Capitalism is not killing democracy, the problem is concentration of economic power and monopolies

“Free markets were supposed to lead to free societies. Instead, today’s supercharged global economy is eroding the power of the people in democracies around the globe.

"Welcome to a world where the bottom line trumps the common good and government takes a back seat to big business.”

This is a caption leading a 2009 article, How Capitalism is Killing Democracy by Robert Reich, published in Foreign Policy.

FINANCIAL CRISIS

Robert Reich was the Secretary for Labour in the Clinton administration and a celebrity professor and author (and a fellow Rhodes Scholar, I might add).

Reich was reacting to the aftermath of the global financial crisis, and the dismay that the populations of Western countries felt as they bore the brunt of the crisis while the banks were bailed out and the bankers who caused the crisis walked scot free.

Is capitalism the problem? I think not.

The Merriam-Webster dictionary defines capitalism as “an economic system characterised by private or corporate ownership of capital goods, by investments that are determined by private decisions, and by prices, production and the distribution of goods that are determined mainly by competition in a free market”.

FREE MARKET
The properties critical to capitalism in this definition are “private ownership of capital” and “competition in a “free market".

There is a general tendency to conflate the two. They are not the same thing.

The economic system characterised by “competition in a free market” is known as a market economy, and is one in which economic decisions, namely, investment, production and distribution are determined by supply and demand.

Supply and demand determine the prices and quantities of goods and services.

CAPITAL

An essential, and problematic, property of conventional capitalism is that, by and large, capital hires labour at a fixed wage rate.

The owners of capital are the residual claimants of the economic surplus that accrues from production.

In this arrangement, they ought also to bear losses.

The public opprobrium that followed the financial crises was because the capitalists had made all the profit from the financial boom, but when the crash came, the losses were borne by the public purse at the expense of workers who were then forced to endure austerity by way of job losses and cutbacks in public services.

LABOUR
In a previous column, I used the example of boda boda (motorcycle taxi) industry to demonstrate the difference between capitalism and market economy.

It’s worth revisiting. In the industry, many riders lease motorcycles for a fixed daily or weekly fee.

They get to keep whatever surplus over the rental fees, and they also bear the losses on the days that they make less than the rental fee.

This is conventional capitalism in reverse, that is, labour hiring capital, and is in effect the “profiteer”.

Even in the global economy, industrial capital as a source of concentrated economic power is rapidly giving way to intellectual or knowledge capital — think Amazon and Uber.

WAGE RATE

Uber has managed to concentrate economic power in the taxi business worldwide without operating a single vehicle.

Uber could, if it chose, lease all the computing power that runs its system.

In a competitive market economy it matters not whether capital hires labour or vice versa.

In a free market the rental rate of bikes will converge to the cost of capital.

The earnings of the riders will converge to the market wage rate.

Free entry into the industry will mean that consumers will pay the lowest possible price.

COMPETITION
And therein lies the problem. When you hear captains of industry preach the virtues of free market and competition, they are lying.

There is no business that likes competition.

A lot of ingenuity, energy and resources are expended on how to drive competition out of business, prevent competition from entering the market, or colluding with the competition to keep prices high.

As Adam Smith famously observed “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

Left to its own devices, the free market economic system that will emerge will not be a competitive economy but a cartel economy.

Adam Smith’s observation was admonishing the pervasiveness of cartels, called “guilds”, in his day.

PUBLIC INTEREST
In a path-breaking 1971 paper entitled Economics of Regulation, 1982 Economics Nobel Laureate George Stigler observed that “regulation may be actively sought by an industry, or it may be thrust upon it” and went on to assert that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit”.

Stigler’s paper challenged the view, then almost universally held, that government regulation of business is motivated by the public interest.

Although he did not coin the term, Stigler’s paper is credited with the concept of regulatory capture.

Regulatory capture occurs when a state regulatory agency becomes a protector of the industry it is supposed to regulate instead of serving the public interest.

With regulatory capture, the firms or industry that have captured the regulator end up with more power than they would have if the market was unregulated.

STATE CAPTURE
When regulatory capture becomes pervasive it progresses into state capture.

The entire state becomes an instrument of concentrating economic power in a few hands.

The term state capture was coined in the mid-90s to describe the economic structure that emerged in the successor states of the Soviet Union, which set out to become liberal democracies in the mould of their Western counterparts but instead became private fiefdoms of corrupt businessmen — the infamous oligarchs — and politicians.

Russia in particular seems on course to revert to the tsarist oligarchy that precipitated the Bolshevik Revolution.

COLONIALISM
While we owe the name to the post-communist oligarchies, state capture itself is anything but new.

The Kenyan state was purpose-built to concentrate economic power in the hands of the minority European settler community.

It did so spectacularly. According to a study by Swedish economist Professor Arne Bigsten, at the height of colonial power around 1950, immigrants (Europeans and Asians) who hardly made five per cent of the population, commanded 50 per cent of the income.

It is not possible to achieve concentration of economic power in a functioning market economy.

The Delameres and the Grogans were no different from the Russian and Ukrainian oligarchs.

PUBLIC SERVICE
The African colonial elite inherited this captive state intact. Their circumstance was very similar to that of the post Soviet Nomenklatura.

Greed quickly overpowered nationalist idealism. The colonial state at least maintained the separation of business and government.

The public service served the settler and economic interests, but it did not itself engage in business.

Colonial governors did not grab land. The African nomenklatura did not have such inhibitions.

They set about straddling government and business, not only concentrating economic power, but also extracting bribes from those businesses they don’t control and taking cuts on every government contract.

ELECTIONS
The long and short of it: It’s is not capitalism properly defined as a market economy that is undermines democracy.

It is concentration of power, whether that is economic and political power.

Concentrated economic power will inevitably capture the state and subvert the public interest.

People may continue to vote, but democracy is a sham, because as we say in Kiswahili serikali ina wenyewe (government has its owners).

Many well meaning democracy activists attack capitalism blindly without appreciating these nuances.

JUA KALI

Capitalism is not the problem. The boda boda industry is as capitalistic as you can get, but it portends no threat to democracy.

The problem is concentration of economic power. Cartels. Monopolies. Oligarchs.

Unlike our friends in the West who have no such experience, we can conceive of a competitive equitable entrepreneurial capitalism built on our dynamic jua kali economy.

We have work to do.

David Ndii, an economist, is currently serving on the Nasa technical and advisory committee. He leads the Nasa policy team. [email protected]. @DavidNdii