Economic Watch

Is classical capitalism reaching end of the road?

Adam Smith.jpg

The debate on whether classical capitalism can retain its status as the world’s dominant economic system is gaining momentum.

In an article under the headline Why capitalism wins. And how a simple accounting move can defeat it, Professor Lorenzo Fioramonti last week wrote that capitalism remains dominant due to an erroneous theory of value.

Capitalism’s strength stems from the theory that “value is only created through market transactions, which are always positive for the economy. The rest - like social costs and ecological impacts - doesn’t matter,” he writes in The Conversation website.

Also last week we reported how concepts like gross domestic product (GDP) and so-called economic growth is calculated, fails to adequately reflect the real state of the economy where it really counts – how it impacts on the quality of life of the majority of people.

We posed the question whether the time has not come “to redefine the terms GDP and ‘economic growth’ in the South African context,” at a time of continuous “jobless” growth. On the other side of the coin, the thousands of  ‘jobs,’ and livelihoods created in the so-called informal economy – informal, unregistered traders and service-deliverers in amongst other, informal settlements – are not taken into consideration when GDP and economic growth figures are calculated. 

The reason for the rise of capitalism to its dominant position, and possibly its soft underbelly, might be a simple accounting principle.

Fioramonti writes: “Classical sociologists and economists like Max Weber, Joseph Schumpeter and Werner Sombart saw the adoption of a specific form of accounting for measuring performance in industries - so-called double-entry bookkeeping - as a critical factor to explain the rise of capitalism before and after the industrial revolution. Since then, we have simply assumed that what is good for the firm must be good for society.

"As I show in my book Gross Domestic Problem, even socialist systems largely accepted capitalism’s accounting approach, ultimately failing to beat capitalism at its game.”

Real value

He, however, also warns that the global economic debate is shifting on the subject of how value is measured. The United Nations’ ‘Agenda for sustainable economic growth and development’ for 2030 describes the creation of real value as when it leads to improvements in social and environmental dynamics.

Fioramonti writes: “I argue that, by changing our headline indicators of prosperity in line with this new thinking, we can show capitalism’s inefficiencies and contribute to its demise.”

And, “Of all accounting tools, the most powerful is the gross domestic product (GDP), the headline indicator of economic performance. GDP fully endorses the capitalist theory of value: it views market transactions as the only drivers of development, as opposed to non-market exchanges; it considers as positive all forms of production and consumption, regardless of their impact on economic welfare; and it neglects social and environmental impacts. For as long as our approach to economic growth is determined by GDP, capitalism will continue having the upper hand. The good news is that, for the first time in almost a century of national income accounting, there is now a window of opportunity for change. A growing number of global institutions, including influential actors like the World Economic Forum are calling for a shift beyond GDP.”

A new, broader based approach to national income accounting, what he calls “wellbeing accounting,” is developing that would eliminate the statistical foundations on which capitalism’s credibility rests, he argues.

Completion of development cycle

If Fioramonti and his ilk are correct, we may be reaching the end of a cycle in humanity’s development, started more than two centuries ago by Adam Smith with his book, Nature and Causes of the Wealth of Nations (usually only referred to as The Wealth of Nations.)

‘Wellbeing accounting’ represents a shift away from the statistical foundations on which capitalism’s credibility rests. “In the end, this is precisely what Adam Smith did with the founding book of capitalism, The Wealth of Nations…,” Fioramonti writes.

“Similarly, wellbeing accounting shows that an economy promoting the public good and the commons can generate more wealth than the capitalist market. Through new numbers, it aims to embolden all those actors marginalised by the capitalist theory of value. Above all, it equips them with new tools to demand more power and a radically different approach to growth and development. It’s a smart way to beat capitalism by stealth, once and for all,” he argues.

However, to judge the state capitalism in isolation from the dominating political system, democracy, do not give a full picture.

In an article last year, Foreign Affairs wrote: “Ever since the emergence of mass democracy after World War II, an inherent tension has existed between capitalism and democratic politics; capitalism allocates resources through markets, whereas democracy allocates power through votes.

“Economists, in particular, have been slow to accept that this tension exists. Instead, they have tended to view markets as a realm beyond the political sphere and to see politics as something that gets in the way of an otherwise self-adjusting system. Yet how democratic politics and capitalism fit together determines today’s world. Politics is not a mistake that gets in the way of markets.”

The article, however, notes that the dominance of capitalism has now provoked a backlash, as inequality has widened and real wages for the majority of people have stagnated, while govern­ments have bailed out wealthy institutions at the first sign of trouble — a situation given momentum by the 2008 financial meltdown.

A “new normal” has not yet emerged as we experience phenomenon like the rise of reactionary leaders like Donald Trump in the US.

 Globally, the political economy is in transition, but transition to what, is still up in the air, and only time will tell if the drive towards instruments like the Organisation for Economic Cooperation and Development’s “better life index,” and “wellbeing accounting,” will trigger a new developmental cycle for humanity without another round of large scale violence and/or war.

by Intelligence Bulletin Team

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