Capitalism and development

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji, @macroafrica

The main idea in IE Business School global economy professor and fund manager Daniel Lacalle’s 2020 book “Freedom or Equality: The key to prosperity through social capitalism” is the “need to apply the power of free markets to solve society’s greatest problems.” In his assertion, “there are market-based solutions to all of our social problems.” Thus, Lacalle defines “social capitalism” as the application of “free market ingenuity toward solving social problems.”

Simply put, “the private sector, not the government, makes direct investments in social welfare.” It is not suggested that firms become charities. Not at all. Social welfare is simply good business. There is money to be made. Plenty of it. But you also add value to society in tandem. A so-called “win-win”.

The idea might not easily appeal to people in places where things already work, where governments deliver public services efficiently and do so quite optimally. In fact, social capitalism could easily be confused with “socialism” if the distinction is properly delineated. In a socialist system, the “community”, proxied by the state, owns “the means of production, distribution, and exchange”. For social capitalism, however, the “individual” remains at the core. Simply put, social capitalism is not collectivism.

And unlike socialism or communism, social capitalism evolves with the times. It is dynamic. It relies on an incentive system that recognises the motivations and weaknesses of human nature. Public goods are likely to be delivered efficiently if there is a profit motive. And the desire to ensure the money wheel keeps spinning motivates adherence to the rules.

So what would be the role of governments then? Their guiding philosophy should certainly be to help businesses in anyway they can. This is not as simple as it seems. When governments look at firms, they see taxes and how their budgets would be financed. In the system being proposed, governments engage businesses before the money-making begins.

In other words, they ask firms how they can help them achieve their targets. They engage the business community on a regular basis. If done right, the relationship becomes a symbiotic one, whereby concessions here and there translate into gains in social welfare. In Lacalle’s exposition, “the government [would] be a facilitator, not the executor, of social welfare.”

Naturally, you may wonder if such an approach might not create a system whereby there is ample but expensive pipe-borne water, power supply, and other social services. And there is always the risk of monopolistic or cartel behaviour, whereby a firm or group of firms dominate an industry so much that they cannot be controlled. There is also the risk that the owners of such dominant firms extend their influence into politics and government.

These are not unfounded. But is it not already the case that the rich influence politics and governments in most countries? And it has nothing to do with whether the country is wealthy or not. American lobbyists literally dictate key legislations and orders of the executive branch; albeit with some finesse. In poor countries, the rich are much more brazen. They have no qualms with parading the extent of their influence in government. And in some cases, they become the government themselves.

In other words, the potential risks of a private sector-led social welfare system are already there. What social capitalism ensures is that firms make money and engender social welfare in tandem. Privately-financed roads rarely have potholes. Consumers of commercially-priced electricity make sure to switch off the lights when going to bed. Needless showers are usually rare if water supply is metered. Our governments would certainly have less debt on their books consequently. We may not have as much corruption. And firms would certainly be interested in sustaining the political system that puts them first.

But should the priority of governments not be the people? Of course, it should. People want jobs. They want to live in a functioning society, where the roads are smooth, and electricity and clean water are taken for granted. The record of governments trying to do these on their own is very poor, however. Capitalism without a leash is similarly terrible, as the rising inequality and populist backlash in rich countries show.

Winston Churchill once described the dilemma succinctly: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.” With the right incentives and safeguards, firms could do for development what they do for themselves.

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