Read the paper in full

Abstract

This paper confines its discussions to the idea of innovations by entrepreneurs, as propounded by Schumpeter, its modern trends, impact on social justice, and some likely future implications. As per Schumpeter, creative destructions or innovations by entrepreneurs are critical drivers of capitalism. Competitive capitalism leads to faster economic growth and capital accumulation, improving living standards of all people. When the effects of innovation vanish over time,super profits decline, warranting new cycles of innovation. This is in contrast with Marxian view, where capital accumulation is driven by generation of surplus value, which in turn is derived from exploitation of workers. Marx did not distinguish between a capitalist and an entrepreneur.

The focus of Schumpeterian theory is in the breaking up of the circular flow with innovations in terms of new products and services by entrepreneurs, raising the level of investments. This is based on an unreal assumption that the state of economy would be in perfect competitive equilibrium, with prices equal to average costs. In the real world, excess profits are being made by innovators, their imitators, and even by traditional businesses. Monopolies and oligopolies make super profits at the cost of consumers, aided by friendly regulations. Markets in general have asymmetric information, which also lead to higher profit generation by those with timely private information.

Like Karl Marx, Schumpeter also believed that capitalism is self-destructive and that the factors leading to demise of capitalism could lead to the emergence of socialist system. While the Marxian view is that capitalism cannot survive because of economic failure, Schumpeter argues that capitalism, with its many internal contradictions, will ensure its downfall. Capitalism would be destroyed because of its very success. Creative destructions under capitalism will lead to monopolies. As these corporations grow, they will become increasingly bureaucratized, warranting more mechanizations, and ultimately eliminating the entrepreneurs. The bureaucracy led by anti-capitalist intellectual class will then push for a socialistic economic system. Schumpeter assumes a central planning system with access to perfect information, which could control the entire economy, thereby eliminating economic downturns and eradicating unemployment.After eight decades, the realities are different. Though capitalism continues to flourish, it is not leading to higher levels of equality or socialism. The ‘trickle down’ effect of economic growth is too insignificant and unemployment remains a big challenge. There is no convergence of economic growth between nations. Why are economies not embracing socialism? There could be many reasons. Today, under political capitalism, rules are generally created and interpreted in favour of the elite. Value systems have shifted towards social rankings, which emanate from and rest with material wealth and political power. Firms and shareholders are therefore more focussed on wealth maximising strategies involving tax avoidance, benefitting from regulatory arbitrages, excessive leveraging, speculation, etc. The profitability of businesses is determined more by regulations rather than by consumer choices. Employees in the top layer are therefore increasingly ‘managing the rules of the game’ in the firms’ favour, instead of concentrating on product innovations. On the other side, technological innovations are creating challenges for ordinary workers. Value of unskilled workers is getting eroded creating huge inequalities.Politicians are also driven by the above logic. They continue to be rent seekers, enriching themselves. Another class that gets enriched disproportionately are speculators. This is due toquestionable wealth creation models. Capital invested in productive activities create new wealth, which gets distributed to different players in the economy including investors, workers, service providers, suppliers, governments, etc. But wealth accumulated using speculative markets do not create new wealth. They either create notional wealth or allow transfer of existing wealth to those who made correct market calls. Speculation has reached a stage where even corporations are bought and sold like portfolios, by cash rich financial giants and conglomerates.

Inequality is also getting widened due to inherited wealth, not envisaged by Schumpeter. Thomas Piketty talked about the inequality of income from labour and capital. He observed that there is moderate inequality of income from labour and extreme inequality of income from capital. As one goes up in the income hierarchy, the income from capital goes up. The lower strata cannot catch up with the increased income generated by the rich from their capital inherited and accumulated. Thus, the super-rich remains an elite club, membership of which is almost stable. Given these conditions, creating a bright future for an ordinary person is like creating one’s shadow. It is yours, but its creation, shape and direction are all decided by external factors, including the ‘unearned’ privileges or disadvantages handed down by heritage. The world is apparently recreating a scenario that prevailed in ancient India under its much maligned ‘Chathur Varna’ (four castes) system. We have ‘Kshatriyas’ or rulers in various designations at the top, followed by ‘Brahmins’ or religious heads who play critical advisory role in many countries. Then comes the ‘Vaishyas’ or business men, who are rich and highly powerful, and at the very bottom, the largest number of ‘Shudras’ or people who are labourers and ordinary workers, who get least respect in society. ‘Chathur Varna’ is also getting reflected in the global tax collection system. Huge multinational corporates and billionaires typically pay very low tax on their global income. Tax havens and dual citizenships help them avoid

payment of due taxes. In a technologically enabled world, tracking and tackling big corporate tax evaders should be possible, considering the governments’ recent success in tracking terrorism funding. But that is not happening. Here we revisit ‘Chatur Varna.’ The first systematic set of economic policies in the world were arguably written in 4th century BC India, called ‘Arthsasthra.’ Its author, Kautilya, also known as Chanakya, was minister of Chandra Gupta Maurya. ‘Arthsasthra’ was written for streamlining economic administration of Maurya Dynasty. In the document, Kautilya advised that those who perform sacrifices, spiritual masters, and priests shall be granted lands. They were then considered productive based on their land ownership, and it was suggested that as productive people, they should be exempted from taxation. This is exactly what is happening now. In the name of productivity, business firms are given land free or at subsidized price, and their incomes are not taxed or taxed less. The rich and powerful need not pay higher tax. We are going back to millennia old ‘Chathur Varna,’ globally.

The focus on welfare that began post World War II got abandoned in mid-seventies, due to large scale state interventions, which allegedly damaged economic systems. Neo liberalism that followed allowed markets to regulate businesses. Welfare responsibilities were transferred to non-profit organizations, and private sector. The higher levels of national debts today keep countries’ future resources significantly pre committed, making governments unresponsive to the welfare needs of people. Thus, it is doubtful whether social equality will happen anytime soon. This trend has dangerous consequences. If inequality grows unbridled, there is a high probability of social unrest and revolts against governments in future forcing them to formulate few hard decisions, which may include the following:

1. Philanthropy: Some countries already have rules mandating corporate social responsibility. Its scope might be increased. The top 500 business firms in terms of profitability globally may be forced to identify and adopt say, 500 poorest districts or identified locations and offer their entire population below an economic level, free education, and healthcare for say, ten years.

2. Removal of ‘limited liability’: Once a company, including its subsidiaries, exceeds a market capitalization of say, USD 50 billion, its limited liability condition may be legally removed. After exceeding such a limit, all shareholders may have unlimited liability.

1. Abolishing Tax havens, Special Economic Zones, (SEZ) etc.: All tax havens could be abolished. SEZs may be allowed to be set up in a nation for promoting smaller firms only.

2. Phasing out shell companies: This could be implemented if big nations cooperate. New ones may not be allowed to be created.

3. No inorganic growth: Private, for profit, commercial entities with a net worth of over say, USD 75 billion may not be allowed to acquire other companies. Such large corporations may be allowed to grow only organically.

4. Banning sovereign funds from speculating: Government money will not be used for purchase of private company equity shares from the secondary market.

5. Ownership of natural resources: Private firms that have long term rights to exploit natural resources like mines, oil fields, etc., may be forced to share wind fall gains with their governments, over and above normal taxes. There would be an assumed private public partnership when such situations arise.

6. Cap returns on equity. Any returns on equity or equity linked instruments or derivatives for any holding period, above a cap of say, 5 times the ten-year government bond rate in that country might be forcibly transferred to a Universal Basic Income Fund or similar fund, to discourage market manipulations and speculations.

References

Mangari, Pushpangadan, “Living by Modern Myths: In a World of Maverick Values,” 2023

Contribute to the discussion

Recent comments

2 Comments ↓