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The business of capitalism

Sunday, October 20, 2013
Business Eye

In the early fifties and sixties some of my older male relatives would leave the country to work abroad, returning at intervals. On inquiry, I was informed that they were working “Down the Main.” That was many years ago. The Main was mainland Venezuela and the work was in the Venezuelan oil industry, which at that time was a major world oil reserve. Today, Venezuela still has the world’s largest oil reserves, but is having difficulty supplying its citizens with basic commodities. 



Why has this country, blessed for generations with a seemingly endless supply of one of the world’s most valued commodities, fallen into this parlous situation? Is there a lesson to be learnt? Since the Industrial Revolution two seminal works have informed the thinking of those charged with running the economies of industrialised nations. The first is Adam Smith’s An Enquiry into the Nature and Causes of the Wealth of Nations. First published in 1776, this is an analysis of the reasons why capitalism was creating a wealthy Europe. 


The second is Karl Marx’s Das Kapital, published in 1867, nearly 100 years later. Marx agreed that capitalism created wealth, but argued that it did so by exploiting workers. 



He further argued that the wealth so created rightly belonged to the workers and to correct this the state must take charge of the economy by confiscation (commanding heights of the economy) and operate it on behalf of the workers. He condemned the market economy as wasteful and inefficient and proposed that it be replaced by a demand economy where economic activity was directed by the State. 


There is now adequate evidence that Adam Smith was correct. The socialist economies of the Eastern European countries all collapsed towards the end of the 20th century after having inflicted decades of misery on their peoples. The capitalist economies of Western Europe were at the same time providing an ever-improving lifestyle for their people. 


To a rational mind this should be adequate evidence that capitalism, whatever its shortcomings, better provides wealth for those countries that use its system of doing things, even where natural resources are lacking, as in Singapore and Hong Kong. Winston Churchill succinctly summed up the difference of results of the two systems. He said: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” 


The economic policies of all developed nations are informed by variants of these two highly divergent theories. Indeed, as Engels wrote in a preface to the Communist Manifesto, “Every labour and socialist party in the world stems from the example which Marx set.” It follows that the success or failure of any economy depends on whether the principles of Adam Smith or Karl Marx are informing the policies of those in charge. 


Regardless of the evidence of over 100 years of political experimentation in the two different types of economic organisation, every so often the siren call of socialism, offering the promise of economic equality of man as well as enormous economic power to political leaders who adopt its principles, continues to lure national leaders into the socialist trap.   


President Chavez of Venezuela found his inspiration for the economic management of Venezuela not in the capitalist models of Western Europe or the Asian Giants, but in the socialist model of Castro’s Cuba.  President Maduro has so far continued those policies and, as a result, is now engaged in “the equal sharing of miseries” among his people. 


Socialist leaders are always surprised at the destructive consequences of the application of socialist methods to the country of which they are in charge. Increases in the selling prices of consumer items due to increases in raw materials, possibly obtainable only from other countries, are seen as acts of sabotage and met with price controls.



When the item is in short supply because it cannot be provided at the controlled price, except at a ruinous loss to the provider, the providers are considered traitors to the country and treated as such. Eventually, a black market develops to supply customers willing to pay the market price, which only confirms the government’s belief that the economy is being sabotaged by enemies of the State. 



Inevitably, such governments begin to see enemies everywhere, enemies of the people abound. Businesses both local and foreign, are confiscated or purchased at knock-down prices by the State and given to civil servants, at best, or cronies of government officials, at worst, to run on behalf of the people. Without the guiding hand of the previous owners, the businesses become loss centres to a government already reeling from bad management


The story is as old as Adam Smith and Karl Marx.  In 1992, Francis Fukuyama, in his book The End of History and the Last Man, argued that the advent of  western liberal democracy practising some form of capitalism signalled the final form of human government. That day has not yet come.



Everard Medina is a former president of the T&T Chamber of Commerce


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