Twentieth century has seen several times the ups and downs of capitalism. All most all the developing countries of the world have followed capitalistic model of economy and they discarded socialistic thoughts to imbibe the most apparent features of pragmatic model of capitalism. It was thought that there is a single path to achieve the state of advancement to overcome the problem of unemployment, backwardness and to break the vicious cycle of poverty. In fact several countries achieved their desired objectives more or less up to their satisfactory level.
In the different phases of human civilization and economic growth, different economic models were adopted by various countries and the validity of the models was tested on the parameter of success and stability. Capitalism was considered the most stable model by several economists. But the recent economic crises questioned the faith of developed as well as developing countries on the unshakable pillars of real capitalism.
Adam Smith's model of capitalism was totally different from the model that is today. Adam Smith presented his theory with division of labour and organizing them within the market that are driven by coherent self-interest. According to him, to be wealthier, a nation should let the market forces generate economic growth instead of imposing state regulations on trade and price.
Though Adam Smith's theory is not much applicable in the era of globalization, but the present capitalism still finds it's root in his theory. Capitalism comprising with privatization and profit driven economic activities rather with a little motive of social welfare, can not survive too long.
In the second half of twentieth century, capitalism was adopted by various countries in the different parts of globe. But they were in different models. U.S.A.' model is based on entrepreneurial capitalism giving as much as freedom to the corporations to decide scale of production, distribution strategies, price and profitability. European model of cultural capitalism is slightly different than that of the U.S.A.' model.
The third model followed by few Asian and Latin American countries called community capitalism allowing the government to intervene in the economy keeping in view the welfare of the whole community. In case of India and Singapore, community capitalism is more apparent.
But how far are these models safe and stable? Capitalism itself is unstable in nature as the free functioning of market forces can lead the economy to any direction due to long run cyclical movement of economic activities. The majority of investment made in capitalistic economy is induced investment. The private investors are always attracted by the profitability rate. Higher rate of profitability accompanied with greater risk factors invite venture capital. Globalization has enabled free flow of foreign capital.
Investment friendly and conducive environment provide attractive platform to the investors to take greater risk. Sometimes the degree of risk goes beyond the capacity of the investors. Financial market being very sensitive, may create a sudden fear among the investors, which in turn give rise to negative sentiments and dysfunctioning of financial market starts working pushing the economy towards recession. If the pressure on investors, producers and creditors is higher, may enroot deeper and the recession will turn towards depression.
The year 1893,1929,1987,and the present year 2008 have faced such situations. In case Latin American countries the situation was not very different in 1990s. Few of Latin American countries like Argentina, Peru Brazil adopted capitalistic model believing to bring a fundamental change in their respective economies. These developing economies of Latin America supported the financial liberty to increase the pace of growth rate. Assuming to have a quick impact on economic growth, these countries introduced liberal financial and monetary policy. In the initial years, their policies showed some positive impacts. But, in subsequent years, uncontrolled liberal financial policy resulted in collapse of their economic systems. This was not thought earlier. People come to learn a new dimension of economic disasters associated with capitalism.
The Great Depression of 1929 showed us the fury of free market. The circumstances prevailing today are also not very fair. Chronic recession has hit the leading economies of the globe. A year ago situation was different. Investment friendly business environment created opportunities for expansion of economic activities. Some sectors, especially banking and finance, over estimated these and took greater risks. Venture capitals flowed into several risky areas. Due to the normal business fluctuations, a short deep in the capital market all of sudden created negative sentiments and arouse panic in the mind of investors. The situation could not revived immediately and the consequences are before us. Again this raises a question on the stability of capitalism. Frequent economic and financial crises make us to think the sustainability and reliability of preset capitalistic model.
DEMOCRATIC CAPITALISM
The new wave which has been paving in the Euro-American economic sphere for last few years is the concept of Democratic Capitalism. The American version of capitalism is slowly moving towards Democratic Capitalism. It is a system based on three main components. First, free market predomination and economic incentives, second- the democratic polity based on individual freedom and equality. Third component is the classical, liberal, moral and cultural system which encourages pluralism.
Under this system the natural liberty for individual growth and economic freedom is not curtailed. Associations and corporations can be formed to attain socio-economic goals.
As a democratic set up, political system is based on equality and participation of people, private ownership and free market continues to work. Giant corporations are allowed to form and operate within as well as beyond the domestic boundaries. market competitiveness and economic incentives are the basic requisites of capitalism which remain unchecked in Democratic Capitalism. Even the leading supporters of capitalism later suggested to have government intervention in the economy to correct the undesirable economic fluctuations. The state has to play dual role in this regard. Firstly, as a catalyst to encourage individual and groups to involve themselves in growth bound economic activities. Secondly to check and intervene in those areas and activities which are found to be speculative and discouraging to economic growth.
The state should not interfere in growth sustaining activities, at the same time it should provide incentives. The fiscal and monetary tools should be strictly implemented to curve speculative activities. The social goals of state to be there and the private participation should be equally encouraged to attain them.
The most sensitive part of any economic system is the financial market. Very liberal financial policy often creates major economic fluctuations. Risky behavior of financial market to generate higher reward results in speculative activities. Even actions to increase
Liquidity in the capital market can increase inflations. Deregulation of financial market should not be allowed to the extent as the level of liberty in the other areas. A good governance is required for smooth functioning of financial system.
Disaster of capitalism can not be prevented if we keep preaching ourselves. Uncontrolled financial liberty and deregulated market are not the part of Democratic Capitalism. On the name of economic freedom, we can not praise the American version of capitalism and wait for the next day to see how does the Wall Street breath in.
Globalization has opened a new dimension for economic consolidation and expansion but the unstable state of present capitalistic model can not give the answers to those questions which vindicate a substantial change in future. This is the time to think and revive the present model of capitalism so that we can have a better stable economic future.
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