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Capitalism is a very flawed system but the others are so much

worse ?
Many people reading about the recent spate of business scandals in the USA may conclude
that capitalism is a pretty dreadful system. We have long moaned and groaned about crooked
Indian businessmen who inflate profits, hide liabilities, manipulate markets, and break a
hundred laws. But the US scandals show that crooked businessmen exist everywhere.

This week, some of the biggest energy companies in the US such as CMS, Dynegy and Reliant
admitted that up to 80 per cent of their electricity trades in California were bogus. They
indulged in fictitious sales to one another to create the illusion of a boom in revenue. They
also indulged in various dirty tricks (some of which could be criminal and lead to prosecution)
to exploit loopholes in power regulations (like artificially creating power congestion and then
getting paid to relieve it).This showed there was nothing unique about the peccadilloes of
Enron, the seventh biggest company in the world some months ago, that hid huge debts off
its balance sheets and overstated profits to create an illusion of prosperity when in fact it was
heading for bankruptcy. Enron was abetted by one of the celebrated Big Five of accounting,
Arthur Andersen, which is now in the dock for criminal obstruction of justice. The most
celebrated giants like General Electric and Boeing stand accused of fudging their accounts to
show ever-rising quarterly profits. Microsoft, the biggest of all, is on trial for monopolistic
behaviour. Pfizer, the biggest drug company, stands accused of manipulating drug prices, and
last year, a cartel of drug companies were fined for trying to rig vitamin prices. Big oil
companies are being investigated for rigging petrol prices.

Crooked behaviour is not uniquely Indian or American. It is inherent in human behaviour, and
can reach great heights in a capitalist system. Now, market systems have enabled many
countries to achieve stunning improvements in living standards that would have been
considered impossible a century ago. Businessmen seek to enrich themselves, not society.
But competitive, transparent markets force businessmen to compete on a level playing field,
because of which the main gains of all their innovation and enterprise go to consumers. For
the 500 biggest companies listed in Fortune magazine, net profit averages only 3.3 per cent
of sales. For that very reason, however, businessmen are constantly tempted to find ways to
reduce competition and transparency to increase their profits at the expense of customers.
This can take legal forms (lobbying, innovative book-keeping, exploiting loopholes) or illegal
forms (bribes, fraud, rule-breaking).

No wonder, then, that so many people are utterly disgusted with capitalism and seek
alternatives. No wonder they find the profit motive a morally unacceptable basis for ordering
an economic system. When the main actors of such a system are self-serving, manipulative
and greedy; when they fudge facts, make false claims and promises, bend the law in various
ways and indulge in outright crimes, how the outcome be at all satisfactory? Answer: for the
same reason that self-serving, manipulative and greedy politicians produce a satisfactory
outcome called democracy.

The argument for a market system is exactly the same as for democracy. Winston Churchill
once said that democracy is a very flawed system, but all the others are so much worse. The
same is true of capitalism: it is a very flawed system but the others are so much worse. Enron
hid its liabilities and exaggerated its assets. But do not all political parties hide their political
liabilities and exaggerate their political assets? Many crooked business promoters promise
investors the moon in order to raise money. But do not politicians also promise the moon to
get votes? Companies fudge their books and make inflated claims to mislead gullible
investors. But do not politicians make inflated claims to mislead gullible voters? Businessmen
claim to represent the national interest while feathering their nest (by, for instance,
demanding high import barriers in the holy name of swadeshi). But politicians in a democracy
also claim to represent the national interest while feathering their own nests. Businessmen
indulge in bribery. So do politicians. Businessmen revel in black money. So do politicians.
Businessmen hire hoodlums to beat up workers or ruin a rival's business. Politicians too hire
hoodlums to capture polling booths and sabotage rivals' rallies. Businessmen intimidate and
buy up rivals to reduce competition. Politicians too use intimidation and money to buy
defectors. There are many criminals in business. There are many criminals in politics too. The
use of money, muscle and influence to sabotage rivals and competition is a feature of
democracy no less than of capitalism.

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Capitalism is a very flawed system but the others are so much
worse ?
Why, despite all this, do we regard democracy as the best political system? Because it is
grounded in choice for the ordinary man, and freedom to choose is a paramount virtue that
makes other freedoms possible. In democracies, the ruler is chosen by ordinary citizens and
voted out by them too. Politicians do their best to subvert free choice through the use of
money, manipulation and muscle. Yet the freedom to choose empowers ordinary citizens so
much that, despite a thousand flaws, democracy turns out to be more desirable and beneficial
than the most well-meaning autocracy. Democracy creates a market for political goods.
Capitalism creates a market for material goods. In both cases, the freedom to choose gives
the ordinary man in the street greater power than the biggest political or economic giant. By
shifting his vote, the ordinary citizen can oust the most entrenched politician, and by shifting
his custom he can bankrupt the most entrenched company. Lenin was logically consistent in
refusing to allow freedom of choice in either political or material goods. What I find amusing
is the notion of many democratic socialists that the people must be free to choose their own
rulers, but cannot be allowed to choose what goods to buy; that political licensing is
abominable but industrial licensing is moral. There lies the road to serfdom.