What makes capitalism work?
By Jagdish Bhagwati
I believe Capitalism flourishes, in the teeth of inevitable inequality, when one of five conditions is fulfilled:
1. First, the poor do not envy or resent the rich because they believe in the myth -- in the U.S., the American dream -- that they too can get rich. So, if Rob Rubin and Soros double their wealth and income on Park Avenue in NYC, and the poor in Harlem notice it, they will think: ah, the size of the Lotto has gone up!
2. Second, even if the poor do not buy into the upward mobility myth, they do not notice the riches of others. Why? Because the rich do not flaunt their wealth by practicing an ostentatious style of living. This was true of Simon Schama's Dutch burghers (see The Embarrassment of Riches); and it has been true of the Jains in my home state of Gujerat, where billionaires often cannot be distinguished from the lower classes because they dress simply, drive small cars, etc. -- as if they were puritans, which many of them are! You cannot resent what you do not see!
3. Third, the poor feel that the riches are "deserved" or "legitimate." Bill Gates has done something remarkable, which most everyone admires. By contrast, George Soros made money from "speculation," which most people hold in low esteem.
True, Bill Gates arouses animosities in Europe because of the anti-trust case; but that is still a boutique phenomenon compared to the huge adulation almost everywhere. By contrast, Soros is admired in that strange land of former East European countries where he directed many of his funds; he is far from being admired otherwise. On campuses in the U.S. we are all under instructions not to criticize him for the rubbish that he peddles, for fear that we may lose a contribution; but Gates would draw admiring crowds.
4. Fourth, if wealth is used for intrusion into politics, it will be resented. The contrast between Gates and Soros is dramatic in this regard. The contrast between Obama (whom I have supported from the beginning) and the Clintons in this regard is also dramatic and is in Obama's favor. If I were Maureen Dowd, and I thank God I am not, I would say that Bill Clinton's problem is that he has gone from White Trash to White Cash. And the spectacle of the Clintons trying to get money from others for their debt by strong-arming Obama into supporting this nefarious notion, when in fact their net worth vastly exceeds this debt, puts them beyond the pale for many of us.
5. Fifth, related to point two, the rich spend their moneys, not on themselves, but on social projects. Typically, the rich in Ahmedabad spent moneys on people's education, on health, and (believe it or not) even on agricultural extension and dry farming experiments. Their motto was: create wealth but spend it on the needy others, not on oneself.
Apropos this, what CSR (corporate social responsibility) does is to extend the traditional practice of the Burghers-Jains-Calvinists -- where families that made the moneys spent them directly on social projects -- to the corporations where families do not usually run the show. CSR is the modern counterpart of the wonderful family-owned businesses.
And as this ethos grows, it may even be financially rewarding to pursue CSR: "good" firms manage today to attract better staff (who want their firms to be socially responsible) and may even get a little premium in the market place from consumers (though the evidence for this is limited to people paying more for Organic foods, for instance).
For me, these observations define what would make for a robust capitalism. And a robust capitalism would help us to reap all the dynamic, wealth-generating energies of capitalism that Marx wrote about and only the faux Marxists today deny or deplore.
This is too bleak and cynical a view of human nature -- at least human nature within the matrix of society.
Social contracts are not a means for "rich" to pacify "poor." History has taught us over and over again that no group stays on top for long. The social position of dominance carries within it the seeds of its own destruction.
Rather than classify people into "rich" and "poor" like Marx, why not reconceive the social contract as an opportunity for cooperation among equals? Where does the story of the founding of the United States of America fit into your theory?
We are not fooling anybody but ourselves when we attach labels like "rich" and "poor" to people without acknowledging that no social status is immutable, no human condition eternal. Our focus should not be on relative position, but on a shared vision of complementarity, cooperation, collaboration.
Marx taught us that social contracts were important. But Marxism taught us that they could also be extremely dangerous. "Us-them" dichotomies are the wrong way to start in writing them.
Posted by: Michael F. Martin | July 14, 2008 at 06:12 PM
You know, perhaps I am wrong, but none of these five points strike me as applying to 19th century England.
Okay, we don't know much about what the English poor were thinking, but did they all believe they could get rich too?
The rich did flaunt their wealth, in terms of lavish living, fancy carriages, expensive clothes (wearing white pre-washing machines was a big boast about your wealth). They intruded in politics - indeed until the British parliament started paying salaries to MPs only the wealthy could play politics. They spent money on themselves. The country developed socialism, and had a variety of riots, so presumably their wealth was not regarded as legitimate.
And yet Britain stayed capitalist and got rich.
Posted by: Tracy W | July 15, 2008 at 09:12 AM
Bill Gates, like the other Copyright Nazis in the MPAA and RIAA, have gotten rich through government-enforced monopolies that should be utterly repellent to any believer in genuinely free markets.
Tom Peters used to gush about the portion of commodity price that resulted from "intellect," rather than labor and material costs. In plain English, that means the majority of what we pay for a commodity (and hence a majority of the hours we work to obtain commodities) amounts to rents on artificial property rights. The good news is that, with the growing unenforceability of so-called "intellectual property" [sic] law, and with the expanding possibilities for peer production and desktop manufacturing, we're nearing a singularity where the superior productivity of the household/informal/barter economy over that of the old corporate economy will result in a decisive shift in the correlation of forces. Those relying on "intellectual property" rights to maintain control of production will find themselves in the same position as the privileged classes of Britain 200-odd years ago, complaining of the effect access to the commons had on the willingness of laborers to work hard enough and cheaply enough to produce a profit. We're very close to the point where something like Vinay Gupta's "Unplugged" movement will offer a viable alternative to wage labor in the corporate economy, and cheap and easy subsistence outside the corporate economy will be an undeniable reality.
Posted by: Kevin Carson | July 15, 2008 at 08:05 PM
"First, the poor do not envy or resent the rich because they believe in the myth -- in the U.S., the American dream -- that they too can get rich."
I do not think this has ever been true.
The hope, rather than a myth, is "my children can move up a notch from where I have been."
This is what fuels the American middle class, this is what gives hope to the poor, and this is what is in jeopardy.
Posted by: save_the_rustbelt | July 16, 2008 at 09:36 AM
I had a post on a similar topic the other day. Ignore what I say, but there are some interesting links and quotes from others discussing this same subject in more reputable forums (than mine).
Posted by: earnestobserver | July 17, 2008 at 05:09 PM
Dr Jagdish Bhagwati writes: Typically, the rich in Ahmedabad spent moneys on people's education, on health, and (believe it or not) even on agricultural extension and dry farming experiments.
I am not sure whether Dr Bhagwati visits his home town oftener these days. But I find things are slightly different at the grassroots from the rosy picture he paints.
I don't deny the rich Gujaratis did spend money on philanthropic efforts. They did and they even supported the Indian national movement even when their business interests went against their nationalist sentiments.
But these days how do the rich Gujarati's spend their money?
It is a fact that the anti-minority pogroms that made Gujarat notorious in recent past were funded and supported by these same sections who have plenty of money to spare and they nourished the politics of hooliganism with their riches. Now all over the world the Gujarati diaspora speak of a new Gujarat and this Gujarat is something terribly different from the one the old Rajkot-wallah, Mohandas Karamchand Gandhi, lived in and died for. It is a place where the other, the poor Muslim who lives in the slums of Ahmedabad and Baroda,has no place.
This is the experience all over the country. As a journalist, I find that the rich NRIs are the major supporters and financiers of a highly virulent kind of nationalism -- a nationalism that is more likely to divide this country again -- that promotes bigotry, hatred and jingoism. They are the people who, from their safe havens in the west, want India to make N-bomb and possibly send its neighbors to the stone age. Read their blogs and comments in newspapers and you are flooded with such sentiments, expressed quite openly and unabashedly.
So perhaps we need to rethink what money can do to a person and a nation. Uncontrolled riches can play havoc too.
Posted by: n p chekkutty | July 21, 2008 at 09:15 AM
Prof Bhagwati:
The opinions of the previous commentor aside, I don't think your thesis is sufficiently general. I agree that the dichotomy between the rich and poor are necessary categorisations, and to ignore it could spell disaster on a societal scale. This is not to say that the positions are immutable, but to do away with them altogether is to entrench everybody, regardless of their lot in life, as equals.
The thesis I'd like to forward is that the success and failure of capitalism - insofar as we are here talking about the possibility of strife owing to a revolution by the poor - very much depends on the comparison of the return on one's own means of production with the perceived returns of the very rich.
As such, there is a threshold of tolerance, which is determined proportionate to one's own standard of living that is compared with various other consideration such as the standard of living of the very rich, the means with which the rich have obtained their luxury, cultural context, etc.
Allow me to address your points:
1) Resentment and envy are necessary elements within a capitalist system as they are the incentives for a person to better their lives. The notion of "We too can get rich," is indeed envy, for what else would instil that feeling? Resentment is also a fact of capitalist society even though polite society require that we stifle its expression.
In fact, I would say that envy and resentment are the default feelings about the rich. More so if you're famous as well e.g. Trump, Paris Hilton. If you don't envy them, you resent them; seldom do you find anyone who really don't feel one way or another towards them.
2) As an extension of point 1 - your observation that the Jains in your town do not flaunt their wealth and hence evidence of the precondition for flourishing capitalism is a flawed argument. I do not think that the one has anyhing to do with the other.
The best reconstruction I can come up with for your argument is that by hiding their wealth, the Jains disguise their riches, hence subduing any feelings of envy of the masses therefor making for peacable capitalistic atmosphere. I don't know if this so much creates a peacable capitalistic environment as much as it just creates a peaceful community!
Obviously, responses towards displays of wealth are culture specific, and has cannot be used to argue for the success or failure of capitalism generally. Presumably, in a society where material wealth is generally disdained or ignored, then it really doesn't matter whether someone is outwardly wealthy or not.
However, it's a different story altogether if there is an ostentatious display of wealth when peasants are starving to death on the side of the road. To generalise, the display of wealth only becomes a consideration for the success/failure of a capitalistic system if the standard of living for the poor falls below a threshold of tolerance, which is inversely related to the maximum tolerance they have for the perceived wealth of the rich taking into account other contextual considerations.
If this weren't true, then there would probably be a lot more strife in California than exists now! It goes without saying that envy - which I've noted in (1) - increases propotionate to the individual's own personal state.
3) Again, I think the notion of whether the rich "deserve" their wealth or not is a product of various factors. It is again related to the standard of tolerance and level of envy noted in (2). Arguably, if someone got their riches in an undeserved manner, then the sense of resentment of the poorer people would undoubtedly rise, and it may well reach a point that exceeds their threshold of tolerance causing strife.
4) I would put this under what I identified as 'contextual consideration' above. It's not always the case that wealth + politics = bad scenario. I think of Silvio Berlusconi of Italy - owner of AC Milan, all round rich guy and priome minister of Italy. Thaksin Shinawatra of Thailand's another example.
We keep in mind that these fellows were elected into office because of their perceived acumen with money, and only later became controversial because of their acts within parliament.
I think it is erroneous to think that what the Clintons did is really that much different from what any other American politician would have done (save maybe Ralph Nader). Money and politics go hand-in-hand; if the Clintons have failed, it's because they didn't do a good enough job hiding that relationship. (Let's not forget that the Gates' are pumping billions of dollars into Africa. I'm sure there is some political backroom wheeling and dealing going on even if it's not immediately apparent to us).
5) Your example here, like the one in (2), is again a recipe for a robust community, not so much robust capitalism. My argument is that in any given economic system - socialism, communism, capitalism, fascism, dictatorship - any expenditure by the rich on a public project, which is in line with the desires of the public at large will help extend the regime. It's just good politics, not good capitalism.
Posted by: Kampung_Boy | July 23, 2008 at 02:31 AM
Prof Bhagwati:
The opinions of the previous commentor aside, I don't think your thesis is sufficiently general. I agree that the dichotomy between the rich and poor are necessary categorisations, and to ignore it could spell disaster on a societal scale. This is not to say that the positions are immutable, but to do away with them altogether is to entrench everybody, regardless of their lot in life, as equals.
The thesis I'd like to forward is that the success and failure of capitalism - insofar as we are here talking about the possibility of strife owing to a revolution by the poor - very much depends on the comparison of the return on one's own means of production with the perceived returns of the very rich.
As such, there is a threshold of tolerance, which is determined proportionate to one's own standard of living that is compared with various other consideration such as the standard of living of the very rich, the means with which the rich have obtained their luxury, cultural context, etc.
Allow me to address your points:
1) Resentment and envy are necessary elements within a capitalist system as they are the incentives for a person to better their lives. The notion of "We too can get rich," is indeed envy, for what else would instil that feeling? Resentment is also a fact of capitalist society even though polite society require that we stifle its expression.
In fact, I would say that envy and resentment are the default feelings about the rich. More so if you're famous as well e.g. Trump, Paris Hilton. If you don't envy them, you resent them; seldom do you find anyone who really don't feel one way or another towards them.
2) As an extension of point 1 - your observation that the Jains in your town do not flaunt their wealth and hence evidence of the precondition for flourishing capitalism is a flawed argument. I do not think that the one has anyhing to do with the other.
The best reconstruction I can come up with for your argument is that by hiding their wealth, the Jains disguise their riches, hence subduing any feelings of envy of the masses therefor making for peacable capitalistic atmosphere. I don't know if this so much creates a peacable capitalistic environment as much as it just creates a peaceful community!
Obviously, responses towards displays of wealth are culture specific, and has cannot be used to argue for the success or failure of capitalism generally. Presumably, in a society where material wealth is generally disdained or ignored, then it really doesn't matter whether someone is outwardly wealthy or not.
However, it's a different story altogether if there is an ostentatious display of wealth when peasants are starving to death on the side of the road. To generalise, the display of wealth only becomes a consideration for the success/failure of a capitalistic system if the standard of living for the poor falls below a threshold of tolerance, which is inversely related to the maximum tolerance they have for the perceived wealth of the rich taking into account other contextual considerations.
If this weren't true, then there would probably be a lot more strife in California than exists now! It goes without saying that envy - which I've noted in (1) - increases propotionate to the individual's own personal state.
3) Again, I think the notion of whether the rich "deserve" their wealth or not is a product of various factors. It is again related to the standard of tolerance and level of envy noted in (2). Arguably, if someone got their riches in an undeserved manner, then the sense of resentment of the poorer people would undoubtedly rise, and it may well reach a point that exceeds their threshold of tolerance causing strife.
4) I would put this under what I identified as 'contextual consideration' above. It's not always the case that wealth + politics = bad scenario. I think of Silvio Berlusconi of Italy - owner of AC Milan, all round rich guy and priome minister of Italy. Thaksin Shinawatra of Thailand's another example.
We keep in mind that these fellows were elected into office because of their perceived acumen with money, and only later became controversial because of their acts within parliament.
I think it is erroneous to think that what the Clintons did is really that much different from what any other American politician would have done (save maybe Ralph Nader). Money and politics go hand-in-hand; if the Clintons have failed, it's because they didn't do a good enough job hiding that relationship. (Let's not forget that the Gates' are pumping billions of dollars into Africa. I'm sure there is some political backroom wheeling and dealing going on even if it's not immediately apparent to us).
5) Your example here, like the one in (2), is again a recipe for a robust community, not so much robust capitalism. My argument is that in any given economic system - socialism, communism, capitalism, fascism, dictatorship - any expenditure by the rich on a public project, which is in line with the desires of the public at large will help extend the regime. It's just good politics, not good capitalism.
Posted by: Kampung_Boy | July 23, 2008 at 02:40 AM
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Posted by: digital dissertations | January 12, 2009 at 04:37 AM
This is pretty dangerous. If we want capitalism to flourish, we can't expect the rich to build social projects. Humans are selfish.
We can deregulate free sex and encourage rich males to make many kids. Then we can force billionaires to spend, at least $10k per child per year.
There goes poverty. Every kids will be well fed and educated. After that, let the market decide how successor they are.
Posted by: Jim THio | January 20, 2009 at 10:09 AM