Democratic Capitalism Cannot Be Laissez-Faire

Ideological rhetoric may suggest that socialism is caring and capitalism is hard-hearted. Yet on Republic Day, the Indian President agonised over the stone-hearted society which socialist India had created. A few days later president Clinton in his state of the union message talked almost non-stop about measures to help the poor, sick, handicapped, uneducated and family values.

Capitalist USA, warts and all, is a kinder, gentler place than India is or was at the height of the socialist raj.

The US is the economic powerhouse of the world today, having averaged 4.5 per cent growth annually for the last three years, double that of continental Europe. I hear much loose talk about the triumph of the Anglo-Saxon economic tradition, portrayed as a Reagan-Thatcher effort to demolish the welfare and create a hard capitalist one where the government retreats into a minimal role and leaves everything to markets.

This is rubbish. Democratic capitalism, the winner of the cold war, is not and never has been about laissez-faire. It has always been about state activism to create a more caring society. Do not be misled by Reaganite or Thatcherite rhetoric, or by leftists claiming that the rhetoric represents reality. Reagan trimmed a few excesses of the welfare state, yet state spending on income support and health actually doubled in his eight years in office. The welfare state has continued expanding under his successors. This is ignored both by the extreme right and left, who continue pretending that capitalism equals laissez-faire. Between 1980 and 1996, the share of government spending in GDP rose in the US from 22.0 per cent to 22.2, and in the UK from 38.3 to 41.7 per cent (World Development Indicators, 1999).

American welfarism is very different from that of Scandinavia or continental Europe, and provides fewer guarantees. But by no means is Anglo-Saxon capitalism a Darwinian struggle for survival where the devil takes the hindmost. President Clinton’s state of the union speech was overwhelmingly about government activism to bridge gaps between the rich and poor, the highly and poorly educated. He said the new “digital divide” was making the Internet-savvy immensely wealthy while doing nothing for inner-city slums, and so proposed an Internet connection in every single school. He proposed to raise education spending by $ 4 billion: Allot an additional billion dollars to Headstart, a programme aimed at children at risk; introduce tax breaks up to $ 10,000 per student to make college more affordable; and to hire tens of thousands of additional teachers. He deplored the fact that tens of millions lacked medical insurance, and proposed measures to cover them. He proposed a whopping increase of $ 400 billion till 2024 to shore up medicare.

Working parents find it difficult to pay for child care. So Clinton proposed $ 30 billion worth of tax breaks to make child care affordable. He favoured a higher minimum wage to help those at the bottom. To help low-income people getting out of welfare into work, he proposed to increase the earned income tax credit to cover an additional 6.4 million families.

Clinton also proposed billions in subsidies to drug companies to undertake research to combat AIDS, tuberculosis and malaria, which kill millions in developing countries.

I do not want to list all Clinton’s proposals. I simply want to show what democratic capitalism is about. It is not about state minimalism or laissez-faire. It is about an activist state that wants to be caring and kind, that wants prosperity to be shared widely.

There are arguments between parties and countries what welfare system works best. But not even the hard right in the US accepts the need for safety nets for the aged, sick, poor and handicapped. The US welfare reforms of the 1990s, originally lambasted by the left as hard-hearted, have succeeded in almost halving the number on the welfare rolls and moving them into work. That is a huge gain. It is not minimalism. On the contrary, it shows that a state which just hands out doles is lazy and inactive, that an activist state is needed to find creative ways of getting people off doles and into productive work.

American state governments are suing tobacco companies for damaging the health of Americans, and now propose to sue firearms companies for helping cause accidental deaths and homicides. Clinton wants every gun to contain a microchip, which ensures it can be fired only by the licensed owner and nobody else.

Microsoft, the biggest company in the world, is being investigated for monopolistic practices, and may well be broken into smaller pieces by law. Several multinational drug companies were fined earlier this year for forming a cartel to rig up prices. This is not laissez-faire, but a system where the private sector promotes productivity and the state promotes basic values and needs, and enforces the rules of the competitive game.

The system is based on democracy. This means competition between politicians, creating a market in political goods no less than material goods. Political goods include education, health, law and order, justice, fair play, safety nets, consumer protection and so on.

This needs to be understood by liberalisers in India no less than the left. Democracies can never have laissez-faire or minimalist governments. Politicians do not get elected in order to do nothing. State activism is built into democracy. Right-wing dictators may be oppressive, but democracies will not tolerate it.

The real question is, what should state activism focus on? In India we got it all wrong: The state focused on economic control while neglecting basic tasks like literacy, public health, administrative and legal justice, accountability and transparency. Successful capitalist economies got the balance much better. The rest is history.

What do you think?