I have little understanding of these topics, but have been keen over the last few months to gain an understanding of political and economic models, and what kind of models and what kind of development, countries should pursue in the future. It seems rather obvious that whatever has been tried so far has failed- though possibly some of these models are good, but have failed due to poor implementation or human foibles. With this objective, I have started reading various articles on the net, social media, and have also purchased 3 ebooks- Capital in the 21st Century (Thomas Piketty), America beyond Capitalism (Gar Alperovitz) and No Local (Greg Sharzer). As I try to get my head around these things, I will share my thoughts on this blog.
A McKinsey Quarterly article was shared by a friend on facebook recently- it’s called “Redefining capitalism’. The authors argue that-
- Capitalism has been the major source of historical growth and prosperity
- However, we do not generally understand how and why it worked well, which comes in the way of our ability to improve the capitalist system
- The dominant economic paradigm over the last century has been that supply and demand will balance each other (based on firms who are trying to maximize profits and rational consumers who are trying to maximize ‘utility’) to ensure that resources are allocated in a socially optimal way (this is called ‘neoclassical economics’)
- This paradigm has come under question given mounting evidence to the contrary (that humans do not behave in this expected ‘rational’ way), and the failure of macroeconomic models built on this paradigm during the financial crisis
- Economics functions more as a complex, continuously evolving ecosystem of players and forces, and cannot be reduced to the ‘mechanistic’ neoclassical model.
- “Markets are evolutionary systems that each day carry out millions of simultaneous experiments on ways to make our lives better. In other words, the essential role of capitalism is not allocation—it is creation. Life isn’t drastically better for billions of people today than it was in 1800 because we are allocating the resources of the 19th-century economy more efficiently. Rather, it is better because we have life-saving antibiotics, indoor plumbing, motorized transport, access to vast amounts of information, and an enormous number of technical and social innovations that have become available to much (if not yet all) of the world’s population. The genius of capitalism is that it both creates incentives for solving human problems and makes those solutions widely available. And it is solutions to human problems that define prosperity, not money.”
- Prosperity in a society is the accumulation of solutions to human problems, and cannot be measured by money. An example of an American with more money living along with an Amazonian tribe is shared- where he does not have access to air-conditioning and antibiotics and is therefore less prosperous.
- GDP is not the right measure of growth and instead growth should be measured by the rate at which new solutions to human problems become available.
- Capitalism is the evolutionary system for finding these solutions to human problems- it provides incentives for problem-solving experiments to occur, competition to select the best solutions, mechanisms for scaling up and making the best solutions available etc.
- Businesses should not have the ‘creation of shareholder value’ as the primary aim, but should be seen as society’s problem solvers. An example of Google refusing to provide quarterly financial forecasts is given.
- It is not always clear whether an activity is solving problems or creating problems- in fact, it may solve problems for some and create problems for others. Democracy is a way of enabling people to be both creators of solutions and customers for other people’s solutions. Governments are required to regulate things- encouraging economic activity that solves problems and discouraging economic activity that creates them. Most prosperous economies in the world mix regulation with free markets.
- The metrics of businesses should therefore move away from profits, growth rate and shareholder value to ‘what problems’ a business has solved.
I found the article interesting and insightful, but have some questions-
- Isn’t it rather simplistic to argue that capitalism is the best ‘evolutionary system’ that will surface solutions to problems? The incentive for the innovation after all seems to be personal greed- so why would the innovator be committed to the best solution? Even assuming that competition will ensure this, and that businesses are not motivated by greed, it seems to me that understanding problems- connecting the dots, is not easy and it is not obvious to me that such an evolutionary mechanism will lead to answers to problems. In fact, I think many of the bigger problems are not even understood- leave alone talking of solving these problems.
- Aren’t the suggestions rather romantic, ignoring the nature of forces involved in the concentration of capital in the hands of a few?
Complex issues..I shall continue to think about these, and see what experts have to say on these things.