At the Small Business Institute’s indaba in Bryanston last week, Judge Dennis Davis, chairman of the eponymous tax committee, bemoaned during his keynote address the parlous state — in his view — of the economic debate in SA at the moment. I agree with him, but for totally different reasons.

He made it clear his biggest gripe was with people he describes as “market fundamentalists”, and I guess he is referring to the fact that high-level economics in SA is somewhat dominated by bank-employed economists whose job is rooted in trying to understand market dynamics rather than to change them.

He makes the point, as anti-market fundamentalists (if that’s a real description) often do, that SA’s Constitution enjoins us to not only develop a free society but to build a society that provides the basic necessities for a decent life: health, education, housing and so on.

During a subsequent session, I was one of the members of a panel, and this proposition was put in a question from the floor. I replied that I didn’t think free markets and a providing society are necessarily at odds. I think free markets are a base requirement of societies that want better education, housing, jobs and so on.

Davis collared me afterwards and then followed a voluminous but rather scattered debate about a range of things economic and otherwise, during which I was challenged to provide evidence of the validity of the Laffer curve and a range of other gripping issues of modern economics of which I have a rather incomplete grasp.

I find it hard to disagree with Davis, whose feisty, combative but fundamentally well-intentioned nature is a credit to SA’s intellectual culture (though some of his judgments on competition matters sucked). But my disappointment about the economic debate lies not so much with “market fundamentalists”, which I think is a lazy slur. It’s the kind of rhetorical trick that the right uses too often about the left and vice versa, agglomerating everyone who disagrees with you in the most extreme version of themselves with the intention of inspiring rejection and hatred rather than debate.

Economists on the right have their problems, but so too do economists on the left. Their biggest problem is that just as economists on the right are dominated by bank economists, economists on the left are dominated by vociferous trade unionists and their supporters in academia.

The problem is that they tend to just ignore great slabs of economic history with a casual brush of the wrist.

The issue goes to the deepest heart of economic philosophy, and that is not going to be solved in newspaper columns, but the overall sense of it is clear. Classical liberals of the 19th century believed political freedom was essentially freedom from coercion and oppression embodied in a system of governance that maximised individual rights.

Social scientist Friedrich Hayek described it thus: “To the great apostles of political freedom the word had meant freedom from coercion, freedom from the arbitrary power of other men, release from the ties which left the individual no choice but obedience to the orders of a superior to whom he was attached.”

Socialists around the turn of the 19th century (the people against whom Hayek was mainly arguing) sought to add a new set of rights to this list — second- and third-generation rights, exactly the ones cited by Davis that we should be taking into account. But classical liberals distinguished between equality of rights and equality of opportunity, on the one hand, and equality of outcome on the other. For socialists, “freedom from want” had to be achieved before individual rights have any meaning.

Great idea of course, but the problem was that to achieve social justice, equality and freedom from “necessity”, socialists almost always fell back on what they believed was the “rational” utilisation of resources, which required central direction and organisation of all economic activity, usually involving some kind of blueprint.

The South African economic debate, it seems to me, really hasn’t progressed much beyond this point. The ANC still believes this proposition to be largely true, and all its economic acolytes and trade-union economists fight furiously to underpin this argument. The disaster that was consequent on this formulation for Europe and Asia goes blithely ignored.

And yet the economic debate internationally has marched on. There is a whole new focus on behavioural economics; the economic performance of China has opened a new discussion on whether it is possible to have economic freedom without political freedom; there are new questions about how culture affects economics; and then there is something called fiscal economics, which nobody thought was important until the 2008 financial crisis.

So what is the solution? To my mind it’s simple. The government-supporting economists need to acknowledge that prosperity and freedom are linked, which should be easy since it’s obvious and easily demonstrable statistically. And bank economists should be focusing on how to change society rather than simply how to predict it, despite the fact that the trading floor is screaming for a new rand estimate. And both should stop calling the other names.

By Business Day –
Tim Cohen