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THE awarding of the 2014 Nobel Prize for Economics to the French economist Jean Tirole of the University of Toulouse has caused me to ponder a bit about the nature of capitalism.
What is the essence of capitalism? Let us briefly analyse several strands, tie them together and see what answers we get.
First of all, Tirole was awarded the Nobel Prize for his contribution on how states could regulate big industries. As the financial news agency Bloomberg’s news report put it: “Regulators can use Tirole’s research to encourage powerful companies to become more productive, while preventing them from harming competitors and customers.”
And Robert Litan of the Brookings Institute in Washington DC added: “He believes that markets don’t always work and worries how to fix them.”
I like the word “fix” in this context. It is, in other words, a regulated freedom. The previous paragraph taught us that capitalism can work properly only when the market is truly free, when the playing field is as level as you can get it.
Monopolies, in other words, are bad for capitalism. They work against affordability and efficiency.
An example: when a single airline flies between two cities, it has an effective monopoly. And therefore the company could charge passengers an arm and a leg.
Now another airline enters the market, with cheaper air fares. You can bet anything that the first airline will not only improve its service, but that its fares will tumble as well.
Tirole looks to the state to regulate the market. If I understand him correctly, not in a socialist way, but to ensure that the market is really free. In other words, to make capitalism work.
But let us look at the problem from a different angle.
Inequality is a scourge
This week, the Credit Suisse bank published a report which, if our first conclusion above is correct, should cause warning lights to flash. According to the report, about 48% of global wealth is owned by 1% of the world population. And the gap is getting bigger, the report states, apparently confirming sensational research by the French economist Thomas Piketty earlier this year.
It also confirms the conclusions by British development agency Oxfam, according to which the richest 85 individuals in the world own about the same as the poorest 3.5 billion of the world’s population.
For several reasons, this is not a healthy situation. It is devastating for societies’ internal cohesion. It deprives economies of millions of middle-class consumers and depresses growth.
It certainly is not a level playing field. It is not a free market, but a skewed one. And that is not healthy capitalism.
The question is: what do we do about it? Do we, as the ruling ANC in South Africa does, shout about poverty and allow the playing field to get ever more uneven?
When well-kown editor and journalist Mondli Makhanya spoke at the Aardklop arts festival this week, he told his audience that about 18 million poor people receive state allowances. “And it did not solve the problem. It brought relief to people, because those people do not go to sleep hungry any more, but it created dependency.”
Hand-outs don't alleviate poverty
He said small peasants do not grow crops any more, because they know the state will pay a few hundred rands out every month. “We haven’t developed a culture of entrepreneurship. On the contrary, we have destroyed that culture. There is a need for creative redistribution.”
Basically the same message may this week be read into a report by the Fraser Institute of Canada. For the last 20 years, this institute has analysed the extent to which 151 states’ economies are free against an index consisting of 42 distinct variables. These are grouped in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business.
The report has been published since 1996. Studies based on the report have, according to the 2014 report, “virtually without exception... found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates”.
Indeed, graphs in the report show that the poorest in economically free countries make much more money than those in unfree countries.
Not surprisingly, Venezuela – the country with which both the ANC and the EFF flirt so happily – is regarded as the world’s most unfree economy. And as it happens, the Venezuelan economy has just about collapsed during the past few years.
As for South Africa, in 2012 the country was placed 93rd with a rating of 6.73 out of 10. This contrasts badly with its ranking of 57th in 1990, before the ANC came to power (of course, under apartheid the economy was free mainly for whites).
What can we learn from all these angles?
Firstly, tackle the big players and their monopolies. Secondly, inequality that is too severe is bad in every respect. Thirdly, do not try to alleviate poverty by hand-outs. You may address the immediate problem, but in the long run you create even more problems than you solve.
And lastly, take the long view: free the economy. Be truly capitalist.
- Fin24
What is the essence of capitalism? Let us briefly analyse several strands, tie them together and see what answers we get.
First of all, Tirole was awarded the Nobel Prize for his contribution on how states could regulate big industries. As the financial news agency Bloomberg’s news report put it: “Regulators can use Tirole’s research to encourage powerful companies to become more productive, while preventing them from harming competitors and customers.”
And Robert Litan of the Brookings Institute in Washington DC added: “He believes that markets don’t always work and worries how to fix them.”
I like the word “fix” in this context. It is, in other words, a regulated freedom. The previous paragraph taught us that capitalism can work properly only when the market is truly free, when the playing field is as level as you can get it.
Monopolies, in other words, are bad for capitalism. They work against affordability and efficiency.
An example: when a single airline flies between two cities, it has an effective monopoly. And therefore the company could charge passengers an arm and a leg.
Now another airline enters the market, with cheaper air fares. You can bet anything that the first airline will not only improve its service, but that its fares will tumble as well.
Tirole looks to the state to regulate the market. If I understand him correctly, not in a socialist way, but to ensure that the market is really free. In other words, to make capitalism work.
But let us look at the problem from a different angle.
Inequality is a scourge
This week, the Credit Suisse bank published a report which, if our first conclusion above is correct, should cause warning lights to flash. According to the report, about 48% of global wealth is owned by 1% of the world population. And the gap is getting bigger, the report states, apparently confirming sensational research by the French economist Thomas Piketty earlier this year.
It also confirms the conclusions by British development agency Oxfam, according to which the richest 85 individuals in the world own about the same as the poorest 3.5 billion of the world’s population.
For several reasons, this is not a healthy situation. It is devastating for societies’ internal cohesion. It deprives economies of millions of middle-class consumers and depresses growth.
It certainly is not a level playing field. It is not a free market, but a skewed one. And that is not healthy capitalism.
The question is: what do we do about it? Do we, as the ruling ANC in South Africa does, shout about poverty and allow the playing field to get ever more uneven?
When well-kown editor and journalist Mondli Makhanya spoke at the Aardklop arts festival this week, he told his audience that about 18 million poor people receive state allowances. “And it did not solve the problem. It brought relief to people, because those people do not go to sleep hungry any more, but it created dependency.”
Hand-outs don't alleviate poverty
He said small peasants do not grow crops any more, because they know the state will pay a few hundred rands out every month. “We haven’t developed a culture of entrepreneurship. On the contrary, we have destroyed that culture. There is a need for creative redistribution.”
Basically the same message may this week be read into a report by the Fraser Institute of Canada. For the last 20 years, this institute has analysed the extent to which 151 states’ economies are free against an index consisting of 42 distinct variables. These are grouped in five areas: size of government, legal structure and security of property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business.
The report has been published since 1996. Studies based on the report have, according to the 2014 report, “virtually without exception... found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates”.
Indeed, graphs in the report show that the poorest in economically free countries make much more money than those in unfree countries.
Not surprisingly, Venezuela – the country with which both the ANC and the EFF flirt so happily – is regarded as the world’s most unfree economy. And as it happens, the Venezuelan economy has just about collapsed during the past few years.
As for South Africa, in 2012 the country was placed 93rd with a rating of 6.73 out of 10. This contrasts badly with its ranking of 57th in 1990, before the ANC came to power (of course, under apartheid the economy was free mainly for whites).
What can we learn from all these angles?
Firstly, tackle the big players and their monopolies. Secondly, inequality that is too severe is bad in every respect. Thirdly, do not try to alleviate poverty by hand-outs. You may address the immediate problem, but in the long run you create even more problems than you solve.
And lastly, take the long view: free the economy. Be truly capitalist.
- Fin24
