By Cherie Wang- Economic Analyst, PhD student
Capitalism has been a dominant economic system for centuries, evolving through various phases and adapting to changing social, political, and technological landscapes. This article explores the history of capitalism, the relevance of Karl Marx’s critiques, and how different models of capitalism—particularly those seen in China, East Asia, and smaller nations like Sri Lanka—can offer insights into the future of this economic model. Additionally, we will examine Dr. Kenneth De Zilwa’s balance sheet economic model, emphasizing the importance of a country’s financial health in guiding economic policy.
The Historical Evolution of Capitalism
Early Foundations
The roots of Capitalism can be traced back to the late middle Ages in Europe where trade began to flourish, leading to the rise of merchant classes. The Italian city-states, such as Venice and Florence, were early examples of capitalist economies, where merchants engaged in long-distance trade and developed financial instruments like bills of exchange.
The transition to industrial capitalism began in the late 18th century with the Industrial Revolution, which introduced mechanized production. This period marked a shift from agrarian economies to industrial ones, characterized by factories, mass production, and urbanization. The work of economists like Adam Smith, who advocated free markets and competition, laid the intellectual groundwork for modern capitalism.
Marx’s Critique of Capitalism
Karl Marx emerged as a critical voice in the 19th century, analyzing the inherent contradictions of capitalism. His labor theory of value, posited that the value of a product is derived from the labor invested in it, leading to the exploitation of workers as capitalists’ seek to maximize profits. Marx argued that this exploitation results in a falling rate of profit, leading to economic crises and class struggles.
Marx’s insights remain relevant even today, particularly as we observe growing income inequality and periodic economic downturns. His analysis of business cycles highlights how profits and capitalist competition leads to overproduction, resulting in economic instability.
The Relevance of National Capitalism
Dr. Kenneth De Zilwa’s Perspective
Dr. Kenneth De Zilwa, a prominent business cycle economist and global markets specialist, advocates for a model of “national capitalism.” He emphasizes that countries, especially net-importing nations like Sri Lanka, must adapt capitalism to their unique contexts to foster self-reliance, internalize profits/earnings and reduce dependency on foreign goods. De Zilwa states, “National capitalism provides an escape route for net-importing nations by fostering self-reliance by shifting manufacturing and value added production of key consumer goods and reducing dependency on foreign goods.” This approach aligns with Marx’s critique, as both recognize the need for structural changes to address economic disparities.
The Importance of Local Adaptation
National capitalism emphasizes the importance of tailoring economic strategies to local needs that capture market share. For example, Sri Lanka has focused on developing its agricultural and textile industries, which has spurred economic growth and job creation. However, the tea and apparel sectors have not gained significant market share over the past 60 plus years. The Compound Annual Growth Rate (CAGR) of exports in these sectors has stagnated, CAGR for Tea Exports (1948-2022): Approximately 7.96% while the CAGR for Apparel Exports (1990-2022): Approximately 9.63% respectively, highlighting the need for strategic interventions. Indicating that the national balance sheet has not been managed well enough as a sufficient market share has not been gained during this period. And in fact losing market share.
Strategies for Improvement
To enhance market share and economic growth in these sectors, Sri Lanka can adopt several strategies:
- Investment in Technology and Innovation: Modernizing manufacturing plants and production processes and improving product quality can enhance competitiveness.
- Diversification of Markets: Expanding into new markets with Asia growing rapidly, this can reduce reliance on traditional markets and capitalize on new opportunities.
- Enhancing Quality and Compliance: Focusing on maintaining high quality for local production and manufactured goods and ensuring compliance with international standards can improve reputation and access to markets.
- Strategic Partnerships: Establish JVs collaborate with international brands can provide access to new markets and technologies.
- Government Support and Incentives: Providing incentives for inputs, national funding program for selected raw material, supporting manufacturing processes improvements and assisting in product innovation can help boost these sectors.
Lessons from Small, Wealthy Countries
Small, wealthy countries such as Belgium, Norway, and Finland have successfully implemented national capitalism, demonstrating the effectiveness of this model. These countries have leveraged their unique assets and adopted strategic policies to drive economic growth and improve living standards.
Belgium has adopted a mixed economy approach, combining free-market capitalism with significant government intervention. The Belgian government has historically supported key industries and maintained strong labor protections, contributing to a stable and prosperous economy.
Norway has effectively utilized its natural resources, particularly oil, to create a sovereign wealth fund that supports national investments and social welfare. The government plays a crucial role in managing these resources, ensuring that revenues are re-invested in the economy for future generations.
Finland emphasizes on state involvement in key sectors while promoting innovation and competitiveness. The Finnish government has implemented policies that protect national industries and encourage research and development, leading to a robust economy.
The Need for a Balance
While capitalism has proven to be a powerful engine for economic growth, it is essential to recognize that unchecked capitalism can lead to significant inequalities. A balanced approach that incorporates social safety nets and regulatory frameworks is crucial in ensuring that the benefits of capitalism have a wider reach. This balance plays a vital role in the face of rising income inequality and environmental degradation.
The Future of Capitalism in the 21st Century
As we navigate the complexities of the 21st century, capitalism faces numerous challenges, including rising inequality, environmental degradation, and the impacts of globalization. The COVID-19 pandemic has further exposed the vulnerabilities of capitalist systems, prompting calls for reform.
Lessons from Global Models
The lessons from China’s model and the experiences of East Asian nations suggest that a hybrid approach—combining market mechanisms with strategic state intervention—may be necessary to address these challenges effectively. Countries must prioritize self-sufficiency and sustainable development to thrive in an increasingly interconnected world.
Dr. De Zilwa’s insights into national capitalism underscore the importance of tailoring economic strategies to local contexts. By fostering self-reliance on internalizing revenue streams and reducing dependency on external markets, countries can create more resilient economies, that are better equipped to navigate global uncertainties.
Furthermore, Sri Lanka stands to learn from the successes of smaller, wealthier countries that have effectively implemented national capitalism since the 1960s. Countries like Belgium, Norway, and Finland have demonstrated how strategic investments and protective measures can co exists and foster economic growth and stability.
By adopting similar strategies, Sri Lanka could enhance its market share and drive economic recovery, leveraging its unique assets and capabilities.
Conclusion
Capitalism has the potential to benefit all segments of society when implemented thoughtfully and inclusively. The successes of China, East Asia, and Sri Lanka illustrate that adaptable capitalist models can drive economic growth and improve living standards. Dr. Kenneth De Zilwa’s balance sheet economic model provides a valuable framework for assessing a nation’s financial health and guiding policy decisions. As nations grapple with modern complexities, embracing a form of capitalism that prioritizes domestic profits, local needs and sustainable development will be crucial for fostering a prosperous future. By learning from diverse experiences and adapting to local contexts, capitalism can continue to evolve and meet the challenges of the 21st century.