The former governor of RBI and the chief economist of IMF Dr. Raghuram Rajan recently told BBC that,
I think capitalism is under serious threat because it’s stopped providing for the many, and when that happens, the many revolt against capitalism.
He said governments cannot afford to ignore social inequality when considering the economy.
Is Rajan correct?
To understand whether Capitalism is under any kind of serious threat or not we first need to know what Capitalism is? Robert Murphy, in his book Lessons for the Young Economist, gives the detailed definition of Capitalism,
A capitalist system is based on private property. In this institutional arrangement, goods and services are owned by individual private citizens, or by groups of such citizens. In a pure capitalist system, not only every house and car, but every tractor, acre of farmland, and assembly line are all respectively owned by private citizens, sometimes organized in groups. A good’s owner is the person with the legal authority to decide how that good shall be used. So in a capitalist system, when a man spots a coconut, he isn’t (legally) allowed to consume it, unless he is the owner, or unless he gets permission from the owner. (p. 73)
And Murphy further reminds us that,
In practice, there are no real-world examples of a pure capitalist system. In addition to its private sector, every major economy today has a public (government) sector. (p. 74)
So, as Murphy says, there are no pure capitalist economies around the world today and so no Capitalism e.g., in USA the share of government spending of total GDP in 2017 was 38%. In OECD countries this share ranges from 25.4% (Chile) to 56.5% (France). The Indian government’s spending to GDP ratio was 12.7% in 2017. This means, around the globe governments are outright owner of an average one third of the economy. Most natural resources are also owned by the governments. And those means of production that are not outright owned by the government are heavily regulated by it.
This means, the system of private property Capitalism is almost non-existent in today’s world. And so to call the present world economic order Capitalism is to misunderstand and misrepresent it. The system that doesn’t exist can’t be held responsible for not providing riches to all (many) and for creating inequality.
As I have discussed elsewhere, Rajan is prone to such confused thinking. What Rajan calls Capitalism is Socialism in disguise. This interventionist mixed economy around the world is just another variant of socialism. And this socialism is responsible for all the ills that Rajan mentions above. The reason why Capitalism is not able to provide riches to all is because it is not allowed to work by the socialistic policies of the government. The social inequality is a product of government’s fascist policies where government officials dole out largess to their few friends in the corporate sector at the cost of majority public. Governments’ central banks are responsible for creating huge inequalities, and not Capitalism.
Looking at these facts, Rajan can only be correct in one way in saying that, Capitalism is under serious threat. Yes, Capitalism is under serious threat but not because of its inherent weaknesses but because it is under heavy assault of the state and its socialist policies. Capitalism has to be saved not from Capitalists, as Rajan said, but from the state.