Can Capitalism bring Inclusive growth?

In the recently concluded Millennium Development Goals of UN, inclusive growth has been put at the forefront. The yearly data on GINI ratio that measures the inequality specific to countries further highlight the growing inequality in world. The most famous book of twenty first century “The Capital” by Thomas PIketty also highlight this inequality (lack of inclusive growth) and how it has grown since last three centuries. The problem is clear, to achieve inclusive growth; and the method to achieve that are many from capitalism model of development, socialist model of development or mixed economy. But what’s the best solution? Before answering this question, we should rather look into these model of development.

Capitalism involves private ownership of the factors of production with prices and allocation of resources is determined on basis of supply and demand, to be precise by the market. Capitalism further includes different models of development like laissez faire model, state capitalism or welfare capitalism. Socialism involves state’s control over the factors of production and price fixation. Erstwhile USSR was a good example. And mixed model is in between the previous two, with both private and public involved into economic activities. India is currently following this model of development.

Here, we are limiting the case to capitalism. Capitalism in its true sense means laissez faire model or free market economy. Here, decisions are taken as per market forces and private individuals are the owners of all decision making activities. It works on the principle of Survival of the fittest. The most competitive firm survives and thus it gives rise to innovations, development and discoveries. But at the same time, since decisions are taken on principles of demand and supply of market; needs of people who are unable to pay are not served. The poor are marginalized in such systems and it heightens inequality. The low GINI index of USA represents the poor inclusivity in American growth story. India on other hand has better GINI index although with one-tenth size of US economy and triple of its population.

But at the same time, innovation brought in by Laissez faire capitalism can directs towards inclusive growth. The birth of Sachet packaging is one such innovation of market economy serving needs of the bottom of pyramid. This enabled poor to use best products and improve their quality of living with access to better resources. But the catch here is “ability to pay”. If one is unable to pay, capitalist class doesn’t have the motivation to innovate. And that’s why majority of innovation is into luxurious products. But such growth is unsustainable and dangerous. As Edward Abbey writes

"Growth just for the sake of growth is the ideology of cancer cell"

Further, the surplus arises out of economic activities in capitalist system accrued to capitalists only. And very little benefits trickle down to worker class. This unequal growth has also been highlighted in Alternate theory of Distribution by Ricardo; where surplus accrues to capitalists and landowners.

In the past, mercantilism was one of the previous forms of capitalism, which gave rise to colonialism. And it divided the world into two halves with haves and have-nots. The third world of today comprising of Africa and South Asia is a result of greed of this capitalism. Thus, even on past experiences it has never proved to be inclusive.

However, other models of capitalism like state capitalism and welfare capitalism which involves state intervention in form of regulation do give a way out for inclusive growth. Here in this model, the excess of capitalism gets regulated and the poor are being supported by state machinery. Long gestation development activities for masses which are not undertaken by private players are rather provided by state. The experience of Nordic countries regarding availing education and health to all from surpluses of capitalist economy is one such positive example.

Also, many of welfare economists like Joseph Stiglitz directs responsibility of state in a market economy towards ensuring rights and growth of poor and destitute. And the excess of capitalism like monopoly practices or cartelization which aims towards maximizing profits at the cost of welfare of consumers need to be checked through regulators. SEBI or TRAI or CCI (Competition Commission of India) are some very good examples which ensure welfare of masses against excess of market economy.

Capitalism in theory do has potential to bring inclusive growth with its innovation, best use of resources and accompanied with welfare state. But the baseline of capitalism i.e. profit motive when combined with human greed in real world, all the diversion starts. And similar is the case with other model of development like socialism. The unsustainable inclusive growth of USSR is one such example. Although, in beginning it promises good result but in absence of competition (ensured by capitalism) people had become complacent and innovation died down.

Inclusive growth requires best use of available resources with equal distribution of surplus benefits. Capitalism do provide this opportunity, but in a world dominated by human decision making, realism always overtakes theory. And reality is human emotions, greed and jealousy which need to be curtailed through regulations and legal standards. In absence, no model can guarantee inclusive growth and neither will capitalism.