Arnold Kling  

Capitalism without Capital

Worrying About Demand... Unprovable Speculations...

In a long essay, I write

The reduced significance of capital means that the cost of entry is lowered in many industries. Today, we see this in the shops that people have set up on eBay or in the blogs that compete with traditional pundits.

...When a new project can be hatched in a basement on a small budget, fast failure is more efficient than organized planning.

...My belief is that this is the wrong time in history to adopt European-style democratic socialism. Under capitalism without capital, we should encourage people to be self-educating and self-starting, not state-parented. Our government should be compassionate and generous to those with mental illness and physical disabilities, but otherwise it should have a smaller footprint, not a larger one.

UPDATE: for more, see Jim DeLong.

For Discussion. What are the implications of rising absolute standards of living, particularly among the poor, with greater inequality as measured top-to-middle or top-to-bottom?

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CATEGORIES: Growth: Consequences

COMMENTS (8 to date)
Lawrance George Lux writes:

Bloggers an online shops are simply the new 'Mom and Pop' stores. The old ones were driven out of business by Corporate concentration and financing. The actual level of small entreprueneral businesses probably has decreased, though wild successes are internationally noted. lgl

spencer writes:

The classic view has been that the inherent problem of capitalism is income inequality creating large gaps between potential output and effective demand. It was widely believed that the social revolutions of the 1930-40s where govt took on a major role of income redistribution and demand management saved capitalism from itself.

It now looks like the US is undertaking a big gamble to test that thesis. We are clearly seeing a major shift in income inequality accompanied by a major slowdown in the rate of growth of the economic wellbeing of most of the population.
Moreover, the slowdown in real income growth for the bulk of the population has been in the face of strong productivity and massive debt.

The risk is that these trends, and the building of massive debts proves that the earlier thesis that income inequality is the inherent problem of capitalism proves to be correct and we return to a depression scenario.

Deb Frisch writes:

Sure, I'd be stoked if Uncle Sam skimmed less than $2.3 trillion a year from the economy.

I'd be even happier if he spent the money he takes making Americans and other people happier, healthier and safer instead of what he does now -
lining the pockets of tobacco farmers and steel workers, destroying Iraqi infrastructure, maiming Marines, destroying Humvees, etc.

Lemme guess - you still think that the difference between the left and right, economically, is that the left is for big government and the right is against it?

p writes:

I'm not sure how the observations aptly made by Kling translate into Capitalism without Capital. The observation of the long tail is in no way an indicator of reduced capital requirements. The observations made suggest that retail will change as the tail grows more profitable to serve. One may even argue that it will increase capital requirements to cover the long tail.

In addition, we see no real signs that capital requirements are falling. One can argue that it is easier to secure capital than in the past. This however is a very different argument.

I think that the real question we need to wrestle with is how can America prosper when it is systematically blocked from leveraging its intellectual and economic capital in the world economy.

Deb Frisch writes:

"I think that the real question we need to wrestle with is how can America prosper when it is systematically blocked from leveraging its intellectual and economic capital in the world economy."

You have hit the nail right on the head. The rules that govern international trade are absurdly biased against Uncle Sam's Club. It is time for us to stand up and say we are MAD AS HELL AND WE ARE NOT GOING TO TAKE IT ANYMORE!!!!

You go, dude. You are so right on.

Ronnie Horesh writes:
The rules that govern international trade are absurdly biased against Uncle Sam's Club.
Tell that to would-be exporters of agricultural products to the USA.
Alistair Kelman writes:

In the long article you said:

I also predicted that consumers ultimately would be able to find alternatives to obtain "effective and credible education." Today, nontraditional education still has a tremendous credibility problem. If and when that problem is solved, my prediction is that traditional institutions of higher education will take a very hard fall. I think that one of the sources of tension between professors and conservatives is due to the fact that colleges and universities have lost their near-monopoly on intellectual talent to a long tail outside of the academy, yet many faculty act as if this nothing has changed./blockquote>

It is worth looking at this piece from yesterday's Financial Times - the full text is included since I do not have the URL to hand.

A fortune at the bottom of the pyramid By Edward Luce Published: January 2 2005 15:40 | Last updated: January 2 2005 15:40

Barely an economic conference goes by in India that does not devote at least one session to the importance of creating more small businesses. Yet, untouched by these power point presentations, small businesses are already flourishing in India at the poorest levels of society - often unregistered and without licence.

In the slums of Hyderabad, a city in India's south, the number of private schools now exceeds that of government schools by two to one. Often housed in small tenements and cramped buildings, the schools are as far removed as possible from the rarefied corridors of India's elite private establishments, such as Doon School in the Himalayan foothills.

But in their rapidly proliferating numbers, India's slum private schools are ushering in a social revolution that is largely beneath the radar of the country's policymaking elites. It is a silent revolution that conveys two important messages. First, India's poorest classes want their children to be educated - and they are setting aside money to pay for it; and second, they want their children to be educated in English.

Mohammed Anwar, the principal of the M.A. Ideal High School - a private school lodged inconspicuously in Hyderabad's old city - was one of the first local "slum-education entrepreneurs" when he established the school in the late 1980s. At the time, there was only a handful of private schools in the Muslim-dominated old city. Now there are more than 1,000.

"None of the government schools use English as a medium," says Mr Anwar. "These parents are often illiterate. In the past, if they paid for private education, it would be in Arabic classes so their children could learn the Koran. Now all they want is English-medium classes, so their children can get better jobs."

In Hyderabad's labyrinthine backstreets, among the traditional vegetable stalls, small mechanic shops and mosques, almost every other signboard proclaims a private school - often with misleading descriptions.

Quite without sanction, these small businesses call themselves Grammar, Convent or Public Schools - in imitation of their anglophone counterparts at the apex of India's social pyramid. A large proportion of these schools are "unrecognised", which means they operate without the permission of India's notorious education inspectorate. But Hyderabad's poorly paid inspectors are happy to permit them to continue in exchange for a well-established system of bribery.

S.V. Gomathi, director of the Educare Trust, a Hyderabad-based non-government organisation that supports private schools, says schools pay as much as 10 per cent of their profits in bribes to inspectors. The average annual bribes amount to two per cent of school revenues, says Ms Gomathi.

"Even the registered [licensed] private schools have to pay frequent bribes because it is impossible for the schools to comply with all the regulations that govern private schools," she says. "Nowadays, bribes are also paid in kind, such as with SIM cards or liquor."

Mr Anwar, also president of the Dynamic Federation of Private Schools of Andhra Pradesh (the state of which Hyderabad is capital), says there is no way any school could fully comply with the education department's detailed regulations.

For example, the rule book specifies the exact size of classrooms, the average distance between children's study desks, the size of playground areas and so on. "The rule book gives the inspectors almost limitless scope to threaten us with closure or harassment," he says. "None of the government schools comply with the rulebook either. But they don't have to pay bribes."

Yet, in spite of high "regulatory" costs, parents continue to choose these makeshift private schools over their better furnished government counterparts. Why? One critical reason - in addition to the fact the medium of instruction is English - is that teachers almost always turn up for duty in the private schools.

Government schools across India suffer from chronic teacher absenteeism, with recent studies suggesting that between one third and one half of all public sector teachers are absent at any one time. Partly this is because there is little sanction a school principal can use against a wayward teacher. As civil servants backed by strong trade unions, government teachers are virtually unsackable.

Another cause of widespread absenteeism is the fact that many teachers are posted to remote rural districts to which they have no previous ties or inclination to live.

"It is not often you will get government teachers who are from the local community," says Ms Gomathi.

In contrast, private schools usually recruit from the surrounding environs. Often the private school teachers have few qualifications and are paid at between one quarter and one third of the salaries of their government counterparts. Yet they are rarely absent - perhaps in part because they can be sacked.

"Our teachers do have fewer qualifications than government teachers," admits Ghouse Mohammed Khan, principal of Indian Stars Grammar School in another Hyderabadi backstreet. "But they are from this area and the most important factor in a child's learning is his or her enthusiasm to learn."

The classes in Mr Khan's school are well attended - not only by the children but also by the staff. The children, learning English using an entertaining new method called Jollyphonics, sing English nursery rhymes as if it were second nature. It is hard to believe that these are the sons and daughters of rickshaw drivers and grocery sellers.

"We wanted our daughters to have the benefit of English education," says Rizvana Begum, a fully veiled Muslim woman, whose husband is a part-time chauffeur. Mrs Begum's husband spends one tenth of his Rs5,000 ($114) monthly income on fees. "The world has changed since we were young. Now you need to have new skills."

According to Educare, which will this month publish detailed findings of aptitude surveys in Hyderabad, these skills are being well transmitted. Children in the private schools score higher on almost every subject except Urdu and Telugu, the media of instruction in the government schools.

One reason that private school teachers have fewer qualifications is that there is no such thing as an English-medium teacher training college in India. But the poor are ahead of government policy on this matter.

"English is no longer seen as a colonial language by ordinary Indian people," says Gurcharan Das, a commentator in Delhi. "It is seen as a tool of commerce and upward mobility."

Few studies exist on the growth of private slum or village schools elsewhere in India. But anecdotal evidence suggests that Hyderabad is not untypical. Which means that - not for the first time - India's political and bureaucratic elite has played no part in a very positive grassroots trend.

In fact, India's administrative system remains a hindrance rather than a help. "The only interaction we have with government is when they want bribes," says Mr Anwar. "What has changed are the aspirations of the poor, not the attitudes of the bureaucrats."


• High teacher absenteeism in government schools. Studies show that in some parts of India up to half of teachers are absent from school at any one time. Since government teachers are virtually unsackable, this looks unlikely to improve.

• Growing demand for English-language education among the poor. Indians no longer see English as a colonial language but as a passport to economic opportunity in the jobs market. Government schools do not use the English medium.

• Greater economic aspiration among the poor. Since 1991, when India began to open up its economy, annual growth has risen to almost 6 per cent. The rapid economic transformation of India has kindled greater aspirations among its poor, who no longer see poverty as a fate that must necessarily be endured.

• Affordable schooling. Slum schools can charge as little as Rs1,200 a year in fees per pupil and as much as Rs10,000. Entrepreneurs still make money, even though they charge less than schools such as Doon School, which charges Rs127,000 a year.

Nathan Cheng writes:
I'm not sure how the observations aptly made by Kling translate into Capitalism without Capital.

Kling relates "capitalism without capital" to the long tail through the Internet. It is the Internet, Kling states, that facilitates capitalism without capital. So Kling's thesis is that the Internet facilitates capitalism without capital and therefore--because of such a low-barrier entry--we see the long tail.

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