“The Economy, stupid”. Apparently, this was one of those bumper-sticker phrases which won Bill Clinton, the 1992 presidential race. Economics is a powerful force today, cutting through political, social and cultural boundaries, and having a massive impact on the world we live in. So, i thought i’d brush up my own understanding of the dominant economic paradigm of today, stripped of all jargon. Down to the very basics. Call it “economic liberalism” or “capitalism” or “free markets” or “neoliberalism”. All these are slightly different flavors of the same core idea. I’ll be a “cat on the wall”, so to speak, and not take positions for or against. I guess i have grown wise enough not to give rhetorical “death to capitalism” kind of calls. Value judgments shall have their day..
Capitalism made as easy as eating a peeled banana
The economic “system” is basically a set of rules answering fundamental economic questions. What are capitalism’s rules of the economic game ? There’s actually only one central rule – Individuals or private enterprises employ their capital (skills or goods or money) in self-interest and try to maximize profit for themselves. This translates into lot of sub-rules, or “policies” that free market advocates call for. I’ll mix them in a sort of free-style approach here, without being too academic:
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What is produced ?
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Generally, a good or service is produced if there is a profit to be made. That is, ’selling price minus cost of production’ is positive, and the producer considers that the profit margin is worth the time, effort, and capital that’s put in.
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A rational producer may end up selling something for a loss for sometime, for various reasons. But, it is generally the case that on continued losses producers quit the endeavor by themselves. Governments owned enterprises which continue even on mounting losses, for reasons like job protection, are therefore considered inefficient.
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Who produces ?
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Private enterprises should be engaged in production, by either investing private capital of promoters, or raising capital from public through financial markets. Government has no business producing stuff, other than shared services like defense and infrastructure. If the government does wish to produce, it must survive in the marketplace without special treatment.
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How is it produced ?
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It is the right of the producer to look for cheapest means of production – labor, raw materials and capital. Salaries are set according to marketplace. No restrictions on hiring and firing labor.
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Technology may be employed if it justifies business interests. That is, if it reduces cost of production or increases potential sale price or increases competitiveness of the product. Technology and labor are fully inter-changeable, based on business interest.
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Who gets what is produced and by how much ?
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The producer has the right to sell a product for highest possible price, obtainable in the market.
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There are two basic ways to earn money. One, as labor salary. Two, as an investor of capital in a business, one has right to pocket the share from business profit. The question of who gets produced goods and by how much, is answered based on the buying power of the earnings thus obtained.
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Taxes are sought to be kept at a minimum, as they may squandered or used inefficiently by the government, and because taxes are a bite on private profit.
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In short, Market is the king. It is the arbiter of all economic activity, setting the prices of everything — labor, raw materials, capital, and finished goods – according to supply-demand dynamics. It is the “invisible hand” magically allocating resources “optimally”.
Global capitalism..
..is simply a question of scale. Just apply the same set of rules across nations, around the globe. The factors of production — labor, raw materials, or capital can be obtained from cheapest locations in the world (global sourcing). The finished goods and services, can be sold at highest possible price anywhere in the world (global marketing). A unified global marketplace, with free movement of goods, services, capital and investment.
Sales pitch
This set of rules appeals to so many people, so it must have some strong selling points.
Let me flex my imagination a bit, and see how it might appeal to a poor college kid. Ram has Rs 500 monthly pocket money, with which he used to buy just one shirt. Now, a new private enterprise started using a new stitching technology or take advantage of cheaper labor costs in Bangladesh, to be able to sell the same quality shirt for Rs 200. Efficiency – more for same money ! Ram is left with Rs 300 with which he chooses to make more money, buys a bunch of lemons and a squeezer, and sets up a lemonade stand. So, the world has Ram’s new lemonade services available. Wow. economic growth ! Meanwhile, the government has opened up telecom services to private operators, leading to fierce competition among them, and lower priced cell phone services. Taking advantage of this lower price, Ram decides to buy a cell phone using his income from part-time gig. Since everyone from Tata’s to Mittal’s to Ambani’s to are in the telocom game, Ram sure does have lot of consumer choice. As the phone guys queue up to Ram to sell their product, Ram enjoys his minute of feel-good factor, remembering days when his father used to queue up in government phone company, to get a land-line installed at home. How things have changed ! Better service, indeed ! Ram, who earlier used to settle for a shirt, has a new job and a cell phone. Is that called “trickle down effect” ? (Well, atleast he has a job until ‘Minute maid’ lemonades start coming down the highway 
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This IS the sales pitch given in everything from Econ 101 textbooks to the WTO. Here’s a very frank WTO sales pitch. (Note: pdf document)
Philosophy
The view of man is that of ‘Homo Economicus‘..“a rational and self-interested actor who desires wealth, avoids unnecessary labor, and has the ability to make judgments towards those ends”. At the core of capitalism, is a somewhat non-intuitive idea — Individuals or private enterprises, by simply following their self-interest, will result in the overall good of the society through lower prices and more goods available overall.
“Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. (Adam smith, in “The Wealth of Nations”)
There is also an undercurrent of “Social Darwinism”. That is, ’survival of the fittest’ attitude applied on a social level. Each man, on his own !
