Avoiding the Revolutionary trap of large wealth gaps in a capitalistic world

P Rajagopal Tampi

Introduction

One of the biggest threats to our peaceful human existence arises from wealth disparities around the world. Great wealth disparities in combination with extremely high debt levels create the fertile ground which have sparked several mass uprisings throughout the ages, the French Revolution (1789 ) and the Spanish Civil War (1936) to name a few. These occurred when the world population was 780 mn and 2.01bn respectively. That’s a far cry from the world population which stands at over 8 bn today. Just imagine what sort of loss of lives and destruction, wealth disparity-based revolutions would entail in todays world? Aided by the exponential growth in money supply and the multiplying power of Twitter and social media to communicate at scale instantly!

Migration to the European continent of the poor from the African continent and elsewhere and to the US from Mexico and South America is driven by inequality and the dreams to have a happy and fulfilling life. Maslow’s¹ basic necessities of food, shelter and security are not met in their home countries. The diversity of populations in European nations is rising due to migration. Diversity brings in change and increases challenges to leadership for peaceful governance.

India's richest 1% of the population hold 42.5% of national wealth while the bottom 50%, the majority of the population, owns a mere 2.8%. India's top 10% of the population holds 74.3% of the total national wealth while the bottom 90% holds 25.7% of national wealth². This high level of wealth disparity needs to be recognized and addressed with urgency particularly because India stands on the threshold of a golden era. An opportunity which comes but once in 300 to 500 years, not to be squandered away.

How is this a threat to our lives?

The British colonial power could not muster enough police, military strength or the resources to quell the ground swell of Quit India movement when the population of India was a mere 340 mn and so they had to leave India in a big hurry. Today, governments of such nations with large populations will be powerless to control or overcome a revolution initiated by the masses. The powers that be will be overthrown, the financial systems trashed, lives, wealth lost and anarchy and destruction will reign. Social media and technology serve the purpose of easily scaling communications in a revolutionary environment. Most times, going by history, the succeeding leadership will not be adequate to meet the challenges of running the nation post the revolution, leading to a prolonged period of greater danger, strife and misery for the population.

With the scaling of the population and the GDP growth of countries, the amounts involved in financial booms and busts is expected to rise exponentially and therein lies the danger. Money shifts to a tiny percentage of the richest people in the capitalistic world creating gigantic imbalances of wealth. In a country like India, this is very much visible (see article cover photo). Is it not advisable to take preventive measures?

Pitfalls of Business

In 2000, we had the “Internet Bust”. New technologies such as the internet, and the web technologies produced a multitude of loss-making companies which grew to stratospheric valuations based purely "on eyeballs" till the bubble burst. In 2008, Wall Street and the US mortgage crisis Credit Default Swaps blew up when Lehman Brothers collapsed. We are seeing another bubble build up with “Unicorns” this time. The bubble is under severe strain in recent times. The layoffs have started in large established tech giants like Meta, Microsoft and Amazon and also in Indian startups. What is the root cause of financial bubbles which are the lead indicators for much misery to follow?

In short, it is the hysterical greed of business in a capitalist framework. The framework is not to blame, it is the best that we have, but the humans operating the framework are.

Threats from global financial centers include, but are not restricted to, financial manipulations like creating exotic, opaque financial products locked in serial chains of global reselling and hedging result in the intentional inability to calculate risk. Such products are uniquely designed for large scale profiteering by Banks and Financial Institutions. The last person in the chain ends up holding the empty can. Risk and debt capital both germinate and grow bubbles. The latest entrant is galloping technology and innovation which are exploited by the greedy on a market of naivete.

Collusions between bankers and businessmen lead to “evergreening” of loans. The tri-partite relationship between Government Ministers, Banks and business men breed “crony-capitalism” and the sudden meteoric rise of some businesses on borrowed money, returns for which the underlying business does not produce.

The current stratospheric valuations of most Unicorns are not a result of naivete. There is so much liquidity sloshing around in the system that PE players have begun colluding to provide serial exits for each other pocketing huge unjustified profits from companies (“Unicorns”) that are not even profitable. This is financial impropriety at its worst in the garb of risk capital. It creates huge bubbles which make economies unstable. Yet there are no laws governing such acts. The original companies that sacrificed profits and shareholder returns for meteoric growth included Amazon amongst others. The basic principle of growing a business profitably has been relegated to an adage of a bygone era.

The exponential penetration of technology in all aspects of our life is a transition that begets opportunities for the crafty to exploit the naïve during the nascent period. An example would be cryptocurrency.

Arthur Anderson a global auditor’s collusion with Enron led to its downfall in 2000. This was followed by the collapse of Worldcom and Tyco leading to the Sarbanes -Oxley Act. The role of auditors and consultants acting in concert needs leaves much to be desired. I know of a case where the Promoter hired a top consulting company for a study report to promulgate his own ends on the business. I also know the CEO of a reputed consulting company who was offered a saliva inducing bribe to give a specific false evaluation of the customer company. Fortunately, this CEO declined to provide such a false evaluation. The Satyam Ltd scam in India in January 2009, happened due to falsification of accounts by Ramalinga Raju, which had grown to such proportions that in his words “he was riding a tiger which he could not control nor could he get off”. The truth about London and Wall Street Financial centers is wonderfully summarized in the words of a bonds salesman “Finally, the sweetness of the moment dulled the pain of knowing I had just placed my most cherished customer in Jeopardy”³. Tracing money through the cryptocurrency eco-system is difficult, leading to its use for funding illegal activities. The FTX and Wirecard collapses are recent telling stories of business greed and depravity. Recent IPOs of in the Indian stock exchanges like PayTM, Zomato and Nykaa have deprived retail investors of upto 75% of their investment while favouring extremely profitable exits to VC and early investors.

What can Business leaders and Governments do?

During each of the busts or 2000 and 2008  and at present, huge amounts of capital has flowed to make the rich, richer and the small investor poorer weakening our capitalistic economies. If the same amount of money had been put to use in building schools, providing healthcare and creating jobs, there would have been greater wealth equality in society. There may not have been the need for quantitative easing. Inflation would have been controlled, debts repayable and currencies not devalued.

The best economic model that we know of, capitalism, needs many of its flaws controlled and eliminated as we progress. The aim of this should be one-pointed; to reduce wealth disparity from crossing levels which will pose a threat to our peaceful coexistence.

This is an area where, business leaders and governments need to be more vigilant and pro-active. It can be achieved in two ways, by bringing in self-regulation (by business leaders) and secondly by improving regulatory mechanisms. The first is a very big idealistic ask. Regulation is lagging woefully behind the unholy imaginations of crafty businessmen aiming for the biggest quickest buck. The issue of growth must be balanced with financial propriety i.e. business profits. Certainly the value of the money of retail investors is not less than that of VCs and early investors. 

The scale of the wealth gap problem is so large that governments will not be able to address it purely through regulation. There is a need for self-regulation within businesses. Like the Code of conduct in the Tata Group of Companies, better Corporate Governance and promoting leaders with integrity. Industry bodies like CII, FICCI, Nasscom, ASSOCHAM and others should devote a track to Corporate Governance issues. SEBI should mandate that a company must be profitable for 3 years before filing for an IPO. 

Entrepreneurs are the modern-day equivalent of past monarchs who brought change, set directions and brought about progress in the world. Entrepreneurs should care that their creations should change the world for the better, not to increase wealth disparity. A detailed study of the capitalism will not doubt reveal areas of weaknesses and all that can be done to remedy it.

Conclusion

The world today does not have a better system than capitalism which expands the pie for all. The weakness lies in the division of the pie. That is what we should focus on.

As part of the process of change and progress made by the world, a conscious realization that endless growth of wealth disparities will be destructive to our collective peaceful co-existence must be developed and supported by business leaders and governments. 

Regulation to counter financial bubble build up and loss of money by the small retail investor to the rich must be put in place. Technical innovations which aim to bypass global financial systems devised by crafty technology and financial innovators are likely recipes for bubble generation and need to be watched and regulated closely.

On the flip side, sometimes, competition in business augurs very well for the country and its citizens. When Reliance slashed telecom tariffs during its launch of Jio internet and mobile a few years ago, it started a price-war between telecom vendors in India. This turned out to be a very large boon for India. It made the mobile phone and telecom tariffs very affordable to every Indian, even in the villages. Rural India leap frogged from no IT/connectivity to mobile IT/connectivity skipping the personal computer and landline based internet stage  altogether. India has capitalized on this boon further by building UPI based payments infrastructure extremely successfully. This has resulted in huge financial inclusion. The mobile phone has provided access to internet and globally available information to even the poor in rural India in local languages. More recently, India has successfully used this great advantage to build a unique vaccination platform and direct benefits transfer system accessible through mobile phones.

The productivity increase of Indians, due to this great fortuitous development in a country with a population of 1.4 bn will play out in the decades ahead. This is something to be celebrated, lauded, cherished and built upon by all Indians.

If only we could come up with more such business solutions!

 Notes:

1.      1.       Maslow Hierarchy of needs” Theory of Human Motivation”, 1943

2.       2.    https://www.livemint.com/news/india/india-s-richest-1-holds-over-40-of-national-wealth-report-            11579534691272.html

3.       3.   Liar’s Poker, Michael Lewis pg 217. 

 Copyright 2022 © Commander P Rajagopal Tampi (R)

The views expressed are the solely that of the author. There may be other views existing on the topic and the author’s intention is not to create any conflicts.