Swellendam: – There are two main ways in which governments become involved in our lives – through laws which are intended to control behaviour, and through a claim on economic resources to facilitate development and redress imbalances in wealth distribution.
The two are linked, but not absolutely. A government could have only a few laws governing the behaviour of its citizens, but could be spending large amounts of taxpayers’ money on state activities. Conversely, it could have many laws controlling public activities, but spend very little on anything else. Champions of free enterprise and free markets have always argued that minimum laws and a small government share of economic resources are necessary for economic growth and prosperity.
That capitalism is in a crisis is no longer seriously questioned. The real question is whether free enterprise is also in a crisis and will be seriously challenged and assailed as an exclusive integral part of capitalism.
For the two are different. Capitalism is a system which may need free markets to flourish, but ultimately its real purpose is the pursuit and growth of capital. Free enterprise is a state allowing maximum freedom of choice for all of its citizens, and the only system required is the protection and nurturing of these freedoms. It can be found in mixed economies and socialist states as much as in capitalist states.
A basic tenet of capitalism suggests that capital is a scarce resource and that its owners in the protection, pursuit and growth of capital are the ultimate gods of wealth creation. This is debatable. Apart from capital reserve accumulation World-wide, capital paramountcy makes some dubious assumptions about motive, and ignores the fact that great efforts, meaningful contributions to society and entrepreneurial achievements have seldom been linked solely or even mainly to this pursuit. Ingenuity and effort attract capital. It is not the other way around.
Free enterprise on the other hand does not concern itself about motive but only with one fundamental truth: that all value is determined by the ultimate customer in free, fair and legitimate transaction. An individual’s or even a company’s real worth is not determined by a board, a boss, experience, certificate, or asset ownership but by an end customer who finds his or her efforts worth paying for – by the ability to make a contribution to others.
Free enterprise and free markets are inherently a benevolent state implying service to the other. The profit motive, shareholder value and maximisation of returns on capital are inherently self-serving.
Ultimately you can never blame an “ism”, but rather behaviour in that system. Clearly a “system” has the propensity to promote or encourage specific behaviours but unless it is completely tyrannical and repressive, individual values will play the dominant role. So, to avoid ideological posturing, let’s accept that behaviours –individual, corporate, and state – have created something of a mess in the “free world” and have become a threat to the freedoms that the system was supposed to have promoted.
The argument that one of the conditions for economic prosperity is small government, as reflected in its share of national wealth creation, or gross domestic product, is contradicted by the table below. (Ranked according to Life Satisfaction). In the United States, for example, the government share of GDP is at its highest since the 2nd world war. The explanation that the state’s share increases as it acts contra-cyclically in times of recession does not account for a steady increase over the past 50 years. Most of the nations listed have shown similar government growth, with some at nearly half of GDP. To that one must add public (government) debt which in many cases exceeds the 60% to GDP prudent level for a developed nation.
To test the small government hypothesis, I included other economic welfare indicators. Denmark defies the assumption having a state involvement of about half of GDP, a marginal personal income tax of more than 50%, although a moderate company tax rate of 25%. Denmark’s public debt level is very modest. It ranks highest in the Gallup Life Satisfaction index; the Danes are amongst the wealthiest people in the world and income differences as measured by the Gini index are amongst of the lowest in the world. An important composite indicator covering incomes, education and health is the Human Development index. Here Denmark ranks 16th with Norway 1st.
A relatively high government share of GDP and high individual as well as company taxes have not affected the competitiveness of Denmark, Norway, Germany, the Netherlands, United Kingdom, Australia and the United States all of whom are ranked in the top twenty of the WEF competitiveness report. One, perhaps tentative conclusion one could reach from global experience is that countries need a high level of wealth creation and accumulation to afford higher government involvement.
Singapore may be the one confirmation of the small government argument. Its very low government share of GDP is based on very low company as well as personal tax. Its Achilles heel is high public debt.
But then, South Africa shows the opposite. Of the countries listed it has one of the lowest government to GDP ratios and a modest public debt level. Its real predicament is reflected in its relatively low per capita income; the low ranking of 123 in Human Development and of course the unsustainable conflict promoting income differences shown in the Gini index. The HDI ranking is perhaps the most telling – showing our real vulnerability because of poor education and health care.
South African tax rates come close to those of a developed nation, which reflect its ultimate dilemma of having too few taxpayers to sustain a higher government share of GDP. There are more people relying on social grants than there are people paying income tax to support them. To boot, life satisfaction in South Africa is one of the lowest in the world.
What the table confirms is that on its own the government share of national wealth creation, whether in tax or expenditure, does not present any real threat to free enterprise. There are far more telling things, such as the nature of government and the nature of its spending; whether it is incorruptible, efficient, effective and appropriate. Without these, the “2nd phase” in South Africa is doomed and a “mixed” economy will be a recipe for economic ruin. Greater state involvement requires “organisational renewal” in government itself and not only in the ruling party.
The real threat to free enterprise lies in the second aspect of government involvement in people’s lives – rules and laws that control individual activities and choices. The Legatum Prosperity index ranks South Africa 55th on personal freedoms. Norway is ranked 1st with Denmark 2nd and Australia 3rd. We also receive a disturbingly low ranking of 65 in the “social capital” measurement which is based on social networks and the cohesion that a society experiences when people trust one another. As desirable as they may appear, coercive interventions invariably have unintended consequences at least some of which could explain South Africa’s arguably crippled economic state.
Not only is there no clear link between state spending and a threat to private enterprise, in some cases it could promote freedom. As economist Cees Bruggemans has pointed out, none is more powerful than education and training.
Without knowledge we cannot be free.
Jerry Schuitema is an award winning journalist, author, retired management consultant and former economics broadcaster who focuses on behaviour in business & economics.