Political and Economic Freedoms Together Spawn Humanity’s Miracles

Wednesday, June 02, 2010

By Temba  A  Nolutshungu

Temba NolutshunguEconomic well-being is a consequence of freedom. In South Africa, with a formally recorded unemployment rate of 25.2 per cent (a figure which does not include those who have given up looking for work), the disjuncture between political freedom and economic well-being reflects a potentially cataclysmic state of affairs.

In July 1794, Maximilien Robespierre, revolutionary republican, radical democrat and driving force behind the Reign of Terror in revolutionary France, during which some 40,000 French men and women died on the guillotine as ‘enemies of the nation’, was put to death by his political opponents. Moments before his death, he addressed the mob that used to adulate him but now was baying for his blood, with the following words: ‘I gave you freedom; now you want bread as well.’ And with that ended the Reign of Terror.

The moral we can draw from this is that while there may be a link between political freedom and economic well-being, they are not the same thing.

Economic well-being is a consequence of freedom. In South Africa, with a formally recorded unemployment rate of 25.2 per cent (a figure which does not include those who have given up looking for work), the disjuncture between political freedom and economic well-being reflects a potentially cataclysmic state of affairs. A danger exacerbated by successive political administrations repeatedly promising all sorts of benefits to their constituencies.

To deal with the challenges that face us, we have to clear away certain misconceptions.

Job creation is not a role of the state. For jobs to be sustainable, they have to be created by the private sector. Government generated jobs are at the taxpayers’ expense and amount to subsidised employment. Being unsustainable, they have no positive economic consequence. The private sector is the main creator of wealth, and the state sector a consumer.

Money is merely a medium of exchange for goods and services and should therefore relate to and reflect productivity. When I visited post-communist Russia and Czechoslovakia in 1991, the joke doing the rounds was that the workers pretended to work and the government pretended to pay them. Thus, in my opinion, when we talk about meaningful job creation we should focus solely on the private sector.

This begs the question as to which policies should apply to private enterprises. Which ones will enhance their productivity and which retard it? What should be done?

Let’s examine the principles that underlie the simplest of exchanges between two parties. Simple transactions can serve as an example and a microcosm of the bigger economy. They should inform policymakers as to which policies are most compatible with human nature, because the human factor is pivotal in the economic context. Start far back in time with a hypothetical caveman who is skilled at hunting but inexpert at making a weapon for hunting. Our caveman meets a skilled weapon maker and agrees to exchange part of his quarry for a weapon. Both men come away from the transaction feeling they have profited by getting in return something of greater value to them than what they gave away. Sooner or later, the weapon maker finds that if he specialises in weapon making, instead of going hunting, he can barter the weapons for fur, meat, ivory and so on. He is in business. He prospers and all his customers prosper because they are now using more efficient hunting weapons.

What is important to note about this scenario is that there is no force or fraud involved. No third party involvement. No party that prescribes the rules of conducting business. The rules that the transacting parties uphold come about spontaneously. They comply as though with a natural order. This is what the late economist Friedrich Hayek referred to as the spontaneous order and part of this order is that private property is reciprocally respected.

From this simple example, one can extrapolate that in the modern day economy, in a country where the government refrains from interfering in the economic arena, there will be high economic growth and concomitant socio-economic benefits. In other words, if a government promotes the economic freedom of producers and consumers and allows them to engage in transactions that do not entail force or fraud, the country, and its people, will prosper. A sure way to reduce unemployment, improve education and create better health care.

These fundamental principles apply to all economies, regardless of the cultural context within which each has taken shape. The persistent ‘work ethic’ myth warrants critical attention. This view implicitly reinforces national or ethnic group stereotypes in terms of having or lacking a work ethic, the logical extension of which is that the poor are poor because they lack a work ethic and the rich are more successful because they do have one. A very dangerous view to uphold, especially when it coincides with race.

Before the Berlin Wall came crashing down in 1989, West Germany was the second biggest economy in the world while East Germany was an economic disaster zone. Same people, same culture, and the same families in some cases before they were divided after World War II. A similar judgment can be made with regard to the two Koreas, the South an economic giant and the North an economic abyss that continues to absorb foreign aid. Again, same people, same culture. And what of the contrast between Mainland China and Hong Kong, before 1992 when Deng Xiaoping ushered in radical free market reforms after announcing that it was glorious to be rich and that it didn’t matter if the cat was black or white so long as it caught mice? Yet again, same people, same culture, and the same telltale economic discrepancies. The difference caused, every time, by the degree of freedom allowed to the economic actors.

Since 1992, thanks to the most radical free market reforms seen in recent years, China now looms large as the third biggest economy in the world. And sadly, in contrast, in the words of Bertel Schmitt, ‘the United States picked up that socialist economic playbook that Deng Xiaoping was smart enough to throw away’.

The legislative and institutional framework within which economic activity takes place, and, in particular, the degree of regulation to which an economy is subjected, is the determinant of how wealthy a country and its inhabitants can be. In other words the degree to which governments allow individuals to exercise economic freedom.

These words in 1986 by Professor Walter Williams, author of the thought-provoking book South Africa’s War Against Capitalism, sum it all up: ‘…the solution to South Africa’s problems is not special programmes, it’s not affirmative action, it’s not handouts, and it’s not welfare. It is freedom. Because if you look around the world and you look for rich people, diverse people who have the ability to get along fairly well, you are also looking at a society where there are relatively large amounts of individual freedom.’

Author: Temba  A  Nolutshungu is a director of the Free Market Foundation.