Saturday, April 3, 2010

Capitalism: A Love Story

I had been waiting for "Capitalism: A Love Story" DVD to be released. Yesterday, finally I got a chance to watch it. To tell you frankly, I liked Moore's intentions, but I was seriously disappointed with his treatment of subject and promoting ideas which have historically proven to be unsuccessful or even detrimental to the growth of economy.

There has been a lot of talk in the documentary about layoffs and job losses. I might be over simplifying this even by Michael Moore's standards, but, jobs are created when the economy grows. The old fashioned worker's union can't sustain economic growth. Also, Moore looses much of his credibility by showing top bankers finding difficulty in explaining simple concepts like derivatives. I was waiting for him to use terms like "mortgage backed securities", "securitization of credit card receivables', or "auction rate securities" and explain how they hurt the economy or people.

But anyway, I didn't really intend to write a movie review. I really wanted to comment on economy. It amuses me that capitalism or socialism are just classified as two simple words. One is good, the other one is evil or vice-versa.

Let's start with simple definitions. What is Capitalism? In simple words, capitalism is a form of economic environment where society is divided into two simple classes. Capitalists and workers. Capitalists own and run the businesses, workers offer their services for a salary or wage. Capitalists sell the produced goods for profit and workers receive market adjusted renumeration for their work. It is imperative for capitalists to find new markets, keep the production cost low (including salaries and benefits to its employees), keep the selling price high and invest in remaining profitable.

What is Socialism? Socialism is an economic system which intends to concentrate the wealth creation into a centralized body (i.e. government) and distribute it to the common man with the intention of shrinking the disparity between rich and poor. A simple example would be government running factories and controlling the means of production, and compensating everyone (including the executive staff) .

Which form of economy is good? Feels like capitalism will concentrate all the wealth into fewer hands and keep a large pool of workers in a vicious cycle of hand to mouth. Well, Socialism feels like a free-for-all system and no one has any desire to compete since one can easily benefit from the profits by contribution of others.

The real answer, in my mind is a combination of these two. Absolute capitalism or absolute socialism can't sustain itself. The very basic nature of human being is to compete and prove one's capability. A system where success and competition is not rewarded will drive out the talent and the system will dry out gradually.

That being said, ensuring some sort of balance in the society is not too much to ask. We witness socialism in various forms. It can be a social security benefit, unemployment benefit, medicaid, medicare, government controlled ration stores, public distribution system etc. The objective of these organizations and agencies is not bad at all. They want to provide for the poor or underprivileged.

However, we human beings are not known to be driven by good ideas or good motives. There must be something for us in order to make something work. It is not a surprise that any agency which doesn't have profit motive slacks and eventually faces huge losses. The sense of ownership is difficult to achieve without ownership. And thats where socialist ideas fail

I think that there is a possibility of creating a system which has the right mix of socialism and capitalism. The comprehensive set of regulations which can allow market to thrive but at the same time put right set of controls so that no one is taken advantage of. Consider this, if McDonalds books profit selling burgers, then shouldn't it be sharing the profit with its employees? As Peter Gibbons in Office Space says "Now if I work my ass off and Initech ships a few extra units, I don't see another dime".

The reality is that extremes of any model is bound to be bad. A country needs to be socialist for people who need help and capitalist for people who can help. In other words, hard working and capable citizens need to participate in a free enterprise system comprehensively regulated by authorities so ensure balance in the competition, but poor, disabled or elderly should be protected by programs which, for the lack of better world might be of socialistic in nature.