Capitalism, Socialism, Democracy and the Return of History

When the Soviet Union collapsed in 1991, political scientist Francis Fukuyama prematurely declared that history had ended. His thesis was that capitalism and democracy—the two ideologies of the Washington Consensus—had finally prevailed over socialism and totalitarianism. History has returned—but not in the way anyone expected.  

However, having vanquished communism and socialism, the victorious Western order has not settled into a stable harmony. Instead, a new contradiction has emerged from within the winner's own ideological uniformity. Much as Hegel's dialectic, a method of argument employed by the 19th Century German philosopher, GWF Hegel, would predict: the thesis, having defeated its antithesis, does not rest but splits itself into two new poles of conflict. This may be the nature of ideology itself—each victory produces not peace but a fresh fracture. And so, the two ideas that marched together against the Soviet Union—capitalism and democracy—are now turning on each other.  

The fundamental conflict between them continues as a clash between the rights of owners of capital on one hand and the rights of all humans on the other. The conflict manifests itself on a global scale in the form of the breakdown of well-established institutions: the United Nations has been made impotent by the United States; the World Trade Organisation’s rules have all but collapsed in the wake of rising protectionism; the climate consensus is in a shambles and the Washington Consensus has fallen apart. 

To understand why this conflict runs so deep, we must look at the foundational principles underlying the two winning ideologies—democracy and capitalism.  

Capitalism's foundation is property rights; democracy's is human rights.  

Capitalist institutions run on the principle that those who own something have the right to use it as they wish, and that those who own more of a shared resource must have a greater say in how that resource is used. Equality is not expected. Therefore, whoever owns more shares in a corporation has a larger vote than those with fewer stakes.  

Democracy, on the other hand, is egalitarian. In a democracy, every living person, rich or poor, has an equal vote in the governance of the collective human enterprise. 

The principle of unequal distribution of rights has deep historical roots. For example, in property rights, the principle that ‘possession is nine-tenths of the law’ has been embedded into systems of governance on all continents for thousands of years.  

The ‘equality principle’, however, is relatively modern. The concept of human rights, that every person has an equal right to freedom, is very recent, even in its articulation. As for practice, equal rights under the law for all humans have not yet been granted even in all constitutionally democratic countries.  

This conflict is the source of much of the turbulence we see in the world today, resulting in violent conflicts amongst nations and within nations.   

Hence, it is time to address this conflict. This can only be achieved by reforming the institutions through which capitalism and democracy are manifested. After all, institutions are the processes by which societies perform functions and are notoriously difficult to change. They cannot be reformed merely by redrawing organisational charts or creating new organisations based on old templates. Implicit 'theories-in-use' at the back of our heads must be made transparent and changed.  

What follows is an examination of what such reform might look like—first in the institutions of capitalism, then in the institutions of democracy. 

Reforming Capitalism 

The ascendancy of capital as the source of power is often traced back to the Magna Carta issued by King John of England in 1215, marking the transition away from the power of the sword to the power of capital. In the modern era, economists promoting free-market philosophies gained more power within Anglo-Saxon governments from the 1970s onwards.  

Milton Friedman, who became famous for his dictum that 'the business of business must be only business', and Friedrich Hayek, known for his thesis that more government was 'the road to serfdom', persuaded Margaret Thatcher in the UK and Ronald Reagan in the US to push back against governments and to privatise public services. Reagan even said that the government is not the solution, but the problem. This turn of ideology gave big capital greater power. 

Once that shift began, it became self-reinforcing as political power accumulates through a process of cumulative causation. Those who have more power will reform the rules to enable themselves to get more power. Thus, the rich few acquire greater power in the governance of societies than the poor many.  

The shift in the balance of power towards capitalism in the past three decades has been made vivid by the creation of international tribunals that adjudicate disputes between foreign investors and governments. On the one side are governments that represent the interests of millions, even billions, of people, and on the other are investors, relatively fewer in number. Global institutions have eased the way for investors, making it easier for them to enter and exit countries at will, while stopping migrants searching for better opportunities across national borders. 

The consequences are visible in everyday life. Today, the rules of globalisation have made life much easier for capital than for workers. The word 'reform' has taken on a one-sided connotation: reforms seem to imply removal of constraints on investors and businesses. This was starkly revealed during the Covid pandemic. The poor lost incomes and homes while stock markets rose ever higher, making investors richer. Even the Indian government's moves since then, such as 'reforming' labour laws to attract foreign investments—making it easier for employers to fire workers and curb union activity—left no room for doubt about who had more power: investors or common people. 

To reform capitalism, we must reform what lies at its centre—the corporation and the concept of development defined purely in econometric terms. 

The Limited Liability Corporation 

At the heart of this system sits a specific institutional invention. The real engine of growth in the capitalist system is the limited liability corporation, conceived in 17th Century Europe to enable investors to pool their money and finance merchant adventures for profits. The British and Dutch East India companies were its key trailblazers. Since then, corporate law has developed and delineated the legal responsibilities of corporations and their boards to financial investors. They are not legally accountable to other stakeholders, though they may care for them. 

Over time, this legal creature has acquired extraordinary power. The limited liability corporation is a selfish citizen of society. It is a legally constituted institution for enabling investors to make more profits with less risk. A legal corporation has the same rights as ordinary citizens—the right to own property, the right to free speech and the right to sue other citizens. The wealth of some corporations is larger than many countries. They have even been granted rights to sue democratically elected governments in international courts to protect the rights of their private investors. With the wealth they have to defend themselves in courts of law, they have become like the pigs in English author George Orwell's Animal Farm—more equal than other animals. 

The elevation of corporate logic has also reshaped governance. Total shareholder returns (TSR) became the overall measure of the performance of corporate leaders. The US-style corporate capitalism was let loose in the world after 1991, widely adopted by corporations, business schools and management consultants. Before the Donald Trump era, it was inconceivable that the head of a country would blatantly apply corporate methods to manage a nation. The current US President is downsizing the workforce in hard times (shipping out immigrants). He is acquiring the assets of other countries (Venezuela, Panama and Greenland) to boost the US economy. He is converting Gaza into a capitalist real estate venture governed by a board chaired by him and staffed with his cronies. 

What GDP Does and Does Not Measure 

The rise of capitalism is not just reflected in the increasing power and prominence of the corporation, but also the elevation of the gross domestic product (GDP) and stock prices as the primary metrics of human progress and a country’s development. This concept of the GDP as a proxy for the all-round well-being of a nation must be subjected to criticism and refinement. 

One of the maxims of management is: you manage what you measure. Hence, the performance of corporations is measured by the returns to their shareholders. However, what is not measured is the impact of their business processes and products on the environment and society. Such a reductionist view ignores the fact that a nation is a complex system composed of three sub-systems: the economy, the natural environment and human society.  

For an economist, the natural environment and human society are merely providers of resources for economic growth. The value of a natural forest lies only in its wood and non-wood resources. Everything around those trees is useless vegetation to be cleared away. The resource that society provides an economy is the labour and intelligence of human beings. American industrialist and Ford Motor founder Henry Ford had once lamented, “Why is it that when I want only pairs of hands, I get whole human beings with their emotions and needs?” 

Today, automation has lowered the human labour requirement and artificial intelligence is reducing the need for human intelligence. Soon, a business enterprise may have no more need for humans. What will happen to humans discarded by businesses? This is especially pertinent in an era when governments are being pressed not to increase taxes on corporations and wealthy investors, while also being pressed to provide universal social security or universal basic incomes. 

In short, looking only at GDP as a measure to guide a nation’s progress is like steering a car with only a speedometer. GDP measures only the speed of growth. A 'fuel' gauge is also required to measure how fast environmental resources are running out. Similarly, an 'RPM' (revolutions per minute) meter is necessary to warn about the build-up of internal tension through the growth of inequalities. GDP is, at best, an incomplete measure of a nation's progress. Similarly, stock prices do not portray the true impact of a corporation's activities. Corporations should be required by law to be accountable to all stakeholders, not just investors. National scorecards must be broadened beyond GDP to include the health of the environment and the well-being of the society. 

A Gandhian Alternative 

If the problem is that both dominant economic systems concentrate wealth upward, is there a third path? Mahatma Gandhi thought so. He saw clearly that both the Soviet state system and the Western capitalist system took power away from the common people. In the Soviet model, real power vested with the bureaucrats who ran so-called 'public' enterprises in which the people were merely workers doing what they were told. In the Western model, power was in the hands of owners of private enterprises. In both cases, the surplus created by the people's work flowed upwards—into the state's coffers in one model and to private owners in the other. 

Not a fan of either, Gandhi advocated new models of enterprises in which the workers—the real wealth-creators—would earn for themselves. He advocated reforms of institutions whereby producers would not have to pass on all the wealth they create to people above them in the vain hope that it will trickle down to them some time in the future. Gandhi understood very well that political freedom with only the right to elect a government is an incomplete freedom. All citizens must also have economic and social freedoms. They must have access to opportunities to earn more, in a dignified manner, and accumulate more wealth for themselves. Cooperative ownership of enterprises by workers can ensure they make profits too. 

Reforming Democracy 

If capitalist institutions need reform, so too do democratic ones—and for related reasons. Individual freedom is the core of liberal philosophy. Liberals on both sides—left and right—agree that all persons must have liberty to stand up, speak up and form associations to represent their interests. In the political sphere, both stand united against authoritarian governments who suppress civil liberties.  

Yet this aversion to an interventionist government does not extend to the economic sphere, at least for the liberals on the Left. They want the government to ensure social security and public services for all and to regulate big businesses. The rightward liberals, on the other hand, carry over their skepticism of the government on the economic side as well.  

While the leftward liberals want the government to ensure worker rights, those on the right want the government to leave businesses alone. 

This ideological divide is not merely theoretical; it produces ideological conflict too. In India, one side says the country has not advanced sufficiently because the 1991 liberal-markets reforms have not been completed, while the other says those reforms have not benefitted citizens equitably.  

Leftward intellectuals point out that inequality in India is among the highest in the world: around 40% of the country's wealth is owned by the top 1%, while the bottom 50% own only 6–6.5%. They point out that while India's GDP has grown since 1991 and poverty has reduced, China's GDP and per capita incomes grew five times faster over the same period.  

It is pointed out that incomes have not risen as fast in India because the employment elasticity of the country's GDP growth is among the lowest in the world. The International Labour Organisation and Asian Development Bank estimate that India has been converting GDP to jobs at only two-thirds the rate of other Asian countries since 2001. 

They worry that rising inequalities can erode democracy through a conflict between fascism (representing the interests of the capitalists) and socialism (representing the rights of those increasingly left behind).  

History reveals that capitalists have not opposed, and have usually supported, fascist forces and authoritarian dictators against communist and socialist movements. When an advocate for workers' rights in the US observed, upon the Soviet Union's collapse, that the last remaining totalitarian state was the Western capitalist business corporation, he was pointing to the same structural reality. This makes addressing inequality a key requirement for the preservation of democracy. 

Democracy Beyond the Ballot Box 

If formal institutions cannot, on their own, capture the evolving will of the people, where does that leave democracy? The evidence is sobering. Pew Research Center surveys and the Global State of Democracy Report 2021 have revealed that two-thirds of citizens in democratic countries do not trust institutions such as elected assemblies and courts to represent them fairly.  

In the US, 51% of Americans said democracy is performing “poorly” or “very poorly” and only 36% are confident that political institutions can solve major national problems. Constitutions, courts, elections and assemblies are not all that a democracy needs to function. Genuine democracy is a government of the people and by the people. Democracies live outside courts and elected assemblies. 

Yet the technology that was expected to empower democratic participation has, in many ways, done the opposite. The ubiquity of information through the internet, social media and multiple 24x7 news channels has surpassed the processing capacities of humans. To cope, we choose the channels and internet communities we can connect with and the opinion makers we will follow. Our choices are guided by our underlying beliefs. People are being driven into 'conceptually and ideologically gated communities' in which they listen to people with similar beliefs and shut out others. Social media has resulted in a cacophony of voices and more divisions. 

This makes the need for genuine deliberation all the more urgent. India's beauty is its diversity. Democracy's essence is the right of diverse people to live as equals. While democracies must give every citizen the right to speak, democratic citizens have responsibilities to listen to others' views too. Consensus on what 'We, the People' want will come about only when people listen to each other. It is imperative for democracy that “People Like Us” listen to “People Not Like Us”. 

The design of democratic institutions has so far concentrated on its vertical structures for upward representation and downward governance. To preserve democracy in this century, reformers should focus on designing horizontal processes for democratic deliberation amongst citizens, founded on the discipline of listening to “People Not Like Us”. Methods must be found to engage citizens thoughtfully with issues that matter to them. How should raw public opinions be gathered from diverse constituents of a democratic society and what should be the design of processes for their refinement? These are critical questions for the 21st century. 

An Agenda for the 21st Century 

The diagnosis is clear; the question is whether we have time for the cure. Humanity must find new solutions to many societal, economic and environmental challenges in a hurry. They are listed in the 17 sustainable development goals agreed to by all governments to be achieved by 2030. It is estimated that if we continue at the same rate and in the same way, we may reach the goals around 2080 or 2090, by when it will be too late. The democratic principle of equal human rights must be vigorously applied at all levels of economic institutions to correct the imbalance between capitalist rights and democratic rights. Institutions of both capitalism and democracy must evolve together. This requires action at every level. 

At the level of business, new forms of 'social enterprises' must be designed to enable workers and small producers to become wealth-creators too. The principle of human rights must apply in redesigning the governance of business institutions. Institutional reform is required to make compassionate capitalism a reality by ensuring that corporations become legally accountable to all stakeholders, not just to shareholders. 

At the national level, local people's voices must be heard by national governments over the voices of large corporations and international experts. National scorecards must be broadened beyond GDP. Economic policies must be framed with the principle of human rights applied alongside the principle of market efficiency. Quarterly changes in GDP growth and daily swings in stock market indices are dangerously incomplete measures of a nation’s well-being.  

At the international level, multilateral institutions like the WTO need fundamental reforms to become more democratic in their operations by applying Gandhi's principle of “antyodaya”—listening to the most vulnerable. Trade policymakers must listen much more to the views of the most vulnerable people rather than the views of lobbyists for large corporations. 

As the US Supreme Court itself observed while overturning women's rights to abortion: “The most important questions in our democracy must be resolved by citizens trying to persuade each other and then voting.” Democracy begins before the ballot box; and democracy lives outside election cycles and elected assemblies. Democracy comes to life when citizens with different beliefs and different needs listen to each other, understand each other's views and realise each other's fears and needs. 

The development of institutions that conform to both democratic principles and market-capitalist ideas is one of history's unfinished tasks. New forms of business institutions are required to produce wealth for workers, not just for financial investors. New forms of democratic governance are required, not only of and for the people by their elected representatives, but by the people too in their own towns and villages. Humanity is on a quest for better outcomes and new ways to obtain them. Human development is a process of collective learning. Perhaps it has become modern India's destiny to help finish this task.