REALITY CHECK: WHAT AILS CAPITALISM?

One would think that the "most capitalist person" in the world's most capitalist country might say otherwise. But:

"As I see it, there are two great forces of human nature: self-interest, and caring for others. Capitalism harnesses self-interest in a helpful and sustainable way, but only on behalf of those who can pay. Government aid and philanthropy channel our caring for those who can't pay. But to provide rapid improvement for the poor we need a system that draws in innovators and businesses in a far better way than we do today.

Such a system would have a twin mission: making profits and also improving lives of those who don't fully benefit from today's market forces. For sustainability we need to use profit incentives wherever we can. At the same time, profits are not always possible when business tries to serve the very poor. In such cases there needs to be another incentive, and that incentive is recognition. Recognition enhances a company's reputation and appeals to customers; above all, it attracts good people to an organization. As such, recognition triggers a market-based reward for good behavior. In markets where profits are not possible, recognition is a proxy; where profits are possible, recognition is an added incentive...

The challenge here is to design a system where market incentives, including profits and recognition, drive those principles to do more for the poor. I like to call this idea "creative capitalism", an approach where governments, businesses, and nonprofits work together to stretch the reach of market forces so that more people can make a profit, or gain recognition, doing work that eases the world's inequities.

Some people might object to this kind of market-based social change, arguing that if we combine sentiment with self-interest, we will not expand the reach of the market, but reduce it. Yet Adam Smith, the very father of capitalism and the author of “Wealth of Nations,” who believed strongly in the value of self-interest for society, opened his first book with the following lines:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

Creative capitalism takes this interest in the fortunes of others and ties it to our interest in our own fortunes in ways that help advance both. This hybrid engine of self-interest and concern for others can serve a much wider circle of people than can be reached by self-interest or caring alone."

That's Bill Gates speaking at the World Economic Forum in January 2008 at Davos, Switzerland. The whole thing is worth reading, and Gates certainly has walked the talk in the last few years with his immensely valuable charitable work.

But this is the point that free-marketers should remind themselves of. Adam Smith himself advocated the implementation of certain sectors- most prominently education- through government. It is our misfortune that governments have become riddled with so much ineptitude and evil. But still, however difficult it is, the solution must be to reform, not to eliminate government. Today, everybody knows Adam Smith's The Wealth of Nations but we also need to remember his other major work, The Theory of Moral Sentiments. There is no evidence to my knowledge in Smith's writings that he advocated rampant or unfettered capitalism. As Gates says, capitalism should be creative and not unfettered. Maybe that's where it has gone wrong. A while back, I read Milton Friedman's Free to Choose and while much of his philosophy makes good sense, the point is that in reality, people are not free to choose, and it should be realised that while this may be due to government, it is not always necessarily so. We have to dissect the reasons for this stranglehold on freedom of choice that bedevils people and tackle the specific reasons inherent in every context.

But interestingly and rather dishearteningly, a lot of times it is fate itself that leaves people unable to choose. This goes straight to the marvelous idea of "competency" or "capability" that Amartya Sen has expounded. More on it in another post, but suffice it here to say that before people have the freedom, they need the sheer capability to act freely in the first place. For example, what's the point of having the freedom to vote if one does not have the competency to decide whom to vote for? For whatever reason, many people don't have competency of one kind or another to vote, to participate in the market system, to lend their views to expedient social and political discourse. And to blame government for depriving this competency in every case is surely a shallow proposition. In fact, sometimes government is necessary because of sheer scale to give people that capability. In today's world, this system is broken in many cases. It would be defeatism to think that the only way we can fix it would be by eliminating it. First give people the capability, by whatever means, and then they will get the much coveted libertarian freedom of choice to fix the system...and themselves.