Eustace Davie: Economic growth requires an environment in which prices are freely formed

Prices, when left alone, “miraculously” direct all resources, including labour and capital, to their most productive uses.

Examine the South African economy to find any activities that are carried out on a basis of voluntary exchange between individuals, under circumstances where peaceful exchanges are not interfered with by bureaucratic action, where prices are arrived at wholly by agreement and I will acknowledge those activities to be capitalistic. But I then defy anyone to show how these activities are causing harm to the population at large.

The labelling of a particular type of thinking requires definition. In discussing capitalism, it is therefore necessary to provide a definition to avoid misconceptions. I define capitalism, free markets, free enterprise and economic freedom to mean “voluntary exchange between individuals free of third party intervention”. It is very difficult for anyone then to interpret the word or words to mean some form of evil activity.

It is true that the enemies of voluntary exchange will attempt to demonise any useful word or label used as a shorthand description of a rather vast subject. The process was described by Friedrich Hayek as “the confusion of language” some of which he considered to be deliberate. A good historical example is the word “inflation”. If, in the early 1900’s, you spoke about inflation, everyone would have known that you meant an untoward increase in the money supply, which would lead to general price increases. Now, if you use the word inflation, everybody takes it to mean general price increases. So, the same word, a century apart, has come to mean both the cause and the consequence. Is it then surprising that very few people understand the economic phenomenon of inflation or know what they are talking about?

There is a profound economic truth of which the socialists appear to be oblivious, which is that economic calculation is not possible in a socialist state. What is totally lost in a fully socialist state is the remarkable price system that allocates resources in a free economy. For instance, some of the most important information the Soviet Union was compelled to steal from the West, in addition to new inventions, was comparative prices, which are formed and constantly adjusted by the activities of buyers and sellers. The efficient functionality of any market is determined, in turn, by the extent to which buyers and sellers can interact freely with each other, free of outside intervention. Price controls and administered prices, for instance, cause major distortions.

Even access to Western prices, which socialist states attempted to apply to the allocation of available resources in their countries, provided merely a rough solution to their problem, the reason being that the consumers in the socialist states did not necessarily have the same hierarchy of values as the consumers in the Western countries where the prices were sourced.

The potential change in the hierarchy of values of an individual under starkly differing circumstance can be dramatically demonstrated. If you were in the middle of a desert and you arrived at an oasis where the inhabitants were prepared to exchange goods for water and food, without which you would die of thirst and hunger. If the only tradable good you had on you was an Oyster Perpetual Sky-Dweller Rolex watch, for which you had paid R584,981, would you trade the watch for the food and water you needed to stay alive? I suggest that you would make the exchange because your hierarchy of values would be substantially different in the dire circumstances.

Economist Ludwig von Mises had this to say on the subject, “The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under a socialist system is without precedent indeed in the history of human thought. The socialists cannot help admitting their crushing final defeat. They no longer claim that socialism is matchlessly superior to capitalism because it brushes away markets, market prices, and competition. On the contrary. They are now eager to justify socialism by pointing out that it is possible to preserve these institutions even under socialism. They are drafting outlines for a socialism in which there are prices and competition.” Mises differentiated between those proponents of socialism with and without an understanding of economics. “This refers, of course, only to those socialists or communists who, like professors H.D. Dickinson and Oskar Lange, are conversant with economic thought. The dull hosts of ‘intellectuals’ will not abandon their superstitious beliefs. Superstition dies hard.” He went on to add that, “They want people to play market as children play war, railroad or school. They do not comprehend how such childish play differs from the real thing it tries to imitate.”

Even with all the interventions in the functioning of markets, socialists are not able to prevent people from trading with each other, exchanging what they value less for what they value more. On balance, the overall results appear to show that the majority of people are making decisions that improve rather than retard their quality of life. It is only in the hell holes such as North Korea, Venezuela and Zimbabwe, where tyranny prevails, and the people are brutally restricted from making beneficial exchanges, that life remains static and grim.

The South African government ministers and officials constantly interfere with prices, in the mistaken belief that by so doing they can improve the outcomes for consumers. The current government perpetuates the socialistic practices of the apartheid government but at a higher rate of intervention. They blame the chaos that ensues on “capitalism”, instead of recognising that the problem lies with their meddling with a wide range of prices, including the prices of labour, pharmaceuticals, motor vehicles, electricity, insurance policies, medical scheme membership, bank charges and services, and there are threats to meddle in many more. Withdrawing and repealing all these interventions is the obvious way to bring about high economic growth, reduced unemployment and less poverty.

Author Eustace Davie is a director of the Free Market Foundation