought to the table in a silver platter. A fourth prince had further wisdom: rice should be served to the silver platter out of a copper cauldron in the kitchen. While each one had his own observation, none of them could give the full story. It was Prince Siddhartha who had the full knowledge on the story of rice. He had explained in minute detail how farmers till the land, how they feed the bulls which plough the field, how blacksmiths make mamoties, ploughs, sickles etc., how farmers protect their paddy fields day and night, how it is harvested, threshed, and transported to stores in carts, how carts are made, how the draught bulls are fed, how paddy is milled etc. Of all the Shakya princes, only Prince Siddhartha had the vision beyond the eye-sight. In Buddhist Discourses, this vision is referred to as parigngnaanaya. For instance, in the Discourse on the Origin (Muulapariyaaya Sutra) in the Majjima Nikaaya, the Buddha preaches that those who are without this vision cannot properly understand the real nature of phenomena. As a result, they get themselves attached to such illusive phenomena thinking that they are all real. On the contrary, those who are with the vision do not suffer from this deficiency”.
Bad economists see only the visible
The bad economists referred to by Bastiat are simply those who do not have a vision beyond their eye-sight according to the Buddha. They just see what they can see with their naked eye and cannot see the intricate series of effects that are naturally brought about by any economic policy action.
Hence, what they recommend therefore leads to a series of consequences which are intended as well as unintended. Since they are unable to foresee the unintended consequences, the overall policy analysis made by them leads to a total loss to the society.
Mao Yushi: Seeking gains in a negotiation is not abnormal
Palmer has quoted the Chinese liberal economist Mao Yushi who won the 2012 Cato Institute’s Milton Friedman Prize for Advancing Liberty: Yushi says: “In business deals in the real world, both parties to a transaction seek their own gain and through negotiations over terms, including price and quality, both sides can reach agreement.”
In a system where people have property rights, they wish to dispose of their property through market exchanges. What is the motive behind such market disposals? That is the self-gain and self-interest. It is this self-gain and self-interest which has been branded by critics as immoral in capitalism. But without the self-gain and self-interest, an economy cannot function and when it is absent, an economy would move to a chaotic disorder.
An example from the market
This phenomenon can be illustrated by taking a simple example from the market. Suppose the farmers of Nuwara Eliya produce carrots and consumers in Colombo consume those carrots. In between the producer and the consumer, there are a number of intermediaries functioning to facilitate the transaction between them. They are the truck drivers who transport those carrots to the wholesale market, the wholesalers who stock them and make available to retailers and retailers who actually make them available to consumers in Colombo. Each party does what he does not out of sympathy or mercy for the other party. They do so out of the consideration for their own survival and sustenance. Suppose farmers are forced by the government or some other authority to give those carrots freely to consumers. How long can they do so? Probably they can do so only or two times without perishing themselves. If they perish, the consumers in Colombo who had enjoyed free carrots would find that they do not have carrots now at all. Hence, the continued supply of carrots to the consumers can be ensured only if the self-interest and self-gain of numerous people working in the economy are recognised.
That law is equally valid for the capitalist who has invested his money or the worker who has chosen to supply his labour to the capitalist. If both come into an acceptable term through negotiation, then, both can ensure their own survival and sustenance. This is the moral philosophy behind capitalism.
If people act only in the interest of others, it leads to a chaotic situation
Palmer presented in his speech the other side of the story too. What would happen if both the producer and consumer act simply in the interest of the other? Can the economic system reach an orderly solution?
In a normal market where producers and consumers act in self interest and self gain, a producer will seek to sell at the highest price and a consumer will seek to buy at the lowest price. This is the normal law of supply and law of demand taught in Advanced Level economics classes. Since both are negotiating for their own benefits, both can come to an agreement from which they need not move away with respect to price and quantity.
To illustrate his point, Palmer took a case where these two laws do not stand. Accordingly, the producer tells the consumer that he could buy the product at a price lower than the one he has offered to buy. But the consumer would not agree to it since he is willing to act in the interest of the producer. He says: “What nonsense, accept even a higher price than the one I have initially offered.” The producer does not agree to this proposition. He says: “I want only your happiness. Therefore, buy it even at a price lower than the one I have initially offered”. Both will continue to argue but will never be able to reach an agreement since they are moving farther and farther away from a price to which both can agree. Thus, the economy moves into a chaotic disorder.
Capitalism brings a win-win situation for all
Hence, both the producer and the consumer are benefitted if both act in their own interest. Palmer named an agreement reached in such a situation as a ‘positive sum game’ where the overall benefit to both parties will end up as a net benefit. Management strategists call this a ‘win-win strategy’.
The critics of capitalism tend to label the outcome of a negotiation under capitalism as a ‘win’ for the capitalist and ‘lose’ for the workers. But Palmer says that it would not happen in a free market economy where institutions have been strengthened and weaker parties have been taken care of. According to him, capitalism involves, in addition to free exchange, a system where there are property rights, rule of law and a strengthened institutional structure. Thus, it is not only an economic system, but also a cultural system where there is continuous innovation resting on the well defined legal structure.
When all these are taken together, the system forms what is explained as capitalism or free market economy system or neoliberal economic system. The opposite of this, according to Palmer, is the crony capitalism where there is no rule of law, law and order or property rights.
Cronyism in any form is a disease
Palmer says that in crony capitalism, a few people will get around politicians, seek favours from them in exchange of their support. Accordingly, those in power bend the rules or apply them arbitrarily to favour their friends at the expense of others.
When this system is driven by the private sector, it is called by crony capitalism. When it is driven in the name of socialism, it is called crony socialism. If the system is driven through state expansion, it is called crony statism.
In the past few years, Sri Lanka had experienced a mixture of all these three systems and not the type of moral capitalism which Palmer talked about. Palmer’s diagnosis is that cronyism in whatever the form is a disease. His prescription is therefore the establishment of free market economy system with rule of law, law and order, property rights and strengthened institutions.
*W.A Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka can be reached at email@example.com