Capitalism is a very flawed system but the others are so much

worse ?

Many people reading about the recent spate of

business scandals in the USA may conclude that
capitalism is a pretty dreadful system. We have long
moaned and groaned about crooked Indian
businessmen who inflate profits, hide liabilities,
manipulate markets, and break a hundred laws. But
the US scandals show that crooked businessmen exist
everywhere.

This week, some of the biggest energy companies in

the US such as CMS, Dynegy and Reliant admitted that
up to 80 per cent of their electricity trades in
California were bogus. They indulged in fictitious sales
to one another to create the illusion of a boom in
revenue. They also indulged in various dirty tricks
(some of which could be criminal and lead to
prosecution) to exploit loopholes in power regulations
(like artificially creating power congestion and then
getting paid to relieve it).This showed there was
nothing unique about the peccadilloes of Enron, the
seventh biggest company in the world some months
ago, that hid huge debts off its balance sheets and
overstated profits to create an illusion of prosperity
when in fact it was heading for bankruptcy. Enron was
abetted by one of the celebrated Big Five of
accounting, Arthur Andersen, which is now in the dock
for criminal obstruction of justice. The most celebrated
giants like General Electric and Boeing stand accused
of fudging their accounts to show ever-rising quarterly
profits. Microsoft, the biggest of all, is on trial for
monopolistic behaviour. Pfizer, the biggest drug
company, stands accused of manipulating drug prices,
and last year, a cartel of drug companies were fined

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 Capitalism is a very flawed system but the others are so much
worse ?

for trying to rig vitamin prices. Big oil companies are

being investigated for rigging petrol prices.

Crooked behaviour is not uniquely Indian or American.

It is inherent in human behaviour, and can reach great
heights in a capitalist system. Now, market systems
have enabled many countries to achieve stunning
improvements in living standards that would have
been considered impossible a century ago.
Businessmen seek to enrich themselves, not society.
But competitive, transparent markets force
businessmen to compete on a level playing field,
because of which the main gains of all their innovation
and enterprise go to consumers. For the 500 biggest
companies listed in Fortune magazine, net profit
averages only 3.3 per cent of sales. For that very
reason, however, businessmen are constantly tempted
to find ways to reduce competition and transparency
to increase their profits at the expense of customers.
This can take legal forms (lobbying, innovative book-
keeping, exploiting loopholes) or illegal forms (bribes,
fraud, rule-breaking).

No wonder, then, that so many people are utterly

disgusted with capitalism and seek alternatives. No
wonder they find the profit motive a morally
unacceptable basis for ordering an economic system.
When the main actors of such a system are self-
serving, manipulative and greedy; when they fudge
facts, make false claims and promises, bend the law in
various ways and indulge in outright crimes, how the
outcome be at all satisfactory? Answer: for the same
reason that self-serving, manipulative and greedy
politicians produce a satisfactory outcome called
democracy.

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 Capitalism is a very flawed system but the others are so much
worse ?

The argument for a market system is exactly the same

as for democracy. Winston Churchill once said that
democracy is a very flawed system, but all the others
are so much worse. The same is true of capitalism: it is
a very flawed system but the others are so much
worse. Enron hid its liabilities and exaggerated its
assets. But do not all political parties hide their
political liabilities and exaggerate their political
assets? Many crooked business promoters promise
investors the moon in order to raise money. But do not
politicians also promise the moon to get votes?
Companies fudge their books and make inflated claims
to mislead gullible investors. But do not politicians
make inflated claims to mislead gullible voters?
Businessmen claim to represent the national interest
while feathering their nest (by, for instance,
demanding high import barriers in the holy name of
swadeshi). But politicians in a democracy also claim to
represent the national interest while feathering their
own nests. Businessmen indulge in bribery. So do
politicians. Businessmen revel in black money. So do
politicians. Businessmen hire hoodlums to beat up
workers or ruin a rival's business. Politicians too hire
hoodlums to capture polling booths and sabotage
rivals' rallies. Businessmen intimidate and buy up
rivals to reduce competition. Politicians too use
intimidation and money to buy defectors. There are
many criminals in business. There are many criminals
in politics too. The use of money, muscle and influence
to sabotage rivals and competition is a feature of
democracy no less than of capitalism.

Why, despite all this, do we regard democracy as the

best political system? Because it is grounded in choice

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 Capitalism is a very flawed system but the others are so much
worse ?

for the ordinary man, and freedom to choose is a

paramount virtue that makes other freedoms possible.
In democracies, the ruler is chosen by ordinary
citizens and voted out by them too. Politicians do their
best to subvert free choice through the use of money,
manipulation and muscle. Yet the freedom to choose
empowers ordinary citizens so much that, despite a
thousand flaws, democracy turns out to be more
desirable and beneficial than the most well-meaning
autocracy. Democracy creates a market for political
goods. Capitalism creates a market for material goods.
In both cases, the freedom to choose gives the
ordinary man in the street greater power than the
biggest political or economic giant. By shifting his
vote, the ordinary citizen can oust the most
entrenched politician, and by shifting his custom he
can bankrupt the most entrenched company. Lenin
was logically consistent in refusing to allow freedom of
choice in either political or material goods. What I find
amusing is the notion of many democratic socialists
that the people must be free to choose their own
rulers, but cannot be allowed to choose what goods to
buy; that political licensing is abominable but
industrial licensing is moral. There lies the road to
serfdom.