Thursday, February 11, 2010

Don’t Blame It on Capitalism

On 27 January 2010, the International Labour Organization, a U.N. agency announced that 27 million people lost their jobs in 2009. Most of the job losses took place in Europe and the US. President Obama, in his recent state of the union address to Congress, said that… “One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. For those who had already known poverty, life has become that much harder.”
It is not difficult to imagine the extent of the suffering that is being experienced by the people affected. Lost jobs mean lost income. Since many families now have large personal debts in the forms of home loans, car loans, study loans etc., the consequences of a job loss can be very devastating. People who are affected may suffer both physical and psychological illnesses. The resulting stress and strain can cause families to fall apart. In many communities there will also be a spike in the crime as well as suicide rate.
Although these terrible and heart-rending implications of unemployment are well known and understood and even though governments after governments pledged to get rid of this modern day `scourge’, the sad stories of job losses and plant closures keep appearing in newspapers every other day.
What is ironic and interesting to note is that in many cases, the main reason given for the massive job cuts is the need to save the companies involved from going under. The most recent example is Japanese Airlines (JAL). Burdened with an unpaid debt of US$25.6 billion, it made history by being Japan's largest nonfinancial corporate failure. But instead of allowing the company to die its natural death, the Japanese government decided to give it a new lease of life. However, there was a condition attached. The company had to accept radical restructuring plans which involved the cutting of more than 15,000 jobs, or about 30% of its workforce by the end of 2013.
The same situation applied at General Motors in 2009. Its debt burden at the end of November 2009 was a whopping US$66 billion. The reason GM is still alive was because the Obama administration decided to rescue it by injecting public funds. But as in the JAL’s case, GM also announced a radical cutting of its workforce. Its salaried workforce was cut by 10,000 in 2009 under a restructuring plan that calls for the elimination of 31,000 employees by 2012 from its workforce of 96,000.
It is therefore difficult not to have the impression that the focus of governments is not really to save jobs but to save companies. Highly indebted companies must be kept alive, usually by using the financial version of an artificial respirator i.e. bankruptcy protection laws or by cash injections using public funds. What is now obvious is that protecting the interest of a small number of wealthy investors and lenders is more important than protecting the welfare of tens of thousands of often poorly paid loyal and long serving employees.
Many people mistakenly think that this is the price to pay for having capitalism as the basis for running a society’s economy. This is actually not true. The most common element in all definitions of ‘capitalism’ is that of an economic system based on the private, as opposed to public, ownership of capital. And this system of private ownership of capital has been around since time immemorial and yet, notably, did not cause misery of the scale that we are witnessing today.
After all, many civilizations had practiced economic and business systems that allowed private ownership of capital and free market. One example is the Muslim civilization which allowed private ownership and free market for more than 1,400 years. However, its history was never replete with stories of massive job losses and high unemployment. True, there were occasions of economic crises due to adverse weather conditions, plagues or other natural disasters. However, there was no instance of financial crises where economic players ended up bankrupt with massive loans and forcing job losses of tens of thousands.
No, this is not about capitalism but rather about the growth of one particular industry – the lending for profit industry. With the legalization of `interest-charging’ loans in Europe circa the 15th century, European Christians who previously considered interest-charging activities as evil and associated largely with `greedy Jewish money lenders’, began to join the financial industry in earnest. Soon the industry grew by leaps and bounds, helped by innovations such as the creation of the joint-stock companies.
In the centuries that followed, the Western world experienced rapid economic growth. Of course there were hosts of problems during these periods, mainly in the injustice and exploitation of workers by debt-laden industrialists who wanted to cut costs in order to earn higher profits and service their debts. Those problems eventually led to the birth of communism as an ideology. But the collapse of communism in Soviet Russia and Eastern Europe in the 1989 meant that the Western financial system was able to continue to thrive. However the world is now beginning to eventually realize that there is a major flaw with it. The increasingly serious and severe financial crises associated with the global debt problem are now spreading economic havoc and catastrophe to all corners of the world.
Unfortunately, some are wrongly pointing accusing fingers towards capitalism or the private ownership of capital as the main source of the problem although the equally devastating failures of communism should have been proof enough that public ownership of capital is not the answer. In reality, if the current suffering associated job losses are to eliminated, the requisite thing that needs to be undertaken is a proper diagnosis of the main causes of the problem. Sadly, many are either unwilling to be honest and truthful in their diagnosis or are simply intellectually incapable due to a lack of exposure to genuine alternative viewpoints.

This article was published by Star newspaper on April 8, 2010. Please click on this link for the online version: http://biz.thestar.com.my/news/story.asp?file=/2010/4/8/business/6010350&sec=business

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