Capitalism and Socialism - Lecture Series Part -1 Notes

(Considering several questions around some of my thought process around liberalization, wealth creation and growth for all, I am going to present a condensed form of my lecture on this subject in "2 minute digest" series. This is the first part. Comments are welcome here or in any other forum as appropriate).

Capitalism and Socialism are 2 essential pillars of human eco-system. There is no one one model fits all in the Universe and both models back each other up. The obvious definition explains it all - Socialism ensures that everyone gets a fair share and Capitalism ensures that wealth is created so that it can be distributed. If it all that simple, then why do systems fail?

Systems fail because:
1. They do not complement each other sufficiently
2. Greed and impatience that is inbuilt in human instinct
3. Manipulated and immaturely introduced macro-economic policies

In the longer term, all three reasons play a equal role in failures; just that at some touchpoints one of them is highlighted more. In subsequent passages I will explain each one of them in detail.

Before we examine the structures of socialism and capitalism, it is imperative to understand that these social structures did not necessarily come out in the seventeenth century. While they have existed in preliminary forms (Robinhood was an early socialist!), both these structures came out as a fallout of the industrial revolution. As the industrial revolution laid the foundation to capitalism, it also led the way to a severe rich and poor divide, thus leading to a strong belief in socialism.

The second important fact is to realize that there has to be constant balance of one over the other. If either of the system progress on its own is unchecked, it will ultimately lead to a collapse because of a bunch of factors - most of which can be directly correlated to the three reasons stated above.

And the third important fact is to understand that International politics and diplomacy are not considered clearly in the underlying theories of these systems.

In the next part let us discuss the reason-1 in detail.

EBITDAT?

We all know that the billionaire investor Carl Icahn is a very shrewd investor. Of late, he has been sharing some of his views in his personal blog. And the latest one has a very interesting term that Icahn has coined - EBITDAT. Now for those of you who wonder what the last T stands for, it stands for THEFT. He jokingly says that the value of the company is not evaluated jusy by looking at EBITDA(which stands for Earnings Before Interest, Taxation, Depreciation, Amortization btw), but by also looking out at the corporate theft of the company. 

Icahn is not necessarily joking. The upper management of troubled corporations, particularly financial institutions are very smart in innovating techniques to protect and expand their persoanl financial assets immaterial of the fact that there is a financial 9/11 going on and their company contributed to this downfall and is falling as well. While it is perfectly fair that executives of great-performing companies get paid handsomely, when failures are also rewarded in hidden forms, that is when the second T kicks in and plays the most significant role in EBITDAT.

WB loses.. only this time not because of the Commies

West Bengal finally lost its golden chance boost employment and investment opportunities in the state. Only this time, one cannot completely fault the commies. For a change, the communists, with their more liberal leader Buddhadeb wanted to get the Tata Nano plant in Singur. As luck would have it, Mamta wanted to prove her might and she eventually did, by forcing Tatas to abandon the site and move off to a different place.

It is just ironic that such a problem happens to the Nano project which has the world watching with such an awe. It is also ironic that it didnt happen because of the communists.

Bengal is back into blackwoods, thanks to Tata saying goodbye to Singur. Now the hard fought land, whose value was estimated to grow in leaps and bounds that actually triggered of this issue, will once again be a wasteland, with no claims and drowned value; and several such areas of Bengal will go down in value as there will clearly be no more Indian investments (leave FIIs alone!) in the near future and some of the already made ones may just be urging to leave.

Politics at play against wealth creation. Surprisingly the commies watch it stunned.

The ICT Convergence

So after several years of talking, the industry is now walking the talk. The ICT convergence is set on full swing and a formal competition is also launched. Apple iPhone set a trend bringing in an instrument that exhibits potential to be the device of the future. And with Google & Amazon joining hands for the next one, threatening Apple's leadership in music industry along with, this competition is bound to become an interesting one.

When the most creative and risk-taking minds of the globe compete with each other, lets hope that our quest for the holy grail will become a reality soon. At some point we will have a device that can do/be: lock/open doors of homes/cars, toll/metro pass, camera/music/photos/games, internet/email/IM/video-conf, ration cards/passport/voter ID/driver license, remote control for TVs, TV/digi-movie screen, debit/credit cards..... I dont think I am dreaming too much. Most of this is already available in instruments today.. the SIM will be the alternate-blood of our life.

May we live in interesting times.

Stop it Merrill. You got Lynched

I couldn't control my laughter when I read this - Buy ICICI, Target 1010, advises ML .

Come on Merill. Stop advising people now. You have been bought. You have been shamed in public. And all smart egoistic investment bankers of Merill - THANKS for the comments, but we know better.

Wall Street Crisis and Why Financial Institutions Deserve this

Let me first start by assuring you that I am not a sadist. It is not good to see age old institutions crumble. It is definitely not good to see investors lose out millions of $$$ when such a crisis hits the street. But it is important to realize that it is the same set of greedy investors and limited-vision top-management that have caused downfalls of esteemed financial institutions.

The success of capitalism lies in the concept of wealth-creation. Remember that wealth creation refers to society in general. And this leads to betterment of lives of people. However financial institutions and greedy investors have read the text completely wrong. All they have managed to do is to just recycle wealth smartly.

And while taking someone else's wealth at the pretext of expanding it, the financial institutions have managed to keep a larger cut for themselves. As they ran out of ideas on this and the greedy investors pushed these companies to show increased growth every quarter, the companies hired brains from top schools, made them think like Shylocks and finally ended up innovating on stuff like sub-prime lending and reverse mortagages. In India, we have had similar innovations on sub-prime credit cards, unasked personal loans and improperly checked home loans.

The middle class, which is cursed to be a loser in every game, fell for this trap as usual. All these financial institutions have done is to suck blood of these unsuspecting middle class. When the loose foundation begins to crumble, these companies have no option but to cave in. Lehman, Merril Lynch, Bear Sterns, AIG - all are nothing but a failure in their own greed.. And with this downfall, they will take their greedy investors and unfortunately dependent industries and whole economy with them.

In India, good institutions like ICICI are also moving towards innovating on this sector. What everyone has to remember that success of institutions and economy & capitalism come by wealth-creation, not by robbing middle class and the like. I really hope that ICICI, HDFC etc.,
take good lessons from these fallen US giants. And IIMs and other institutions should stop teaching their students to be money bloodsuckers and instead show them the right way to make good growth.

And yeah, the rhetoric. The middle class should learn. After depression, sub prime, recessions, chit-funds, Harshad Mehta scandals, credit card payment issues etc., it is time to realize that only hard earned money and smart investments will sustain.

Hype Cycle for Emerging Technologies

(Source: Gartner's review-July 2008)