A PERIOD OF PUNCTUATED EQUILIBRIUM: CAPITALISM AND DEMOCRACY
By Manuel Cereijo
Business cycles are as intrinsic to capitalism as earthquakes are to the earth's geology. Capitalism has always had them and always will have them. Capitalistic recessions occur for a number of reasons. For sometimes, good reasons and sometimes trivial reasons, demand starts to rise or fall rapidly in some sector of the economy. We are experiencing now cutbacks in the very sophisticated high tech areas of telecommunications, fiber optics, and microelectronics.
Since the onset of the industrial revolution, when success came to be defined as rising material standards of living, no economic system other than capitalism has been made to work anywhere. No one knows how to run successful economies on any other principles. The market, and the market alone, rules. No one doubts it. However, we are experimenting an economic recession. Something has to be changed to alter these unacceptable results of the year 2002.
But what is it? And how it can be changed? There are forces that are changing the very structure of the economic world in which we live. These causes are to be found in the interactions of new technologies and new ideologies. They are the forces driving the economic system in new directions. Together they are producing a new economic game with new rules requiring new strategies to win.
The how is not easy. How does a system that believes it takes competition to make the firms within capitalism efficient, adapt to a changing environment and maintain its efficiency if the system of capitalism itself has no competition? Perhaps with all of its competitors driven off the economic playing fields, capitalism has lost its ability to adapt to new circumstances?
As the second world collapsed, the third world splintered. Within it there are now clear winners (the little tigers of Singapur, Taiwan, Hong Kong), potential winners (Thailand or Malaysia), those rapidly integrating with global capitalism (China)-and the losers (Africa). The third world is gone just as much as the second world is gone. As we watch, the world's economic topography alters.
To understand the dynamics of this new economic world, we must borrow from biology the concept of punctuated equilibrium. Normally evolution proceeds at a pace so slow that it is not noticeable on a human time scale. But occasionally something occurs that biologists know as "punctuated equilibrium". Evolution takes a quantum leap. The best-known example is, of course, the dinosaurs.
Today the world lives in a period of punctuated equilibrium-which is being caused by six simultaneous economic dynamics. They are: Terrorism; The end of communism; An era dominated by man-made brainpower industries; A demography never before seen; A global economy; An era with only one dominant economic, political, and military power.
However, in the end a new game with new rules requiring new strategies will emerge. Some of today's players will adapt and learn how to win in this new game. They will be those who understand the six new economic dynamics. These are exciting times.
The crucial aspects of big companies are not quantitative but qualitative: the nature of the product and the mode of manufacture and marketing. Successful firms typically start slowly as they make their initial investment in a new product, then enter a period of very rapid growth as markets are developed and productive methods are perfected. Finally, they reach a stage of routinized mass production. Only a relative small number of large companies ever arrive at this final phase, looming over the national and world economies.
Their great efficiency derives from many years of making the same thing and incrementally improving it and perfecting the means of producing and selling it. Such companies have become highly rigid and specialized, and in static terms, greatly productive. Many of them are now experiencing a new lease on life in the global economy. But from the point of view of overall economic growth and technological innovation, these firms are of little importance to the economy.
Entrepreneurs are fighting United States' war against the slow economy. It is small and high technology businesses, not big firms that generate most of the employment. These small firms generate jobs about thirteen times faster than mature firms. This is the crucial role of entrepreneurs in these times of punctuated equilibrium.
Yes, entrepreneurial spirit and globalization of our lives-socially, economically, and even educationally-will determine the success of our society, wherever we live. For the first time in human history, anything can be made anywhere and sold everywhere. In capitalistic economies that means making each component and performing each activity at the place on the globe where it can be most cheaply done and selling the resulting products or services wherever prices and profits are highest.
Minimizing costs and maximizing revenues, is what profit maximization, the heart of a successful social and economical society, is all about. Sentimental attachment to some geographic part of the world is not part of the system anymore. The global economy is both bigger and more of a reality than it ever has been. In an era of man-made brainpower industries, the global economy is a dynamic one always in transition.
We must keep in mind that nothing matters more than education. A number of industries, some nationally prominent, others better known regionally, have embarked on novel approaches to accelerate the transfer of knowledge to their employees.
Flexibility in adapting to change, in acquiring new knowledge, in accommodating technology, and in adjusting to new management processes has become a central theme for both corporate and individual success, if not survival.
The same attitude should be expected from our school system. What expectations do we attach to education? The college class of 2019 will enter the first grade in September 2003. What will the class of 2019 need to know by the time it graduates in order to be competitive on an international scale? What caliber of teachers will it take to distill more and more knowledge into each year while still retaining its interrelatedness?
Innovation must impact education as much as education impacts innovation. Educators have a central role to play in what is becoming an increasingly knowledge-intensive society.
The question is not anymore only what to teach but how to teach it. Four years of college are no longer adequate preparation for a lifetime of professional work, but the answer is not to extend the interval of full-time study. We need a commitment by corporate managers, by school boards to an aggressive renewal of human capital through continuous lifelong education for teachers and corporate professionals as an integral part of their jobs.
We need a sustained infusion of resources into education of the young and reeducation of workers. Knowledge of technology will be necessary for all employed to participate in improving and perfecting their working effectiveness and productivity.
There is little argument today about whether or not there is a relationship between capitalism and democracy. Two great economists of the last generation, Max Weber and Joseph Schumpeter, detailed the linkage. Weber contended that democracy in its clearest form can occur only under capitalist industrialization, and that it had its greatest opportunity in a society which emphasizes individual responsibility. He stated flatly that history clearly confirms that modern democracy rose along with capitalism and in a casual connection with it.
Capitalism is the social system based upon private ownership of the means of production. However, the primary premise of capitalism, the one that I consider most important, is that is based on individual rights. It is the only politico-economic system based on the doctrine of individual rights. This means that capitalism recognizes that each person is the owner of his own life, and has the right to live his life in any manner he chooses as long as he does not violate the rights of others.
Capitalism is the only political system that is based upon man's true nature as a being who possesses the faculty of reason-capitalism is the only system that recognizes that human beings can think. Indeed, individual rights and capitalism not only protect the individual person and property of each human being, but most importantly, they protect the individual mind of every human being.
The only purpose of government in a democratic capitalistic society would be to protect its citizens from force or fraud. The protection from force, that is, the protection of individual rights, would be achieved through the use of a police force to protect the rights of citizens at home; a military, to protect the rights of citizens from foreign aggression; and a court system to enforce contracts and settle disputes between citizens.
An absolute democracy, which means unlimited majority rule, is incompatible with capitalism and freedom. This is so because capitalism rests on the principle of individual rights. In an absolute democracy, rights would really have no legitimate meaning because they could always be voted away in the next election. When most people think of democracy, they usually mean a constitutionally limited democracy. The function of a limited democracy is to decide who held political power and how that power is specifically exercised, but what that power is should be strictly defined and limited in the constitution. Individual rights would not be subject to vote. Freedom is one whole, and anything that reduces freedom on one part of our lives is likely to affect freedom in the other parts.
Democracy and capitalism have very different beliefs about the proper distribution of power. One believes in a completely equal distribution of political power,"one man, one vote', while the other believes that is the duty of the economically fit to lead the development of society. However, in democratic-capitalistic societies power comes from two sources-wealth and political position. It has been possible to convert economic power into political power or, conversely, political power into economic power.
Economic freedom is an indispensable means toward the achievement of political freedom. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom, because it separates economic power from political power and in this way enables the one to offset the other. The relationship between political and economic freedom is complex and by no means unilateral. History suggests only that capitalism is a necessary condition for political freedom. Clearly, it is not a sufficient condition.
The first of these is the right to private property. It is assumed, in the Lockean tradition, to flow from the law of nature itself. It is not a concession by those governing to the governed. Along with the right to life and to liberty, the right to property is natural, unalienable and essential to meaningful existence. Government's responsibility, its very purpose, therefore, is to protect individuals in the enjoyment of their natural rights and to secure their persons and property against infringement or violence.
A second economic value implicit in the Constitution is support for private entrepreneurial activity. The Constitution provides for defining the national economic interest in relations with other nations, regulating interstate trade, creating a reliable money supply, securing copyright and patent rights, granting corporate charts, and protecting the sanctity of private contracts. Increased trade and commerce always improve the life for both workers and proprietors.
A third value of special significance is the rule of law. No power can be exercised except in accordance with the procedures, principles and constraints contained in the law. The vibrant economic growth which the Constitution was intended to promote are to be controlled by law. The inherent limitations of the legal order are understood to be fundamental.
There also appears to be a growing consensus that a high level of education is a necessary condition also for democracy. A high level of education presupposes that all citizens in democratic societies need more than minimal education. They need to develop an understanding of the essential concepts and the actual functioning of constitutional governments and of market economies.
The decisions which citizens in free societies are called upon to make in both their personal and political lives are replete with the ideas-and choices-of economics. A basic grounding in economics is essential, if they are to make sense of policies in print and on the airwaves and if they are to make intelligent choices in polling booths. Ignorance in today's world forms a prison from which citizens must be given the tools to escape.
In this modern technological world, skills, education, and knowledge can be called human capital. Human capital differs from physical capital in three important ways. (1) Human capital can not be owned; (2) Human capital investments require a long time horizon;(3) Human capital generate the man-made brainpower industries. These are another basic reasons linking education, capitalism, and democracy. However, a college education is very expensive.
While it may be true that not everyone needs sophisticated high-tech training, the technology is affecting many job categories not normally associated with high technology. For the foreseeable future, the economy will be driven at the leading edge by the strengths or weaknesses of the nation's high technology industries and by the ability of other industries to absorb new technologies. Both situations require a sustained infusion of resources into education of the young and reeducation of the work force. The infrastructure that is really going to count in the future is not so much the physical infrastructure but the knowledge infrastructure
A country's wealth is a more slippery sum than the spending power of its citizens or the reservoir of its resources. Wealth consists in assets that promise a future stream of income. This is a very important concept that unfortunately most Latin American nations do not practice. The flows of oil money, for example, do not become an enduring asset of a nation until they can be converted into a sock of remunerative capital-industries, ports, roads, airports, schools, and working skills-that can offer a future. A wealthy nation must be able to save as well as to consume. This is not a world anymore in which the gain of one nation can only come at the expense of another.
All the world will benefit from the increase impotence of statism and socialism. This is the age of democracy, freedom, capitalism, dignity, safety, individual and family.