The recent economic downturn has led to several voices round the world questioning the merits and effectiveness of capitalism as an economic system to promote the general welfare of human society.
What a number of people find troublesome is the fact that chief executives and senior functionaries of corporate organizations, particularly in the bastion of capitalism, the U.S., have apparently been helping themselves with large payments from their organizations that were actually going down and several of which have actually become bankrupt. There is also the sad experience of thousands of homeowners whose dreams of owning their own shelter have been destroyed by unregulated mortgage activity run by unscrupulous and incompetent operators. Several voices are asking questions about the root of the current economic crisis which has gripped the entire world and has clearly left so many people vulnerable to great distress and dislocation.
Indeed a number of these questions are valid and justified, but in my view a much greater flaw with the manner in which economic growth and policies to promote it have been functioning relates to a far more fundamental issue. Markets on their own cannot bridge the gap between private costs and benefits on the one hand and social costs and benefits on the other, given that the system of capitalism has been built on maximization of profits and private benefits for the owners of capital. As a result externalities like environmental damage and degradation have remained stranded and unaccounted for in our system of costs and prices. The cumulative effect of this failure can be seen in the problem of human induced climate change which is the progressive result of this form of market failure.
At this stage while, we are looking at various means to bring about adaptation to the impacts of climate change and the implementation of effective mitigation measures by which we can stabilize the earth’s climate, a more fundamental discussion needs to be undertaken essentially in the arena of economic analysis and policies by which governments are motivated or even compelled to adopt policies by which this gap can be closed and the problem of market failure addressed effectively. However, this would only happen if in democratic societies the public demands policies which close the gap between private and social benefits with due regard to costs associated with both. This is where I believe civil society needs to be transformed from actually being and seen to be mere whistle blowers on economic violations that affect the lives of those without power or influence. Civil society and the media have to focus on solutions that address the very basic flaws which have defined the functioning of capitalism in the past. In other words it would not help to throw the baby out with the bath water but certainly to clean the bath water completely. I regret, however, that the economics profession has not really launched a major debate or discussion on this issue which in my view is essential and long overdue.
Photo © Sara Galbiati