• Wednesday, July 24, 2024
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BusinessDay

Capitalism: East or West? (1)

Nigeria’s economy

We are all capitalists now. Even still communist North Korea has a thriving black market. With so many variants of capitalism these days, it is increasingly hard to say definitively what capitalism is. According to Encyclopaedia Britannica, “Capitalism, also called free market economy or free enterprise economy, is an economic system, dominant in the Western world since the breakup of feudalism, in which most means of production are privately owned and production is guided and income distributed largely through the operation of markets.

A little complicated? I’ll simplify. In the June 2015 issue of Finance & Development (F&D Magazine), a publication by the International Monetary Fund (IMF), authors Sarwat Jahan and Ahmed Saber Mahmud, break it down quite well. Whereas in socialist societies, “the state owns the means of production, and state-owned enterprises seek to maximize social good rather than profits,” “the essential feature of capitalism is the motive to make a profit (Jahan & Mahmud, 2015).”

According to Jahan & Mahmud (2015), capitalism is founded on the six pillars of (1) private property, (2) self-interest, (3) competition, (4) a market mechanism, (5) freedom to choose, and (6) a limited role of government. And “the extent to which these pillars operate distinguishes various forms of capitalism (Jahan & Mahmud, 2015).” Broadly, there are two forms of capitalism: free markets and mixed (Jahan & Mahmud, 2015). And I agree with Jahan & Mahmud (2015) when they assert that “mixed capitalist economies predominate today”.

Interestingly, even in so-called free-market economies, the state actually plays a more active role than is let on

Most of the world’s economies take a middle course between private and state ownership; with the preponderance of either one suggesting the tilt. Consequently, varied classifications have emerged. One system identifies four types of capitalism underpinned by entrepreneurship: “state-guided capitalism”, “oligarchic capitalism”, “big-firm capitalism” and “entrepreneurial capitalism” (Jahan & Mahmud, 2015). This is a needless complication for our purposes.

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Any form of capitalism can be dimensioned along three lines: politics, production, and profits. Politics determines the rules and ownership of production. How the surplus from production is shared determines the incentives for either efficient or innovative production or both. Efficiency could almost certainly be assured in a totalitarian state. Innovation, however, thrives better in free societies, where risks are appropriately rewarded and the gains not expropriated by the state.

Interestingly, even in so-called free-market economies, the state actually plays a more active role than is let on. And even without the stealth involvement of the state, so-called “free markets” are not as “free” as we think. The reaction of global hedge funds and associated brokers to the “usurpation” of their “power” by a coalition of small-time retail traders in late January 2021, is vindication enough of this long-held view. In other words, the much-vaunted democratic capitalism of the West is not as efficient and meritocratic as is oft-perceived.

Thus, the goal of our exposition is to compare how the West (e.g., United States) and the East (e.g., China) have gone about achieving prosperity at scale for their respective populations. There is consensus that but for China’s embrace of some form of Western-style capitalism, it would have remained in the doldrums. What is interesting in the Chinese case, however, is that it took lessons from the various Western experiences and those of pioneering Asian peers, replicating what worked, while avoiding some of their mistakes.

We could not say for sure as yet which of the East or West got it right. But as we move further along in the discussion, the recurring insight is that there is truly nothing new under the sun and that ultimately, African economies looking to lift their populations out of poverty would find that it is how they adapt what they know about these systems to their own perculiar circumstances that would determine how successful they become.