Useless free markets and power of politics to allocate resources in society

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By: Hadebe Hadebe

O phutile matsoho, O shebile banna ha ba sebetsa! – Sankomota.

There is a disturbing illusion or assertion that economics can exist without politics. Or put differently, market fundamentalists believe that politics should and must not get close to the economy and its institutions. Thankfully, the recent developments in the world are quickly nullifying this extreme view concerning how governments and central banks interact. At the core of this change, among others, is the idea that an institution that carries a constitutional mandate such as the South African Reserve Bank (SARB) should be beyond the influence of politics. Therefore, its decisions should support the country’s political imperatives aimed at improving lives and facilitating development in broad terms in the same way the police acts to protect society from criminals.

This topic has received a lot of attention in recent years but for many people it makes little or no sense at all. Its context is not only confusing but it can also be quite complex. The only reason it is seen this way is due to the dominant position that markets are an optimum way to decide economic outcomes. However, this is not true. As such, it is important to illustrate the strong linkage between politics and economics as a way of building sound case for a sound approach in how these two elements should be aligned to benefit citizens. The failure to make economic policy a subset of politics ensures that the country continuously falls short to improve lives. This opinion piece will demonstrate how the “privatization” of economic function exacerbates poverty, inequality and unemployment as well as low growth. In fact, market fundamentalism is a dishonest way of keeping millions out of the economy.

In the book ‘The Illusion of Free Markets: Punishment and the Myth of Natural Order’ (2011), American criminologist Bernard Harcourt notes hypocrisy in how people insist on government-interference, yet they demand vigorous government action in imprisoning criminals. The main argument of this article is that the artificial separation of economics (free markets) and politics (government) can be thoroughly misleading and that the retention of this divide is responsible for the massive socio-economic challenges South Africa faces today. Taking cue from the University of Cambridge economist Ha-Joon Chang who argues that “the market is a political construct”, the view is that markets are closely tied to politics than a stand alone as it is often argued. The point advanced here is that economics and politics influence one another to a point that it is not possible to separate them.

It doesn’t matter whether one approaches this subject from the point of view of laissez-faire economics (neo-classical school) or the Marxist doctrine, the relationship between economics and politics doesn’t change. In that way, the ancient ideological fault lines separating ‘markets’ (capitalism on the right) and politics (socialism, communism on the left) could be outdated in today’s world. Harcourt sees markets as an illusion. These ‘invisibles’ do not exist in a vacuum but rely on government regulation or policy to thrive. Governments are therefore better positioned to to tame their virulence. The reason for the long-awaited ‘merger’ between politics and economics emanates from the fallout the economic crises create and poor responses by governments thereto.

¥ Politics concerns resource allocation, not banks

Political scientist Harold Lasswell says politics is about “who gets what, when and how”. This definition, according to Pakistani scholar Muhammad Zahid, “has encapsulated political behaviour around the world, with politicians being driven by political positions, resource distribution and outcompeting their competitors.” In his book ‘Affluence and Influence: Economic Inequality and Political Power in America’ (2012), Martin Gilens argues that the ideal of political equality “is perhaps impossible to fully achieve in the face of economic inequality.” As such, those with greater resources are “better able to shape government policy to their liking.” At worst, they favour structural arrangements in the economy that are agreeable to them. For example, the independence of the central bank and market-led policies fall in the category of preferred positions.

On the other hand, those who argue for minimal government intervention think that resource distribution should be determined by markets. Paul Samuelson argues, “in the real world, no economy actually conforms totally to the idealised world of the smoothly functioning invisible hand. Rather, every market economy suffers from imperfections which lead to such ills as excessive pollution, unemployment and extremes of wealth and poverty”. This position stands in sharp contrast to the view that this is a function of politics. Considering the growing inequalities in society, the laissez faire doctrine is under pressure to admit that markets aren’t capable to create fairness and justice.

The likes of Cambridge University’s Arthur Pigout long dealt with the problems created by market failure. Hence, government participation in sorting out the unequal distribution of resources gains prominence one more time. Also, the views of economists and analysts on the role of the state in the economy don’t really matter much whether they are positive or negative. What counts is that they take trouble to dissect and analyse what the treasury does. Economists deal at length will general failures of markets and that is where government intervention becomes topical. The interaction between politics and economics is a given and therefore cannot be ignored.

The point that is often ignored is that the subject of economics has little or no value without government. In the main, it is concerned with government economic policy, and economic theory and politics influence each other. The artificial separation between economics and politics therefore makes little sense in the bigger scheme. It is a fallacy to suggest that politics cannot direct economic actors and institutions, especially those under direct state control. That is not to say it cannot prescribe to banks and private funds what to do. In an understandable manner, Mboweni begs pension funds or retirement administrators to finance infrastructure projects instead of using the power of legislation. The cash hoarders will not voluntarily spend in the economy for obvious reasons.

¥ Politics needs to reign in markets

The nation state is perhaps the only form of political organisation humans have to assist them to respond to large threats like viruses, war, and poverty – markets become utterly useless in helping people to respond to catastrophe. When the coronavirus (2020) or global financial crisis (2007-08) besieged the world, governments were the first in line not only to protect people but they also provided huge stimulus packages to save economies, companies and jobs. But when all is well the view is that political intervention is unnecessary. And the present situation only allows a handful actors to make economic decisions and or to distribute resources. This is proving over and over again to be unsustainable.

Some form of permanent ‘truce’ between the opposing forces needs to attained. Or, politics needs to permanently take over the running of economies and not wait for crises. In the case of South Africa, the coronavirus is not a crisis but it simply adds to greater problems of poor economic performance, unemployment, lack of basic infrastructure, poverty, etc. There is therefore a good motivation for the state to intervene on a continuous basis to solve many of the challenges that have since been ‘normalised’ over time. But market fundamentalists are more than convinced that politics is an irrational force that interferes with the rational, optimal functioning of the market. Yet, they expect government to jump in hard times.

Chang says that extremists assume that there is “a scientifically definable boundry of the market into which political forces should not be allowed.” It is exactly this kind of thinking that led to the decision of giving ‘independence’ to the SARB. This idea was informed by a most weirdest idea that if politicians were to be allowed to go close to monetary policy they will create unending chaos. Increasingly, this fictitious borderline is quickly being dismantled both in theory and practice. Chan insists that this border never existed in any way, since “the freedom of the market is in the eyes of the beholder.” Many economists and politicians now favour new monetary policy theory which is premised on the argument that fiscal and monetary policies should be complementary.

In this regard, the likes of Trump and deputy finance minister David Masondo have been criticized for interference with the central banks in their respective countries. Their views were seen to be impinging on the old doctrine of central bank independence. Nonetheless, the artificial divide between politics and economics has long been challenged. At the time of the 2007-08 financial crisis, former US president George W. Bush defended government’s USD 700 billion stimulus package to strained banks as “a continuation of the American system of free enterprise, which rests on the conviction that the federal government should interfere in the market place only when necessary.”

Most governments in advanced economies appear to see the government’s interventionist role in the economy as more permanent rather than temporary. British-based publication The Economist points out, “the forces encouraging governments to retain and expand economic control are stronger than the forces encouraging them to relinquish it.” What’s most baffling though is that South Africa is taking the most conservative stance. Instead of tapping into the massive arsenal stored in the SARB, a decision has been made to borrow from international credit sources. While finance minister Tito Mboweni prefers zero-based budgeting, which is another term for austerity, government spending across the world continues to climb. In 2019 alone, fiscal spending reached 38% of the GDP in the developed world, and is still rising. The interaction between fiscal and monetary policies plays a huge part in this. For instance, the British government ‘borrows’ from the Bank of England (BoE) to fund its expenditure.

The rapidly growing gap between richest minority and the rest of the population creates headaches for governments across the world. In his book ‘Capital and Ideology’ (2019), French economist Thomas Piketty points out that governments resort to heavy taxation of the incomes and wealth of the richest to deal with resource distribution. However, the rich mischievously hide their wealth in tax heavens, or they simply refuse to share their fortunes. In South Africa, corporates and the wealthiest pay less tax than both income earners and value-added tax contributors.

The paragraphs above show that the government is an important economic player by far compared to the private sector and its market doctrine. Chang sees the debate on what constitutes a free market as a futile and meaningless exercise because “there is no such as a free market.” He continues to point that all that happens in an economy (market activity) occurs within clearly define rules, laws and institutions. At the end of the day, all these are defined by ethical and political assumptions. However, in South Africa there’s a rigid stance that free markets should supersede everything, including politics. This makes one to wonder what exactly is the purpose of politics if the massive pushback from market fundamentalism is allowed at the expense of freedoms of everyone.

¥ Power relationships affect the economy

South Africa is stuck with an anomalous situation where financial markets are at least five bigger than the real economy. The overfinancialisation of the economy has created a false notion that markets are untouchable, and therefore they should not be disturbed. Financial markets want freedom to move funds and wealth in and out of the country without anyone telling them what to do. The late Malawian economist Thandika Mkhandawire lamented the power that the financial sector has over the South African economy. What this means is that critical decisions about the distribution of resources (or asset allocation) in the economy rest outside the power of politics. That explains why the ANC governance in the past twenty six years is seen as a failure, especially in both social and economic fronts.

The country is hamstrung by a not-so-easy to understand preference for markets as if they are a panacea to everything. Market fundamentalists appear to ignore the fact that their standpoint isn’t helping to solve many problems facing the country today. The present thinking requires a different approach that would facilitate a truly inclusive economy that would be beneficial to all. The dim view of government in as far as economic management is concerned needs to be revisited in the light of the rapidly changing world of economic theory. The economic policy is not a responsibility of markets, large companies banks and the JSE. These economic players hold more decision-making powers than anyone can imagine. Hence, the dictatorship of “market sentiment” goes unchallenged.

What is upsetting is that monopolies have market power to make a number of economic without question. These include the types of products and who can consume them using price and advertising. They together with people with income and wealth hold more power decide who can participate in their spaces and who has to be excluded. Those with money also try to influence people not to develop views that would challenge the status quo. The black middle class and their white counterparts are worst culprits in this regard. The present social-political-economic order is lobsided and is therefore not good for the black majority. But it is this falsely conscious class who form the first line of defense to help protect an economy and its institutions that add no value to large sections of the population.

False consciousness is a problem when it comes to the general opposition to nationalization of the SARB and sale of state assets, for instance. What the black classes do is to side with those who want SAA sold even if that transaction is likely to strengthen the overall position of a economically dominant group. As regards to the SARB, one important function of this institution is providing commercial banks with liquidity which enables them to issue credit to