Monday, August 03, 2009

On Capitalism

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest"
(Adam Smith - British Economist and Father of Capitalism)

What is Capitalism?


In the simplest way, Capitalism can be described as the economic system which maintains the idea that owning and accumulating private wealth are the basic rights of every person, and those rights must be preserved and protected by the State on a first priority basis.

In general, Capitalism believes that the preservation of the above rights and the freedom of people to enjoy such rights will enable the society, as a whole, to gain maximum prosperity.

However, we must always remember that Capitalism is not a divine system established by God. It is an economic system created and developed by men through countless trials and errors. There are many ways in implementing Capitalism in various parts of the world and even until today, we have not found yet a definitive and final form of Capitalism. To make it short, Capitalism is still evolving and I believe that the process itself is unlimited.

In this article, I will explain some of the basic concepts of Capitalism. I'm not an economist, but my job as a corporate lawyer is directly related to the practice of Capitalism. Through my job, I realize that Capitalism makes sense and its principles are built on a solid basis. As I will further argue in this article, and despite the critics and the current global financial crisis, I still consider Capitalism as the best economic system that men ever have.

What Are the Basic Principles of Capitalism?

Capitalism is derived from three basic principles:

1. a common man will put his self interest as his first priority;

2. all men are interdependent; and

3. free competition is the most effective safeguard mechanism of Capitalism.

Could You Explain the First Principle of Capitalism?

Capitalism believes that a common man will put his personal interest as his first priority. It is not surprising that, using the above argument, many people claim that capitalists are evil individualists who only think about themselves and who will do anything to obtain what they want. But, those people are exaggerating, too exaggerating. I even dare to say that they are actually fooling themselves for not letting to believe their exact nature as men.

Let us go through this simple test. Say that you are an average man, having some decent work with a considerable good salary for living and you are not in a dire need. Then, you somehow get the opportunity to receive US$10 legally from someone. Now, answer these questions truthfully. Would you really want to reject that money and say to the generous man that the money should be given to other people in dire need?

Then, try increase the number into US$100, US$1,000, US$10,000, and so on. And then keep asking the same question, would you reject that money? How about if you are also in a dire need, will your answer remain the same?

Or, try to imagine this: Having work really hard in your office, you soon realize that up to 30% (depends on the amount of your gross salary) of your salary is going to our beloved country for paying your income tax, which means in one year, there is a probability that you might spend more than 3 months doing charity work, working without any payment, acceptable or not?

For the first question, I'll be honest, I'll take the money for sure (especially when the amount is significant). For the second question, I must be damned if I call that kind of legalized robbery as acceptable (though the new Indonesian Income Tax Law provides a lower tax rate and a higher limit of taxable income, for which I say Hooray!!!).

I bet my X-BOX 360 that most people will also take the money and reject the high rate of tax (or even the tax itself). This is natural, it's in our blood. You're not turning into a bloody parasitic dark lord for pursuing your self interest, you're basically trying to survive in this vast world. Capitalism happily embraces this fact and establishes it into its first principle.

Interestingly however, some people pretend to forget their own nature on these issues and say crap things publicly about the need to promote social interests above individual interests while in reality these guys would absolutely chase their own interests before even thinking about the interests of the society. By this, I refer to the majority of the politicians.

How Come the Pursuit of Self-Interest Are Not Causing Misery?

You see, after acknowledging the basic nature of men, Capitalism puts the second basic principle: not a single man can pursue his self-interest without cooperating with others. Thus, every man is interdependent with another man. Whether they like it or not, they need to work together and reach mutual understanding in order to satisfy their needs. What a beautiful concept!

Have you ever imagined how you can get your nice nasi padang at the Sederhana Restaurant? Who supply the rice, the meat, the coconut milk and those other spices? Who cook the tasty food? Who serve the food? Who provide the place of the restaurant? The creation of Nasi Padang Sederhana actually involves a huge amount of actions, actors and factors, from the production of the rice to the distribution of the Sederhana franchise (including the recipes).

The most interesting part of the above scheme is the fact that none of the actors involved in such scheme are doing their part of actions due to their compassion for the greater good of the society. All of them are pursuing their own needs and interests! The farmers grow and sell the rice so that they can earn some cash to buy their needs, the waiters at the restaurant serve the guests nicely so that they can earn their salary (and maybe some tip) and buy their needs, and so on. And amazingly, no one actually have a global and full control over such process despite its complexity. If you think that there is a conspiracy back there which force all of the above actors to work together in order to provide a Nasi Padang, you must be crazy.

So, in the end it is all interrelated. Capitalism believes that the pursuit of self interest should not cause misery to each other, because through the existence and exchange of various self interests, men can actually satisfy their needs. The words of Adam Smith stated in the opening of this Article would be excellent to summarize this second principle.

I must also add a note that this second principle is being greatly supported by the existence of money. With money, people has an easier mechanism to value goods or services that they want to produce or obtain. I will reserve the discussion about money on a separate article.

I Don't Buy This Idea, There is Something Missing, Isn't It?

True, as beautifully crafted as it may be, there is still a weak point in the second principle: not all men have equal power and status. Though all men are interdependent, the difference of power may disrupt the balance and thus opening a way for the emergence of the darkest part of human soul, the hunger for everything, even if it costs other people's life and needs. Without any safeguard mechanism, Capitalism will definitely crumble into dusts as a result of this problem (as once predicted by Karl Marx).

Thus came the third principle of Capitalism:
Free Competition. Too simplistic? Not at all. Free competition is actually a brilliant way of ensuring that power is distributed efficiently among men. The concept is actually simple and can be explained by the following example:

Some years ago, there were only two telecommunication providers in Indonesia using a dual-monopolistic system. To cut it short, these two companies have absolute control over the Indonesian telecommunication services. Result? Expensive telecommunication tariff and poor infrastructure. In 2004,
it only cost me Rp.80,000 per hour to make an international call from Seoul to Jakarta using a Seoul public telephone. That was very cheap at that time compared to the cost for doing international calls from Jakarta to Seoul.

But now, with the increasing number of telecommunication providers, we see the new era of cheap telecommunication services. Those telecommunication providers spend billions of Rupiah just for claiming in TVs and radios that they are the cheapest operator. Indeed, they don't have many choices. If they don't cut their prices, provide better services, and make the most entertaining advertisement, other operators will claim their customers and in the long run, losses will become the end result.

Of course, how can they cut their prices if they can't increase their business efficiency? Like it or not, this competition game forces those operators to find new ways in increasing their business outputs. Efficiency, creativity, innovation, name it, and they will get it. Such are the results of competition, incredible!

In fact, the free market, the free competition, is actually doing better than the Anti Monopoly Supervisory Committee (KPPU) in the telecommunication sector. This is related to one case when KPPU brought the case of Temasek, a Singaporean State Owned Company, to Indonesian public attention for having control in two major Indonesian telecommunication companies. In that case, KPPU claimed that such control has caused monopoly and unfair competition and thus increasing the consumer cost for getting telecommunication services.

So much hours and money are wasted to force Temasek to release its majority ownership in one of the operators and to cause those two operators to reduce their tariff. Yet, without having to wait for the final judgement, those two telecommunication operators have already reduced their tariffs for the sake of winning the competition. And this is the current trend, as I've once discussed it with an executive of a major telecommunication provider.

Do we actually need a better example for understanding the power of free competition? I guess not.

Okay, Enough with Capitalism Principles, What About the Market?


Ah, good timing!
As discussed in the second principle of Capitalism, all men are interdependent. But, how can they cooperate with each other? The answer is the market.

The market is the most important facility of any economic system, even for the so called communism, since it provides a place for people to meet, trade and exchange their self-interests. Of course, I'm not referring to a traditional market in a remote village where you can find living stocks and fresh vegetables. I'm referring to the concept of market as an abstract place, a structure where goods and services are offered and traded, where supply meets demand, where buyers meet sellers.

There are countless numbers of markets in this world, telecommunication market, energy market, stock market, financial market, commodities market, you name it. But the basic is same, within the respective market, people may look out for what they want and try to obtain those things with certain price.

The issue of price brings us to one of the most important aspects of the market under the system of Capitalism, one that has become a never ending subject of debate, the market equilibrium and the self-efficiency of the market. Until today, no one has ever reached a perfect theory which can explain how the market can reach those conditions, where the prices of each goods and services reflect the actual supply and demand, and all market participants have obtained the necessary information in making their economic decision.

It is almost impossible for me to explain those complicated issues within a single article without having the readers getting lost in understanding the concept. So, let me put this simply. Under the basic principles of capitalism, the market will work best if there is a minimum intervention from forces outside the market, BUT, it does not mean that the market itself can always maintain its equilibrium and efficiency, some interventions would be need for certain cases, especially when the principle of fair competition has been breached due to unfair or illegal activities.

The key issue here, is to find the best policy that can HELP the market to avoid its own weaknesses without having to sacrifice the freedom and the unlimited opportunities that market can produce through free enterprises. I can't answer that yet, but am hoping through the times of my journey here, I would be able to provide certain solutions and insights on how we can create such best policy.

Why Promoting Capitalism?

Simply because Capitalism is applicable in every part of the world, even in the so called Communist Republic of China, and because it has survived for many times during the last 200 years. Economic crises come and go for many times, people have gone through some pessimistic and optimistic periods in doing their business.

You know, during crisis, like in 1933, 1987, 1997, and 2008, people always claim about the end of capitalism. Of course this is a politically correct maneuver and it is easy to reach such conclusion. But, if you analyze it further, in the end it is a part of a grand business cycle. What goes up, will go down, and vice versa. During the Asia financial crisis in 1997, most people blame us for our fragile economic fundamentals, and you know how the western countries see Asia at that time, a failure. But now, it is Asia who has a better economic fundamentals and can maintain such fundamentals despite the crisis in the US. Amazingly, most of Asia Countries and US use capitalism principles in making their economic policy.

I believe that
the basic nature of human is always the same, everyone want the same opportunity to do business and reap profits, and they want to do it without too much of restrictions and inefficiency, the way that capitalism has always preached about. In general, the application of Capitalism principles has created an accumulation of wealth and development in many countries, and Indonesia, without a doubt, has also received benefits from capitalism.

Of course, like I've said in the beginning of this article, Capitalism is not without any flaws, there will always be a problem, such as the problem of distribution of wealth, power disparity between market players, etc. But, we can't stop using a system or even try to replace it in entirety because of some flaws, that would be horrendous. It is our job to modify and fix the flaws in capitalism to ensure that it can work properly rather than spending times on building a new entire system which would be most likely not efficient. This is a never-ending process, and I expect to see many new developments in the future of capitalism.

To end this article, I would like to share a piece of wisdom from Milton Friedman, an American Nobel Laureate, "What kind of society isn't structured on greed? the problem of social organization is how to create an arrangement under which greed will do the least harm; capitalism is that kind of a system."

2 comments:

ism,  Thursday, August 20, 2009 8:18:00 PM  

my my,
an elaborate piece you have here.
Gee, wonder how long did it take for you to write it. I haven't got the time to even start writing my thoughts.

Enihu,
one comment at this juncture: the concept of free trade.
The funny thing about the implementation of free trade is that it's never free. There'll always be restrictions, which apparently broader for the developing countries compared to the developed ones.

Of course, a system can do no harm. But neglect to a system would.

I think our task, as mankind and as Indonesian, of adjusting the system is long overdue.

*ismar

Pramudya A. Oktavinanda Thursday, August 20, 2009 9:39:00 PM  

Thanks for stopping by Ismar. A quick note, I don't think the restrictions in developing countries are broader than their developed counterparts. Developed countries are also doing the same in term of restriction of trade, sometimes even worse, and I believe it's more on the political reasons than an economic one.

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