Is this the end of capitalism as we know it?

By XN Iraki

Since 1776 when Adam Smith wrote "The Wealth of Nations," capitalism has been said to be the golden road to prosperity; it has withstood several tests from the Great Depression in 1933 to the two world wars.

It outlived communism and its utopianism. After the fall of the Berlin war in the 90s and the conversion of former Soviet Union and Eastern bloc countries to market system, it seemed capitalism had finally triumphed and the world had no choice, but to adopt capitalism as the holy grail of economic prosperity.

But a few events in the last few months have dented our faith in this system. We can boldly ask if these events mark the end of capitalism, as we know it. Will a new system replace capitalism? What is its name and how soon will that be?

Economic events were in the past isolated, affecting a nation or only a group of them. Today, our economies are like the medieval societies where plagues spread from one country to another.

new problems

It seems that what we conquered through advances in biology, mutated into something we cannot tame in economics and finance.

We still do not fully understand what causes economic crisis like recessions; we still cannot inoculate our economies against the malaise of recessions.

Just when we thought we understood the economic systems, new problems arise to challenge our conventional thinking. A few examples.

In UK, the Central Government did not hesitate to nationalise a ailing mortgage firm, the Northern Rock.

The amazing word is nationalising, a word that often evoked risks, communism and the antithesis of capitalism.

Yet it is UK that gave us some of the world’s leading advocates of capitalism.

The argument given for nationalisation is that it stopped the contagion from affecting the rest of the UK financial system. Ireland in the neighbourhood was not left behind in shoring up her banks.

more regulation

UK was trying to contain the aftermath of the financial and economic meltdown in the US, where unusual decisions were also taken.

Some famous investment banks reverted to bank holding companies subjecting themselves to more regulation, yes more state regulation, but with greater access to liquidity, and deposits.

The same investment banks had spent years fighting off regulation or inventing financial instruments (like derivatives) that circumvented the prevailing regulation.

The two countries are cited for the vigour in which they have sold capitalism. The heydays of market system or capitalism coincided with Reagan presidency and Margaret Thatcher’s premiership in UK.

They preached and practiced the virtues of market system. Both are remembered for deregulating industries then thought as sacrosanct such water, railways and airlines. They ruthlessly dealt with labour unions with Reagan sacking air traffic controllers for going strike. Thatcher fought and won over coal miners who went on strike for more than 11 months.

The argument was that labour like any other factor of production should be easily bought and sold in the market.

Labour is under the laws of supply and demand and unions interfered with such laws leading to higher wages without commensurate productivity.

Through IMF and other institutions, these countries demanded the end of price controls, and privatisation of state firms, still ongoing in Kenya.

undesirable decision

Developing countries found themselves making very socially undesirable decision like cost sharing in Kenya.

The famous structural adjustment programmes were supposed to harness the power of the market.

Yet, long before the meltdown in the Wall Street, some people were sceptical about the success of the western models in countries where traditional thinking was culturally anti- capitalism.

Some argue that the voices that resisted these models should have been louder, but who wanted to be labelled Marxist?

Others argue that Scandinavian countries long saw the dark side of capitalism and came with their hybrid system, where the government is big, and plays a greater role in social welfare. Is US copying these countries? The events in UK and USA may easily tempt one to believe that capitalism is under threat. My hunch tells me no.

The greatest strength of capitalism is its ability to renew itself and adapt. The unexpected reactions in the current crisis are likely to be short-term.

government role

Capitalism appreciates that the government has a role to play in the economy, the reason we have central banks and politicians making economic decisions from minimum wages to the use of monetary and fiscal policies.

Many have predicted the end of capitalism but it has outlived them. What is clear is that capitalism as we know it will continue evolving as it reacts to events spawned by the same capitalism.

The system ought to be self-correcting, generating new ideas and jettisoning moribund ones.

We should not celebrate the misery of western countries, we should learn from them, so that as we adopt their systems, we should inject our own ideas and put our own context into consideration.

We can build our own brand of capitalism; after all I highly doubt if Karl Marx would still attract a huge crowd if he were to hold a public rally to discuss the solutions to the current crisis.

The writer is a lecturer at the University of Nairobi, School of Business. xniraki@aol.com