Capitalism, Representative Democracy and

bridging Inequalities

“When I'm sometimes asked when will there be enough [women on the Supreme Court] and I

say, 'When there are nine,' people are shocked. But there'd been nine men, and nobody's ever

raised a question about that.”

― Ruth Bader Ginsburg

In economics scarcity is the central problem. Scarcity may go by a synonym- need.

Production of a certain good happens when consumers are able to identify, by themselves or

by the help of producers (the visionary and clever kind who are able to persuade consumers)

the existence of a need or scarcity. Thus, scarcity is a trigger for production. In other words,

production stops when needs are fulfilled. It starts again when the producers identify a new

need of consumers.

In the present day we have seen Covid-19 wreak havoc in the world. The inequalities of

resources (or purchasing power; or income) have become even more visible and drastic.

Essentially, Covid-19 can be seen as a stress test of economic, mental and social well-being

of people. The less well-off faced most inopportune moments.

The major scarcity in times of Covid-19 was absence of its cure. Covid-19 could be defeated,

its effects could be done away with if there was a medicine available. The vaccines did come

and positively affected the health of people. Today we are effectively out of that period.

However, a lot occurred in that period.

The difference between walking from the place of work you migrated to and getting a

vehicle for the same was the level of income savings you could part away with. If market

efficiency and competition take care of the well-being of people, what happens when markets

and production need to be restricted to protect that same well-being? Can markets look out

for everyone?

Stigler’s view

According to Stigler, governmental regulations produce inefficiencies in the market, raise the

scope for corruption and harm innovation. When governments regulate an industry, the big

players try to influence the regulatory body by using the resources at their disposal. They

might bribe or provide support for some other government policies (which does not influence

the costs and profits of their firm). These policies, which might harm the public in the long

run, thus find an unintentional support.

It also results in erection of barriers to entry to the market and ensures the influential firm’s

continued operation and success. It increases the marginal cost of other firms. The rising

costs discourage innovation (which requires trial and errors) from smaller (or newer) and

niche players which in turn anyway require long gestational periods and relatively high

marginal costs.

Thus, Stigler argued for the decreased role of government in the market. The government, in

his view, can play the role of a facilitator and protect the rights of citizens instead. In this way

the ills of private production could be contained.

This approach seeks to prevent the collusion of private producers and regulatory bodies by

wriggling out the space for collusion itself. Thus, it argues for a form of capitalism where

consumers get goods and services of high quality at reasonable prices and private producers
ring in greater profit. The government has less regulatory burden and greater revenue in the

form of taxation to protect fairness in the society.

Against Capitalism

However, why at all does a private player participate in lobbying for policies that might harm

the general society when the employees and their bosses are themselves part of the same

society?

Stigler argues that some private players are able to influence the government's coercive

powers through which it regulates society which ultimately favours those at the top of the

decision making process. When private players become a crony in practice of such coercive

powers, they will try to build a moat around themselves, i.e., unassailable lead in profit and

production. It is not asked as to who makes this decision. The maker of a decision of a policy

with negative outcomes must be protected (or unaffected) from those outcomes. Thus, in

Nassim Nicholas Taleb’s words the decision makers (and his allies) have no “skin in the

game”.

Stigler says correct valuation of factors’ marginal contribution to production in a complete

and timely manner can redistribute wealth in the long run. The salary and wages of people

can help them to do better for themselves in the long run. The idea of capitalism thus says

that when private firms survive, its workers become well-off. Their ability to pay for goods

(cars, chocolates, education, and medicine) is directly related to their well-being. Here, the

success of capitalism is dependent on the capability of firms to earn a profit. It is not

dependent on the welfare of people; it is a secondary result.

When a private enterprise struggles to increase its production, it often slashes labour wages to

lower marginal costs. Lower costs help in fighting the competition and maintain or increase
the sales of its goods. The rise in sales contributes in serving the consumer better but is a

disservice to the employees. Further, to make their products increasingly competitive firms

attempt to increase their productivity and often the practice is to increase the working hours

of its employees. The increased working time cuts into their leisure time which negatively

affects their enjoyment of life’s pleasure such as spending time with family, going for picnics

etc.

It is the weakness of capitalism to judge welfare from the mere lens of monetary well-being.

There is a disconnection between the policy planning and implementation, and the policy

planners and other average citizens.

Cohen’s view

Cohen suggested the Interpersonal test which became an important opposition to the neo-

liberal thought and its description of the market. It places the capitalists' personal behaviours

and ideas at the central stage rather than justifying their behaviours and ideas as a cause-

effect relationship with the market. When Capitalists business persons describe the

achievements of capitalism and free market, they basically are describing their own

behaviour. They are asking for more incentives for production out of their own reasoning and

not market forces. Here, in Nassim Nicholas Taleb’s words the capitalists (and their allies)

have “skin in the game”. Since the wealth, power and influence of those at the top echelons

of private firms and public planners is positively related to the returns on the invested capital,

they care for the welfare of people as much the bottom line of their businesses allows them

to.

Thus, the purpose of individualism in Neo liberal thinking is defeated because some people at

the top can go undercover to influence markets and negatively affect the individual freedom

of others. The self-deterministic principles of capitalism that Stigler supports are thus not
widely available. Even if the firms and government do not collude through lobbying, the need

for higher tax collection makes governments support those policies where a few private

players can benefit and government’s duties can be fulfilled quickly. Thus, there lies a

propensity for unequal distribution of resources and opportunities in capitalism.

A policy framework that can bridge inequalities

The present-day inequalities are not a product of scarcity. Under scarcity, we would have

endeavoured to distribute resources in a just manner. To call concentration of wealth in

present times in the hands of few their achievement born out of their talents and productivity

is ignoring the simple role of luck and basic absence of opportunities for others. For example,

most billionaires are in the USA but Ethiopia faces severe poverty. Similarly, Delhi has the

most millionaires after Mumbai but most of the people live in unregulated buildings. The

financial well-being of few, even if sizable numbers, does not contribute to the welfare of

others less well off. Instead, it might stand against it.

In this regard it is important to remember the 73rd constitutional Amendment of 1993. It

introduced a new institution of governance with compulsory representation of Women, Dalits

and Adivasis who face most discriminatory behaviours in India. This institution is closer to

people and accounts for those who are marginalised.

Our policy recommendation is strengthening the Panchayati Raj system. This system has

already produced great results but can do better. The elected representatives of this tier need

training and investment in human resources. It also needs partnerships with civil society

groups to strengthen their functioning. Also, the funds transferred to them must become more

uniform and timelier. This tier of governance represents the grassroots level of our

governance structure. When those who are less well-off than others participate at this level, it
can create a bottom-up approach to development as opposed to the top-bottom approach of

capitalism.

Cohen’s suggestion for socialism was motivated by simple human nature to share the fruits of

their labour. Capitalism’s appropriation of fruits of production fails to distribute to all justly

by ranking the capability of one factor of production over the other. In Stigler’s view, the

moral value of people matches their behaviour, which the capitalism contends to be rational

and is influenced by their social identity. So, when a priest returns lost money found on the

road to the police, or if a poor person takes it for himself, they perform rationally. Thus, a

very capable person can pocket more money than his employees because it is simply rational.

If any of his employees becomes more capable, then they too may have a higher cut of profit.

This argument ignores the existence of opportunity to become capable equally to all. It puts

all the onus on the government to look after the rights of people as if the private owners of

capital carry no moral responsibility. Cohen is, hence, against this improper distribution of

responsibility and power. Ownership is synonymous with ethical and moral responsibility.

The Panchayati raj system places power in the hands of the most vulnerable. It uses the axis

of ownership and responsibility. For people to make choices as they deem fit, they need

ownership of resources. In effect, it basically gives worthwhile freedom to people. It also

gives people the opportunity to intermingle for the sake of taking impactful decisions

affecting their lives rather than, as in a capitalist setup, let relationships be governed by forces

of market.

Hence, what matters is-who? Who is the decision maker? Who is positively impacted by it?

Who is negatively affected? Who is most influential? And how are each of them related?

Conclusion
The institutional design of Panchayats offers an opportunity to participate. Monetary power

cannot be waited for to reduce inequalities. It needs the other frontier of power to provide

people with the ability to back their individual perspectives of progress. And that is the

Government. Thus, the government can stand with unequal people to make their lives

worthwhile and their decision their own. Social freedom comes before economic well-being.

Freedom needs self-ownership. Panchayati Raj is a kind of social engineering which gives the

targeted groups social power to, in turn, affect the economic decision making. Here the

decision makers are closer to those subjected to such decisions. This improves the speed and

efficiency of the feedback loop. Hence, this policy framework provides a check against

inequalities by giving a shot at power to those who are more unfortunate.

References

Economics or Ethics? (1980) George J. Stigler The Tanner Lectures On Human Values

Delivered at Harvard University

Peter Ronald deSouza (2003). The Struggle for Local Government: Indian Democracy’s New

Phase. The Journal of Federalism.

G. A. Cohen (1991). Incentives, Inequality, and Community. The Tanner Lectures on Human

Values