Is the Free Market Monster, a Monster, After all?

Most of the South African propagators of Socialism normally question the validity of the current economic system in our country – the free market economy. In their view, it is a monster that does nothing but promotes the income disparities between the haves and have nots – thus, the descendant Europeans and Afrikans. Although they’re not entirely wrong, I normally get a sense that they’re not aware of the basic fundamentals of the free market economy. Here’re the few:

- In a country, property rights for citizens are ensured.

- The allocation of recourses – mainly goods and services is left in the hands of private individuals other than government.

- The above ensures that prices of the goods and services are determined by the forces of supply and demand. (If there’s high demand or low supply for a product, the price will increase – the opposite of this is true.)

- Government intervention in the allocation of resources should be limited. The exception is made in the Strategic Industries like: Electricity (Eskom), Water (Umngeni Water), Arms Manufacturing (Denel) and other SOE’s. It is believed that private individuals are incapable of running such industries – due to their magnitude and because mostly, these are public goods.

- Monopolists are discouraged because they retard economic growth, thus, competition is encouraged to promote, inter alia, innovation which ensures that more goods and services are produced, which in turn will promote economic welfare and economic growth.

- Promotion of Foreign Direct Investments to ensure the transfer of capital, skills and technology.

The World Bank and the IMF have proposed several Macroeconomic fundamentals that should be maintain to ensure that the FME function smoothly – the so called Washington Consensus: Inter alia, trade liberalization, low inflation, and lower budget deficits. And much of the debate is deeply entrenched on the blanket promotion of this Washington Consensus to every country, regardless of the divergent development challenges and historical dynamics.

Thus, it’s an economic system that ensures private ownership of property.

It is not a perfect system – as we have seen in SA (albeit this statement can be contested), but, the alternative systems (e.g. Command Economy where government is solely responsible for all the above) have failed tremendously and Free Market Economy is the only system that has created more social welfare in recent history.

What can be said about SA?

Was this a right choice (FME) for SA?

Would it have helped if the government nationalized all the private companies and run them itself (As it is the case in Eritrea, North Korea and Cuba)?

I do not know – if you’d ask me!

What do I think is the solution?

- We should promote education – free education is the only thing that comes to mind.

- We should have social medical security system which will ensure that even poor people access superior medical assistance (The so called private hospitals)

- Government should at least protect infant industries (like Clothes manufacturing) from imports – so that we ensure the growth of our own industry before we can complete globally.

- Government should at least own a 2 Gold Mines and 2 Platinum Mines (Commodity prices are high) to ensure that Afrikan people run the mines (Skills transfer) and the proceeds to contribute on the fiscus – I am thinking Free Education here.

Let’s do all these in the free Market Economy – A more developmental state, so to speak.

Although the above will require higher taxation (say higher taxation from the rich) to ensure income redistribution, history tells us that taxation is not always redistributive. Let me make an example: The VAT: Most goods that are subject to VAT are consumed by the poor because the more individuals; income increase, the less they consume these goods.

Corporate Taxes are normally passed on to consumers (in the form of price increases).

So, should we have done things differently after 1994? I do not know. But I do not think (my view) that an alternative economic system would have helped. The country is now well placed into the growth path. The international community (with which we trade) has more confidence in our abilities than they did 13 years ago.

In my view, as we move forward, our country is now ready for a more developmental state than it did, 13 years ago.