How capitalism is mutating for survival?

By M H Ahssan

As banks collapse and government bailouts proliferate, it's difficult to see how capitalism is going to reinvent itself.

When last heard of, Citibank, a bank 20 times bigger than State Bank of India, had a market value just about equal to the latter. Giant enterprises -- from GE to GM -- were either tottering from market blows or emitting death rattle sounds.

Well, don't believe your eyes. Don't trust your ears either. A few weeks ago, this writer predicted that capitalism will always survive because it is the only system that responds to information, incentives and penalties efficiently. It can falter, but it manages to pick itself up. In the current recessionary scenario, capitalism is beginning to mutate for survival.

Three elements of this ongoing mutation are already visible. First, we are seeing a clear shift in business attitudes. Among the most interesting ideas coming out of the US is bank nationalisation, which some would consider the very antithesis of capitalism. Nouriel Roubini, professor of economics and international business at Stern Business School, New York University, says that it is cheaper to nationalise banks temporarily than to bail them out.

The argument is simple. Banks are currently unwilling to lend to one another and to customers because they are mortally scared of defaults. You don't know who will go belly-up. There is a crisis of confidence and throwing good money after bad may not be enough to stem the rot. If you were nationalised, though, no bank would be unwilling to lend. Uncle Sam stands right behind you.

It's also cheaper. Citibank has already swallowed up $20 billion in equity, and has been given guarantees for another $300 billion against potential dud loans (a.k.a. toxic assets). Its current market worth is a meagre $13-14 billion. Why bail out a $14 billion company with $320 billion?

If banks are temporarily nationalised, they would be free to take normal risks by lending to businesses and customers. When the normal credit cycle is resumed, the economy will start to rebound. Once banks rebuild their credibility, they can be resold for a profit.

In short, Mutation No 1 is the subtle shift in assumptions: nationalisation is not any more seen as inimical to capitalism. It is a useful safety net in crisis situations.

Just as capitalism embraced the welfare state to dull the edge of worker revolts in the first half of the 20th century, in the 21st century capitalism is co-opting nationalisation to its cause. Bravo!

Mutation No 2 is also visible. As cash becomes scarce in a recession, capitalism survives by shifting to barter. No matter what happens to the financial system, the real economy always works -- albeit slowly. Also when you are broke or paying down excessive debt, you want to conserve cash. But that doesn't mean you can't buy what you need by offering your own services in return.

Let's take the case of India's IT companies. Many of their US clients can't pay top dollar for their services; some are offering them a share of cost savings or future profits in part-payment. At the bottom end of the market, every jobless worker can become an entrepreneur, trading his skills in return for services he needs.

Barters work best in a recession, since they help you keep your cash. All across the US, barter sites and exchanges are mushrooming, enabling people to buy goods and services in exchange for other goods and services. The cash economy will return in force when the recession starts receding. At last count, there were at least 500 barter sites in North America and Latin America.

Mutation No 3 occurs precisely because capitalism is down. Just as necessity is the mother of invention, entrepreneurship --the basic building block of capitalism -- thrives in a recession. In a downturn, companies start downsizing operations or cutting out product lines, but the customer need for products and services that are discontinued does not disappear.

Carl Schramm, an evangelist for entrepreneurship, estimates that in the last five US recessions, the recovery was propelled largely by people who began new businesses. For example, even as people stop buying big houses, a new business is springing up in ready-to-use, micro houses with foldable furniture.

Nobody may be buying the Hummer anymore, but smaller cars are beginning to sell better. The US auto giants may be headed for oblivion, but the industry will revive under Japanese or Chinese entrepreneurship.

In short, capitalism succeeds best at the precise moment of its apparent failure. The animal spirits are reviving.