The fallacy of continuing to have faith in the free market

The capitalist neoliberal economic theory proposes that human well-being can be achieved by liberating individual entrepreneurial freedoms within the institutional framework of a free and open market, private property rights and a liberal political system of representative government that carries out the 'will' of the general population and maintains social justice and equity. 

That this theory has not gone well in practice is now well established. Namely, corporate concentrations, extreme wealth acquisition by a tiny group/class and large segments of populations living marginally without any opportunities to improve their livelihoods, corporate and elitist control of politics and government, and more negativity are what we have observed.

The concentration of capital giving rise to unequal distribution of income is an intrinsic feature of the capitalist economic process, not market forces. Social grievances and upheavals arising from inequities in the system have been the norm throughout the history of the capitalist economic process. In ameliorating the negativity of a capitalist system and suppressing workers' movements for a fair, just, and equitable society, western capitalist democratic states have created welfare systems that provide citizens with a marginal life with a social safety of sorts.                 

In a recent keynote address "Rethinking socialism for democratic developing countries", Professor Wahiuddin Mahmud attempts to outline a possible social democratic development path for the global South. 

His points of departure for the discourse are three key elements: a market economy, democracy, and socialist goals. He claims that history shows the undeniable inherent strength of individual freedom and market economy, meaning individual property rights and capitalist representative democracy are at the core of a nation's progress. 

The market is moral-neutral. It discriminates against the weak and creates inequities that require mitigation of its negativity through state intervention by establishing 'socialist' goals. It is apparent that by market economy he is referring to a capitalist mode of production since a market economy does not exist outside of how production and exchange are carried out. 

Professor Mahmud avoids being ideological, refraining from using capitalism as the economic system assumed in his conceptualisation of social democracy. He much prefers to use 'democratic socialism' for the South, separating that from some social democratic nations of Europe, going to some length to describe why, by socialism, an ambiguous term, is not meant the centrally controlled economy of the Soviet Union or the Mao-era China. 

The interpretation of 'socialist' in his concept of socialist goals is one of greater society, it has nothing to do with socialism, which he states many post-colonial nations incorporated as an ideal in their constitutions. By defining society or 'social', it becomes possible not to discuss class impacts in society, the global capitalist exchange, finances and institutions, and the possibility of alternatives to a capitalist competitive market. 

In a similar fashion to Fukuyama's 'End of history,' he tells us that the fall of the Soviet Union and the economic liberalisation of China show that centrally controlled economies and suppressed private initiatives inevitably fail to arrange economic management. But the history of economic and political transition is more complex and simple brushstroke explanations can harm knowing true positions. 

Soviet Russia remained a war economy throughout its early decades forcing centralised economic management. Russia's civil war of the 1920s and Europe's war thwarted the possible implementation of the New Economic Policy that intended to relax state controls and permit a degree of capitalism to kick-start the economy. 

In fact, Lenin reasoned that workers' control in the factories had to be abandoned, and experts were brought in regardless of their class or political background, so the economy could grow. China's economic development since the late 1980s is not a radical break from earlier decades, but a continuation of past achievements, with strengthened state operation in economy and politics, while permitting private entrepreneurship and functioning of a mixed market economy.

Professor Mahmud premises that emerging economies can emulate European welfare state models by incorporating a market economy, private property rights, and an economy fully operated by private individuals. Delivery of a just and fair framework and material welfare goals is significantly placed on the state. 

The political environment and commitment necessary to achieve the goals of a welfare state is a separate issue, not discussed in his discourse. The nature of the state, the conditions required of a state to govern its citizens, to create and sustain such a welfare proposition are excluded from discussion (The discourse of 'Rethinking socialism for democratic developing countries' is innocent of the idea of the state). 

He is content at glorifying liberal democratic institutions of the western nations, while he anecdotally informs that a socialist agenda can fail due to opposition from vested interest groups or by colour revolutions organised and assisted by the 'White Atlantic.' To borrow a phrase from Victoria de Grazia's 'Irresistible Empire', primarily the USA, that he avoids bringing in his discourse. 

American political philosopher Sheldon Wolin describes, "Democracy should not depend on elites making a one-time gift to the demos of a predesigned framework of equal rights….but rights in a democracy depend on the demos winning them,…..acquiring experience of the political, that is, of participating in power, reflecting on the consequences of its exercise, and struggling to sort out the common well-being amid cultural differences and socio-economic disparities." 

Winning equal rights through a representative electoral process is impossible today, as the history of post-colonial struggles shows, admits Professor Mahmud. Instead of addressing the structures that historically (colonial and post-colonial) perpetuated inequalities – politically connected big business, governmental bureaucracy, privatised elite education system and mass media, income and assets of the national bourgeoisie and professional classes linked with western nations - Professor Mahmud falls back on some pre-assigned "democratic principles" that deliver justice and equity. 

The admission that a democratic capitalist laissez faire economy results in significant inequalities, should have led to the question of whether inequality was systemic to a democratic capitalist system, harbouring inequities as a matter of course. If that should be the case, as I believe it is with the economic arrangement of capitalist free market operations, then it becomes imperative to consider alternatives to that arrangement. Those alternatives are available, as many in the South including China struggle to create a viable alternative to the western capitalist market system.

How can the nations of the South keep the status quo of a free market and democratic institutions but address social justice of welfare for disadvantaged groups? Professor Mahmud has an answer and that is for the state to increase its revenue base, capture part of the wealth created and redistribute it to the needy. 

Most western countries, especially Scandinavian nations, have a high government expenditure as a percentage of GDP from which he draws conclusions that a democratic socialist path can only be drawn out from a high government revenue as a percentage of GDP. This then is prescribed to emerging economies as a means for creating a welfare state. 

How can the state increase its revenue source? 

Although state-operated economic enterprises are shunned, an idea of state equity participation in private corporations is floated. Suggestions are made for the Bangladesh government to buy shares in large private corporations to increase government revenue. An impossible step. The private sector can only look with horror at such a prospect. The destruction of whatever manufacturing Bangladesh inherited from Pakistan can remind any analyst how obviously wrong such a move on the part of the government would be. 

POSCO and Malaysia Petronas Global, both state enterprises, are forwarded as examples of a strong source of government budget, admitting that only good governance and a just and able state can utilise resources appropriately. 

Indeed so, and a proper understanding of the state's role, governance and leadership are most necessary. Park Chung Hee built POSCO defying many critics and sceptics, while the World Bank refused to finance it. Now POSCO is the fourth largest steel manufacturer in the world and the largest global player by market value. 

But this position for POSCO could not have been established if Park Chung Hee did not pursue a vision of establishing the heavy industries required to embark on an economic development that the Soviets did earlier and China continues to do. He had the confidence to bring in Park Tae Joon, a private sector tycoon, to lead the construction and operation of this project. 

Park spent 18 hours a day, even flying to the project site during construction at midnight in order to make sure work continued and the steel plant could be built as scheduled. They believed that heavy industries, (steel being one such industry), needed to be established to support industrialisation and infrastructure growth. 

On the other hand, The Bangladesh Steel Mills Ltd, designed, planned and initiated in the late 60s, would be one of the largest steel mills in Asia, but was fully mismanaged, neglected, looted and finally closed down. 

Professor Mahmud refuses to discuss these and assumes away all implications from adopting specific political systems. One must ask whether a parliamentary electoral system adopted by Bangladesh and many ex-colonial countries of the South has inhibited economic development or supported it. Under what political system would effective leadership, civil servants and citizenry be motivated for economic development and maintain national interests?

Professor Mahmud is greatly influenced by Piketty and Amartya Sen, the former an adherent of income redistribution through wealth tax and increased government revenue, the latter a liberal moralist to whom an open market under a capitalist mode of production and liberal democracy is the only system that provides "Pareto optimality". 

Both hold firm faith in a liberal capitalist economy with the proviso that its ill-effects of income concentration, leaving the larger population marginal, can be mitigated through redistribution of income and appropriate social welfare systems. The ideals of a social democratic country outlined in the discourse theoretically are no different from a socialist country. 

Why then choose a socialist democratic system? There is no historical evidence of an emerging economy achieving high economic growth and delivering an improved livelihood to all its citizens by pursuing a liberal democratic political organisation. In fact, all countries face the global trade and institutional order set out by the White Atlantic to benefit them, restricting local economic development goals. None of these post-colonial issues appears relevant to the discourse. 

How should nations of the South arrange economic management that incorporates intertemporal decisions to bring all its citizens under the mainstream of the economic and political life of society? This is the question to be posed.

The Asian miracle happened because of some specific and deliberate initiatives. Park Chung Hee said Korea's economic transformation is not so much the work of a miracle as the fitting result of many years of hard work to make Korea stand on its own feet. So much of this is true for Japan, China, Taiwan, Singapore, Indonesia, Thailand and other Asian countries. 

Many tables and graphs tell the story of how, over four decades, these countries have transformed their economies to bring increased income and improved living standards to their populations. In the early 1970s, several of those countries had socio-economic conditions similar to Bangladesh with much of the population living in poverty with relatively low literacy, low industrialisation, poor institutions, skills, and technology. 

Asian countries across the region instead pursued a strong state intervention in the economy with a unique model, relying on heavy industries to provide the "push" alongside traditional small and medium enterprises. They forged a partnership between the state and business, between bureaucrats and technocrats, providing a vision for economic development fully supported by the state and its leaders, while ensuring professionalism in all executive functions of the state.

It is imperative for every Southern nation to arrange a developmental path that prioritises its national interests with a framework that puts at the heart of it, the participation of all its people in economy, politics, and culture. And instead of a concentration of the nation's wealth in a few hands, it should be administratively redistributed to a permanently marginalised group through a welfare system. 

To achieve the above, a strong and stable state willing and capable of arranging economic development is a must. State participation in the economy is not simply to enhance its revenue source, as has been suggested, but to intervene, guide, plan and prioritise resource use and build-up. 

For this to happen it must then own enterprises, and nurture and grow those enterprises, as POSCO has been and is. Such a state will perhaps be known as a socialist state. It is a fallacy to continue to have faith in the free market and individual initiatives to achieve the goal of common prosperity for all.

Farook Chowdhury studied economics and had been in policy advisory services serving numerous developing countries.