Why Has Capitalism Failed the Poor?
Because it considers interests of only people with money, to the exclusion of everyone else.
“Human entrepreneurship” is the magic wand that creates prosperity. We lead a rather safe and comfortable life today because of scientific, technological and medical advances of past few centuries. Today we have much better social infrastructure and human development than some decades ago – and certainly far better than 100 years ago. It all testifies to the superb potentials of human capabilities and ingenuity. This is the reason why the UNDP declares that “People are the true wealth of a nation.”
[World would have been a far better place if nations defined “development” by keeping people at the focus and developed economies around them. Today, economy and technologies occupy the spot light and people are just the tools to achieve it! As a result, people are mere “human resource”; they are no longer the “true wealth” of nations; material possessions and technological advancements are.]
People and their capabilities are nurtured by socio-economic conditions which vary from society to society. As a result, many parts of the world are seeing unprecedented prosperity and wealth creation while others have seriously lagged behind. There are socio-political and cultural reasons why many parts of the world failed to taste the fruits of development. But that is beside the point.
Leaving aside the natural differences among societies and people, the most worrisome problem is the extremely high levels of inequality within most countries. This inequality is so striking that increasing number of people wonder if market driven economy has failed the poor – many blame the capitalistic economic model for persistence of poverty. Over 2.5 billion people (of the total 7.2 billion global population) live within less than $2-a-day income and about 1 billion survive below $1.25-a-day. Poverty related issues are still behind most major problems around the world.
The US offers a great example of inequality created by an “almost free” market economy. According to a recent report, about 49 percent Americans are receiving benefits from at least one government program and nearly 150 million citizens (of the 315 million total population) are considered to be either "poor" or "low income." There are many other grim facts on poverty in the US – which by all means is a symbol of free-market capitalism for the whole world, particularly since 1980s. The government welfare programs serve to redistribute income from the top to the bottom via the tax system. This is the only mechanism that looks after the poor and disadvantaged and serves to reduce inequality to some extent.
Trend of Growing Accumulation of Wealth in Few Hands
Since fall of the communist bloc in 1990 wealth has been increasingly concentrating with fewer people and global elites are becoming increasingly richer. Yet the vast majority of people around the world remain excluded from this prosperity. For instance, while stocks and corporate profits soar to new heights, wages as a percentage of gross domestic product (GDP) have stagnated.
Oxfam International’s briefing paper of Jan 20, 2014 (title: Working for the Few) highlighted the fact that the wealth of the 1% richest people in the world amounts to $110 trillion – it’s 65 times the total wealth of the bottom half. The wealth of the richest 1% increased from 44% in 2009 to 48% in 2014 while the worst-off 80% at the bottom currently own just 5.5%. If the trend continues the richest 1% would own more than 50% of the world’s wealth by 2016. In short, currently the total global wealth is almost evenly divided: around one half is with the richest 1% and the remaining half is shared by the rest 99%. Amazing, isn’t it?
Note further: 70% people live in countries where economic inequality has increased in the last 30 years; the richest 1% increased their share of income in 24 out of 26 countries between 1980 and 2012.
The financial crises of 2008-09 failed to bring any fundamental change in the working of the financial world that would change the trend. In the US 95% of post-crisis recovery between 2009 and 2012 was captured by the wealthiest 1%, while the bottom 90% became poorer.
To give an indication of the scale of wealth concentration: In 2013 only 85 richest people had wealth equal to the combined wealth of the poorest 50%! Currently, only 80 richest people have as much wealth as the combined total of 50% of the poorest humanity. Between 2009 and 2014, these richest 80 doubled their wealth in cash terms. The combined wealth of Europe’s 10 richest people (€217bn) exceeds the total cost of stimulus (€200bn) measures across the European Union (EU) between 2008 and 2010. Furthermore, post-recovery austerity policies made life of poor harder, while making the rich even richer. Austerity has also adversely impacted life of the middle classes. The rich elite use their money for lobbying policymakers and funding election campaigns to further their interests. This further excludes the poor from the policy making circle.
Such massive concentration of economic resources in the hands of fewer people presents a significant threat to inclusive political and economic systems. It destabilizes societies; people no more move forward together, they are increasingly separated by economic and political power, leading to increased social tensions and the risk of societal breakdown.
Moreover, it also dampens economic growth. It is, however, not inevitable and can and must be curtailed.
Yet, experience shows that capitalism is the only model that works, despite its imperfections – most notably, its exploitative character and tendency to favour the rich.
Too Narrow Focus of Capitalism – Profit Maximization for the Few
The current brand of popular “shareholder capitalism” revolves around a single theme: maximizing profits for the shareholders. It is designed to serve the interests of a very small fraction of people, investors – people with the capital. As a result, interests of all other stakeholders – employees, society and environment – become secondary and subordinate. In fact, there is a built-in conflict of interest; employees must be paid the least and all other expenses minimized so that owners’ share is maximized.
This concentrates wealth and prosperity in too few hands and creates an elite class that turns politically powerful. Then they use power to further their business interests. This sets in a vicious cycle of money and power feeding each other. Needless to say, this also undermines free and fair play of democratic processes which in the extreme case destabilize the society.
Government runs welfare programs for the poor and needy from the collected taxes which partly redistribute wealth from the rich to the poor. However, what is not passed on to the poor is the “influence” and “power” enjoyed by the elite class. As a result, people at the lower end survive but can’t change their fortune. This is also precisely what is wrong with the charity – it keeps the poor where they are, in poverty! [You may like to explore: 4 Reasons Why Charity can't Eradicate Poverty]
Prominent personalities like Bill Gates suggest fine-tuning the capitalism to give it a more “human face” because the current model ignores the human-side of people’s life and works on the assumption that people are only concerned with money and profits.
Fixing Capitalism for Common People
As the anti-poverty discourse is becoming louder and the environmental concerns are getting urgent, the business world is increasingly being forced to pay attention to the concerns of the ordinary people and society. In many countries, phrases like "corporate social responsibility" and "public private partnership" are becoming important in the development discourse.
While businesses are certainly setup to make profits and they certainly operate to maximize their profits, but should “profit maximization” be the only goal of a business? Since they can’t work without society, how about businesses having social goals? It is fairly common to see businesses houses often indulging in philanthropic activities in different ways. However, people increasingly wonder why with so much philanthropy, charity and welfare programs of past several decades poverty doesn't seem to go away.
The reason being that hand-outs and give-aways are short term relief; they are never designed to empower the poor who are seen as mere passive recipients. For long term poverty elimination, the poor need inclusion (involvement) and empowerment.
So, what else should be done in the markets?
A social business is a non-dividend company created to address and solve a social problem. – Professor Muhammad Yunus
Businesses With Social Goals Is The Solution
It is business model with a social goal. A business operates exactly in the same manner except that the goal is changed – it is no more limited to “profit maximization.” Instead, the dominant goal is social or targeted at certain sections of people in order to enhance their well-being. They are more popularly known as social businesses. The phrase was popularized by Nobel winner Professor Muhammad Yunus who is better known as “the father of microcredit.” His microcredit initiative through the Grameen Bank, which is a great example of social business, has revolutionized the lives of millions of poor around the world by offering them tiny amounts of credits.
Rather than profit maximization social businesses have other motives, which could be social, environmental or justice. They make money to be sustainable but work to achieve their social goal. Social businesses are emerging as the “missing links” – bridging the gap between the traditional businesses and the nonprofits or charities. They harness the market dynamics in a self-sustaining way to meet social objectives.
In fact, there is nothing in the free market economy that forbids having goals other than “profit maximization.” Moreover, social businesses fill the void by catering to the “unmet” needs of the society without interfering with the normal profit making businesses. People who invest in social businesses are driven by some social goals and derive satisfaction, in fact far bigger satisfaction than monetary gains, in achieving them.
It is a capitalistic myth that people are driven “only by profit motive.” In reality, there are a lot of other things people are more passionate about – for them profits are secondary. Social business model offers them the opportunity to realize their mission.
Social business may aim at social objectives related with education, health, unemployment, environment, housing, or anything else society needs. Once investors recover their money, profits stay with the business to help it grow further and expand its outreach and increase the social impact.
For example, you strongly want to help handicapped people so you set the goal of having at least 50% disabled in your work force. As a result, you create necessary physical infrastructure for their easy movement and treat them with dignity and at par with everyone in all aspects. By doing this, you just assimilated many disadvantaged people who would otherwise remain excluded from the mainstream economy. It can never be underemphasized that social exclusion is the most common cause of poverty.
Social businesses have two unique advantages: they are more efficient than government programs and they are more sustainable and resourceful than charities which have to depend upon donor’s funds and their wishes. In fact, social businesses are far more effective as anti-poverty tool because they ‘empower’ people and are financially independent – not at the mercy of distant or unknown donors.
A host of real life examples of social businesses can be found on this page.
Why business can be good at solving social problems?
The Strasbourg Conference
On January 16 and 17, 2014, an important conference on social entrepreneurship and social economy was organized by the European Commission, the European Economic and Social Committee (EESC) and the City of Strasbourg. Over 2000 people including social entrepreneurs and social economy enthusiasts affirmed that the social enterprises must play a much larger role in the Europe and laid out a blue print to unlock their potential for sustainable and inclusive growth. The conference concluded with 10 recommendations to be adopted at the local, national and EU levels.
“Europe’s economic and social model needs to reinvent itself. We need growth that is fairer, greener and anchored in local communities. A model that values social cohesion as a genuine source of collective wealth.” Read on The Strasbourg Declaration
What Do You Think?
The Social Economy in Europe
In the European Union, despite their diverse nature these social enterprises operate in areas such as helping jobless people through training and skill development; providing jobs for disadvantaged groups and promoting their social inclusion; offering special services such as childcare services or services for elderly and disadvantaged people; and focusing on underdeveloped areas such as the remote rural areas or neighborhood development in urban areas.
The social economy contributes about 10% of the GDP and employs over 11 million people or 4.5% of the EU’s working population. Each year, 1 in every 4 new businesses is a social business; in countries like Belgium, France and Finland the ratio is even better – one in every three.
Social enterprises provide hundreds of successful examples how Europe can improve its business model, with more focus on improving people's well-being and less on maximizing financial gain. The social economy can create quality jobs even in difficult economic circumstances and clearly deserves EU support to grow and spread. - László Andor, Commissioner for Employment, Social Affairs and Inclusion
- Social Enterprises in Canada
- Growing Social Enterprises in Southeast Asia
- Social enterprise is at the core of European economic strategy
The slogan "there is no economic growth and jobs creation without social entrepreneurship" launched the Commission's Social Business Initiative last November.
Social entrepreneurship is the best way to add human face to current brand of capitalism without disturbing any market rule. Social businesses offer the best way to integrate economic activities with social development. Already there are numerous organizations that naturally pick up some social cause to serve.
Charities and non-profits should also think seriously about converting into social businesses so that they can serve their causes in a much more efficient and effective way.
Goodpal (author) on February 06, 2014:
Thanks ME, for reading and sharing.
The purpose of economics and all other activities done in society is primarily to make people's life better, comfortable and safer. Presence of persistent poverty, violence, drugs and crimes are signs that something has gone wrong in the system. It needs fixing.
Any system that converts people into mere numbers and tools can not ever serve the humanity sustainably. Development must revolve around people, not GDP or some other abstract number. Social economy is just a long overdue step in that direction.
SALVAONEGIANNAOLCOM from south and west of canada,north of ohio on February 04, 2014:
Our problems can only be solved by a wholesome approach to life and how we treat each other in education and government where cultural ideals or issues are concerned.
Enough money for all will naturally follow if all are true to the same cultural ideology of equals rights and the merging of social and practical ideals concerning money and equality. Those with the most effective work habits should get more than those less so. No one should be given more than is due to them. Inflation and deflation are to be prevented at all times.Reason being that inflation created from manipulation of the money supply by those who control the money supply only serves those who created the extra money - first - by spending it before everyone sees that the extra money has devalued the total money supply even if they did nothing personally in order to spend it. It's like spending other peoples money. Making everyone poorer through the ever present illusion - that the more of something that someone has somehow makes one wealthier because it is believed to have a fixed value in and of itself as a medium of exchange. Paper money or even numbers in a computer account or ledger are intended to represent something of real value such as a commodity such as food ,clothing or the labor to produce it . Money if treated as something of real value as if it were a commodity itself when in fact it only represents items of real value is a disservice to everyone when the money supply is increased artificially and people ask for more of this inflated currency in order to compensate for the lost value due to inflation of the money supply through unnatural means. Putting more money into circulation than the goods and services available is tantamount to having a tree that grows money that can be harvested just as produce in the food market is.
There must always be a one to one relationship between money and commodities of real value! Money as I've said is not a true commodity.Just a medium of exchange that can be created or destroyed by the stroke of a pen by the moneychangers. If,destroyed creates a shortage and makes a commodity more valuable even money . We must stop the illusion that money is a commodity if it can be created or destroyed with impunity for reasons that only create chaos rather than community and trust in our fellow man.
Scott Belford from Keystone Heights, FL on February 04, 2014:
I couldn't agree more, Goodpal; an extremely well written and presented hub! I even own stock in a mutual fund that invests only in social companies, PAX Mutual Funds. To work, in the aggregate, however, without government intervention, requires something humans are in short supply of as a group, virtue, especially moral virtues.
The very nature of unregulated, "free-market" (very few markets are actually free such as corn and other grains are thought to be), capitalism leads to despotism a la America prior to the 1900s and England during their industrial revolution.
Regulated Capitalism (government sponsored virtue, if you will), is an entirely different matter. That can, and has achieved some of the objectives you seek while maintaining the economic vitality that capitalism offers.