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The party pooper

Have the fiscal warriors thrown down the gauntlet to unhappy workers?
Finance Minister Tito Mboweni's MTBPS may have been a signalling for a very tough budget come February 2020. Image: Jairus Mmutle, GCIS

Finance Minister Tito Mboweni’s Medium Term Budget Policy statement must certainly go down as one of the economic highlights of the past year. It reminds me of one of those mischievous moments when you are in a silent reverent group, and you scream hysterically: “FIRE!!”

Apart from load-shedding, the MTBPS’s sombre message was the ultimate party pooper – or perhaps funeral wake pooper. In retrospect, one can only wonder whether there was some ulterior motive other than signalling a very tough budget come February. Economists often forget, or perhaps even deny, that emotion and sentiment are more important economic drivers than maths, theories and statistics. One may take heed of Nobel laureate economist, Robert Shiller’s comments that “gossip, half-baked philosophy, and fake news drive economics — not only numbers”. Could South Africans be talking themselves to death?

I have argued previously that our own debt hysteria has to be tempered by the global context. But not so well bull-horned, perhaps for good reason, was a subtle throwing down of the gauntlet to labour. A conspiracy theorist could be forgiven for connecting some obscure dots between Mboweni’s message of doom and the South African Airways strike. Is organised labour flexing their much weakened muscles? It’s early days yet but much of the Minister’s stance seems to have been shaped on a textbook austerity approach that has had very mixed results elsewhere and that has contributed in no small measure to growing populism: polarising society between haves and have-nots and the establishment versus the rest: umbrellas in Hong Kong, yellow vests in France and ancient stones in Greece.

By its very nature, fiscal austerity logically and immediately cuts into GDP and slows down economic growth. Its benefits may be longer term, but the short term impact is often disruptive when it leads to job losses (civil servants and elsewhere); higher taxes; lower disposable incomes and reduced spending. One cannot dispute the need for the medicine. It’s the side effects that should concern us – especially if the medicine has to be swallowed by a powerful, ideologically driven, intransigent and angry labour bloc and the despairing unemployed. It is extremely lame to preach patience and endurance from an elitist podium to a hopeless mass. Democracy has shifted substantially from seats to the streets and planning solutions in plush offices at a centralised level are meaningless unless driven at ground and micro level. “Representation” is seldom that.

It’s a tired old refrain of mine but I might as well sing it again to the tune of auld lang syne.

Wealth creation is and always has been the outcome of contribution – creating something meaningful for others. That principle dates back hundreds of thousands, if not millions of years, when man first honed a rock into a hand axe. (See article here). It is the most enduring economic principle of all and gives us the real answer: easily understood and applicable at the lowest and smallest level of economic activity. It will ultimately rescue us. A large part of my writing, and my website has covered the detail.

It is no coincidence that the more we have moved away from adding value as the supreme principle of creating wealth and generating prosperity, the more we have created distortions and arguably many of the critical problems modern economies are facing. These include mountains of debt; over-financialisation and the ability to accumulate wealth without tangible effort; contamination of price discovery through overwhelming speculative and derivative markets; critical levels of inequality and the growing displacement of labour as a significant contributor to and beneficiary of wealth distribution, which in turn feeds market demand.

All it will take is to temper our pursuit of benefit and increase our pursuit of contribution. That means redefining our understanding of business, and indeed our economic system: away from the money and institutional paradigm to a relationship perspective based on serving each other. That is NOT a socialist view, but an evolved human perspective. The primary purpose of any enterprise is to serve its market. As the unfortunate industrial action at S.A.A. has shown us, nothing will bury a company deeper and more permanently than imposing its will on customers and letting them down.

Sound business principles are fully accommodated in having a common focus on wealth creation and ensuring optimum distribution that meets the legitimate expectations of all contributors and encourages continued contribution.  That implies changing our view of labour from cost to contributor and treating them as such. In turn they have to behave as such. Through understanding, transparency and regular information sharing, expectations can become flexible and manageable. This has to happen at an enterprise or local level. It cannot be centralised. The most important principle rests on the axiom that any economic construct has to reflect the best of what we are and can be. Do we honestly believe we achieve that through appealing to the worst in us: greed, fear and insecurity?

The underlying prospect, or dream if you will, is quite simple. At one point the financial froth will be blown off the global cappuccino economy and with it many of the 1%. Albeit with much pain and discomfort, we will be left with the real economy — the actual coffee. We will be able to smell it and taste it again.

A return to wealth generation based on productive enterprise should place emerging economies, especially those with abundant resources, in a better position than they are now.

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Correct, squire and compliments of the silly season to you too. On the button so to speak. I learned ya well! It’s not socialism by any stretch of the imagination. Socialism is legalised compulsion. I breathe therefore you owe me, and I shall use the full force of the state apparatus to collect my dues. Free enterprise, on the other hand, is enforced altruism: I have to produce something you (as in society) want/ need in order to consume that which you (as in society) have produced that I want/need.

We all consume wealth (eat, use water, use electricity and thousands of other goods and services others produce). The question is are you a net producer or consumer of wealth? Are you part of the productive or parasitic economy? A lot of people will maintain that they are definitely “productive” but without state intervention there would be no buyers for their product, thus they are parasitic. The simply trick is to ask would there be a willing buyer/ seller relationship for your product/service in the absence of state intervention?

Sadly the parasitic economy has run amuck. Its turgid tentacles infiltrate our lives ubiquitously. This is the reason money becomes debased and life is so hard. The laws of economics are never suspended. Since the parasites consume wealth, they drive up prices of goods and services by their demand. Essentially their money competes with yours in the free market. Since they produce nothing of value in return, the supply of goods and services is not augmented. It is supplied solely by the productive economy.

Who are the parasites? those close to fiat money, those that depend on the largess of the taxpayer and those who steal: be it your electronic goods or consuming that for which you do not pay.

@Richardthe Great….yup, great summary, thank you !

In short:

1] Socialism sucks

2] And a true free market capitalistic economy is still the best option we ever have [ had ? ]

Period.

The fact that SA need to take the medicine now is undisputed.

The fact that it will kill off many of the parasites is what is unpalatable to this government because the parasites represent the vast majority of those that do NOT contribute to the economic well being of SA but are their voter base.

The socialists are rapidly running out of other peoples money to steal !!!!

Thank you for another thought-provoking article Jerry.

The attitude of value-adding is the opposite of exploitation. Those who are in a position to add value to society needs the sign, or the messenger, to tell them where this value-creation is needed. In a socialist society, this attempt at value-creation is directed by a centralised authority who always lacks information. In the free-market society, on the other hand, the need and opportunity for value-creation are conveyed by the price-signal. When the entrepreneur calculates the opportunity to create value, he has to consider the value, or cost, of his inputs, relative to the value of the finished product. This process tells the entrepreneur where society needs value.

When a central organisation determines the minimum wage, and abuses the legal processes to enforce wage increases, then the results are general destruction of value. This leads to the exploitation of the value of the labour of the unemployed. The value of the labour of those who can’t find jobs in the depressed economy that results from the restrictive labour laws is expropriated and redistributed among the privileged and politically connected union members who do have jobs.

What is the value of a job? The salary? The working conditions? The bonus? The value of a job should be measured by the amount an investor has to invest to generate an amount that is similar to the salary. At a 2% dividend rate, an investor needs to invest R12 million to generate an income of R20 000 per month.

So, in effect, a job does have a capital value and labour unions steal the value of that capital from the unemployed and distribute it among their members. They exploit society.

The factors of value-creation, contributing to society, satisfying the needs of the consumer, benevolence and charity are inherent to participants the free-market mechanism. Exploitation and the destruction of value is inherent to the socialist project.

That is why, after 25 years of ANC rule, we have very little value-creation left, while value-destruction and exploitation are widespread.

@Sensei….too true !

Well summed, and totally agree

At the core of all our problems lie the reason. That is the governing party. If our governing party saw themselves as serving the country rather than serving themselves, we would have been able to withstand the global economic ebbs and flows and still grow and sustain an economy in which jobs are created. In stead, the corrupt cadres helped themselves and destroyed the infrastructure. Now they are scratching their heads and wonder what went wrong.

Focusing just on “Wealth creation” by itself is NOT the magic panacea Schuitema enthuses it to be.

Solving SA’s economic problems is like using a pair of scissors. You need TWO blades, and they must BOTH work TOGETHER .

The 2nd blade is Social Discipline.

Perhaps the Feb 2020 Budget won’t be as bad as expected, simply because Govt will pull “prescribed assets” out of the hat!

In one swell swoop, mounting Govt & SOE debt problems will be solved in a jiffy.

…and please don’t forget to invest some ad-hoc lump-sum to your good ‘ol RA Fund before 28 Feb 2020!

Want to see economic growth? Drop income tax for Indiv & Comp to 15% (like Mauritius) and then you’ll see econ activity picking up! (Oops…I retract my statement! My error! Unlike MAUR, SA does NOT have effective rule of law & property rights are not held sacrosanct…dropping tax alone won’t fix SA)

Ironic that, at the end of the article, you insist that this is NOT a socialist view. If it’s not then it is at least an altruistic view. Now how do the the altruists a quite the means to keep giving? Is it turtles all the way down?

And I thought value creation was measured using NPV.

It is easy to focus on NPV as it is measurable and in theory easy to maximize. When you add stakeholders then things get tricky. This results in a hodgepodge of competing agenda’s (employees, customers, community members, government officials, environment, terrorists, blackmailers and thieves).

South Africa’s dismal performance is not the result of capitalism, it is the failure of ideology, governance, and leadership.

Successful countries like Singapore and China used high economic growth and low population growth to jump ahead.

The topic you’ve raised is serious but the outcomes you suggest are fanciful. It is clear that you are not a capital creator but rather an observer pulling theories from the sky that if put into action solve what is a serious economic malaise. Your problem (South Africa’s) is rather simple – those in power whether it be political, business or social are benefitting enormously from the current system. Therefore it will not change. The solution then has to be an individual one as opposed to a collective – make a decision. A decision that results in definitive action and sacrifice and find a new home where your value system is embraced and your children will prosper

@De Guzman…your post in short:

Emigrate

However, bear in mind, this is not an option for all !

Thanks Jerry….great article as usual !

So:

If one looks back at the Golden Years, ie, 1950’s to early 2000’s, the West as we know it prospered amazingly well !

Why ?

It was for all intents and purposes, a reasonably free market capitalistic system, growing per capita across the board for most

Unfortunately, at the same time, the banksters got too powerful as they got better at gaming the system, while the monopolistic Corporates got more and more greedy, and started squeezing everyone else out the market [ not only by sheer size, but by farming out to low cost producing countries like China etc too ]

So what you have left now in a nutshell, are a few basic Corporate behemoths that are able to borrow money cheaper than it costs, and leverage to even greater advantage in a self perpetuating orgy that benefits only themselves and their shareholders

Fantastic if you are part of that elite, while the masses are left further behind

A race to the bottom if ever there was one !

Pity, because, as I always stress, Capitalism is not PERFECT, but it’s the best we got

The reality is, like the common fault with most matters, it got hijacked by GREED

And the nett result which we are experiencing now is giving fodder to this rise in popularity of socialism/Neo Marxism [ the masses that are getting left behind ], which is a faulty knee jerk reaction to this corrupt capital system we have now, and unfortunately will only make things worse !

Eish

End of comments.

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