Relax, capitalism is not the problem

The choice for policy-makers is not between free markets and central planning but in getting the right mix of regulation, says Gurcharan Das.

The epic, Mahabharata, thinks that human beings are fundamentally flawed and their faults make the world "uneven" (vishama). As a result, they are vulnerable to nasty surprises.

Duryodhana is the chief purveyor of "uneveness" in the epic, but the others also contribute to it in good measure - Yudhishthira cannot resist gambling; Karna suffers from status anxiety; Ashwatthama has a revengeful nature; Dhritarashtra is prone to excessive love for his eldest son and so on.

These human defects drive the epic towards calamity. Like the Mahabharata's characters, investment bankers on Wall Street, rating agencies and even regulators suffer from similar failings, and it is these dangerous infirmities that brought the global capitalist system to its knees in 2008.

A year ago, the world was unravelling. People predicted that it was the end of the road for global capitalism. They forecast political collapse in many emerging markets. President Sarkozy of France, former Prime Minister Tony Blair of England, and the German Chancellor Angela Merkel, kicked off a debate in January 2009 on the nature and the future of capitalism.

Now, just a year later, the doomsayers have turned out to be wrong. The world economy is reviving, and India, China and other emerging markets are at the forefront of the recovery.

The governments deserve much credit for having learned the lessons of the Great Depression of the 1930s, and for expanding state support to their economies and have buffered the damage.

In India, some of this buffering did not happen by design, but by accident, as a result of the Congress party's strategy of state spending via loan waivers, Sixth Pay Commission, and NREGA, all the measures designed to win an election, including the raising of interest rates much before the crisis, which succeeded in slowing our growth rate.

John Maynard Keynes, the great economist, had a similar insight as the Mahabharata about our "uneven" world. He lived during the Great Depression when there were many calls to end capitalism. The unevenness of the world is caused, he said, by "animal spirits", which drive businessmen to take risks, often in the face of insufficient knowledge.

John Nash, the Nobel Prize winning hero of the movie, A Beautiful Mind, traced this to "asymmetries of information". This leads to crises - such as the dotcom bubble, in which many sensible persons quit their jobs in order to make a fortune.

It burst in 2000 but was replaced a few years later by another mania of the "smart flippers of securitised mortgages of sub-prime properties", which sent the world into a recession in 2007. Keynes believed that a capitalist economy left to itself is unstable, and needs state regulation.

Standard economic theory makes the mistake in ignoring the world's vaishamya, brought about by human passions and animal spirits. Ever since Adam Smith, classical economics has assumed that capitalism is inherently stable. People buy and sell rationally, and this results in equilibrium.

It forgets that people get into manias and even paan-wallas start buying shares on the basis of rumours. When manias take over there are bubbles and when bubbles are pricked confidence falls sharply, and the whole economy collapses.

Hence, we do need regulation to protect people from themselves - to ensure they are not falsely lured into buying bad assets.

This regulation, however, must not kill the "animal spirits" of entrepreneurs, which is what happened in India during the ugly days of the License Raj...and we almost lost two generations.  

If Keynes thought that the answer lies in regulation, the Mahabharata seeks to "even" out the world through dharma. Dharma is a complex word - it means virtue, duty, law, religion depending on the context, but it is chiefly concerned with doing the right thing.

The Mahabharata recognises that it is in man's nature to want more. Dharma seeks to give coherence to our desires by containing them within an ordered existence. No amount of regulation will catch all the Duryodhanas and the Ramalinga Rajus of the world.

What is needed is self-restraint on the part of each actor in the market place in order to build trust within a society. The sunny world of Adam Smith may have been a tad optimistic, but Smith understood the importance of trust which underlies each transaction in the marketplace.

Self-restraint is one of the meanings of dharma and the trust that it helps to create is the "dharma of capitalism".

The market is based upon trust between buyers and sellers. The buyer trusts that the product will perform and the seller trusts that the buyer's cheque will not bounce. This moral under-pinning is what the epic calls satya, "truthfulness", which helps to balance the animal spirits and bring about stability. This is the middle path of reform that Keynes also recommends, not the utopian path of socialism.

Regulators and central bankers around the world are wrestling with how to reform their financial systems.

They are expending huge energy in debates between the political Left and the Right when the greater divide is between conduct in accordance with dharma and adharma.

It is not enough to punish Ramalinga Raju. Institutions must also develop a culture of self-restraint and reward as well an act of goodness - one of the very few things of genuine worth in this world. A life lived according to dharma diminishes the vulnerability of human beings to the "unevenness" of the world.

The idea that an ancient Indian epic might offer insight into capitalism's nature is, on the face of it, bizarre. The truth is that the Mahabharata's world of moral haziness is far closer to our experience as ordinary human beings than the narrow and rigid positions that define debate in these fundamentalist times.

The choice for policy-makers is not between free markets and central planning but in getting the right mix of regulation.

No one wants state ownership of production where the absence of competition corrodes the character even more. Dharma's approach is not to seek moral perfection, which leads inevitably to theocracy or dictatorship. Human beings need a coherent world to order their existence.

They want good acts to be rewarded and bad ones punished. Good regulations should not only catch crooks but also reward dharma-like behaviour and the nobility of character. The point is not to throw out capitalism but to keep reforming it.

The first of a monthly column, this is based on the author's book, The Difficulty of Being Good: On the Subtle Art of Dharma.