I have been pondering over this question during my free time for the past few weeks or so. This was spurred by what I read about Margaret Thatcher’s passing. She was Prime Minister of UK at a time when I was too young to understand much about the policies she instituted but I remember my Dad saying good things about her and thus she struck out to me as a very successful lady PM. It was with her passing that I discovered she instituted labour reforms and led to the privatization of national assets that have allowed London to gain the status of a global financial centre today. While there are opponents to the harsh measures instituted, I look at it as a necessary evil, just as the French Revolution, or the Tiananmen Incident was to both France and China. But getting back to the main point here is whether free market capitalism is still an ideal state for global economy as opposed to government regulated capitalism.
Early in 2011, with the world still reeling from the aftermath of the financial crisis, China led the way for the rest of the world in showing how government regulated capitalism works quite well in preventing a slow down in job creation. But this had led to criticisms such as how the big 4 banks in China is essentially a quad-o-poly (if there was such a term), as they essentially controls the lending to large state-backed enterprises, leading to a loss of innovation and entrepreneurship (could be disputed…). Yes I do believe government regulated capitalism works to a certain extent, but it has its flaws. Maybe my MBA education has changed my world views a little, but I am a firm believer in free market capitalism. That means letting the market decide for itself what is right, though I have to say free market capitalism is but a myth and is just like the ideology of communism and socialism in its pursuit of utopia. Even with the extent of privatization in the United States, I still do not see free market capitalism working because of the extent of the chain of events that results in inefficiencies due to time delays and moral behaviour.
I am sure by now everyone is familiar how the subprime crisis led to a much bigger banking problem in the United States. This is what a market that most closely resembles a free market looks like. Housing prices are bound to drop in an event of over-supply, and the aftermath of a free market economy might not be the prettiest thing on earth. Certainly no one wants to be left picking up the pieces. In this case, it is worth noting how the biggest of banks like Goldman Sachs, JP Morgan, Morgan Stanley, B of A, and Wells Fargo are deemed to benefit, while the smaller banks like Lehman and Bear Stearns are shredded to history. Free market capitalism creates winners and losers, as do government regulated capitalism where governments dictate who should get loans and who should be left out to die.
Let’s put this into an easy example, picture a fishmonger having one huge tuna for sale, and 6 customers. Assuming they are equally well to do, they would pay a fixed price for the fish. The moral and just behaviour will be for the fishmonger to split the pieces into 6 and reap a normal profit. In a government regulated capitalism, the government acts like the fishmonger, except he or she is not working rationally, instead giving the fish to the ‘favoured’ buyer (maybe because the buyer is prettier, or maybe the buyer dresses nicer or maybe the buyer is more courteous, who knows? though recent articles suggest cronyism in play here). In a free market capitalism, the fishmonger sells the whole fish to the highest bidder, and the rest goes home with nothing (an extreme example, I know but it shows size does matter…). For the simple innocent child, they will say it is not fair at all, but then ‘what is fair?’ and in this quote, I suggest people read up on the Harvard Case Study on this. The way I see it, neither is totally fair nor totally unfair, but in the free market capitalism, it garners a ‘fair value’ for the fish even if it is not affordable to some. In other words, with an ever burgeoning population, and limited resources on earth, it creates a divide between the haves and the have-nots. But the government-regulated capitalism tries to make it ‘fair’ to the ‘sandwiched’ portion of the populace.
In my Geography classes during secondary school, I remembered a single defining point with regards to employment. It is mentioned that employed people are too busy to protest or riot, and hence countries like Indonesia were heavily affected by violence after the financial crisis due to high unemployment rates amongst the youth. This is again highlighted in the turmoil in North African countries like Egypt, Libya and Tunisia. Will Mediterranean Europe fall into the same fate? With respect to this, I give credit to governments like Singapore and China which has placed job creation a priority. In Singapore, the government created one of the best environment for businesses to grow and thrive by lowering corporate taxes, opening up immigration to attract skilled workers and developing new niche industries like biotechnology, pharmaceutical manufacturing, information technology, gaming, banking and automobile racing. For China, the fact that the banks are controlled by the CCP provides the Communist Party with the ability to relax lending when times are tough and restrict lending to prevent speculation in homes. This is not bad at all in stimulating growth of employment as companies gets the credit it needs to conduct business. As we can see, government regulated capitalism is not bad at all as long as they do the right thing.
The key word here is ‘the right thing’. Market-led capitalism is like a free hand that creates an equilibrium which is signalled by the point at which human sentiment decides to act on the opposite reaction. On the other hand, government regulated capitalism relies on a group of people to make the right actions for a much larger group of people. While I like the idea of a free market capitalism, it is not possible to implement in the world as this creates a scenario where all the resources go to a particular group, leaving none for others. Due to unequal access to knowledge and levels of literacy, there are a lot of advantages for skilled people in a free market world, but in a government regulated capitalism, this might not be the case as governments create incentives that might favour a particular group of people. Both are imperfect models but they both serve to create a ‘fair and just’ outcome and ultimately a success of one or the other really depends on the appropriateness of the situation.