Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Feudalism is not Capitalism

Written by johnleemk on 11:10:51 am May 11, 2007.

One common criticism of free market capitalism is that it creates a feudalistic oligarchy, concentrating wealth in the hands of a few who then lord it over the many.

There seems to be ample evidence to suggest that this claim holds water. Formerly socialist or communist countries like those of the former Soviet Union and those in Latin America have seen such yawning disparities arise after the carrying out of free market reforms.

However, the problem with many of these countries is that they have actually acted antithetically to the fundamental premise of capitalism — competition. A number enacted overtly pro-business policies, which run counter to capitalist ideals, while others simply failed to adequately open up markets to competition.

It is fine to reduce government intervention in the market and liberalise regulations. But it is simply not enough, because the fundamental premise of a capitalist society is competition, and if existing firms or monopolies are allowed to stifle competition, then a government monopoly has simply been replaced by a private monopoly.

A true capitalist country would go beyond deregulating its markets. It would also refrain from favouring business or granting unwarranted subsidies; at the same time, it would act to prevent existing players in the market from suppressing competition.

The problem with many Latin American countries is that they had an existing landed class — a heritage of Spanish colonialism. This landed class, once independence was gained, used its power to suppress competition, often by force of violence or corruption. In such a society, it is impossible for capitalism to thrive when the existing market players have no competition and thus no incentive to improve their goods and services.

Meanwhile, countries like Russia saw problems because instead of the measured government regulation necessary to enforce certainty in business dealings in a market economy (good contract law, for example, is a requirement of capitalism), the government just decided to butt out altogether and not do a thing about the business world.

The result, of course, was Russian society being dominated by gangs and mobs which now run not only the Russian underworld, but also back several leading Russian oligarchs. A new feudalistic society has developed in Russia because those who want business power are allowed not only to seize it for themselves, but also to suppress those who wish to compete against them.

There are plenty of countries which have done well for themselves after free market reforms. Chile, for example, was vilified at one time because of its dictatorship under Pinochet. Pinochet's market reforms which were maintained after democracy was restored, however, have proven successful in growing the Chilean economy without the ugliness associated with other Latin American pseudo-capitalist countries.

It is possible for a capitalist economy to work well and for the rising tide of a market to lift all boats. What is necessary, however, is not a total lack of government regulation, but measured and well-targeted government action to properly keep the markets open and competitive.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

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