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The Schumpeter Prize Essay 1998

Capitalism and Democracy in the 21st Century


Sharad Bailur


In this essay I have tried to put forth the view that both Capitalism and Democracy are evolving institutions. That in the 21st Century they will evolve towards wholly desirable forms of people orientated entities. Democracy has metamorphosed slowly, even painfully, out of absolute monarchy. Capitalism is, likewise, undergoing its own metamorphosis. Only, in its case, the changes have been even slower. The metamorphosis in both cases consists of a slow form of devolution. In the one case it is a devolution of political power from the king to the people. In the other it is a devolution of economic power from the Classical Capitalist to the people. In making this case I am not depending upon any kind of Hegelian dialectic. The case should not be understood to be historicist in the sense of its inevitability resulting from forces outside of itself. In fact I do not even regard it as inevitable. What I think I observe happening may never come to fruition and my view could well be wrong. It is that as human interaction has evolved with improvement in the means of communication, a stage is being reached in which both political and economic power will be ultimately controlled by those to whom it matters most. They will ensure voluntary political democracy and the voluntary democratisation of capitalism. Some of the observations in this essay may, at first sight, appear to be rather disjointed. All, however, are in some sense connected to this central theme of the increasing control that people all over the world are beginning to exercise over their own lives both politically and economically.

Capitalism began with the ability to gather and hold a surplus of goods. It is the crux of the concept of private property. It existed among nomadic hunter gatherer tribes before agriculture took firm root. The surplus of goods or services could be traded to mutual benefit. Trading of such surplus goods engendered vested interests. Even as the politics of nations revolved around absolute monarchies, the economics revolved around sole proprietorships. The sole proprietorship was reinforced in law by the absolute monarchy many of which were themselves sole proprietorships of sorts. A form of this kind of politico-economic structure exists to this day in Saudi Arabia. This has been the overwhelming form of both politics and economics for the greatest part of recorded human history throughout the world. Since an absolute monarchy and a sole proprietorship have interests that coincide, their mutual reinforcement led to a stability of partnership unrivalled in human history.

Part I

Size as a determining factor:

It is in this century, probably the bloodiest in the history of mankind, that we have seen the growth and development of capitalistic empires within nations and later across national borders. The connection between the urge to expand territory politically, the need to expand economic interest with political help and the need to expand and develop commercial interests has something in common.

Modesty is not a royal virtue. No king wishes to rule over a small kingdom. A small kingdom is a dangerous kingdom to rule. It can be overrun with ease. A monarchy is therefore, by definition, potentially imperialist. By the same token no sole proprietor wishes to run a small business. The smaller the business the greater the chance that he fails. A sole proprietor is therefore, by definition a potential monopolist. Predatoriness is the first in-built characteristic of both kingdoms and capitalists. In today's world while political predatoriness in an international context is kept under tight leash by sanction and control, economic predatoriness has acquired new dimensions and functions internationally in its new incarnation as the multinational corporation.

The size of a kingdom depended upon the ability of the monarch to control his territory. This ability in turn depended upon the flow of information. This depended upon the means of transport for that information. The size of a kingdom depended upon the speed of the transmission of information if we ignore all other factors. That was the final overriding consideration. The only way this inherent limit could be circumvented was by keeping control over a number of subsidiary controllers or satraps who in turn controlled their own territories and paid tribute to their emperor. This itself would come up against a similar limit beyond which empires could not grow.

The need to grow is as much the inherent need of a business organisation as it is that of a state under the circumstances outlined above, limited only by the absolute factor of technology. The evolution of single proprietorships into joint stock companies, and then into mercantile empires in their own right need not be gone to here. Suffice it to say that the growth of international trade was fostered by the need for business organisations to grow. Competing sources of information therefore became available to the company from its operations in ever widening geographical areas. Since most often these areas were contiguous with those of the country to which the business organisation belonged, these sources of information also inevitably became available to the state. Large commercial interests therefore fostered and reinforced large political interests. They still do.

The waning of economic despotism:

The evolution of firms into joint stock companies has meant that the absolutism of the sole proprietor is over. It is inherent in the nature of the modern day business organisation, too big as it is to be run by one individual, that decisions are made either consensually or by vote. In other words size has compelled some sort of democratic functioning.

Size however does not seem to be a determining factor in the making of or the successful running of democracies. This is evident from the fact that we have an absolutist regime in China, a large nation, and a democratic one in India, which is almost as large. Once the constraint of information transfer had been overcome size is not a determining factor for any kind of political regime.

The compulsions of growth along with the compulsions of economy added to the advantages of loopholes in the laws of various countries make for the evolution and successful operations of multinational business organisations which flourish equally well in liberal democracies and under absolutist regimes.

Unfortunately while the expansionist tendencies of capitalism and multinational firms can be predicted fairly well, it would be incorrect to say that the bigger they grow the more democratic they become. The democracy of capitalism is the democracy of compulsion caused by the fact of a large number of share holders. It is not the democracy of equal rights and liberty which is what political democracy is all about. It is therefore circumscribed by the unequal power of voting given by the unequal number of shares held by its share holders. At best it can be hoped that the larger the number of its share holders the less the inequality.

Capitalism has survived and flourished best most often under absolutisms of various kinds because by nature capitalism itself is despotic. That Capitalism today not merely survives but thrives in a democratic milieu is a tribute to the ability of modern democratic forms of government to accept and mould it to meet the needs of modern day economic realities. It is also a tribute to the ability of capitalism itself to adapt itself to the changing political circumstances under which it has had to live and survive.

In his History of Economic Thought Joseph Schumpeter said that liberalism originally meant that, "the best way of promoting economic development and general welfare is to remove fetters from the private enterprise economy and to leave it alone." This is fine as it goes, so long as it does not end in the exploitative collapse of a market and the emergence of a non-competitive monopolistic situation. While it would certainly do a lot of good if the government adopts a generally hands-off attitude, a certain monitoring would seem to be important. And irrespective of how much governments support a free enterprise economy they do have in place laws to prevent the collapse of markets and of competition. This is because capitalism totally unfettered under any kind of law can be a brutishly grinding force bent upon profit at all cost - even human cost.

Capitalism as a bulwark of democratic society:

Laissez Faire, and even modern day Capitalism, in practice, amounts to the economic equivalent of Herbert Spencer's theorem on survivalism. It is not a theory of justice in the sense that Democracy can be termed a theory of justice. If ever there was such a thing as "Political Capitalism" it could only be a despotic dictatorship, not a democracy. A despotism is by definition "political capitalism" in the sense that a dictatorship accumulates power just as a capitalist accumulates capital. The coexistence of capitalism with democracy should therefore occasion some surprise because in their deepest philosophical tenets they disagree so violently with each other. Here is a political creed which believes in the devolution of power to the people. And there is an economic creed that believes in the private accumulation of the economic means of production. It is capitalism that first succeeds in China, not democracy. President Clinton grandly lectures them in vain about democracy. It falls like water off the Peking duck's back.

It is for this reason that I am most sceptical about the belief, which is accepted by the world in general as gospel, that democracy and capitalism go together and that capitalism is somehow a bulwark of democratic society. The continued prosperity of Krupp and other large organisations in Hitler's Germany and similar organisations in Japan all go to show that capitalism does not necessarily need democracy. Indeed, being on the right side of a despot is a much easier proposition than to be on the right side of something as unpredictable as a democracy in view of its regrettable predilection for changing rulers and policies every few years.

Democracy offers itself freely to the growth and fostering of capitalism in any form. In this sense democracy has a rare ethical quality and seems to echo T.H.Green's call for the greatest good of the greatest number. That it is succeeding in spite of those who would gain by its failure may be considered an indication of the evolving ethical nature of mankind as a whole, slow and halting as that may be. Or it could simply be that the speed and increasing sophistication of communication makes despotism a much more difficult proposition in this day and age.

To the extent that free trade and freedom of choice are democratic principles these are fostered by a democracy. But were Capitalism, unbridled, red in fang and claw, to be given the freedom to do what it chose, the first thing it would destroy would be competition and the free market. This is because by its very nature it can tolerate neither, irrespective of what the captains of modern day industry, so solemnly, tell us.

Competition the bugbear of capitalism:

What keeps capitalism under control is competition and certain immutable rules of the game which, if broken, would result in swift and condign repercussions for the business venture concerned. The legislation of such measures and their enforcement, even by democratic governments, clearly shows that laissez faire works only under strictly controlled conditions. This is invariably made out by big business as a dilution of their democratic freedoms in a free economy. It is in fact a dilution of their ability to destroy competition and acquire monopolistic power.

In essence therefore capitalism held in balance by the laws of competition, is in the same position as a state of nature held in an ecological balance. No more no less. There is neither the ethical content of a democracy in it nor is there necessarily a concept of justice in it.

Capitalism and free enterprise implies as it does the freedom of the market. The freedom of the market in turn makes for brand monopolies when total monopolies are not possible because of competition or are restricted by law. Brand monopolies make for brand equity and add to the value of the organisation. They also make for the freedom to advertise and package goods distinctively. Competition compels efficiencies at levels not possible in any other manner. It quickly eliminates the inefficient and the slothful and retains only the best - or the most powerful. Competition and brand advertising takes up a substantial proportion of the cost of the final product reaching the consumer.

In much the same manner as the return on investment when calculated properly optimises marketing and advertising effort, what is needed is an easily calculable cost-benefit analysis method for consumers to ensure that they get the largest benefit for every unit of currency they part with. The business related organisation has the means to have its needs taken care of by organised marketing and advertising. The needs of consumers vary, are more amorphous and cannot be articulated in the same organised manner. The consumer's case therefore invariably goes by default. It has to be taken care of by competition but this is sought to be distorted by organised marketing, advertising and brand monopoly.

Free markets in a developed economy and free markets in developing economies:

While all this is a matter of only some concern in the developed economies it does make a real difference when the purchasing power of the final consumer is fragile, where goods are perishable, when goods on sale constitute essential commodities, where the market is limited or when excessive demand cannot be fulfilled for want of production capacity in the short term. It leads to market distortions and eventual collapse, law breaking, hoarding and black marketing, adulteration and even fake manufacture.

It is evident that capitalism and the free market work best in an ambience of a superabundance of infrastructural facilities in terms not only of capital but also of technical knowledge, ready markets, raw material, energy and the means of physical communication. In such a case there is no fear of a collapse of the market. Competition then ensures that despite the distortions sought to be created by marketing, advertising and brand monopoly the consumer continues to get the best deal in the circumstances prevailing.

Economic Planning and Democracy:

The efficiency of capitalism and the free market depends essentially upon Adam Smith's Invisible Hand. So long as the Hand operates without let or hindrance everything works out well till of course the economy finds itself in the inevitability of a trade cycle. In fact today's "monetarist" economic theories are more Adam Smithian than in many previous generations. From what I have been able to gather it would seem that today's economists have forgotten the Hicks Trade Cycle and the attendant Multiplier-Accelerator effects. That seems to be the reason for Keynesianism to be considered something of an anachronism at the end of the twentieth century. Government intervention in the running of an economy is today considered anathema, though how this can be reconciled with the annual budget or the regulation in interest rates and other policies imposed by Central Banks is something I have never quite been able to fathom. Much more important I do not subscribe to the view that economic planning cannot take place in a democracy. When a government has to spend money on infrastructure and on key projects, very often stepping into fields like industry, economic planning in a democracy and a free economy can and should take place if the economy in question is backward if only to give it the necessary impetus to move forward.

Economic Planning in a free economy:

Take economic planning. It acquired a noisome aura when Soviet style planning collapsed under bureaucratic controls. The question nobody asked was what the planning was for. It is clear that in an undeveloped economy or even a developing one particularly of subcontinental proportions infrastructure cannot be built to further the economic aims of a nation if the government of the day is to depend on the private sector to do it. This is the job that the government must do itself.

Take the case of India. No private sector bank was willing to go out into the interior of the country to set up branches and stimulate the economy by lending to agriculture or its allied activities. As late as 1969 everything was tried to persuade private sector banks to go; all to no avail. The only bank that could be ordered to go was the State Bank of India but that was because it was owned by the Reserve Bank of India, the central fiduciary authority which in turn was owned by the Government of India. A move to "impose" "social control" over private sector banks failed. The nationalisation of the major commercial banks in the country in that year was widely seen as a political move by the prime minister, Mrs. Indira Gandhi, to consolidate her position in power, which it well may have been. But it also enabled the government of the day to force the newly nationalised banks to open branches in the countryside to ensure that the monetisation of the economy went ahead.

Earlier, the building of the railways in those areas that were economically backward was likewise not taken up by the private railways that the independent government of India inherited from the British when they left the subcontinent. It had to be done only with the nationalisation of the railways against the 'good sense" of immediate profit maximisation. Even today private airlines are most reluctant to fly routes which they consider unprofitable. After the infrastructure is built and regular flights by the nationalised airlines prove that profits are possible, the private sector always rushes in with alacrity, to sample a slice of the new cake. I am sure there are any number of such examples in the economic development of other countries.

Conversely, in those countries that had governments with neither the wits nor the sense to defy conventional private sector wisdom the neglect of the infrastructure has meant long term denial of economic improvement. This of course does not mean that India has been a model of development. There have been bad errors, for many of which the country has suffered. Much of the malaise of bureaucratisation that killed of Soviet development hit India as well and it hit much earlier because we have this penchant for making things worse much quicker. The lessons learnt have now begun to change the situation though it is a matter of debate whether the steps being taken are steps in the right direction.

Economic planning in a free market developing economy and the possible role of a public sector therefore makes sense if you are clear what the planning is for. Quite often certain areas of development need to be taken up before certain others if only to facilitate the faster development of the other sectors later. This cannot be left to the Invisible Hand of the market because the Hand cannot think ahead well into the future. In a developed economy the role of planning becomes unnecessary for the simple reason that the level of development itself ensures that the emerging needs of the economy are taken care of by the quality and timeliness of communication and the availability of the necessary infrastructure which in turn helps the smooth operation of the Invisible Hand.

Part II

The Open Society and its Enemies:

The open society has many enemies. All of them without exception try to ensure that it becomes a closed society. The history of political thought has shown that all organismic philosophies of the state are totalitarian in intent, conception and execution. It is only the mechanistic and so called contractual philosophies that approximate to democratic norms. It is this that makes democracy such a precious commodity. There are, in short, no alternatives to it.

Alternatives to democracy:

In the history of political thought there have been many alternatives, suggested through the ages, to democracy . Each of these has been suggested on grounds of better management of a state in terms of efficiency, the ability to survive foreign invasion, the economic welfare of citizens; in fact a whole host of extraordinarily ingenious reasons have been given in support of such alternatives for the general "betterment" of mankind and the lot of man.

The cleverest and perhaps most effective alternative to democracy was the economic route to a regime of the proletariat leading to a "withering away of the state", suggested by Karl Marx. It was clever because it appealed to no mystique. Economic determinism seemed self evident. It was effective because it ostensibly was, to all intents and purposes, so completely democratic that a "dictatorship of the proletariat" seemed the very acme of democracy.

Two things were missing. In a democracy people have the freedom to look for and experiment with alternatives. Alternatives even to democracy. No alternative to democracy offers similar freedom to the people. Second, democracy is, by definition, tentative and agnostic in the exercise of power. No alternative to democracy is either tentative or agnostic. All alternatives, without exception, are full of certitude and their practitioners are therefore closed to opinion other than that which agrees with whatever dogma they call their own. In sum, therefore, any alternative to democracy must of necessity be a despotism of some sort.

When the Pigs Took Over:

Next only to the two World Wars the rise and fall of the Soviet Union must rank as the most important event of this century. Here at the beginning of this century was this vast empire ruled by an absolute monarch and his secret police. In just seventeen years the Tsar was overthrown in a bloody revolution and killed along with most members of his family and this vast land embarked upon the most important social, economic and political revolution in modern times. Here, for the first time in the history of mankind, the key tenet of all known Economics till then, the concept of private property, was overthrown in favour of common ownership by the people as a whole. That it came to mean ownership by the state was a later pragmatic development. The revolution followed a path of bloody consolidation, forced collectivisation of land and property and the expropriation of all private assets. The economic cost was appalling. The entire social structure was upended and for a time successive rulers of the "New Class" proclaimed new rules including those which called for the abolition of the church and the institution of marriage. The social cost was horrendous and it is still being paid.

Prodigious nation-wide effort to reach and then to best the economic progress of the developed west were made over decades resulting in some truly remarkable economic and scientific achievement. The cost to the freedom of the human soul was incalculable. It resulted in a nation of slaves ruled by an elite of slave drivers. It resulted in a constitution that promised everything to everyone. None of the promises could ever be made to come good because the means to ensure that the promises were kept were missing. It resulted in the creation of and later the self-perpetuation of a bureaucracy which would eventually be partly responsible for the sclerotic functioning of the state and its eventual collapse.

The Failure of the Communist State:

The Communist State in the USSR began with the revolution of 1918 and lasted till 1991. The Soviet Union was vast. It was bigger than Canada, the United States and Mexico combined. Communism systematically destroyed all opposition to itself within the Soviet State. This gave it the unfettered ability to do what it pleased to ensure the successful running of a people's paradise. Its vast land mass gave it natural resources at a level which it would be impossible to imagine in any other nation on earth, whether it was minerals, metals, oil, agricultural land or forest resources. It had no population problem. Yet in the seventy years of its great proletarian revolution the Soviet Union was not able to feed its people, clothe them or house them at a moderate degree of comfort, or give to them a modicum of prosperity. It is true that it faced concerted and constant opposition from the outside world. The Second World War also was responsible for a lot of the economic hardship that it faced. Yet a nation that had swept out of its way all the known hurdles caused by a competitive, exploitative, capitalistic society was unable to make the best use of the opportunities created for it by Communism. The main cause for all of this was Communism itself.

There is a hilarious book by Stephen Pyle called The Book of Heroic Failures which "celebrates failures in the same way as one would celebrate successes and victories", to quote from its preface. When Pyle's book first came out in 1976 the failure of Communism was not on the horizon and was therefore not included. In today's revised edition it would probably have five star billing. Communism would have been the biggest unmitigated joke in the history of mankind were it not to have been so dark, so solemn, so cruel, so sad that it made the lives of whole generations miserable.

Demise of an extremist ideology:

In the history of mankind the slow devolution of power from the king to the citizen has taken millennia. Much of this devolution has occurred in the last three centuries. And most of it during this century. In earlier ages attempts by the people to acquire some sort of say in the running of their own lives was always considered rebellion and put down ruthlessly. Apart from the rare flowering of a citizens' state in the Greece of Socrates and Plato we have no other instance that can be quoted in history in which people acquired a say in the running of their own country. Even the Greek city state was a "democracy of the aristocracy" and was capable of affording the luxury on the strength of the slaves it held, who of course had no such democratic privileges. The centralisation of power in the hands of the few has therefore been the norm through all of recorded history. The conception of equality in fact goes against everything in nature.

From this point of view Socialism and even Communism as an ideology is intensely, even fervently, democratic. But when an ideology does not take into account the various possible ways in which it can be perverted it invariably lands the nation involved with it in a situation in which perversion becomes the norm. Human social psychology has evolved only when philosophers have taken a long cold look at the badness of human nature, and tried to devise the means to prevent that badness from spreading misery among other human beings. The other error is to conclude that history is somehow deterministic. That, once the key to the form of determinism is found, it is possible to predict how human history will progress. There are deep philosophical reasons to dismiss the belief in a force outside human affairs that determines human history. There are even better reasons to dismiss the belief that there is a specific path that history can be expected to take. Hegelianism had its place in the sun, till it was found wanting. Marxism, which took a much more realistic view of society believed that economics determined the course of history. It may well be true but ironically it is not true in the sense that Karl Marx meant it.

The bankruptcy of Communist ideology lies not in its democratic pretensions. It lies first in the invention of a mythical dogma and in trying to fit the facts of history to support it after ignoring those that did not, and second, in its unwillingness to have a second standard for comparison, having arrogated to itself the position of sole standard bearer. It lies in its inability to prevent ideology from being corrupted to meet the ends of those who hold power - undisputed power in the name of the people. It lies in the absence of accountability and therefore of responsiveness to the needs of the very people it claims to represent. It is a classic case of a good idea corrupted by bad human nature with no means in place to prevent the bad human nature from doing its worst.

The eclipse of a political entity :

Considering that the Communist Party was supposed to be a party of the people, membership should have been the norm, not the privilege. Yet membership was something of an honour not offered to all and sundry. This created what Milovan Djilas so aptly called the New Class. The Russians had another name for it - "Vlasti". This exclusivity only meant that those who were members were accorded privileges not offered to the ordinary citizen. As a result corruption was inevitable in a situation in which avenues for making money were few and far between because everything was owned by the state. Justice as understood in an open society would have made no sense in a society in which the ability to learn and parrot dogma earned party privileges and offered avenues for institutionalised corruption. From corruption to criminality is then just another small step. The organised gangsterism of the post Soviet era in today's Russia is merely the offshoot of what must have all the time been growing underground.

Besides, a restive population can only be kept under control by despotic means. Despotic means involve all the paraphernalia of a totalitarian state, right down to a "Big Brother" secret police. So long as this iron grip continues a peaceful situation by default can be enforced. The grip can never be relaxed; only tightened further. One little bit of relaxation can result in the unravelling of the whole fabric of this artificially forced state of discipline. It goes to the credit of the Soviet state that despite post Stalinist relaxation in the Khruschev era the state held together for as long as it did. In spite of all this Communism as an ideology, so peculiarly suited to the secretive and despotic nature of Russian polity through the ages would have survived were it not for the economic collapse of the Soviet Union. It in fact goes to show the inherent strength of the institution of despotic rule which has been the bane of mankind through the ages. What is so sad is that it should have all happened to such an extraordinarily brilliant people.

The death of state capitalism:

The economic philosophy of Communism is based basically on the concept of hatred of those who own as against those who do not. When private property is abolished and is "owned by the people" the actual ownership buck stops somewhere. Ownership then rests with the state, which is controlled by the Communist party, which in turn is the sole political voice of the people. In effect the property and the resources of the state are exploited by the Party for its own benefit and at the cost of the nation and its people. When everything is owned by the state problems occur that would probably not even be remotely thought of in a free market economy. Enver Akhmedzianov, was a Press Attaché to the Soviet Consulate General in Bombay in 1989. He gave me just one instance of how the economic sclerosis of the Soviet Union made the state collapse in on itself. In a country as vast and populous as the Soviet Union the government had built just two factories manufacturing laundry detergent powder. These factories needed their own raw material. If any of the raw material was in short supply or late forthcoming from the other sources owned by the government that supplied them, or there was any other small problem, either of the two factories could, and did, just stop production. This meant that, overnight, the supply of detergent within the country was cut by half. It was not surprising therefore that the rupee arrangement made by the Indian Government with the Soviet Union to buy arms, ammunition and aircraft was used by the Soviets to purchase laundry detergent from India. As the story went, India's MiG 29s were paid for with Surf.

The vast creaking bureaucracy needed to keep the Soviet economic machine going could only be lubricated by corruption, bribery and the black market as time went by. From being a state in which the people owned the assets of the nation it became a state in which the government owned the assets and nobody was responsible for looking after or improving or increasing them. From then on the long road to economic disaster got steeper and more slippery till disaster could be avoided no longer. As happens in any government bureaucracy anywhere in the world nobody would take the responsibility for getting a job done. The Soviet Union became the ultimate buck passer's paradise. ,/p>

The entire fabric of the Soviet economy started unravelling towards the end of the Brezhnev era but, effectively shielded from the reality of the economic disaster looming ahead, it is possible that many of his successors till the accession of Mikhail Gorbachev, did not quite know what really was happening, even though there were signs of many things going wrong. The falling harvests. The creaking factories rapidly falling into disrepair. The antiquated state of equipment. The shortage of ammunition and spare parts for the armed forces. The empty GUM store in Moscow. The horrendous shortages of essentials including food. The long queues of people waiting to buy - anything. The fact that queues would form to purchase whatever was available was because if a queue formed it was presumed that whatever was on sale was worth buying. It did not matter whether the buyer really needed it. If he did not he could sell it off later at a black market price and make something on the side.

The fact was that the Soviet Union just could not continue to afford to spend as high a proportion of its national income on its armed forces which it had built up in its adversarial relationship with the west as it had been doing in the past. Neither did it have the means financial or otherwise to do the research necessary at the high end for purposes of defence. The country was running out of its ability to run itself. In an ironic reversal of fortunes it would appear that it was a new kind of "Economic Determinism" that paved the way for economic disaster in the Soviet Union.


The stakes were steadily raised by both the Soviet Union and the non-communist west beginning with the confrontation over the blockade of Berlin after World War II. Between then and the start of the war in Korea the western alliance forged a policy of ensuring that it had the Soviet Union tied down to facing a series of alliances which encircled it from almost all directions, to prevent further adventurism from its leaders. This did not stop the Soviets from trying to break out of the encirclement. Cuba in 1962 was just one case in point. Aggressive attempts to communise and take over the smaller nations of South-east Asia followed ultimately leading to the high cost that both the French and later the Americans had to pay over Viet Nam. This sort of proxy war encouraged the Soviet Union into thinking that the west could be tackled piece meal. The fact however was that despite all that was being done there seemed to be no progress in improving the political clout of the communist parties of western Europe. By the time Mrs. Thatcher and Mr. Reagan came to power in the UK and the US it was clear to the western alliance that while the Soviet Union could be wrestled to a halt there was little more that could be done with the strategies that had been followed till then. It became necessary that the stakes in the geostrategic game be raised to such intolerable levels that either the political will of the Soviet Union would crack or its economy would give in. There must have been excellent reasons to believe that either or both would happen from informed intelligence on the performance of the Soviet economy as well as knowledge of the emerging political situation within the Soviet Union. Both Glasnost and Perestroika were the last desperate attempts to shore up communism as an economic system rather than as a political ideology. They did not work.

The Soviet Union and the Russia of the Czars before it has never known the meaning of popular participatory government unlike many of its east European satellites. It has always been a long series of despotisms from way back into recorded time. The unravelling of the Communist structure would have worked fine if there had been an evolved democratic order to take up the slack. The dismantling of communist political structures and their replacement by participatory democracy took place relatively smoothly both in the Czech republic and in Hungary because both have had the experience of running such governments before their forcible inclusion in the Soviet empire. There was no such experience available in the Soviet Union capable of putting in place a set of rules governing democratic functioning of the state. The collapse of the Soviet Union and the secession of various states is the result of a basic lack of democratic participatory structures lower down the line, down to the village level. The Communist party ensured that it was the sole structure. When it collapsed the entire political edifice collapsed with it. This is the inevitable end of all despotisms. Since no despotism tolerates competing participatory structures it ensures their extinction more thoroughly than would be possible in a persuasive atmosphere.

While the political effect of such a development results in intense dislocations the economic effects can be horrendous. This is visible in the Russia of today. The Communist party not merely destroyed participatory political structures; it destroyed participatory economic structures as well. Much though I believe that Capitalism is not a democratic structure, private capitalism is not the same as state capitalism. In that sense democracy affords capitalism the freedom to be a participatory economic structure, imperfect in its democracy perhaps, but participatory nevertheless. In the absence of such a participatory economic structure economic collapse was inevitable. If we examine the defeat of Nazi Germany after the Second World War and the re-emergence of Germany as an economic power in the post war period it is quite clear that the re-emergence was helped along immensely by the participatory economic structures that remained at the end of Nazi rule. To that extent the despotism in Italy, in Germany and even in Japan perhaps did less harm to those countries than did Communist rule to the Soviet Union. Besides, we must take into account the level of sophistication of the participatory economic structures in the area which was eventually covered by the Soviet Union prior to the establishment of Communist rule. They were not particularly sophisticated even compared to those of the western Europe of that time.

Part III

Capitalism at the end of this millennium:

The first major distinctive feature of capitalism at the end of this millennium is the manner in which political borders have started behaving rather like the Cheshire Cat towards the development of economic relations. The economic pacts of the immediate post war years have given way to the economic union of Europe which is slowly but surely moving towards a single currency. Bretton Woods was succeeded by the General Agreement on Tariff and Trade which has now evolved itself into the World Trade Organisation. The move all along has been towards a lowering of tariff barriers all over the world in order to facilitate greater volumes of trade between nations.

The move towards greater economic inter-dependability between various parts of the globe has of course its advantages particularly for those organisations that function out of a multiplicity of countries. Put simply, it means that they can source material raw or manufactured out of those places that produce it cheapest. This adds to the multinational's profits and is welcomed by its shareholders. The interests of the countries involved in the multinational deal are not of any consideration. As a result while it is perfectly possible that such multinational manufacturing may be mutually beneficial to both countries and to their respective peoples it is also perfectly possible that it is not. The worst effects of such multinational operations are generally seen when the two countries involved are of unequal economic sophistication and strength. Profits flow out to the richer nations.

Unequal Trading Terms:

This generally leads to nations taking steps to prevent unequal trading terms from harming their essential economic interests. This affects freedom of trade and may eventually harm both nations. Sophisticated nations look forward to and nurture large markets in the developing world for their own products which they assiduously promote. This may do the countries that have the markets some good. On the other hand it also may not. Take the case of the sale of infant formula baby food in the third world. Here is an instance of what happened in India. Nestle and Glaxo refused to manufacture it in India for two reasons. One, the Indian air was too badly contaminated with bacteria. The required level of sterilisation could never be ensured. Two, it was not possible to make milk powder out of buffalo milk. This fact had been testified to by dairy specialists from Scotland and New Zealand. Besides, "natives", could never be trusted to handle the functioning of a milk powder plant making baby food. The natives went right back, found a way to make powder out of buffalo milk and set up an infant formula plant, marketed it and promptly captured 60 per cent of the market. When Nestle heard of what they had done it rushed to seek permission to set up a plant to make Lactogen in India. So did Glaxo for its own brand of infant formula. India has learnt slowly but surely that the advice of foreign experts on anything is coloured by the economic interests of the countries they come from.

Protection of Markets:

In another recent instance the Government of Sri Lanka sought the help of the Dairy Board of India to set up a dairy plant in their country. Sri Lanka imports some 90 per cent of its dairy needs today from New Zealand. It was told by the International Monetary Fund and the Asian Development Bank that if it wished to develop dairy in Sri Lanka it should not seek help from India. The New Zealanders had been selling them their dairy produce and they could help them do it. The Sri Lankans refused. They were then warned that if they were to continue in their intransigence they might face problems getting aid from the IMF and the World Bank in future. The Sri Lankans took the warning in their stride and set up a dairy with the help of the Indians. The Indians are now planning to set up a network of dairy producers' cooperatives in Sri Lanka on the Indian pattern. The aim is to make Sri Lanka self sufficient in milk in ten years. The New Zealanders do not like this. In effect it will destroy an almost captive market which they have carefully built up and nurtured. But it will do the people of Sri Lanka a world of good - and they know what is good for them.,

The disappearance for all practical purposes of political borders in Europe has unforeseen consequences, particularly when the economies of so many countries are so closely integrated into one large international grid and virtually none have identical economic strengths or weaknesses. Similar changes in the political structures of countries on other continents would not be unexpected in the new millennium. However the difficulties that would occur would probably be much greater than those that Europe faces today. This would be because of the much greater differences in languages, cultures, denominational beliefs and other non-economic factors. It is therefore a matter of some pride for me as an Indian citizen that my country which is to all intents and purposes some fifteen countries with their own languages, scripts, religions, cultures and ways of living has had a successful economic union, for the last fifty years, of continental proportions involving almost twice as many people as there are in the European Union.

The effects of speculation on an integrated world economy:

Speculative rapacity particularly in the currency markets can make or mar currencies and even economies. During the month of November 1997 ( as this is being written) the currency markets in South East Asia are under attack as a result of which major currencies in the region have taken a severe beating. This has affected the working of stock exchanges the world over. The immediate reaction of those countries that felt the heat later has been to insulate themselves as quickly as possible and let those that were in the front line deal with their wounded and dead. This is the effect of integrated capitalism in the international context at the end of the millennium. Sir Geoffrey Crowther a rather celebrated editor of the Economist, in his book An Outline of Money had said, of the gold standard, that if the value of gold got drunk, it and the purchasing power of money swayed together instead of separately. It can just as well be said today that if the currency markets and economy of one region of the world get drunk, those of the other regions sway together with it even if they are sober. The good, if any, that this does is not visible. The misery that it creates for those on the front line is oft interred with their bones.,/p>

Non-tariff barriers:

Free trade should work well if the interests of all participating parties are protected equally. The problem has been that even countries who are strongly in its favour, like the United States, are known to apply the rules of free trade selectively to themselves and to others, the selection being done on the basis of interests which concern them. Third world economies face the problem of non-tariff barriers in the quantity of import, in the insistence that manufacturing or production should follow certain processes and no other, in the insistence upon equating third world production methods with first world industrialisation and so on. If free trade is to usher in prosperity through more trade the cult of the non-tariff barrier may have to be given some sort of final quietus.

The widening base of capitalistic shareholding:

The internationalisation of the capitalistic firm and its diffused ownership spread across continents has inevitably resulted in a slow but steady movement away from capitalistic despotism to more equitable ownership and therefore of trends towards the democratisation of its decision making. Microsoft, which is every capitalist's dream, runs as well as it does by the simple expedient of offering regular stock options to its staff, so much so that every second Microsoft employee is known to be a stock millionaire. A similar devolution of capitalistic interests in the software field is taking place in India which has a burgeoning software development industry. Almost every software firm offers its staff stock options on a regular basis either as bonuses or as firm options at reduced prices.

Co-operative Capitalism:

While capital rich countries can therefore take justifiable pride in this development in the 21st century, the third world may have to work out a two pronged strategy to induce more democratisation in the economic decision making processes which it follows. In areas where organised large firms can become more broad based in their shareholding the process may be found to be continuing and being encouraged to continue.

In areas where capital is in short supply but people can get together to ensure the viability of a cooperative network that might work just as well. The Indians have successfully involved twenty million farmers in a dairy producers' network to make their country the largest producer of milk in the world. These dairy producers' cooperative networks own their cooperatives and dairy factories and they are the largest food business in the country - far larger than any of the multinationals functioning in India. The farmers run their cooperatives according to their own plans and daily make informed decisions on the functioning of their cooperative federations. This is grass-roots democratisation of capitalism in practice. Those areas in which the cooperatives have succeeded show an astounding all round improvement in the standard of living of the farming community which traditionally was the poorest of the poor in a largely indigent nation.

Let us leave the Indian experience aside and see how such organisations function elsewhere. To quote from a paper by John Rouse of the Food and Agricultural Organisation: "On the face of it agricultural co-operatives seem well placed to occupy an important place in the new economic situation. According to International Co-operative Alliance virtually all of Sweden's dairy production is marketed by farmer owned co-operatives, in Norway, 75% of the forest products are processed and marketed by co-operatives, in Italy 60% of wine is co-operatively produced. Fourteen farmer owned co-operatives in the USA are among the 500 largest corporations and no fewer than 8 of the 10 largest Canadian firms are co-operatives."

Apart from agriculture, co-operatives in other countries seem to function well in the service industry and rather oddly enough in something that has an enormous future in the 21st Century - software. A large number of countries run their electric power generation organisations as service co-operatives and do a very successful job of it. Aldus the software and manufacturing company which till recently owned the famous Pagemaker brand of design and layout software is a cooperative.

In either event what is evolving is a new form of capitalism in which the capital is owned by those who work for the organisation. The line between worker and owner started beginning to get thinner in the latter half of this century. It is beginning now to get blurred. I would expect it to largely disappear in the coming five decades. In either case the decision making process would be based on majority vote and the ability of the people involved in controlling their own lives would be to that extent greater.

If we are to accept that the state and the power exercised on behalf of the state has evolved over time to lead to a sort of amorphous "ownership" by the people in the manner in which it is exercised in a democracy, a similar evolution in the nature of capitalism also appears to be taking place even if rather more slowly. It involves and will continue to involve the all important concept of the ownership of private property. If it evolves in the direction of a devolution of economic power it may serve a much more useful purpose than modern day capitalism as it stands today. In this sense what I am advocating is a "democratisation of capitalism" in the twenty-first century either through the diffusion of ownership through a widely spread out owner basis of shareholding or through the evolution and growth of co-operative organisations which are owned by those who work for them.


1. A History of Economic Thought by Joseph Schumpeter
2. Principles of Sociology by Herbert Spencer
3. Reason in History by Georg Hegel
4. A Theory of the Consumption Function by Milton Friedman
5. A Theory of Justice by John Rawls
6. The Wealth of Nations by Adam Smith
7. The Trade Cycle by J.R.Hicks
8. Monetary Reform by John Maynard Keynes
9. The Open Society and it Enemies by K.R.Popper
10. The Myth of Historicism by K.R.Popper
11. Das Kapital by Karl Marx
12. The New Class by Milovan Djilas
13. The Book of Heroic Failures by Stephen Pyle
14. Animal Farm by George Orwell
15. 1984 by George Orwell
16. The Republic by Plato
17. Julius Caesar by William Shakespeare
18. The End of History by Francis Fukuyama
19. Alice in Wonderland by Lewis Carroll
20. An Outline of Money by Sir Geoffrey Crowther