Poverty amid plenty and joyless affluence are but symptoms of a profound disorder. Tibor Scitovsky Capitalism, in its classical laissez-faire sense, does not exist anywhere. has been modified over the centuries. Governments have intervened extensively to correct some of its deficiencies and to offset, at least partly, some of its adverse effects on equity. Nevertheless, it continues to exercise a charismatic appeal as a model.
This appeal has gained further strength from the failure of socialism, the disenchantment with a large government role in the economy, and the backlash against the welfare state. Calls have been intensified in recent years from both intellectual and political platforms for liberalism, or a return, as nearly as possible, to the classical model with ‘minimum’ government intervention. This call is at present tending to dominate the thinking and economic policies of not only the Western industrial countries but also a substantial part of the Third World and the now-liberalizing Communist countries.
It is hence desirable to understand the logic of the system, the factors that led to the development of its worldview and strategy, and to see whether it is logically possible for this system to realize efficiency, which is taken for granted as its hallmark, and equity, which many economists now recognize, it cannot realize. Some of the modifications that had become a part of the conventional wisdom as a result of the system’s failures, but which are now being challenged, will be discussed partly in this Chapter but mainly in Chapter 3 on the Welfare Stale.
Capitalism may be said to have the following five distinguishing features: (a) it considers accelerated wealth expansion and maximum production and ‘want’ satisfaction following individual preferences to be of primary importance in human well-being; (b) it deems unhindered individual freedom to pursue pecuniary self-interest and to own and manage the private property to be necessary for individual initiative; (c) it assumes individual initiative along with decentralized decision-making in freely operating competitive markets to be sufficient conditions for realizing optimum efficiency in the allocation of resources; (d) it does not recognize the: necessity of a significant role for government or collective value judgments in either locative efficiency or distributive equity; and (e) it claims that serving of self-interest by all individuals will also automatically serve the collective social interest.
The crucial feature in the entire logic of the market system is the claimed symmetry between public and private interests. It is assumed that individuals, in their capacity as sovereign consumers, act rationally and maximize their utility by buying at the lowest price the goods and services that occupy a higher place on their preference scales. Their preferences are reflected in the marketplace through their demand or willingness to pay the market price.
Individuals, in their capacity as producers, also act rationally and respond ‘passively’ to this demand by producing at the lowest cost whatever will help them maximize their profits. The free interaction of utility-maximizing consumers and profit-maximizing producers under perfectly competitive market conditions determines the market clearing prices for goods and services. These prices (and costs, which are also prices) serve as an impartial, value-neutral filter mechanism and lead to the production of that configuration of goods and services which is in maximum harmony with consumer preferences. These prices also automatically determine the transfer of resources from one use to another, thus contributing to their most efficient utilization without anyone’s conscious effort or intervention.
Since the resultant configuration of goods and services is a reflection of consumer preferences, it is the most ‘efficient’ – it is not possible to improve upon it. Since this configuration also determines the incomes earned by the respective factors of production based on their contribution to output and revenue, the resultant income distribution is also ‘equitable. At the point of equilibrium, consumer satisfaction (utilities) are maximized, supplier costs are minimized, and factor earnings (including wages and profits) are maximized.
The market system, it is thus concluded, determines not only the most ‘efficient’ use of resources but also the most ‘equitable’ distribution of income rationally and impartially without value judgments. It also automatically brings about a harmony between private and public interests. Questions about whether this configuration satisfies basic human needs and whether the distribution is equitable are improper because such questions cannot be answered without collective value judgments which, unlike market clearing prices, cannot be established impartially. Questions about differentials in wealth holdings are similarly improper because the wealth of individuals represents the savings resulting from the market value of their contributions to output and their abstinence from consumption.
Hence there is no need for government intervention except to the extent to which it is necessary to ensure competition and orderly markets and to offset market failure in the supply of public goods. Every competitive equilibrium is considered to be a Pareto optimum – it is not possible to make anyone better off without making someone else worse off – which must be accepted as both ‘efficient’ and ‘equitable’. Thus the terms ‘efficiency’ and ‘equity’, as defined within this framework, do not have a direct relationship with the objectives of removing poverty, fulfilling needs, and reducing inequalities of income and wealth. It is assumed that these objectives will also be realized as a ‘necessary’ concomitant of ‘efficiency’ and ‘equity’ brought about by the competitive equilibrium. Any outside intervention to change the status quo must necessarily lead to results that are less ‘efficient’ and ‘equitable’. The only acceptable way to change the status quo would be within the framework of Pareto optimality – to make some people ‘better off’ without making anyone ‘worse off’. But history and experience belie the claimed symmetry between private and social interest.
The system has failed to release equity. The ‘invisible’ hand of market forces, guided primarily by ‘self-interest’ has led, in the words of Dalton, to “an inhumane, squalid and unjust society of rampant commercialism, social division, and conflict between employer and employee, landlord and tenant, and ruler and ruled.”) The reason is that the logic of capitalism is based on several assumptions about preconditions that are unrealistic and which have not been and cannot be satisfied under normal conditions. As Brittan has rightly indicated: “The full set of assumptions, side conditions, and constraints required for the pursuit of market gain to yield beneficial results can never be fully written down. Many of the most important rules are not formulated explicitly until a special problem arises.”4 Since the secularist thrust of capitalism’s worldview has played the most decisive role in its failure to harmonize individual and social interests, it is important to look at the historical factors that have led to the development of this worldview.
THE THRUST TOWARD SECULARISM
The Enlightenment Worldview The worldview of capitalism was greatly influenced by the ‘Enlightenment’ movement stretching over approximately two centuries, from the early 17th century to the beginning of the 19th. The Enlightenment, a term often used interchangeably with the Age of Reason, was in its extreme form’ a repudiation, and some respects an antithesis, of much of Christian belief. It is beyond the scope of this book to go into the many reasons for this anti-religious posture. One of them, certainly, was corruption and despotism in the Church. There was” so much laxity of morals among the clergy that a thousand testimonies could be adduced to prove it.
This anti-clerical sentiment, unfortunately, also shook confidence in revealed religion so that everything that the Church stood for came to be regarded as “quite untenable”. Voltaire’s “crush the infamous thing” rang through the Enlightenment periods Durant asserts that’ ‘The Church might have sustained the supernatural sanctions provided by the Hebraic Scriptures and the Christian tradition if her personnel had led lives of decency and devotion.”9 The leading Enlightenment thinkers crowned human reason as the absolute sovereign of human affairs in place of faith and intuition. Knowledge was to be derived from only sense perceptions. Great confidence was placed in the power of reason alone to establish ultimate metaphysical truths. The classic sequence of Locke – Berkeley – Hume – Kant acquired respectability among the elite and played an important role in arousing general skepticism about God, the immortality of the human soul, moral values, life after death, and other religious notions. Hume described such beliefs as “sophistry and illusion. Such remarks helped create a favorable climate for the acceptance of the Newtonian worldview which reduced God to the position of a “clock-maker”, who had to exist to set the “Newtonian world machine” in motion and to guarantee its uninterrupted running, but who did not interfere with its operations. This was stated by Voltaire in the oft-quoted aphorism: “If god did not exist, it would be necessary to invent him.
This mechanical concept of the universe led to a mechanical explanation of even the human soul. Man, like the physical universe around him, began to be treated as the chance product of a blind, purposeless nature operating through accidental variations in a self-designed and self-propelled evolution. He was at the mercy of brute forces that “unknowingly happened to throw him into being. It did not matter whether the assumptions on which the new worldview was based were ‘scientifically’ valid or not. In the name of science, they were taken to be a priori well-grounded. The hold of religion, which provides the sanction for morality and human brotherhood and which, therefore, constitutes the foundation of life, thus became continually weaker. If the existence of God is doubtful or carries no significance for human life, then there is no question of continuity of life after death or of accountability before the Supreme Being. If indeed there were some ultimate purpose in life, it was, according to Descartes, impossible for us to know. Human purpose became a concept that was “scientifically useless and gradually disappeared from social thought.
Accordingly, Bertrand Russell concluded that “all the labors of the ages, all the devotion, all the inspirations, all the noonday brightness of human genius are destined to extinction in the vast death of the solar system, and the whole temple of Man’s achievement must invariably be buried beneath the debris of a universe in ruins. If there is no ultimate purpose in life, there is no question of transcendental values to live for. Everything is permitted. The only foundation for values, as Sartre epitomized, is human freedom and no external justification is needed for the values that anyone chooses to adopt.18 Social Darwinism further reinforced this idea and its concepts of ‘struggle for existence’ and ‘survival of the fittest’ took root.