I have personally benefited a great deal from a capitalist system all my life. I was born into a poor lower-caste family in India. My father had studied up to the fourth grade and earned a living by running a small business selling lumber to feed his family and educate all his eight children. I came to America on a boat with $40 in my pocket in 1964 to get a PhD in physics. Later, I turned to electrical engineering because of its financial potential and started on a long journey building several tech businesses in the US. I love the capitalist system, with its freedom, flexibility, opportunities and innovations that meet the market’s changing needs and lead to design and development of new products to serve people at the bottom of the economic pyramid.
The relationship between capitalism and democracy, however, can be highly complex and nuanced. On the positive side, capitalism supports democracy by creating a financially secure middle class that can engage in political participation. It can also encourage innovation, leading to a higher standard of living for citizens and lifting people at the bottom of the economic pyramid out of poverty. However, since wealth and resources tend to be concentrated in the hands of a few in a capitalist system, it can lead to a power imbalance that favours the interests of the wealthy over the rest of society. This can undermine democratic values and institutions, leading to a situation where the economic elites have disproportionate influence over the political system. Also, when wealth and income disparities become too great, it can create a sense of disenfranchisement and resentment among those who are left behind, leading to social unrest and political instability.
The conflict truly arises when the pursuit of profit and economic efficiency comes at the expense of social justice and equality. Capitalism and democracy particularly entered a dangerous phase after the economic and political crises of the 1970s – what is popularly known as the phase of “shareholder capitalism.”
The ethos of this new era is best described in Milton Friedman’s famous words, “The business of business is business.” In other words, the only social responsibility of business was to maximise profits. By this logic, outcomes that are good for capitalists need not be good for the public.
Friedman’s theory, however, has come under a lot of criticism, with detractors pointing out that social issues aren’t peripheral to the business of business but fundamental to it. In fact, companies that ignore public sentiment do not just attract criticism but also fail to achieve their intrinsic goal of corporate profitability in the long run. While maximising shareholder value is important for retaining and attracting investors, companies that focus solely on shareholder value to the detriment of other stakeholders face negative consequences, such as decreased employee morale, public backlash and even legal or regulatory action.
The relationship between capitalism and democracy can particularly be studied through the lens of the US-China experience of the last three decades. It is the top-down approach to scale operations, optimize profits and increase corporate shareholder value, as opposed to optimising human development that led to US companies moving jobs in the last three decades to communist China. It was possible for the Chinese government to get hundreds of thousands of people from the villages to live in bunkers and work long hours under difficult working conditions at low wages to meet the needs of the US corporations. Clearly, labour would not be willing to work under these conditions in the US or Europe. As a result of the low-cost labour and the Chinese government’s efficient infrastructure and subsidies, profits for the US corporations skyrocketed. The US stock market reached levels never seen before. In the process, however, Chinese companies also acquired technology and the know-how to compete with the US in the global markets. In the long run, the impact of the model of moving manufacturing out to China to optimize corporate profits led to loss of millions of jobs in the US and increased geopolitical tensions between the US and China. At present, America is obsessed with the rise of China and its associated economic and military power, which is approaching American standards.
With the world being focused on a top-down approach, the Gandhian approach that I grew up with, which emphasises bottom-up development, has been ignored. In the early 1980s in India, I committed to build telecom and IT institutions and infrastructure with a focus on access to telecom as opposed to telecom density. To do this, I concentrated on indigenous development, local talent, ancillary industries and local manufacturing. The idea was to provide public call offices on street corners for ordinary people, as opposed to providing telephone ownership to the rich in expensive apartment buildings and affluent homes.
This model for telecom and IT development, based on the Gandhian idea of decentralisation, was quite unique in the 1980s and required a great deal of political support. At the time India had 2-2.5 million telephones for 750 million people, and getting a telephone connection involved a waiting period of over ten years. But the novel strategy based on Gandhian ideals changed the face of India. Not only did it lead to improved connectivity, but it also eventually led to jobs for millions of youths not just in India, but also in the telecom and software industries globally.
Today India is recognised as a global leader in IT only because the focus was on building human capacity and not on increasing profits by importing products to meet the local needs of the urban rich. The real credit goes to Prime Minister Rajiv Gandhi for providing the political will and to the young Indian talent that put its best foot forward. To put it simply, these innovative initiatives are feasible in a democracy that offers its people the freedom and flexibility needed to experiment and innovate.
What democratic countries need to do, is to evolve a new model of capitalism that optimizes human development, sustainability and inclusion. This model of capitalism needs to adopt a more stakeholder-oriented approach in its business operations, also keeping in mind the interest of employees, customers, suppliers and the wider community, in addition to shareholders. This involves the implementation of ethical and sustainable business practices, reduction of environmental impact, promotion of diversity and inclusion, and investment in employee development and well-being.
When a company invests in these areas, it can lead to improved customer loyalty, enhanced employee satisfaction and retention, and increased social and environmental responsibility, which can benefit the long-term success and sustainability of the business itself. In fact, studies have shown that companies with high levels of stakeholder orientation can outdo their peers over the long term in financial performance and shareholder returns.
On the other hand, failure to address these intrinsic issues will threaten the survival of both capitalism and democracy. While some of the problems that will rear their head as a result of this failure are economic – rising inequality, stagnant wages, lack of employment – some are political – corruption at the highest levels and declining trust in government – and yet others are cultural – resentment of migrants and growing tensions over race, religion or gender, for example.
Additionally, what is witnessed in such economies is the rise of populism as the system falls short of producing what citizens need and want. Jan-Werner Müller, in his book What Is Populism? argues that populists divide society into two sections and attribute legitimacy only to themselves and the people who support them. By “people”, populists mean “people like us”, while others are illegitimate and potential enemies, often referred to as “anti-nationals”. Populist leaders in a democracy use capitalism to their advantage by promoting policies that encourage economic growth and support their own political goals. For example, they may promise to lower taxes or increase government spending on programmes that benefit specific groups of voters.
Excerpted with permission from The Idea of Democracy, Sam Pitroda, Penguin India.