“Men follow their sentiments and their self-interest, but it pleases them to imagine that they follow reason. And so they look for, and always find, some theory which, a posteriori, makes their actions appear to be logical. If that theory could be demolished scientifically, the only result would be that another theory would be substituted for the first one, and for the same purpose.”

- Vilfredo Pareto

“Can capitalism survive? No, I don’t think it can”

- Joseph Schumpeter

During the Annual meeting of the Valdai Discussion Club in Sochi in 2021 President Putin formulated fundamental concerns related to the inefficiency of the current capitalist system amid the pandemic crisis. In the words of the Russian President, this inefficiency relates in particular to shortages and pricing excesses observed in the context of the energy crisis and the overshooting in gas prices in Europe. The frequency of anomalies observed in the markets – from negative oil prices to shortages of goods and services, including in advanced economies – is raising questions with respect to the inherent capability of the current system to cope with the string of ever more frequent crises.

There may have been doubts in the efficiency of the current market system after the 2008 global financial crisis. The scale of excessive debt on the corporate and sovereign balance-sheets in the developed world, the lack of transparency at the micro-level of companies and the macro-level of countries’ fiscal policies called into question the virtues of the market system. And then came the pandemic and took the scale of doubts to a whole new level.

As noted by President Putin, the Covid pandemic laid bare a whole plethora of vulnerabilities inherent in the current market system. “Market failures” included not only the “energy crisis” and shortages across countries and sectors of the global economy, but also lingering and rampant protectionism and other restrictions from the advanced economies that at the same time espoused the virtues of free market economy. Rather than exhibiting the qualities of economic/distribution efficiency, this crisis witnessed countries and corporates resorting to hoarding accompanied by large-scale shortages witnessed elsewhere in the economic system.

The score of the current economic system is neither high with respect to economic efficiency, nor the humanitarian side associated with international cooperation as well as environmental and social sustainability. While the attainment of allocative efficiency (Pareto optimality) as well as production efficiency appears to be far more problematic than suggested in theoretical neo-classical scripts, there are also issues with the key fundamental assumptions underpinning the neo-classical economic analysis such as rationality and self-interest of economic agents. If these are the fundamental assumptions underpinning the current economic system, there should be no surprise with the outcomes elicited by the current crisis.

It could well be then that capitalism became the victim of its own success as the increases the living standards in the global economy were undermined by rampant inequality and rising share of profits vs wages (capital vs labour). If the attainment of higher growth and wealth was to be advanced at all costs, then the costs ended up being too high for comfort.

The world community is aware of the shortcomings of the current system and the debate on its transformation has been underway for years on different sides of the global political spectrum. In particular, the World Economic Forum (WEF) has advanced the concept of stakeholder capitalism designed to render the capitalist system more viable and vibrant via greater inclusivity and due regard for factors such as longer term economic goals and sustainability. According to Klaus Schwab, “stakeholder capitalism is a form of capitalism in which companies seek long-term value creation by taking into account the needs of all their stakeholders, and society at large” . 

On the other side of the political spectrum there are already those that bring back the age-old debate between Milton Friedman and Oscar Lange about the relative efficiency of the market vs regulated economic system in pricing. The current argument from the neo-Lange camp in line with the “socialist calculation debate” is that market socialism can be at least as efficient as market capitalism via current technological advances in IT and computer science. In particular, “cybernetic planning” on the basis of big data processing becomes arguably more feasible and tractable as compared to the invisible hand of the “ever efficient markets”.

For Russia, the search for the perfect economic system could well yet again focus on the imitation of success cases observed abroad. The range of possibilities is wide – from the Scandinavian socialism in Europe to the Chinese version of socialism in East Asia. The sway of China’s economic model may well prove significant (as argued by Russia’s president in this year’s Valdai club discussion) given its successes of the past several decades in coping with a string of regional and global crises (1997 Asian crisis, and the 2008 and 2020 global downturns). Nonetheless, for all the attractions of the economic success stories abroad, Russia will ultimately need to devise its very own model of economic modernization that takes due account of the country’s history, culture and its very own streaks of successful economic modernization. 

Admittedly, capitalism has exhibited admirable capability for innovation and adaptation to challenges in the past – the “New Deal” and the response to the 1929-1933 crisis, the growth exhibited by US and Japan in the 20th century, the success stories such as Singapore, South Korea are just some cases in point. It may be after all, that as per Putin’s favourite quote from Mark Twain, rumours on the death of capitalism are somewhat exaggerated. Still, in view of the pile-up of challenges faced by the current system, the time-frame for capitalism’s transformation towards greater humanism, but also greater efficiency is arguably not exorbitantly long. After all the transformations and soul-searching experienced by the global socialist movement at the end of the 20th century, it is time for the current market system to demonstrate the capabilities of “capitalism with a human face”. 

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.