Where in the world is it REALLY easiest to get rich?

This article is an answer to the wonderfully entertaining TED talk of Herald Eia on the question: Where in the world is it easiest to get rich?
I suggest you watch the video below first. It’s really good fun to hear this guy’s argument. (please paste into your browser):
www.ted.com/talks/harald_eia_where_in_the_world_is_it_easiest_to_get_rich
I decided to crunch some numbers myself too, to see, first of all, if his claim that the Nordic societies (Norway, Sweden, Denmark and Finland) are indeed the countries which fit this description, and not supposedly free-market America, or any other free markets. Secondly I wanted to evaluate his theory that this is so because these countries have huge welfare states which ensure first of all that they have superior free education, which prepare people to get rich; and secondly because equality of income (entailing high wages for ordinary workers and lower wages for managers) ensures that employers have to improve productivity by mechanising, resulting in higher productivity, and also in greater social mobility.
As a sample of countries to investigate, I chose countries with large numbers of millionaires, that seemed to have high proportions of millionaires as percentage of population. I left out for example, India and China, which obviously have low numbers of billionaires as a percentage because of their massive populations. I also discarded countries where there are only one or two billionaires, but because of a very small population the percentage of billionaires appears to be large (like Iceland which has only 300 000 citizens but one billionaire). I calculated the relative number of billionaires by dividing the population of a country by the number of billionaires, to calculate the number of people per billionaire. So, the lower the number the greater the percentage of billionaires.
I included some statistics to test various possible explanations for the number of billionaires per country. The countries are ranked according to the percentage of billionaires starting with the highest percentage first.

What is immediately clear, is that the three top performers in the table are Hong Kong, Switzerland and Singapore, all countries with exceptionally free markets and very low tax burdens. What that makes clear is, if a country is really serious about nurturing billionaires, free markets and low taxes are the way to go. So that already disproves the speaker’s thesis to some extent. The freest societies in the world, with the lowest taxes, no free university tuition or minimum wages to speak of and with low trade union presence, beat the other countries by a country mile.
What we also see, is that not all the Nordic countries are world-beaters in the billionaire stakes. The social democracy system (high taxes and spending on welfare benefits) has not worked to make Finland and Denmark top performers. So if the recipe suggested by the speaker (free education and compressing wages) is such a superior recipe to create rich people, why do these countries not perform better?
What is impressive about the Nordic countries, is how much they tax their citizens. The first question is whether this correlates with better education, as the speaker suggests. If he is correct, we would expect citizens of those countries to have more years of education and better-quality education.
First let’s consider how much education the average citizen has. The UN Education Index score (the column marked “EI”) is calculated by combining average adult years of schooling with expected years of schooling for children, each receiving 50% weighting. That gives a good indication of how far adults advance in education, including tertiary education. It is fair to say that the Nordic countries, while their education advancement is good, are not exceptional in this grouping. The same applies to their higher education enrolment levels, which are good, but barely suggestive of some kind of competitive edge. Certainly the US has on the whole similar or better figures.
What about the quality of higher education systems? Here we bear in mind that higher education in Nordic societies is largely state-funded as part of the benefits of a welfare state. Again, with the possible exception of Sweden at position 14, none of the Nordics does particularly well in the context of this privileged group of countries. The US outperforms them all in terms of both tertiary enrolment and quality of higher education. It is not alone. There is little doubt that the best higher education systems with the highest enrolment rates are the systems that are largely privately funded. (9)It turns out that “free” university tuition does not lead to more people studying, or getting better-quality education, after all (10).
Before dealing with basic education, which I consider later on, let us examine the theory that the welfare states in Scandinavia create income equality, and that that results in better prospects of social mobility. It is undoubtedly correct that the Nordic countries have more equality of income, which is in large part the result of their enormous welfare systems. The figures in the table above makes that clear.
There is furthermore good and convincing evidence that greater equality contributes to social mobility:

The question is however whether there is a price to pay for it. The next table examines that question by comparing income inequality with per capita GDP, growth and unemploymenthbin the same group of societies.

As can be seen, I divided the billionaire field group into three categories of equality:
• the highly equal Nordics, with their sub-30% Gini coefficients;
• a middle group between 30 and 40; and
• a high-inequality group with Gini figures over 40.
What is painfully obvious, is that the Nordic paradises have been stagnant in terms of growth in the last decade. Among the four of them, they have not managed a single percentage point of growth in ten years. By comparison, the unequal societies have been roaring ahead at an average rate of 16% for the ten-year period. And it bears noting that unemployment in the Nordics is almost double that in the unequal societies. This is the result of the fact, largely, that job growth in the unequal societies was more than three times that in the equal Nordics.
And as for billionaires, the unequal societies have almost double the number per capita that the equal societies have. Of course, there is a mixed bag in the middle group, that range from high-billionaire Switzerland to low-performance Japan.
What this chart shows, is that the famed equality brought about by the trade unions and the welfare states of Scandinavia, is most likely not what has caused their relatively high number of billionaires. Given the poor growth rates in those countries, that explanation seems very unlikely. Why would these paragons of equality offer such poor growth to the average citizen, but still be good for billionaires? It doesn’t compute. Surely if income equality was their competitive edge, that would have correlated with superior economic performance? It clearly doesn’t.
And it is in any event clear that there is a huge price to be paid for the straitjacket of equality into which these societies are forced. Sooner or later it catches up with you, and growth and job growth stagnate.
But it remains a fair question: Why do Sweden and Norway beat the US in the super-rich game? We now know that the high-equality welfare state of social democracy is not the reason. If that were so, it would have been fair to expect Finland and Denmark to beat the US too. And we would have expected all four these countries to have dynamic, high-growth economies – which they don’t.
Having said that, it remains true that both Sweden and Norway are free markets in their own right. In my book South Africa Can Work I deal with it as follows:
“As currently ranked, they occupy the following positions out of a total of 159 countries on the Economic Freedom of the World Index: Finland 20, Denmark 21, Norway 32 and Sweden 38, all well within the first quartile. The only criterion that identifies them as statist is size of government (tax, government spending, and so on). According to the other four criteria (trade policy, monetary policy, regulatory policy, and property rights and rule of law), these countries are very free.
In the following table, fiscal policy (size of government) as a factor has been removed from the ratings. The results are rather interesting:

Source: Daniel Mitchell (15)

As can be seen, according to the remaining four criteria, Denmark, Sweden, Norway and Finland are very free and, significantly, rank above the United States.”

So the first point is that, but for the welfare state that occupies a large section of each of their economies, these societies are economically freer than the US. What is more, until about 1950, Sweden and Norway had smaller governments than the UK, the US, Japan, Germany and France . In 1937 Canada’s government spending, for example, was 25% of GDP, that of New Zealand 24% and the United Kingdom 26.2%. In the same year Norway’s was 11.8%, Sweden’s 16.5%. Move along to 1960, and Canada was 28.6%, New Zealand 26.9%, Norway 29.9% and Sweden 31%. So clearly the Nordic countries got rich while their state spending was low, even lower than that of the typical Anglo-Saxon economy.(16)

In both 1937 and 1960 Sweden and Norway had state shares similar to or lower than the US and the UK. It was only in the next two decades – 1960 to 1980 – that their state shares rose to 57.7 and 45.6 respectively .(187)

It should also be noted that until 1936 Sweden was the wealthiest country in the world, and that it only started adding to the government fiscal burden at a rate exceeding the US and Switzerland, for example, in approximately 1960. It is no coincidence that its position in terms of wealth started slipping from then on. It is now approximately 18th in the list of wealthiest countries, having been overtaken by Singapore, Switzerland, Hong Kong and the United States, among others.

The other Nordic countries have similar figures. It is also worth noting that the famed life-quality of these countries already existed when they started expanding their state sectors. For example, in the 1960s the life expectancy of these countries was among the highest in the world, and already comparable to what they enjoy today. So it is incorrect to argue that the Nordic countries became wealthy on the back of state expenditure. Clearly something else is at work.

Nima Sanandaji is a Swedish economist who has made it his life’s work to explain the phenomenon of Nordic, and in particular Swedish, economic success. One of the most striking discoveries made by Sanandaji is that Nordic immigrants to the United States achieve higher per capita income in the US than their peers in their countries of origin:

“Median incomes of Scandinavian descendants are 20 per cent higher than average US incomes. It is true that poverty rates in Scandinavian countries are lower than in the US. However, the poverty rate among descendants of Nordic immigrants in the US today is half the average poverty rate of Americans – this has been a consistent finding for decades. In fact, Scandinavian Americans have lower poverty rates than Scandinavian citizens who have not emigrated … the median household income in the United States is $51,914. This can be compared with a median household income of $61,920 for Danish Americans, $59,379 for Finnish-Americans, $60,935 for Norwegian Americans and $61,549 for Swedish Americans. There is also a group identifying themselves simply as ‘Scandinavian Americans’ in the US Census. The median household income for this group is even higher at $66,219 … Danish Americans have a contribution to GDP per capita 37 per cent higher than Danes still living in Denmark; Swedish Americans contribute 39 per cent more to GDP per capita than Swedes living in Sweden; and Finnish Americans contribute 47 per cent more than Finns living in Finland.” (20)

Sanandaji examined the cultural history of the Nordic countries and discovered that in the previous centuries (from the 19th century onward) citizens typically made their living from difficult agriculture in harsh economic conditions. It is no secret that these countries are in a very cold region and that it is not easy to make a living from farming. Citizens by and large adhered to Calvinist religious doctrine and were quite conservative in their outlook. These factors, together with a general attitude of self-sufficiency, contributed to a frugal and productive work culture. To a large extent, this culture persists today.
The same culture also prevails among Nordic peoples who have immigrated to the United States. Significantly, these immigrants outperform the average American in terms of economic income. It is difficult to conclude that it is any factor other than the culture of thrift so typical of that part of the world that has ensured this impressive outcome.
Add to this the history of Sweden, that was a very free, low-tax market for years before adopting a welfare state, which enabled it to become the richest country in the world. And add to that the monumental blessing of the discovery of oil in 1960 which the Norwegians have managed very wisely, and it becomes easy to see why both these countries are now home to many of the super-rich of the world.

What about social mobility? We must accept, it seems, that social mobility is higher in more equal societies, as we have seen above. The question is, why is that so?

An obvious place to look for the answer to this question is basic education, for which we can use the international PISA scores in maths, science and reading. In this grouping (which, as could be expected has good basic education) Sweden and Norway are rather average. Understand me well, their education systems are good, but in the list of countries we have here, that does not give them a competitive edge. They lounge near the bottom of the list, in fact. Finland and Denmark do very well, but that has not made them exceptional in breeding billionaires, as we have seen.

But that is not the end of the enquiry. Common sense tells us that if most learners in a school system acquire educational skills that enable them to advance up the economic ladder, such a system is more likely to achieve social mobility. happens if the highest percentage of disadvantaged learners possible, do as well academically as their more privileged counterparts. This phenomenon is what is described as educational resilience. It goes without saying that countries with such educational systems are best placed to achieve social mobility, that is, the ability of children of poor parents to advance quickly to an economic income or educational stratum that is better than those of their parents.(21)

The OECD has investigated this phenomenon on a country-to-country basis. In a report (22) it describes the phenomenon of academic resilience as follows:

“Most of the students who perform poorly in PISA come from socio-economically disadvantaged backgrounds. But some of their similarly disadvantaged peers beat the odds working against them and excel in PISA…. PISA 2015 data show that, on average across OECD countries, as many as three out of four students from the lowest quarter of socio-economic status reach, at best, only the baseline level of proficiency (Level 2) in reading, mathematics or science. While in Canada, Denmark, Estonia, Finland, Germany, Hong Kong (China), Ireland, Japan, Korea, the Netherlands, Norway, Singapore, Slovenia and Viet Nam, more than 30% of disadvantaged students scored at Level 3 or above in all PISA subjects in 2015, and can thus be considered “academically resilient”, in Algeria, the Dominican Republic, Kosovo, Peru and Tunisia, less than 1% of the disadvantaged students who were eligible to participate in the PISA 2015 test performed at that level. Students who perform at Level 3 begin to demonstrate the ability to construct the meaning of a text and form a detailed understanding from multiple independent pieces of information when reading. They can work with proportional relationships and engage in basic interpretation and reasoning when solving mathematics problems; and they can handle unfamiliar topics in science. Such skills are the foundations for success and further learning later in life.” (23)

Here are the results relating to the percentage of students from the lowest quarter of socio-economic status who perform at Level 3 or above in reading, mathematics and science (again using the usual suspects as before):

Again, the excellence of Hong Kong and Singapore can hardly be missed. Whilst both of these countries have very high income inequality by developed-country standards, they have developed education systems that are able to lift disadvantaged learners out of their situations, to a degree virtually unparalleled in the world. What makes this particularly impressive, is that it is done on state expenditure on education that is a fraction of that of Norway and Sweden. Viewed like that, the welfare states spending on education is rather inefficient and wasteful.

Hong Kong has good intergenerational income elasticity, which measures the ability of children of poor parents to move up the income ladder, which seems to follow from the educational resilience shown above. Although Hong Kong does not show up in international indices of social mobility, a calculation was done by Yoe Chim Richard Wong, showing that in recent years it stabilised at 0.3, which compares favourably with countries like Sweden, Austria and the Netherlands, all very socially mobile, but not as mobile as for example Finland. By contrast US mobility sits at just over 0.5 (average at best) and the worst performers (like say, Uganda) hover around 1.0.

Not surprisingly, both Sweden and Norway perform better than the US in terms of social mobility. It is not clear that social mobility is necessary to create billionaires, but it seems reasonable to accept that it contributes. It is reasonable to expect that a country that is able to mine the talent of all strata of learners, is simply better placed to discover star performers. If that is correct, then it goes a long way towards explaining the magnificent achievement of the super free markets (Hong Kong, Singapore and Switzerland), and the relative lagging of the US.

On the basis of this evidence it seems fair to infer that the negative impact of income inequality can largely be overcome by means of a good basic-education system that promotes academic resilience. In other words, even if incomes are unequal, as long as poor students have a fair opportunity of performing as well as their richer peers, they can move up the income ladder relatively quickly.

In this context it should just be mentioned that free (and unequal) markets like Hong Kong typically have immigration rates that exceed 30% of their total populations (compared to a global average of 3%). In addition to creating billionaires, Hong Kong thus also creates jobs for many thousands of immigrants. By comparison the Nordic countries average about 12% immigrants’, and barely create any jobs. Who makes the greatest contribution to human welfare, one must ask?

Still that is not the end of the matter. There remains one glaring outlier, which is Israel. It performs less than spectacularly in both PISA and the criterion of academic resilience. Nor does it have the freest market in the sample. What do we make of that?

As the above illustration of the performance of Scandinavian immigrants to the US demonstrates, what we can loosely call “culture”, matters. Jews are well-known for their hard-working approach when it comes to both academic and commercial achievement. Depending on how it is measured, the average income of Jews in the US is higher than any other. More to the point, Jews are the ethnic group by far with the highest proportional representation of billionaires globally. Jews are only 0.2% of the World’s population, but 17.46% of the World’s richest. Thus their representation is 8,730% of their population share (compared to gentile whites at 260%, for example) .(24)

Compared to the US, the Nordic societies are ethnically homogeneous. The US, by contrast, is very diverse. If culture matters, then surely so does diversity. In such a diverse society the concentration of cultures conducive to wealth creation is simply likely to be less.

If the US wants to catch up in the billionaire stakes, what it should do, in order to compensate for the diversity of ethnicity and income strata, is to improve basic education, not only in the mean, but in particular to achieve greater academic resilience, and thus social mobility. Ethnic diversity is no excuse, as the successful examples of Switzerland and Singapore show.

A good model to follow is Hong Kong. Compared to Hong Kong, US basic education is very centralised. Ironically, the US spends more per pupil than almost any other country, and certainly more than any of the Nordic societies, which once again proves that it is not the welfare state as such that creates upward mobility and billionaires.

By contrast to the US, in Hong Kong private institutions run the vast majority of schools, albeit funded by the state in some cases.(25) There are three main types of schools in Hong Kong: government schools (8 per cent of enrolments); government-aided private schools (77 per cent); and private schools that raise their own funds (15 per cent). (26)

A percentage of the government-aided schools participate in the so-called Direct Subsidy Scheme (DSS), which allows private schools to get state funding regarded as sufficient to fund education on a per-child formula, and to which the school may add by means of funds it raises itself. In effect, DSS schools submit to certain overarching guidelines laid down by the state in exchange for subsidies. The remainder of the state-aided schools are fully funded by the state, but operated by private institutions.

All state-aided schools are subject to certain government guidelines, but set their own curricula and appoint their own teachers. There is also flexibility in terms of the examinations to be administered. Competition is keen, and results are world class, as we have seen.

A similar trend toward decentralisation is notable in Sweden and Norway, according to an article (27) by Dovemark and others:
“As part of the general trend in the Nordic countries, Sweden went through a “municipalisation process” (kommunalisering in Swedish) in 1991, which meant that many of the responsibilities related to the governance and financing of education were shifted from the state to the municipalities and the local level. Gustafsson, Sörlin, and Vlachos (2016Gustafsson, J.-E., Sörlin, S., & Vlachos, J.(2016). Policyidéerför svensk skola [Policy ideas for Swedish school]. Stockholm: SNS Förlag. [Google Scholar]) argue that the “municipalisation process” can be described as “marketisation” per se, because the responsibility for education moved in effect from the state to the municipalities followed by various reforms in free school choice (Beach & Dovemark, 2007Beach, D., & Dovemark, M. (2007). Education and the commodity problem: Ethnographic investigations of creativity and performativity in Swedish Schools. London: Tufnell Press. [Google Scholar], 2009Beach, D., & Dovemark, M. (2009). Making ‘right’ choices? An ethnographic account of creativity, performativity and personalised learning policy, concepts and practices. Oxford Review of Education, 35, 689–704. doi:10.1080/03054980903122267[Taylor & Francis Online], [Web of Science ®], , [Google Scholar], 2011Beach, D., & Dovemark, M. (2011). Twelve years of upper-secondary education in Sweden: The beginnings of a neo-liberal policy hegemony. Educational Review, 63, 313–327. doi:10.1080/00131911.2011.560249[Taylor & Francis Online], [Web of Science ®], , [Google Scholar]).
….
In Norway, there are similar patterns. Although the state of Norway has retained local representation in educational matters through county governors (fylkesmannen), the relation between the state and municipalities as well as between municipalities and schools began to change focus in the 1990s, from controlling the input to controlling the output, thereby effectively increasing the decentralisation of power (Borge & Rattsø, 1997Borge, L.-E., & Rattsø, J. (1997). Local government grants and income tax revenue: Redistributive politics in Norway 1900–1990. Public Choice, 92, 181–197.[Crossref], [Web of Science ®], , [Google Scholar]; Wiborg, 2013Wiborg, S. (2013). Neo-liberalism and universal state education: The cases of Denmark, Norway and Sweden 1980–2011. Comparative Education, 49, 407–423.[Taylor & Francis Online], [Web of Science ®], , [Google Scholar]). According to Imsen and Volckmar (2014Imsen, G., & Volckmar, N. (2014). The Norwegian school for all: Historical emergence and neoliberal confrontation. In U. Blossing, G. Imsen, & L. Moos (Eds.), The Nordic educational model. “A School for All” encounters neo-liberal policy (pp. 35–55). Dordrecht: Springer.[Crossref], , [Google Scholar]), the principal reasons for introducing management by objectives were to update the schools to meet the requirements of a knowledge-based global economy. …”

What is clear is this: The country where it is easiest to become a billionaire, is not one of the social democracies of Scandinavia. Nor is it the USA. It is Hong Kong, the territory with the freest market, one of the lowest tax burdens, and best education system to achieve academic resilience, in the world.

End notes:
1 https://en.wikipedia.org/wiki/List_of_countries_by_the_number_of_billionaires and
https://en.wikipedia.org/wiki/List_of_countries_by_population_in_2000
2 https://en.wikipedia.org/wiki/List_of_countries_ranked_by_ethnic_and_cultural_diversity_level
3 Education Index of the UN, measuring average advancement in education: https://en.wikipedia.org/wiki/Education_Index
4 Higher education enrolment percentage: https://www.nationmaster.com/country-info/stats/Education/School-enrollment%2C-tertiary/%25-gross
5 https://studyabroad.shiksha.com/country-with-best-higher-education-system-articlepage-1423
6 http://www.oecd.org/pisa/
7 https://www.fraserinstitute.org/sites/default/files/economic-freedom-of-the-world-2018.pdf
8 Overall tax burden: https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio
9 For a fuller exposition of this evidence, see Frans Rautenbach: South Africa Can Work (Penguin) Chapter 15
10 Ibid
11 https://en.wikipedia.org/wiki/List_of_countries_by_income_equality
12 Per capita GDP from 2007 to 2017: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.KD?locations=SG-HK-GB-US-NO-FI-CH-SE-IE-AU-DK-DE-KR-JP-CA-IL
13 https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
14 Number of persons per billionaire (as above)
15 Daniel Mitchell, ‘Economic freedom in America is declining mostly because of creeping protectionism and the loss of rule of law and
property rights’, International Liberty blog, 24 August 2015, available at https://danieljmitchell.wordpress.com/2015/08/24/economic-
freedom-in-america-is-declining-mostly-because-of-creeping-protectionism-and-the-loss-of-rule-of-law-and-property-rights/ (last
accessed 27 March 2017).
16 Daniel Mitchell, ‘Why Western Europe became rich in the past … and how it can regain prosperity today’, International Liberty blog, 14 July 2012, available at https://danieljmitchell.wordpress.com/2012/07/14/why-western-europe-became-rich-in-the-past-and-how-it-can-regain-prosperity-today/ (last accessed 27 March 2017).
17 Ibid
18 Ibid
19 Ibid
20 Nima Sanandaji, Scandinavian Unexceptionalism: Culture, Markets and the Failure of Third-way Socialism (London: Institute of Economic
Affairs, 2015), pp. xvi, 62–63, available at http://iea.org.uk/sites/default/files/publications/files/Sanandajinima-interactive.pdf
(last accessed 27 March 2017).
21 See eg https://www.persee.fr/doc/estat_0336-1454_2018_num_499_1_10814
22 https://www.oecd-ilibrary.org/docserver/66e037e8-en.pdf?expires=1556968340&id=id&accname=guest&checksum=ABE3B6EC0B6BF6443C6FD8239CD5BF90
23 Ibid
24 ttps://pumpkinperson.com/2018/07/08/world-billionaires-by-race/
25 ‘The Hong Kong education and schooling system explained’, ITS Education Asia, available at http://www.itseducation.asia/education-
system.htm (last accessed 22 April 2017).
26 ‘Hong Kong: Secondary education’, StateUniversity.com, availble at http://education.stateuniversity.com/pages/620/Hong-Kong-SECONDARY-EDUCATION.html (last accessed 22 April 2017).
27 https://www.tandfonline.com/doi/full/10.1080/20004508.2018.1429768

0

The Causes of Corruption

Why are the institutions of some countries corrupt, and others hardly at all? Examining this question soon makes clear that there is not a single cause, some of the influences associated with corruption or its absence, and some outcomes, are obvious, while others are frankly surprising.
An obvious candidate for a factor that combats corruption, is the rule of law.
The statement that the rule of law prevents corruption, seems like a self-evident truth. This is the result, perhaps, of a common misconception of what the term “rule of law” means. Most people when asked this question, will reply that it means that law and order must be observed, or that generally the law is enforced. Yet that is not the meaning of the phrase. Such a meaning does not nor assist us to know how to prevent corruption, precisely because it is so self-evident. Of course there will be no corruption if the law is observed, since the prohibition of corruption is part of the law.
The real meaning of the rule of law is that citizens are governed not by the decisions of people, but by the law.
In a state where the rule of law holds sway, arbitrary government power is constrained. In other words the ability of officials or organs of state to rule by whim, yields to objective law made by proper democratic process. Self-evidently corrupt officials and citizens are prosecuted and sentenced impartially, and without fear or favour.
Here are the most important ingredients of the rule of law.
Separation of powers
1. Power to make law resides in Parliament.
2. The executive administers the law free from interference by the judiciary, save to the extent that it breaches the law.
3. All disputes arising from the interpretation or application of law are resolved by courts that are independent of the legislature, the executive and other parties.
Limited delegation of Power
4. Power to make law/regulations is not delegated by parliament to any official or organ without circumscribing the ambit and purpose of the power.
5. No official or organ with delegated power, further delegates that power unless expressly authorised by the empowering law, stating the ambit and purpose.
6. Delegated regulatory power is exercised in accordance with its ambit and purpose.
Due process
7. Parliament and bodies with delegated power observe due process in rational and objective pursuit of the public interest.
Content of laws
8. All laws are clear and known, or reasonably knowable, as to the behaviour that they regulate and consequences of non-compliance, and do not operate retrospectively.
9. The law protects all private property from state confiscation without proper compensation, and without due process in the public interest.
10. There is equality before the law. Laws are of general application, and not discriminatory on arbitrary grounds, whether in terms or application. Offenders are prosecuted without fear or favour.

The combined effect of all these applications of the rule is that ordinary citizens know that officials in government have limited power to harm their interests by taking decisions that are subjective, capricious, arbitrary, random, unpredictable or motivated by ulterior purposes or improper motives. Official power to decide is thus constrained by the law.
It goes without saying that decision-making power that does not comply with the rule of law in this sense (in other words amounts to legally unfettered discretion), creates room for officials to take decisions for bribes, otherwise to benefit themselves, or to victimise subjects. All the manifestations of the rule of law listed above are designed to curtail such legally unfettered discretion.
Equality before the law ensures prosecution and conviction of corrupt offenders without fear or favour.
We would then expect a strong correlation between rule of law and low levels of corruption.
To test whether this is so, we must find a way to measure compliance with the rule of law in different countries. There is an international index, The Rule of Law Index of the World Justice Project, which purports to measure rule of law across a range of countries. An analysis shows however that what the Index measures overall, is not rule of law as described above per se, but also various presumed consequences of the rule of law, one of which significantly is a lack of corruption. The composite rating of the Index is not of use therefore in tracking a correlation between the rule of law as defined, and corruption. Instead, we should identify variables in the Index independent of the prevalence of corruption, which bear a closer resemblance to the rule of law as defined, and can serve as a proxy for it. Here is a list of such variables contained in the Index:
1. Constraints on government power by legislature (item 1.1);
2. Constraints on government power by judiciary (2.2);
3. Publicised laws and government data (3.1);
4. Equal treatment/no discrimination (4.1);
5. Due process of law (4.3);
6. No expropriation without adequate compensation (6.5).

According equal weight to each variable, I calculated a composite point for each country, and then compared each country’s resultant figure with its corruption index rating. The data is summarised by quartile, from the highest rule of law score to the lowest:

The amount of corruption in a country clearly correlates with its rule of law rating.
The inference is irresistible that the cause of lower levels of corruption in countries that comply with the rule of law, is that it prevents discretionary power that can be abused. If South Africa wants to fight corruption, strengthening the rule of law should be the first port of call.
It also seems fairly self-evident that whether or not a country tends to be corrupt, depends on the sources of its societal values. A good place to find a clue to governing values, is the religious history of a society. To simplify matters, I looked at the main religions, and considered only the dominant religion in each country. Christian religions were divided into three broad groups, namely Roman Catholic, Orthodox and a third group, loosely defined as “Protestant”. The remaining two groups are Buddhist and Muslim. Jewish and Hindu-dominant societies I left out of the equation, as in either case the sample is too small to be of use. Countries with no dominant religion was left out of the calculation.
And here are the results, expressed as the average position on the Transparency International Corruption Perception Index occupied by each dominant-religion group, where the least corrupt country is number 1 and the most corrupt is 180:

As can be seen, the Protestant-dominant societies are best associated with a culture of low corruption by far. Some distance behind those are Roman Catholic, Orthodox and Buddhist countries. And then, at an average position more than twice the level of corruption in Protestant societies, follow the Muslim countries.
The same sequence appears in the African statistics, but the advantage of the Protestant societies is not as pronounced as that in the world as a whole.
What is surprising about the Muslim societies, is that crime rates for offences like murder and other violent offences are very low. Yet it seems that corruption presents different outcomes. The reasons for this are discussed later.
It is to be expected that there are other factors that influence corruption. I have made a list of such possible influences.
A fairly obvious candidate seems to be education. Good education, one would expect, would over time inculcate values associated with good governance, such as honesty and respect for the merit principle. Perhaps more important, educated peoples tend to know about values embodied in the rule of law, and are less entitled to be intimidated into silence and inaction than more ignorant citizenries. More sophisticated law-enforcement institutions, like courts, are possible in a well-educated society.
Media freedom obviously plays an important part in exposing and potentially leading to the prosecution of corruption. The so-called fourth estate often does more to shine a light on dishonest politicians, officials an their civil collaborators, than do law-enforcement agencies.
Another consideration, one that may not be so obvious, is diversity of the population of a country. Why would diversity be important? It seems that the degree of diversity in a society has to do with social cohesion, or trust. For example, the success of homogeneous corporatist systems (ie where the state, trade unions and employers negotiate economic rules or labour conditions for the whole society), is well-documented, while it invariably fails in diverse societies. Examples of the former are the Nordics, and the latter Spain, South Africa and Brazil.
Countries with high trust, in turn, have low corruption levels, as the next chart shows.

Diversity can have a “horizontal” dimension (as in the case of ethnic groups) or a “vertical”. Inequality of education is an example of the latter, and so is inequality of income. Inequality of income is associated with higher crime rates and in particular violent crime . By the same token, one might expect less corruption in more equal societies, where social cohesion is better.
The antidote to diversity is decentralisation . Decentralisation can be achieved by economic deregulation, but also by decentralised governance systems. Generally we can say that a free market is economically decentralised, while a governance system where small groups of citizens take governance decisions on an autonomous basis, is more decentralised.
Why would a decentralised system lead to less corruption, especially in a diverse society?
It must be understood that government power is fundamentally about power over the wealth and the person of a citizen. The more power citizens have to deal with their own affairs, both personal and economic, the less officials in government are in a position to abuse government power over their affairs. This may take two forms: Economic decisions in the form of voluntary exchanges (contracts) in a free market, and localised decisions by communities, either themselves or represented by close, accountable representatives attuned to their needs. In either case the interests driving decisions are more likely to be those of, or at least benefitting, affected citizens, than would be the case with centralised decision-makers or regulators. The concept of decentralisation is particularly powerful in diverse societies where the interests of groups are more diverse, and social cohesion at a national level is weak. Conversely, in a diverse society small groups taking decisions about their own affairs are statistically more likely to have to accommodate fewer diverse and conflicting interests.
Centralisation should not be confused with a large government sector in the sense that the state spends a relatively big portion of the national GDP. The Nordic societies have large government sectors (for which we rightly criticise them) but they are some of the most decentralised societies in terms of both governance and economic management. In a study done for the World Bank , Denmark, Sweden, Finland and Norway occupied positions 2, 3, 4 and 6 on the Government Closeness Index, which ranks countries according the overall decentralisation of governments. Large government sectors show no correlation with corruption in general; centralisation does indeed.
Apart from these considerations, average income seems to be a factor worth considering. One reason for that is that people who benefit from well-functioning economies, whether in government or the private sector, tend to be tempted less to abuse their positions or buy favours. High-income citizens tend to tolerate abuse less easily than the poor, who are often ignorant and vulnerable to manipulation. High per capita GDP is also associated with free markets generally, which have their particular mechanisms ensuring that state officials have fewer opportunities to abuse power.
And here are the results of the comparison of the various factors and corruption (set out in sequence from the least corrupt to the most corrupt country, but summarised by quartile), largely confirming these intuitive predictions:

Besides reiterating the obvious importance of the rule of law and media freedom, what we note is:
• Economic freedom, together with its corollary, per capita GDP, is without a doubt the most potent predictor of low levels of corruption.
• Decentralisation is also very important.
• It is then not surprising that ethnic diversity is likewise associated with high corruption levels
• There is also a significant correlation between corruption and a lack of education.
• Income inequality seems marginally influential.
It is fair to expect that a country would hope to have in place more than one, preferably most, of the factors that correlate with good governance. Some factors are impossible (not to say unethical) to control, notably religion and ethnic diversity. But clearly neither of those is the end of the road.
A number of diverse countries, like Switzerland, Singapore, New Zealand and the US, are world-class corruption-busters. Save for New Zealand, they all have relatively decentralised governance systems. All have very free markets. All have advanced education systems. And all score high on the rule of law.
That Muslim countries on the whole appear to be more corrupt, of course does not mean they cannot combat corruption. The UAE, for example, is in position 21 out of 180 in the world. It does, however, have quite a free market, high income, reasonably advanced education and above-average rule-of-law institutions. However, most Muslim-dominated countries do not have a reputation as being highly democratic, and the corollary is that the rule of law suffers too. Almost without fail Muslim-dominated societies have barely any media freedom. Without changing their institutions and the values implicit in them, it is hard to see how this problem of corruption in Muslim societies can be addressed.
The causation does not run one way only. For example, low corruption in itself makes countries’ economies freer, and tend to boost income. Less corrupt countries have more efficient spending on public services like education. And we must not forget that by definition the rule of law is part of the measurable criteria to determine market freedom. More problematic, the rule of law is in large measure a matter of personal and societal values, as much as it is the result of structures. The best constitution with the most sophisticated legal system is helpless against people in government who really want to cheat. But the above statistics show that adopting the right structures alters the probabilities significantly, even decisively, in favour of good governance.
Africa is generally not a pretty sight. Of the 180 countries assessed by Transparency International, only one African country (Botswana) is in the first quartile of least corrupt countries (occupying position 34). Of the total of 45 African countries, 19 find themselves in the fourth quartile. The average position occupied by African countries is 123 out of 180. South Africa is surprisingly high on the list at 77, considering that the impression in the media is that we are one of the most corrupt countries in the world. That is not the case. In many other African countries corruption is a way of life in the administration of licences, passports, traffic fines, courts and starting or operating a business. Whilst we should not underestimate the size of the debacle that is state capture and its cousin, tenderpreneurship, SA’s corruption is a manifestation of centralised government power gone wrong. It does not permeate every aspect of life. Our institutions like courts, the Department of Home Affairs, traffic police and company registration operate more or less as they should. Our media are free.
African countries for the most part overwhelmingly share certain characteristics that are conducive to a culture of corruption.
• Unfree markets: It is no coincidence that the two least corrupt states (Botswana and Mauritius) are also the freest economically. As for the rest, they are quite unfree. Out of a total of 162 countries assessed for economic freedom, the average position occupied by African countries is 118.
• The rule of law is, sadly, still an orphan in much of Africa. In terms of the criteria adopted above, African countries fare quite badly, achieving on average 1.96, compared to the international average of 3.24 and the top-performers like New Zealand and Denmark that achieve more than 5.
• Lack of media freedom: The average African country would occupy position 114 on the list of 180 assessed. Here at last is good news for South Africa, which occupies position 28, similar to Ghana and Namibia at 23 and 26.
• Muslim faith is the dominant faith in more countries in Africa than any other religion. Countries with a history of protestant mission schools have generally adapted better to democracy.
• African countries are the most diverse in the world on average, which is the result, to a very large degree, of the heritage of colonialism, that carved up and lumped together vast tracts of land without any regard to the ethnic composition of its their occupants.
• On top of this, African countries are generally far more centralised in terms of governance structures, than countries in the rest of the world. Together with the multi-ethnic nature of the societies, this makes for a toxic mixture ripe for corruption.
• Education in Africa is a particularly unfortunate victim of the phenomenon of centralisation in a multi-ethnic society. There is compelling evidence that decentralised, autonomous schooling is far superior to the centralised model favoured in Africa – especially in a heterogeneous environment with diversity of languages, cultures and ethnic groupings .
• This witches’ brew of factors has resulted in Africa suffering from poverty and inequality of income, which makes corruption a recognised career choice and essential navigational tool in business.
The public choices are clear. A government that is really serious about eradicating corruption, must:
• Adopt a constitution and/or other laws that respect the rule of law and media freedom, and use those institutions impartially to root out corruption;
• Reform the economic system to a free market;
• Create decentralised governance structures;
• Take steps to create an excellent education system.
Public-choice theory also tells us that politicians and officials are not easily persuaded to change structures that serve as rent-seeking feeding troughs. How to persuade a government in a corrupt country to reform the system, is no simple matter. It is difficult to see how that can be achieved without at least one strong leader who really wants to change. And then that is not a foregone conclusion.
South Africa has some beacons of hope: besides a constitution and institutions that are reasonably supportive of the rule of law, its major redemption is media freedom. Few countries would have exposed the Zuma- and Gupta-driven state capture campaign as dramatically as did South Africa. One cannot imagine that occurring in a country without media freedom. Despite some justified criticism of the courts, they have largely held the line. Our downfall has been the remainder of the factors listed above: Weak education, over-centralisation of state power in a highly diverse society, and over-regulation of the economy. The latter factor cannot be stressed enough. In SA the flashpoints of much corruption are state-owned enterprises like Eskom and SAA. These monopolies are fecund breeding grounds for malfeasance by politicians and officials. The power of control in the hands of the state, which is in effect power over money, has time and again proved too tempting. It is government power that enables bail-outs, tenderpreneurship, wasted and uncontrolled expenses, theft of public money and bribery for favours.
Think about it this way: The rule of law is essentially a set of principles designed to enable ordinary citizens to exercise self-determination. It enables accountable leadership, fair adjudication of disputes and equality before the law. In a nutshell, it keeps government out of the business of ordinary people, save to protect them against interference by others or the state. The free market does this in the sphere of commerce, and decentralisation in the sphere of governance. All three sets of principles (rule of law, free enterprise and decentralisation) protect individual freedom. A necessary corollary of that is that it limits the power of the state. The less power the state has, the fewer opportunities there are to grant favours arbitrarily, ask for bribes, and commit nepotistic deployment and state capture.
Our constitution, our media and our courts are excellent anti-corruption institutions. But they have proved not to be enough. The Bible warns us not to put our trust in princes. A leader on a white horse on his own will not do it, unless part of his plan is permanently to roll back the might of the state. Nothing less will do.
And even then we may flounder, because ultimately we need an evolution of values. Values are shaped by incentives created by experience. The free market, defined as it is as based on the rule of law, makes it difficult to commit corruption. Its natural incentive is that of merit. It requires voluntary exchange as the means of acquiring income and wealth. There are few government officials able to ask bribes for granting licenses to trade, or government tenders, or special subsidies and concessions. In the private sector it creates skin in the game. Most entrepreneurs and workers know the game requires that they play by its rules, and that entails delivery of goods and services on merit. Of course fraud still happens, but that is why we have courts that work. The self-same rule of law that combats corruption in government, does so in the private sector. Free markets also force undertakings to protect their reputations by delivering good service honestly. Unless they do, they will be shamed by the media and drummed out of business. Free markets score exceptionally well in the Global Competitiveness Report in terms of good commercial governance. For example, here is the global ranking out of 135 occupied by the 5 freest markets in the world for the criterion “ethical behaviour of firms”:

Then there is a second player in the game of values, and that is our education system. There is no room in this article to give a full exposition of reforms necessary to bring about a successful education system , save to say that it, too, will necessarily have to be the result of policy choices. As we have seen, good educational achievement is associated with low corruption levels.
Unless we get the state out of the affairs of ordinary people and get our schools system working, we will continue to suffer the predations of corrupt government.

0

Why taxing the wealthy in the US at 70% of income is a very bad idea.


This issue raises a couple of subsidiary questions:
1 Firstly, will the wealthy pay more tax as the plan assumes?
2 Secondly, will the economy of the country grow faster?
3 In any of these scenarios, who is likely to harmed, the rich, the poor or both groups?
As to the first question, let’s consider history. There have been three major tax cuts in the modern American era, four if you add that of Trump. As the latter is rather recent, we can ignore it for the moment.
The first tax cut was in the early twenties, when the top marginal rate was cut from 70% to 25%. The result was that tax revenue rose from $719 million in 1921 to $1164 million in 1928, an increase of more than 61%. In the same period the share of the tax burden paid by the rich rose from 44.2 percent in 1921 to 78.4 percent in 1928.
In the Kennedy era top taxes were cut from 90% to 70%. That had the effect that tax revenues climbed from $94 billion in 1961 to $153 billion in 1968, an increase of 62 percent (33 percent after adjusting for inflation). The relative burden of the wealthy rose from 11.6 percent to 15.1 percent.
Ronald Reagan introduced a dramatic tax cut in 1983. This was followed income tax revenues rising dramatically, by more than 54 percent by 1989 (28 percent after adjusting for inflation). The share of income taxes paid by the top 10% of earners jumped significantly, climbing from 48.0 percent in 1981 to 57.2 percent in 1988.
Tax takings probably rise after a tax cut because taxpayers paying low taxes have less incentive to evade or avoid taxes, and because they have more incentives to produce, as their take-home income increases the less tax they are liable for.
What about growth?
In the years following on the twenties tax cut (1921-28) the GDP of the US grew by 42% in real terms. Between 1961 and 1968 it grew by 43%, and in the Reagan years by 28%.
In each case GDP growth more than doubled compared to the equivalent preceding period.
Here is summarised data of a list of wealthy countries (countries with per capita GDP over $20 000, chosen at random but omitting oil economies), setting out their average tax burden per quartile as a percentage of GDP, together with percentage change in GDP over a 10-year period and the size of their government debt:

The low-tax countries outgrew the high-tax ones by a country mile. This confirms the theory that the more the government takes money out of the economy by way of taxes, the less it grows. This would be explained by the fact that taking wealth out of the productive private sector and allocating it to the unproductive state sector reduces productivity of that wealth, and hence growth. It is further explained by incentives: by punishing citizens for earning income, the state creates a disincentive to produce. It should be added that if this confiscation disproportionately affects the rich (as is usually the case and certainly in terms of the current proposal) , the normally most productive section of the economy is harmed most.

As for the argument that a low tax burden will cause government debt to grow, it is clearly not the case based on the above figures. If anything, a lower tax burden seems to be associated with a slightly lower average public debt. Debts are run up when governments borrow (and then spend) too much.

In a review of major studies between 1983 and 2012, Will McBride, former Tax Foundation chief, located 26 studies in total, out of which all but three, and all in the last 15 years, found a negative effect of taxes on growth.

There is no question that increasing the tax burden on the rich to, say 70%, will in the net result increase the aggregate tax burden of the US dramatically. The reason is that the rich already pay the lion’s share of taxes. For example, in 2016 the top 1 percent in the US paid a greater share of individual income taxes (37.3 percent) than the bottom 90 percent combined (30.5 percent).

Increasing the marginal tax rate to something like 70% is thus very likely to depress both tax takings and economic growth. That will mean less money for welfare, health and education, reductions in investments and employment and lower wages. Whilst those outcomes are designed to reduce the income of the rich, they are almost guaranteed to harm the middle class and the poor more.

0

The causes of crime, and what to do in South Africa


In our blighted, crime-ridden country, we must sooner or later ask: What can we learn from other societies about crime? In particular, why are some societies crime-prone and others not? The likelihood is that there are multiple factors that potentially influence criminal tendencies in countries. Whilst acknowledging that the list of such factors could potentially be endless, we are interested in the fundamental, or major, causes of crime, that have a material impact on outcomes.
That said, here are some candidates, some obvious and some not so obvious:
• The degree of adherence to the rule of law;
• Education;
• Income;
• Unemployment;
• Inequality;
• Economic freedom
• Ethnic diversity;
• Religion
• The prevalence of fire-arms.
I decided to conduct a study comparing as wide a range of countries as available data allows. To achieve this, I had to find an easily measured criterion to measure criminality, that would apply uniformly across many countries. Most crimes are defined differently in different countries, statistics are calculated by different methodologies and many offences are simply not recorded in some countries. But murder – the intentional killing of a person – is relatively uniformly defined across jurisdictions and easily detectable. Moreover, there is a rough correlation between the number of murders and other offences in a country.
The reason for this correlation is fairly clear. By definition crime is the opposite of obeying the law. It is therefore likely that if the population of a particular national entity tends to flout law prohibiting murder, they will be inclined to disrespect the law in other respects too.
In order to measure the influence of the law, I make use of the rule of law score in the Economic Freedom of the World Index. This includes factors such as independence of courts and the like. It fundamentally has to do with the question whether society is ruled by laws that are fair and consistent (not necessarily harsh and strict).
I first divided the murder tally of each country (expressed as the number of murders per 100 000 citizens) into four quartiles. Then I tabulated as far as possible (again data permitting) the score of the potential contributing factors of each country listed. The average score per quartile would then tell us whether there is a trend indicating that a correlation exists between the murder rate and the particular factor. The significance of the corrrelation can also be measured.
Here is a summary of the results by quartile:

Murder all factors

Leaving aside religion for the moment, it appears that the most reliable predictor of low crime rates is wealth creation, measured as per capita GDP. It should be said that education, rule of law and free markets all correlate with crime rates, and all probably combine positively to influence wealth creation. Of those three in turn, free markets show the most significant correlation with low crime rates. Lower unemployment absorbs idle people into gainful jobs, replacing its illegal counterpart, which is crime. The effectiveness of the police is self-evidently relevant to curbing crime. Inequality of income arguably results in social unrest, which could fuel crime.
As for religion, I make use of available statistics of the most dominant religion in any particular country. (Where there is no dominant religion, the country is left out of the results that follow). Here is the average murder rate per dominant-religion group:
Buddist 1.79
Orthodox 2.475
Hindu 2.74
Muslim 4.12
Christian 7.86
Catholic 11.52
At the risk of stating the obvious, religion is to all intents and purposes impossible to change on a national level, at any rate by means of any legitimate policy instrument in a modern country. Yet is is clearly relevant. It is also clear that the beneficial influence of Roman Catholic and general Christian religion (if any) is rather weak compared to the others. There is one possible exception, and that is Orthodox church-dominated societies, whether in near-Asia or the Mediterranean, that have lower murder rates than even Hindu countries. Buddism’s reputation as a peaceful religion seems well-founded, as it comes first among the groups. Although “thou shalt not kill” is an injunction of all mainstream religions, some are more effective than others in curbing murder. The Christian-dominated societies include North America and Europe, that have become secular. To a great extent liberal values such as democracy, human rights, the rule of law and free markets have effectively replaced religion as the social organising framework. With the exception of the USA, all of these countries have low murder rates, ie well below 3 per 100 000 of the population. South Africa is of course a Christianity-dominant society, which does not help, as the above numbers show.
What about firearms? The conventional theory is that countries with large numbers of guns have higher murder rates, because the more guns there are, the higher the risk that they will be used to commit crimes.
So let’s investigate this claim. Here is a list of all countries with available statistics, and their fire-arm possession numbers, and their murder rates:

Murder and guns international

This table makes it clear that there is no correlation between guns and murders internationally. Gun ownership does not seem significantly to increase the risk of murder. It is however notable that the gun ownership distribution roughly describes a bell curve, so that societies with very high gun ownership, and countries with few guns, both have low murder rates, while the middle portion (encompassing the peak of the curve) has relatively high murder rates on average. It may be that certain societies have values (due to their dominant religion and/or ethnic and cultural homogeneity), that abhor violence to the extent that they disapprove of both guns and murder.
It also seems that high gun ownership levels are not necessary to ensure that murders are kept to a minimum.
Next, to correct for the impact of development, let’s repeat the comparison in respect of developed countries only:

Murder and guns developed countries

Again, it is clear that there is no correlation between high gun ownership and murder rates. The first point to make is that some of the countries with the lowest murder rates (Iceland, Norway, Austria and Switzerland) have amongst the highest gun ownership figures. The exception is of course the US, which has by far the highest level of gun ownership of all the developed countries, and also has the highest murder rate. It is for that reason that it has become the poster boy for the gun-control lobby. But the facts show that there is no relation between the two.
This is confirmed by figures within the USA. In the US we can compare states’ gun ownership with gun murders (a figure that is not readily available in most countries, where I worked with murders as a whole). That should give us a fair idea whether jurisdictions where more people own guns, are more likely to use them to kill others intentionally.

Murder and guns US

Once again, there is no correlation between the two sets of figures that supports the gun-control argument. Washington DC, with the highest murder rate, has low gun numbers, while Alaska, with by far the highest gun ownership, has a below-average gun murder rate. Even iff we take DC out of the equation (on the basis that it is a city, which naturally tends to have higher crime rates), the first-quartile average is still over 3, higher than any of the other three quartiles. Whilst there is not much of a correlation supporting the notion that gun possession reduces gun crime, the opposite is not true either. Gun ownership numbers seem, as in the international comparison, to make very little difference to the murder rate on average. More significantly, here we are talking about murders specifically committed with guns.
What then explains the relatively high murder rate of the US, when compared to other developed nations?
The other criticism of the American setup that is often heard, is that its income inequality causes social unrest and violence. To test this, lets order the US states by their income inequality, and compare that to murder rates:

Murder and Gini US

Inequality is indeed a good predictor of gun violence in the US – far better than gun prevalence is. This trend holds even if we once again take Washington DC out of the equation. It is then no coincidence that, among the developed countries listed above, the US has by far the highest income inequality.
So here is clear evidence at last that income inequality matters. It seems to contribute to violent crime. Despite the beneficial influence of free enterprise, the rule of law, reasonably good education, high income per capita and low unemployment, the US has relatively high murder rates for a developed country.
Inequality it is also a species of diversity, and conceivably operates in the same way as ethnic diversity, in that there is greater diversity of incomes, and thus social division. Thus it creates social tension between groups. Whatever the mechanism is by which it works, it seems indisputable that greater diversity is associated with more crime. The two factors of ethnic and income diversity seem to be the major ingredients that distinguish the US from the rest of the rich world.
Applying all of this to South Africa, we are stuck with high ethnic diversity and a mainly Christian society, both of which correlate with relatively high crime (assuming the accuracy of murder as proxy). Neither of those two factors we can change, and both increase our crime risk. What we can change are our policies about education, employment and economic growth. Improving those will at the same time improve inequality of income.
The rule of law is under severe threat in this country. State capture, general corruption and nepotism in the form of tenderpreneurship and cadre deployment all contribute to lawlessness. We are already seeing negative impacts of the mere threat of expropriation of property without compensation. Law enforcement by the prosecution and police is inconsistent in the extreme, and often tainted by political motives. It is barely surprising that SA scores poorly in terms of the effectiveness of our police force, namely 3.86 out of a possible 10. Our courts of law, for the time being, seem to be reasonably intact.
There is much work to be done. The most effective change that we can make, is to reform our economy to a free market, which will improve income, employment and equality of income. Ten million potential criminals will be taken out of the crime market if jobs can be created for the unemployed. Just as important is to reduce corruption in the government, and to improve the performance of the police force.
How all that is to be done, is a discussion for a different day.

0

A RESPONSE TO A TYPICAL INTERVENTIONIST/DEVELOPMENTAL STATE ARGUMENT

This is a response to an article by Montier and Pilkington (https://www.advisorperspectives.com/commentaries/2017/03/27/the-deep-causes-of-secular-stagnation-and-the-rise-of-populism). They identify four main changes in the modern economy that they say caused the current stagnation. The article is typical of the type advanced often nowadays by those who don’t want to accept the superiority of free markets, but realise that real old-school socialism has been thoroughly discredited. They then argue that the so-called “neo-liberal system” has failed, and propose an interventionist/developmental state model. My response hopefully arms the reader to deal with many of these fallacious contentions, and so should have more general application.

The first alleged mistake in economic management is the abandonment of the policy of “full employment” followed after WW I. In support of this the authors suggest that Keynesian policies of government spending ensured full employment during the “golden era” of low unemployment (1948-1970).

This is just nonsense. To start with, here is the graph of all federal spending during the last century, showing how spending rose after the War to 1980 (from about 15% to 24% of GDP):

And here is the unemployment rate over, inter alia, the same period, showing an increase from about 2% to 10%:

After WW I and before the depression (1920-29), spending was relatively low, and unemployment was low too. In fact, unemployment during that period was on average about the same as in the “golden era” of 1948-1970, without the aid of sky-high state spending. In the period after the war the trend line of federal spending was gradually upward (1948-1980) – and so was the curve of the unemployment rate. Reagan reversed the spending trend, and also the unemployment curve trended down (1980-2000).

A simple glance at the curves of federal spending and unemployment in the period 1970 to date will show that as spending increases, so does unemployment. This does not necessarily mean unemployment was caused by spending growth, but it sure as hell does not prove the opposite, namely that spending kept unemployment levels down.

Notably in the modern era, the Reagan years (81-89) were marked by a simultaneous decline in spending and unemployment. The same applies to the period of the Clinton administration – 1993-2001. On the other hand under Bush II, spending grew as did unemployment. Obama reversed the trend again.

The same applies during the most famous stimulus programme, the New Deal, which carried on for almost a decade after 1929, without succeeding in bringing unemployment down below 20%:

Significantly, unemployment fell by 10%, after much of the New Deal had been declared unconstitutional in 1935. The War’s low unemployment was abnormal. Bear in mind the so-called war economy was a case of government deficit spending to manufacture arms and ammunition, while Americans went hungry. It was not productive employment. Equally importantly, after WW II the government slashed spending by 70% (see the spending graph above), immediately restoring normal unemployment patterns.

The authors further suggest that the inflation of the seventies was not caused by excessive state (Keynesian) spending. The above federal spending graph certainly would suggest that spending was what caused it. But the authors say inflation in the seventies was caused by the OPEC oil crisis (and labour troubles. We’ll return to that below). But there are ample studies showing that it is not the case that the oil shock caused the inflation peak of the seventies. But just a look at the inflation rate graph of the period before and after the oil shock (which occurred in October 1973) makes it clear that the

inflation trend began long before, in 1960. Furthermore, the inflation rate was in tandem with federal spending. So for example it peaked at 15% during the War (1945) when spending was at a historical high, and then declined in step with spending declining until the early sixties, when it reached about 2%. At that stage government spending was a relatively modest 18%. Then, from about 1962, both spending and inflation increased, until inflation reached about 11% in the early 1970s. Then it reached another peak of about 14% in 1980, which coincided with a further spending peak (just before Reagan took over) of about 24%.

The argument that inflation was caused by the oil crisis (and not by state spending) would have had more traction if state spending did not also reach unprecedented heights during the seventies. How the authors could say increased spending was not accompanied by rising inflation, and was necessary to maintain low employment, is hard to fathom – especially seeing that over the next two decades the trend reversed, and we see the following declines:

– Spending declined from 24% to 19% of GDP;
– Inflation declined from 14% to 3%;
– Unemployment declined from 10% to 4%.

What the authors do not mention either, is that in 1971 the US abandoned the gold standard, (to which the dollar had been pegged), causing the value of the dollar to drop. That caused inflation as dollars flooded the market. Because the OPEC oil suppliers were paid in dollars (which were losing value fast), they increased the price of oil. So it was inflation that caused the rise in the oil price, not the other way around. What is clear is that the delinking of the dollar from gold added to the inflation woes of the US.

This bit of history makes it clear that there is a link between state spending, inflation and unemployment. At present the unemployment rate is 4.7%, better than the “Golden era” average of the sixties of 4.8% (while state spending in 2016 was 34 % of GDP – down from 43% in 2009 – and inflation at 1.26%. The statement that unemployment “stayed permanently elevated” and needs inflationary, Keynesian spending to reduce it, is just not true.

Decadal Estimates of the Average Unemployment Rate
Lebergott/BLS
(percent)
1890–1899 10.4
1900–1909 3.7
1910–1919 5.3
1920–1929 5.0
1930–1939 18.2
1940–1949 5.2
1950–1959 4.5
1960–1969 4.8
1970–1979 6.2
1980–1989 7.3
1990–1999 5.8

In the Obama era, federal spending decreased as percentage of GDP, as did inflation.
Not surprisingly, during his tenure unemployment also declined:

The authors’ “solution” to low incomes and high unemployment is NAIBER, which is a scheme whereby the government must employ all unemployed workers at a basic wage, end use their services to perform charity, public works or whatever.

But wait, has that not been tried? O yes, they called it the New Deal. Government in the New Deal era ran up unprecedented debts and barely made a dent in the unemployment rate. Why would this plan be any different? On 9 May 1939, Secretary of the Treasury Henry Morgenthau appeared in Washington before the US House of Representatives Committee on Ways and Means and exclaimed:

We have tried spending money. We are spending more than we have ever spent before and it does not work. I say after eight years of this Administration we have just as much unemployment as when we started … And an enormous debt to boot!

The incentives of the scheme are all wrong. Workers will not be required to be productive, because their employment will be guaranteed. Even workers in the private sector will know that their jobs are safe in the sense that if they were to be fired for not doing their work, the safety net of the state would catch them. The state as employer, for its part, will not need to use their service productively, because, well, it is the state. Any waste can after all be funded by the taxpayer. The state will run up costs and debts. The state’s share in the economy will grow. Wealth creation will suffer, as always happens when the state’s share in the economy grows.

Implicit in the NAIBER solution is that it will be inflationary, because the authors’ criticism is precisely that the modern “neoliberal” system wrongly targets inflation. It follows that what they really want is inflationary state spending. As we have seen above, it leads to serious economic problems. The period of 1960-80 was one where state spending, inflation and unemployment were ramped up in tandem.

Next, the authors blame globalisation, notably immigration increases and international trade, for the stagnation of the economies of the US and other developed countries.

Dealing with immigration first, while it is true that immigration to the US is at a historical high, immigrants’ median income is on the whole lower than US workers’ . At the same time, it rises more quickly than that of US workers, and currently unemployment among immigrants is 3.7% , significantly lower than that of citizens. That indicates that immigrants assimilate well into the labour market, which is a key component of social integration. These figures also suggest that initially immigrants do jobs at salaries that citizens are not prepared to accept, and thus are unlikely to disrupt citizens’ employment opportunities.

What is true of course, is that over the last decade or so, American workers in the lower quintiles have seen their incomes decline as a relative share, and in real terms. The reason is that the American market was skewed by successive interventions by the Federal Reserve since the time of Greenspan, in the form of money printing. The effective negative interest rates maintained by Greenspan, together with anti-discrimination policies in the bond market and the implicit guarantee that banks would not fail, led to the 2008 housing crash. That destroyed incomes of poor and middle class people as unemployment soared and home buyers defaulted on mortgage payments. The next 6 years was followed by a period of Zero Interest Rate Policies (ZIRPS) and Quantitative Easing (QE), fancy names for more money being printed and pumped into shares and bonds. That caused an unprecedented boom in the stock market, benefitting rich people, and resulting in dwindling pay cheques in the hands of the middle class and poor of America . The inflationary policies of Greenspan caused headline inflation to rise from 1% to 5.5% between 2001 and 2008. In the Obama years the Fed did not pump the excess money supply into the consumer market, but into assets. The result was that there was little impact on consumer prices, but the stock market was artificially inflated .
Here is the relationship between the value of assets held by the Fed (which is the result of QE and ZIRP – money printing for short) and the value of the share index:

That was a boon for the rich and the worst blow to the poor. It also devastated productivity, as investment in paper assets do not improve technological investment or training of workers.

That is the real reason for the declining incomes of the poor and middle classes. If the economy had been healthy, investment would have been made in training, machines, information technology and productive assets, instead of share portfolios.

US productivity has surely also been depressed by the poor school system, which, despite the government being one of the most prolific spenders on education as percentage of GDP in the world, has failed to show any significant improvement in reading, maths and science teaching over the past 50 years.

Immigrants have always been part of the American labour market. The rising employment level of citizens (at higher wages than immigrants) suggests that immigrants are not taking their jobs or depressing their income. There is no evidence that immigrants take US citizens’ jobs. Quite the contrary.

There is a reason why manufacturing has declined in developed countries. It has to do with the relative skills level of countries, and wages pay for different levels of productivity. The modern economy is knowledge-based. Countries with high-tech products and services such as information technology, consulting services, research and development, have a competitive advantage. Countries with lower skills levels then have to compete with the advanced economies by performing manufacturing jobs at lower wages. Why do the authors want Americans to work in factories? They should be grateful that the economy has graduated to a knowledge- and hi-tech-based industrial complex. Insofar as a section of the workforce has been left behind, then improve the education system. The US school system is positively mediocre compared to the good systems of the world, such as most Nordic countries, most oriental societies and Switzerland. That is a story on its own, of course. But in short, the US education system fails because it is a centralised, government-driven system in a highly diverse society. All the successful systems in the world are either culturally homogeneous (Shanghai, the Nordic countries, Germany) or highly decentralised or privatised (the Netherlands, Hong Kong, Chile, Finland, Switzerland), or both homogeneous and decentralised (Hong Kong, Finland, the Netherlands, Shanghai).

As regards trade due to globalisation: What would the authors have us do: should countries like the US have less trade with the rest of the world? Presumably not. Then one supposes the problem is the dreaded trade balance, namely that countries like the US import more than they export. The answer to that is simple: If the trade balance is a problem, then increase value for money by improving productivity. Improve education, reward real bricks-and-mortar investment, not paper pyramids on Wall Street.

The authors’ prescription to deal with the effects of globalisation, with a view to repatriating “good” manufacturing jobs back to the developed world, is import substitution by way of targeted subsidies for products that can be manufactured more cheaply abroad – in other words, good old-fashioned protectionism through subsidies. In principle import substitution subsidies are the same as protective tariffs. In both cases the state uses taxpayers’ money to increase the relative price paid by consumers for imports. In the subsidy scheme the taxpayer firstly funds the subsidy, and secondly pays for the inevitably reduced value for money brought about by restricting the competition of imports. In the tariff scheme the consumer pays a tax on imported goods (which adds no value to the purchase) or buys inferior value for money locally. Both are destructive of growth, unproductive and wasteful.

For example, here are 5 countries with high ratings for import tariffs according to the Economic Freedom of the World Index (ie with few or no import tariffs), compared to 5 countries with lower ratings. Both groups come from the first quartile of economic freedom, and save for separating them into low- and high-tariff groups, have been selected purely so as to have about the same degree of economic freedom on average. Any difference in average performance is therefore not due to general economic regulation, the significant difference between the two being the degree of import protection only.

Low-tariff group

The free-trade group (with little or no import tariffs) grew three times as fast as the other group. This accords with more general evidence showing free trade is overwhelmingly associated with per capita income growth:

It follows that the converse, increased protection, will lead to less growth, which will scarcely be likely to address the problem of lower income for workers that concerns the authors. If anything, there should be more international trade if we are serious about addressing income of poor and middle class people.
The next aspect that the authors tackle is labour regulation, contending that labour flexibility has led to lower incomes in the developing world.

As a general proposition, this is just not so.

Real-world examples making this point are not difficult to find. The following are a few examples of countries with lightly regulated labour systems, taken from the periods shown:

In all these cases the countries maintained low levels of labour regulation, low unemployment and growing incomes.

Historically, a prime example of a country that achieved a spectacular ‘race to the top’ is Taiwan (once again with a very lightly regulated labour market), which performed as follows in the period 19611994:

Countries where labour deregulation took place also support this conclusion. In 1991, New Zealand introduced the Employment Contracts Act (ECA), which significantly reduced artificial statutory support for trade unions, and abolished centralised bargaining structures that prevented employers and employees from concluding their own, individual contracts of employment. Here are the results over the period from inception of the ECA to the implementation in 2004 of the Employment Relations Act of 2000, which reversed some of the deregulation of the ECA somewhat:

• Between 1991 and 2004, unemployment fell from about 11 per cent to under 4 per cent.
• During the same period, the labour-force participation rate increased from 63.8 to 66.9 per cent.
• Most significantly, GDP per capita in real terms increased from $12 230 to $25 420.

Also Denmark makes the point. In the period 1994-96 Denmark deregulated important aspects of its labour market, including hiring and firing rules. The result was that unemployment declined from about 10 percent to about 3 percent between 1995 and 2009, while the country’s per capita GDP grew by 16.5% over the same period .
It is simply not true that deregulation is likely to lead, or has led, to a plummeting of labour standards. Quite the contrary.
As for the notion that union membership increases employment, this is simply false. Study after study has shown that the higher the union density of an industry, region or economy is, the lower the employment growth. See the graph below, showing the union density in South Africa and employment growth/decline 1980 to 2004:

As the union density rose from 1980 onwards, employment growth declined from 5.5% p/a to a negative of -4% in 1988. The two curves run in parallel like rail tracks.

In 1947, the United States passed the TaftHartley Act, which affirms the right of states to enact right-to-work laws. Under these laws, employees in unionised workplaces may not be compelled to join a union or pay for any part of the cost of union representation. In anticipation of Michigan’s adoption of right-to-work laws in 2013, the Mackinac Center for Public Policy in Michigan examined the economic effects of right-to-work status. Unsurprisingly, right-to-work states have far lower union density than non-right-to-work states (8.83 per cent as opposed to 15.59 per cent).

Here are some of the study’s most striking findings:

• ‘According to the Bureau of Economic Analysis, right-to-work states showed a 42.6 percent gain in total employment from 1990 to 2011, while non-right-to-work states showed gains of only 18.8 percent.’
• ‘According to the U.S. Census Bureau, population increased in right-to-work states by 39.8 percent and only 16.7 percent in non-right-to-work states from 1990 to 2011.’
• ‘According to the U.S. Census Bureau, 4.9 million people moved from non-right-to-work states to right-to-work states from 2000 to 2009.’
• ‘According to the Bureau of Economic Analysis, nominal personal income grew by 209.3 percent in right-to-work states and by 148.5 percent in non-right-to-work states from 1990 to 2011.’

For present purposes, the most significant impact is on employment growth. Right-to-work states in the period 19702011 grew employment at a rate exceeding that of non-right-to-work states by 0.8 percentage points per year. Importantly, despite growing jobs roughly three times faster, right-to-work states did not sacrifice in terms of personal income. On the contrary, according to the study ‘states with right-to-work laws enjoyed an annual average increase in real personal income of 0.8 percentage points … compared to what they would have experienced without such laws’.

Montier and Pilkington compare countries internationally by way of a scatter gram to show that countries with high union density have low unemployment. They also show that during the period of low unemployment (1948-1970) union density was higher. This is a classic case of comparing apples and pears. In order to know if unionisation increases employment, we must surely control for relevant factors.

To show how easy it is to make such a generalised point, let’s look at the UK instead, that leads to exactly the opposite conclusion. Here are the graphs showing the historical trends of trade union density, unemployment and inflation in the UK:

Union density, inflation and unemployment reached a simultaneous peak in the early 1980s. That was when Margaret Thatcher stepped in and broke the back of the union movement. As trade union density declined, so did unemployment and inflation.

So yes, poor labour relations contributed to inflation. That in turn was caused by high trade union density. Not only that. As in the US, UK government spending also peaked around 1980:


It is far better, if we want to compare the effect of unionisation, to isolate it as a factor. The easiest way to do that is to compare union plants in one industry with non-union plants in the same industry, as the heritage Foundation did in respect of manufacturing in the US:

And in respect of construction:

So, trade unions are a problem for unemployment. The same applies to labour laws generally. In the United States, the federal government regulates many aspects of labour relations. But over and above the federal laws, each state also has the right to enact local laws that regulate employment. Any state could, for example, enact a minimum wage for the state that exceeds the national minimum wage. This makes America an ideal testing ground for the effect of labour laws on employment creation, because many of the economic conditions in states are determined by federal legislation and circumstances that are shared by all states; and citizens of states are free to move from state to state to find work.

Based on a survey of employment policies conducted in 2009, the US Chamber of Commerce developed an Employment Regulation Index (ERI) to measure the impact of state labour and employment regulation in each of the 50 US states on a scale of 1 to 100, with a score of 100 denoting conceivably the most heavily regulated state. The ERI is based on rankings of 34 measures of state labour and employment policies covering six categories: the employment relationship and the costs of separation; minimum wage and living-wage laws; unemployment insurance and workers’ compensation; wage and hour policies; collective-bargaining issues; and the litigation/enforcement climate. Using the ERI, each state is assigned an overall rank – ‘Good’, ‘Fair’ or ‘Poor’ – as an indicator of the extent to which the state’s labour and employment policies regulate labour. It was assumed that states with a ‘Good’ rating have strong pro-employment policies, while those with a ‘Poor’ rating have policies that inhibit job creation.
In a 2011 report of their findings, the Chamber of Commerce measured the economic impact of regulation on the performance of each state:

‘Applying standard statistical techniques, we found that, when the ERI is inserted as an explanatory variable, our models demonstrate that higher levels of regulation (i.e., higher ERI scores) result in both higher unemployment and lower rates of new business formation, and that the effect is statistically significant at standard confidence levels. Moreover, the magnitude of the estimated effects is substantial. We estimate that, if each state were to achieve a ‘perfect’ score on the ERI, the effect would be equivalent to a one-time boost of approximately 746,000 net new jobs.’

When it came to assigning overall rank, 15 states were ranked ‘Good’, 20 ‘Fair’ and 15 ‘Poor’. In the five-year period from 2009 to 2014, I calculated the average employment growth in each group, which was as follows:
Good 2.72 per cent
Fair 0.6 per cent
Poor 0.49 per cent

Quite clearly it pays to be ranked ‘Good’. Average employment growth in this group is about 4.5 times higher than in the ‘Fair’ group, and 5.5 times higher than in the ‘Poor’ group.

A more dramatic illustration of the value of low regulation is to compare the percentage of jobs created over the same five-year period for all the states in each group combined. The ‘Good’ group’s employment growth was 4.4 per cent, while that of the ‘Poor’ group was a measly 0.6 per cent. In other words, the ‘Good’ states proportionally created more than seven times as many jobs as the ‘Poor’ states did. In actual numbers, the ‘Good’ states created 2 124 734 jobs (starting from about 47 million), while the ‘Poor’ states created only 390 551 jobs (starting from a much larger 62 million).

And in case you were wondering, per capita income growth is also better in the ‘Good’ states:

Good 1.82 per cent
Fair 1.64 per cent
Poor 1.68 per cent

So, when labour law is isolated as a factor, it is and remains a job-killer. That does not mean its effect cannot be ameliorated, as for example in the Nordic countries that have national corporatist negotiations. The difference is, they are all homogeneous societies. No multi-ethnic society like America has ever succeeded with a corporatist model.

The authors further argue that the theory that minimum wages do not suppress employment, is not correct. This argument they support with evidence that the minimum wage as percentage of average wage was higher during the so-called “golden era” when unemployment was low, than when it unemployment was high in the period from 1970 onwards. This is a poor argument. Any economist worth his salt will tell you that isolating one factor – the minimum wage – and arguing that it caused or did not cause unemployment, without controlling for other relevant factors such as the general regulatory regime of the economy, the share of government spending, the education of the society and external shocks, is just a nonsense. For one factor, just look at the share of government spending, the records of which appear above. In the so-called “golden era”, spending was lower than in the high-unemployment era of 1970-80. Then spending declined over the period 1980-2000, during which unemployment likewise came down.

In the real world, minimum wages have proved to be much of a muchness. Everyone agrees that if we imposed a minimum wage in the US of $50 per hour, or in SA of R15 000 per month, the economy would take a severe knock and millions would become unemployed. Yet in the real world minimum wages are set at far more modest levels, resulting in far less drastic effects, or sometimes none at all, and thus ongoing bickering among economists as to their importance. The reason for this is that in most real-life situations it is easy to demonstrate that the impact of minimum wages is at worst, modest. The one reason is that only a tiny minority of workers are affected by minimum wages, namely those marginal workers at the bottom rung of productivity. No country’s economy has come to a standstill because of it. Yet studies consistently show that teenage employment is significantly harmed by minimum wages.

The next graph makes the same point, over a longer term. Note especially the decline in the minimum wage, and the concomitant drop in teenage employment from 1980 to 2000.

Again, one remains mindful of the fact that this is not proof that minimum wages cause unemployment. But it certainly shows that the converse is not true, namely that unemployment is lower when minimum wages are higher.
As for the ratio between CEO and worker pay, and other forms of income and wealth inequality, we have seen the impact of asset inflation at the behest of the Fed (above) and the effect it had on income disparity. The authors are correct to assert that CEOs are typically compensated on the basis of their companies’ share values. If share values (duly inflated by pumping money into the asset market) are a determinant of pay levels, then it is not surprising that the increasing ratio has manifested. This relationship is clear:

The answer to the so-called shareholder value problem – causing income inequality and low investment levels – is clearly to return to basics. The Fed and other central banks must reduce the assets on their balance sheets and stop pumping money into the stock market, so that those seeking investment destinations for their funds will invest it in productive plant with real prospects of wealth creation.
The problem of shareholder maximisation is sought to be addressed by the authors by making an appeal to the good natures of capitalist shareholders and boards of directors. That will not work. One might as well ask workers in a socialist state to work hard because it is good for the poor people in society. It has never worked, never will. People respond to incentives. If shareholder value maximisation is a problem in the sense that profits are not reinvested in businesses, then incentives to invest in productive processes must be restored. That would firstly require that the incentives for the current alternative, namely to invest in paper assets, must be removed. Real productive investment in the form of factory plant, information technology and worker training must become a competitive alternative again by eliminating the easy, rent-seeking alternative of share pyramids on the back of asset inflation.

In conclusion then, I do not agree with the diagnosis of the disease of stagnation in the so-called ‘neoliberal’ economies. In addition to targeting consumer inflation, there should also be targeting of asset inflation. Training and education should be beefed up. Labour markets and international trade should be freed up further. A good model to follow here is Switzerland. From a policy point of view, Switzerland is number four on the list of the freest economies in the world. It has good education, relatively low government spending for a rich country, low levels of labour regulation and union density and low tariff rates. It has high levels of basic, VET and tertiary training, high levels of investment, a strong non-inflationary currency, restricted state spending and a huge positive trade balance, and moderate and declining inequality of income.
Where the developed world has gone wrong, is by growing state expenditure and regulation, and by giving the monetary printing presses free reign. It can all be fixed, but not by means of this protectionist, old-style unionist, neo-Keynesian recipe for disaster.

0

A response by Frans Rautenbach to The Myth of the Private Titling of Land by Lubabalo Ntsholo


In this article the author’s main grievance seems to be that the hearings about the amendment of section 25 of the Constitution missed an important opportunity to debate the whole cause of skewed economic power in our society, and how it can be corrected:
“This article is not concerned about this parliamentary process per se, or whether or not the Constitution will be amended, but rather with the missed opportunity by most thought leaders on the land question to utilise this process to engender, at the basic minimum, a discussion about what is necessary to bring about deeper level transformation in South Africa.
I argue this because the discourse about the land in its multifarious manifestations is not merely about land as a physical solum; it is, or at least ought to be, a discourse about the reconstruction of society, about rethinking power and how power is held, by whom and for whom, for what purposes.2
This ought to have been an opportunity for society to take a careful look at itself, its assumptions and its aspirations, and stretch the limits of our imagination beyond those already prescribed for us by the architects and beneficiaries of the status quo, which has ensured that a few have power, property and resources, while the majority have none.”

The alternative desired by the author, once we think through the reconstruction process to move from the status quo to the desired transformed society, seems to be this:
“The Constitutional Review Committee would demonstrate intellectual lethargy and cowardice were it not to pay special attention to the second part of the EFF motion, which asked the committee to ‘propose the necessary constitutional amendments with regards to the kind of future land tenure regime needed, taking into account the necessity of the State being a custodian of all South African land’”.
In other words, the state should be made the “custodian” of all land, and no one should own property by way of registered title. How and by whom the rights of current owners are to be determined, is not clear. But this much we know: The state must manage the properties in its custodianship so as to reconstruct and transform the current economy in order to correct the status quo of skewed power relationships.
In order to get to this solution, the first task that the author sets himself is to attempt to dispose of the idea that property rights is a central tenet of constitutional states:
“They argued that private titling of land is the cornerstone of democracies and the principle of constitutionalism, and that amendments that seek to undermine private ownership of land would violate the very principle of constitutionalism. We must dismiss this nonsensical claim out of hand. The idea of private titling of land is an ideological one, not a constitutional principle.”
The rule of law is a principle that is embodied in the SA Constitution.
It has been recognised by our Courts, notably the Constitutional Court, as a fundamental part of the Constitution and the Law. It has been recognised as the principle that ensures that government action shall not be arbitrary.
One of the debates conducted internationally around the rule of law, is the question as to what its content is, and what principles form part of it. Some of the less controversial tenets of the rule of law are:
• Due process, ie the principle of a fair procedure, including that those affected by government decisions must be afforded the opportunity to be heard in order to protect their interests;
• Closely aligned to this, the notion that decisions must be taken in an unbiased fashion in the public interest;
• The principle of separation of powers between the legislative, executive and judicial branches of government;
• The prohibition of unfair or arbitrary discrimination;
• The requirement that all laws and rules must be known or reasonably knowable, and not have retrospective effect.
The glue that holds these tenets together, the essence of the rule of law if you like, is the grounding principle that citizens of a country are to be governed by an objective body of law, and not by the arbitrary whims of people. Such a form of government is what stands as a barrier between ordinary citizens and tyranny.
While none of the recognised tenets in and of itself guarantees the outcome of non-arbitrary decisions, each makes a substantial contribution to it:
• Due process helps ensure that affected citizens’ concerns are taken into account, making for a greater likelihood of decisions being taken in the public interest, rather than the parochial interests of individuals or politicians, for example;
• Unbiased administration in the public interest achieves the same object;
• Separation of powers results in decisions about legislation being taken by a duly elected parliament which is accountable to the public and best equipped and incentivised to create legislation in the public interest;
• Importantly it prevents delegation of legislative powers to officials, save in limited circumstances, making it more likely that laws will be in the public interest;
• Separation of powers also means disputes are resolved by fair and neutral adjudicators (courts) following due process;
• The no-discrimination principle self-evidently makes for fair and unbiased administration, rather than arbitrary human decisions;
• Publication and non-retrospective operation of laws means that the citizenry have a fair chance of arranging their affairs in a way that they stay within the four corners of the law, rather than being surprised by the whims of arbitrary decisions of officials.
At first blush the principle of protection of private property does not seem to fit into this mould of non-arbitrary application of law.
It is important however to know that most rule-of-law systems provide protection of private property in the form of a prohibition on the expropriation of property by the state save in the public interest and for fair compensation set by a court of law.
Section 25 of the SA Constitution for example provides that:
“25. Property
1. No one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.
2. Property may be expropriated only in terms of law of general application ¬
a. for a public purpose or in the public interest; and
b. subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided or approved by a court”.

The SA Constitution makes it clear that its protection of property is a manifestation of the rule of law, by requiring non-arbitrary expropriation in the public interest.
This and similar formulations encompass a number of concepts that make it clear that the protection of property so formulated is indeed part of the rule of law:
• Firstly and perhaps most importantly, property may be expropriated only in the public interest. It is not permissible for an official or politician to expropriate property for the needs of a person, a political party or a politician or his family. That already embodies the central value of even-handed public-spirited decisions, rather than parochial confiscation.
• Secondly, property may be expropriated only against payment of fair compensation. That is crucial, because it means that such a process acknowledges that the right to property is universally acknowledged, without any exceptions. Every single property owner confronted by an expropriation claim is even-handedly entitled to fair compensation, which is, on the face of it, compensation aimed at placing him or her in the same position, commercially, as that occupied before expropriation;
• Thirdly, compensation must be set by a court of law, which contains in itself the idea of due process, and fair and unbiased decision-making.
Over and above these considerations, it must be borne in mind that a society which does not protect property in this fashion is effectively one where the government has absolute say over the property of people, which includes landed property, movables and intellectual property such as patents, copyright and the like. That means that property can be confiscated at will, on the arbitrary say-so of politicians or officials. Such a society will be one governed by the whims of people, not laws.
The idea that the right to private property is not a constitutional right in the normal sense, must thus be rejected.
Even if we can however get past the legal difficulty that no modern-day constitutional state operates without adequate property protection, the question is how we see the proposal of the author unfold. As we see, the process of universal, once-off confiscation of title is the first step. The state would become the owner (custodian) of all property. Property as a means of production would thus vest in the state. In the context it goes without saying that such custodianship would be meaningless if the state cannot deal with the property within its discretion in order to transform the economy. Phrased differently, it would be meaningless if the state becomes no more than a nominal custodian, without the power to redistribute existing rights over property. If current owners’ legal position to all intents remains the same, the proposal seems futile.
So it must be assumed that, although no previously disadvantaged person will get title in such a process of redistribution, he or she will get rights in respect of property. Given the skewed power balance that troubles the author, it follows without any question that current white owners will lose some of their rights, in favour of black persons.
For example: A farmer, who owns the land on which he farms, will lose title to the government as custodian. The government for its part will then redistribute the right to farm on the property to the labour tenants or employees employed on the farm. This, the author tells us, is part of a bigger process to address the unequal relationships of power brought about by historical dispossession. Paraphrased, land is only one part of the jigsaw of transformation. The entire economy should undergo a similar process. By parity of reasoning, this can only mean redistribution of wealth in all its forms from white holders of economic power (except for land title, of course) to the previously disadvantaged. How else will it work?
So then let us examine the origins of the economic power relations in our country, and let us have “a discussion about what is necessary to bring about deeper level transformation in South Africa”.
That compels us to face the question foursquare:
What is wrong with redistribution of property/employment equity/affirmative action/BBBEE/black public-service employment/social welfare in order to provide redress for white privilege?
These strategies all aim to improve the material conditions of life of members of previously disadvantaged groups. One way or the other they all take the shape of redistribution of wealth from a privileged group to a disadvantaged group. And the strategies redistribute on the basis of group identity, not on the basis of one identifiable individual having been unjustifiably enriched at the expense of another. If the latter had been the aim, the existing process of land claims under the Constitution would have done fine, and we needed not argue further.
In South Africa the wealth divide is of course not perfectly aligned with race. Much less is property the defining distinction of wealth. Far from it. But it is historically significant enough to have enabled the proponents of these redistributive policies to make a fairly convincing argument as far as many in the mainstream media, politicians and academics are concerned.
Now there are a few fundamental truths about this problem that we have to acknowledge:
• First of all, white privilege exists. By that I mean that white people on average have a historical advantage in the race to accumulate wealth. That does not only mean that they have more wealth and income, but more importantly, a greater ability to acquire wealth and income. That advantage has many aspects, including capital assets such as land and equities, education, technology, networks and inheritance. To simplify matters, let’s call these collectively “growth capital”, which of course includes property.
• Secondly, the origins of white privilege are multiple and varied, and in some respects go back millennia. Originally all of humanity came from Africa, and for reasons of historical happenstance some of them relocated to Europe. Europe became the home of the group now known as the whites, and it coincidentally offered huge advantages (over Africa, for example) that are relevant to growth capital:
o Europe (Mesopotamia to be more precise) had significant plant types suitable for cultivation as food;
o It also had wild animals suitable to domesticate as beasts of burden and providers of milk, meat and eggs;
o These factors enabled locals to develop agriculture, which was conducive to productivity, leisure time and creativity, all of which created room for the invention of tools, weapons and modes of transport;
o Europe has far fewer geographic barriers and its plains are conducive to navigable rivers, which promoted not only internal trade, but also trade with China, India, the Middle East and ultimately Africa.
• The result was that by the time whites started colonising Africa, they were already millennia ahead in the race to acquire growth capital.
• To make things worse, when the colonisers arrived in Africa, for the most part they discriminated against the local African people, which caused them to perpetuate their historical advantages. For the moment let’s accept that in many cases that took the form of dispossessing black people of land. For ease of reference, I will call all these acts collectively “dispossession”, knowing that it may include dispossessing blacks from other forms of growth capital too, such as employment opportunities and education.
• Generally the dispossession directly impacted on the ability of blacks to accumulate growth capital.
• If whites had not so dispossessed local blacks from the time that they arrived on the continent some 300-400 years ago, blacks would have had an earlier head start in rectifying the backlog of growth capital; but white people would have been better off still, as they would have had richer markets of black buyers to which to sell their goods and services, and better-trained workforces.
• In the result white privilege is the result of a hodgepodge of reasons, from which it is impossible to unscramble the extent of the influence of dispossession on the relative growth capital of the races, from its other, age-old sources.
• The other fact to acknowledge is that the economy is a system with systemic characteristics, in the sense that any intervention in one aspect of it is bound to influence and affect other aspects. Most importantly, any intervention that impacts on the attractiveness of the economy (or specific industries or businesses in it) as investment destination, also impacts on other parts of it. For example, BBBEE legislation not only empowers some black beneficiaries, it also, besides deterring investment in businesses, causes lowered job creation. Or, at a more topical level right now, any threat to private property rights deters the purchase and development of property (as farms, factories, mines or retail operations for example) which once again deters employment growth.
The upshot of all these facts is that, for historical reasons, on average there is a huge gap between average white and black growth capital.
Now the point about growth capital is that it is meaningless as a form of redress for historical disadvantage, unless it makes a real improvement in the income of any beneficiary.
That makes it significant that recent history has shown that – despite pervasive and continuing redistribution strategies – white people have not only maintained the income gap as against mainly African blacks, they have actually increased it. Despite the redistributive strategies of BBBEE, employment equity, labour law, welfare grants, public service employment given to blacks on the back of mainly white taxes, and so on, white people are still better off than blacks in terms of income, and increasingly so. That is the result of the historical advantage in terms of growth capital, but also the fact that whites have been incentivised by the very same redistribution measures aimed at helping blacks, to become more self-sufficient, to accumulate more growth capital than before, and on average to out-compete blacks.
The main manifestation of black people on average falling behind, is unemployment. Since 1994 unemployment among black people has increased by more than 150%. None of the redistributive strategies has worked. On the contrary, there is a strong argument that redistribution has resulted in counterproductive outcomes.
The key to all this is productivity. What I call growth capital, directly translates into productivity. And the most effective way to address that is education and work experience. It is no coincidence that in terms of a recent survey by the IRR, the most important problems for by far the greatest number of black respondents, were unemployment (38%) and lack of education (26%). Land was rated as most important by only 1%.
It is no coincidence either that BEE deals in the guise of agricultural land reform have almost universally failed. For instance, an assessment of 39 land-reform projects in Limpopo reported by the Institute for Justice and Reconciliation in 2015 showed that these projects had ‘caused an 89.5% decrease in production, as well as many job losses’. The obvious reason is that black people, who would in a normal market not have been interested or able to enter the farming profession, receive land to farm. Very few successful black farmers have emerged in the process.
Land is a productive asset for a beneficiary only if he or she has the ability to exploit it as growth capital. What is more, the vast majority of white people never acquired their income via the route of property. In fact, the shoe is on the other foot: They acquired education, which enabled them to get jobs, which in turn enabled them to take out loans from banks, with which to buy residential property. Far from denigrating the value of property, we should bear in mind that the 1 or 2 % of the population who make a living out of agriculture, are exceptional, not typical of white privilege.
But not all education and all work experience is equal.
Both of these will be optimal only if a fine balance is maintained between enabling the beneficiary to participate at a level that is easy enough to enable him or her to participate, but difficult enough to serve as a real challenge and learning experience. And the incentives in either case must be maximally conducive to top performance. In other words, the rewards (passing, distinctions, prizes and qualifications in the case of education, and appointment, remuneration and promotion in the case of employment) must be attractive enough to serve as the best possible spur to achievement, which can only occur if achievement matches the reward. Jobs and remuneration must match the productivity of workers.
In short, both institutions must function on the principle of merit.
Something similar applies to property. The benefit of land title is that land is then a tradable commodity. A purchaser of land is not the only conceivable person who can exploit it successfully. But he has one advantage over other players in the economy, and that is what is colloquially called “skin in the game”. A purchaser of land has an interest in ensuring that it is used economically optimally. This may take the form of developing it for own residential use, or as business premises, or as a farm or as a factory. Or simply as an investment. That interest creates an incentive to use the property as productively as possible. And even if he, and other owners, decide to hold on the property in the hope of realising a profit later, that will increase demand. If the demand is high enough, most owners will eventually sell. In that way the true value of property is determined, and it is not a wasted commodity. More importantly, such purchasers are best incentivized to develop properties as residential land, retail centres, farms, industrial areas or tourist destinations – all of which in turn will create employment.
By contrast, in a situation where the state becomes the custodian of all land with the discretion to distribute rights thereto in the interests of justice, the law with one stroke of a pen destroys the market in land. That will have the effect of removing the merit principle, so essential to ensuring productive use of resources, from land.
The ability to buy land is of course no guarantee that the purchaser has the skill to use it productively. But if he does not, he can sell or lease it to, or employ, someone who does. In any of these cases skin in the game ensures the best chance of a good decision on the merits.
A puzzling idea underlying the thinking of the author is the notion that all races should be equitably represented in property rights. Why does it matter whether or not property or land is the particular form that growth capital takes? The facts on the ground show that education and employment are far, far more important as engines to generate income. The vast majority of well-off white people – who earn, say, more than R20 000 per month, whatever they do – do so not through the vehicle of property, but through employment, independent service contracting or ownership in businesses.
It is precisely those people who out-compete blacks. They don’t do that by exploiting property. 99% of them are not farmers, landlords or property speculators. They are ordinary salary earners, professionals like lawyers, doctors or engineers, or entrepreneurs with IT companies, restaurant franchises or shops. What makes them prosperous, is not land, but education and productive work. In fact, it is their prosperity that enables many of them to buy residential properties, rather than the other way around.
Put together, all these factors lead to some incontrovertible hard truths that may seem hard to digest:
o First and foremost, African blacks are so far behind in the race that only exceptional individuals will reach material parity with privileged whites.
o That they will do partly because of their inherent talent, but not only that. More importantly, black people mainly will become competitive with whites only if they try much, much harder.
o There is no alternative that is likely to be more successful – no leg-up or preferential pathway, or compensation for disadvantage in the form of any of the redistributive strategies discussed above.
To use an analogy: In a sports league (rugby or soccer, say), it often happens that some players are injured because of foul play by others. Sometimes it is detected, and sometimes not. Either way, let’s say one of the players suffered a serious injury, causing him to undergo surgery, rehabilitation and a strenuous training programme to become competitive again. The only way that that player will get back to full competitive capacity (regain his “growth capital”, if you like) is by training much harder than the competition.
Any suggestion that that player should get preferential treatment during games because of his past injury, will fail. It will fail because:
o that player is unlikely ever to recover to full strength unless he is exposed to the full rigours of the game;
o but more importantly, the moment it becomes known that the game is rigged in that way to favour the injured player, the inevitable outcome will be that the league will lose its credibility as a competition to choose the best;
o In the result all serious players will soon withdraw from the league, and form their own, separate league;
o That will have the result that the standards of competition in the old league will go into decline.
In our economy we want the most serious players – investors, professionals and business leaders – to participate. The last thing we need is investors in property and property development being deterred because they do not acquire full dominion over their investment.
And if we are serious about creating the best chance of bringing the previously disadvantaged up to par, we must make them compete on merit. In property development, merit means the greatest possible opportunity and incentive to develop property as productively as possible.
The author of course does not believe that a merit-based property market (with protection of private property as cornerstone) will in actual economic terms deliver the best chance of growth and prosperity:
“The idea that a freehold system of land tenure is a necessary requisite for development and investment is not new. In South Africa at least, it began with the proclamation by the then Governor of the Cape, John Cradock, in 1813, which discontinued the system of loan farms in place since settlers started annexing land from Africans, and converted these into freehold titles. The belief at the time was that farmers did not invest as much as they should on the land because they did not own it.
This idea has proved incredibly resilient over the years, and has been the holy grail of modern capitalist thinking and accumulation strategies.”

The right to own private property – with its necessary corollary that the law must protect it – is one of the two crucial ingredients of a free-market economy, the other ingredient of which is the freedom to contract for the exchange of goods and services with minimal intervention by the state.
Free markets are most conducive to increasing citizens’ income. Here is a graph showing the correlation between market freedom as measured by the Economic Freedom of the World Index of the Fraser Institute, and per capita income:

And here is the correlation with growth:

And a chart showing that market freedom does not lead to greater inequality of income:

But even if we examine property rights in isolation, we get similar results. Here is a table showing the relationship between property protection and per capita income:

The better the protection, the higher the income.
What is perhaps more important, is that property rights do not create inequality of income. On the contrary, there is a slight preponderance of income equality among countries with the best protection of property rights.


What is more important, is that the first quartile of countries, those with better property protection and slightly more equal income, are countries where we have now seen that the average income is significantly higher than in other quartiles with less property protection. Simply put: the poor in those countries are significantly better off than elsewhere. That leads to the clear inference that property protection is on balance better associated with improvement of the life quality of the poor.
So, the author could not be more wrong when suggesting that investment and growth do not depend on property rights.
Finally the author attacks the idea that poor people should be given titles to property, whether land on which they already live or state land, as it will expose them to selling the land to the highest bidder, as they are not able to secure mortgages from banks to develop their land or themselves economically.
This is the point at which we should remind the author that economic development is indeed a matter of total transformation of all aspects of the economy that created the skewed power balances about which he is so aggrieved. Nothing less than complete economic freedom will do. More in particular, it would indeed be futile to give poor people land or titles to land, and not equip them with the tools to exploit it productively. Without education, employment and freedom to trade goods and assets, no title to property will make a dent in this problem.

0

The Growing Income Gap

One of the obvious problems being debated among policy-makers, economists and commentators is the low share of labour income compared to that of the wealthy, property-owning class, or the growing inequality of income, a phenomenon particularly notable in the US and other developed countries. This pattern is typically accompanied by growing wealth for the rich, especially growing equity values.
The first enquiry is to get the facts about wage income. Median wage income is a good proxy for the relative income of middle-class and poor people, because we know rich people’s incomes have been rising in recent decades (as more fully shown below):

Here is a graph showing median wage income in constant dollar terms:

What we see are various fluctuations, including three periods of wage growth, namely1982-88, 1996-2002 and 2014-2018.
For starters, it is clear that the simple narrative that wages and salaries didn’t grow is not correct. There has been overall growth in real income of 14% since 1980. As we will see below, the lion’s share of that went to the rich. But even so, it is useful to see what happened to cause intermittent periods of income growth, as I do a little later.
But first, let’s look at the overall trend of declining income. A major contributor to this has been the growth in true money supply in the US, shown on this chart:

The real money supply (which includes demand deposits with banks, ie “money” that banks’ customers are entitled to demand, even though the funds do not exist, typically 10 times the amount that banks are required by law to hold as cash). The money supply so defined has in recent decades increased in tandem with a decline in US federal Funds interest rates:

Lowered interest rates self-evidently encouraged customers to borrow more from banks. The more money is borrowed, the greater the impact of fractional-reserve banking. That is because borrowers spend more money in the market, which in turn finds its way back to the banks as deposits. That, in turn, enables banks to lend out more money.
It is clear that the early 1980s was the real watershed in this regard. Declining interest rates made it more and more attractive for businesses to borrow money from banks.
This is also the time during which a decline in total factor productivity has been noted:

This also was the period showing a trend for businesses to buy shares in businesses (including their own shares) instead of investing in research and development, training, new technology and new plant. Companies’ buy-backs of their own shares increased from about 5% in 1980 to close to 90% in 2000. The culture that took hold since the seventies has been one where consumption has been fuelled by debt, not productivity.
This is all no coincidence. It is a fundamental principle of economics that production has to precede consumption. Low interest rates effectively open the door to money creation out of nothing. That encourages malinvestment in the form of share buying instead of building factories (to simplify) and fuels consumption[2]. The Mises Institute explains:
“On account of loose monetary policy and the subsequent increase in the money supply, the process of wealth transferring from wealth generators to the holders of the newly created money is set in motion. Since this new money was generated out of “thin air,” nothing was exchanged for it, hence we have here an exchange of nothing for something.
This means the holders of newly printed money have taken from the pool of real wealth without giving anything back in return. Consequently, this puts pressure on the pool of real wealth. Similarly to government, these holders of newly created money are engaged in non-wealth generating activities. (These activities sprang up on the back of money pumping. In the free unhampered environment these activities, which ranked as low priority would not be undertaken.)”[3]
It is hardly surprising, then, that it is precisely the period from 1980 onward that was characterised by declining wages for the middle class and the poor. The reason for that is simply that the relative value of workers’ salaries and wages was watered down because the wealthy drew more dollars as a proportion of the total number of dollars in circulation.
It was also the period during which the different income quintiles parted ways, whereas before their income growth was very similar:

Indeed during the period from 1980 the top 10% outgrew the rest of the economy by a huge margin:

Money supply fuelled by low interest rates is not the end of the story however. An analysis of federal spending in the US also correlates with wage growth and decline, as a comparison of this chart, with the median income chart above, shows:

The pre-1980 era saw rising state spending and declining real wages.
Then the Reagan years (1980-88) were marked by declining spending and an increase in wage income.
Over the next 4 years the trends of both state spending and income growth were reversed.
The Clinton era (1992-2000 – circled on the chart), was marked by deep cuts in government spending measured as a percentage of GDP, and wages growing in response to that.
During the era of Bush (2) (2000-2008), spending rose sharply. Wage income remained largely flat, except for a spike right before the 2008 crash.
Understandably, post-crash wages declined between 2008 and 2012.
Then they increased again as the Obama administration managed to cut federal outlays.
So in most periods wage growth largely formed a mirror image of government spending. The explanation for this seems to be that the more the government spends, the less the private sector is able to spend on productivity-enhancing research and development, acquisition of technology and training of workers.
The exception to some extent is the 2008 year, which seemed to be a blip in this pattern. That was the year in which the Greenspan era reached its zenith. The priming of the economy created a once-off spike, after which it plunged to new depths.
Long story short, in 2008 Greenspan’s effectively negative interest rates and the government policies designed to encourage a national splurge on new mortgage bonds resulted in the biggest financial collapse since the great Depression. For a brief period it seemed as if every indicator – home ownership, employment and income, seemed to hold the line. But it could never last. The plunge in wage income between 2008 and 2014 was a sickening drop.
Now let’s interrupt the monetary narrative for a moment, and consider the impact of economic freedom, ie the degree to which individuals are free to engage in market transactions as measured by institutions like the Fraser Institute.
To help with the comparison, I’ll use the same periods analysed above, namely the respective presidential terms:
1980-88: During this Reagan era US economic freedom increased from 7.92 to 8.40, which, together with the decline in spending, helps to explain why wage income increased handsomely.
1988-92: During this term of Bush (1) economic freedom remained high. This was however offset by significant increases in federal spending, so that in the net result wage income declined during this period
1992-2000 (Clinton): This was a good era in that economic freedom was high, and in fact increased, and spending was cut. It is no surprise that wage income grew.
2000-2008: During this period (Bush (2)), economic freedom declined, and spending rose. Wage income trended downwards.
2008 to 2014: This era (under Obama) saw a significant decline in economic freedom. Despite his reining in spending somewhat, employment income dropped.
2008 to 2014, importantly, was also the period of zero interest rate policies (ZIRP) and quantitative easing (QE), money-printing mechanisms by which the Fed loaded its balance sheet, as this chart shows:

The growth in the Fed’s balance sheet (which was made up by growth in equities and similar instruments) caused an unprecedented surge in buying on the NY stock exchange. This in turn caused massive growth in the value of shares, as the next chart shows:

To summarise then:
The era of relative wage decline for the middle and poor sections of the population was introduced in about 1980, when the decline in the Fed’s interest rates and consequent money supply growth began. The broad trend of declining income for the bottom 90% has continued until now.
But within that broad trend there have been multiple fluctuations that partly correlated with government spending: the higher the spending, the lower the wage growth, and vice versa.
The growth or decline in wage income also correlated with economic freedom. The freer the economy during a particular era, the better the wage growth, all other things being equal.
What the developing world (of which the US is a good prototype) thus needs, is a return to a real (as opposed to a paper) economy, where federal interest rates are a reflection of market demand (and not government fiat), where the money supply is stabilised and where state spending is reduced, making more available for private-sector investment.. That would incentivise private sector firms to spend on real productive capacity, as it will no longer be cheap and easy to buy shares in other companies or one’s own, on credit.
A good dose of economic reform (towards freedom) and reductions in government spending are also crucial.
Together these factors will improve productivity, the only realistic way to turn wage growth around.
One should not hold one’s breath. There are far too many vested interests (central bankers, politicians, wealthy shareholders and pension funds, to name but a few) gorging at the feeding trough.

0

The moral case for a free market in a society with past discrimination

Is there a moral case for a free market where a significant portion of the population has by law for years been excluded from the economy? In short, can we justify a free market in South Africa in circumstances where there was an apartheid economy with group areas, inferior education, job reservation and all other manner of similar prejudice to black people?

It must be understood what possible justification there is for the alternative. State intervention is purportedly justified on the basis that it is necessary and effective in redressing the wrongs of the past. Here we have in mind things like affirmative action, black economic empowerment, labour laws, welfare grants paid by the state and lately, expropriation of property without compensation. A free market is all very well, those in favour of the alternative might say, but only once redress has restored justice between the different groups.

One potential difficulty in criticising the latter argument is that one is often, if not invariably, driven to a utilitarian argument relying on the practical economic results of a free market and state intervention, and arguing that the former is more effective in bringing about redress. Which it is. (Without going into the argument in detail, economically unfree markets are inefficient, resulting in suppressing growth of jobs and income, undermining the very aim of redressing disadvantages.)

The question addressed here is whether there is an a priori moral argument in favour of the free market in these circumstances, and is it persuasive?

To start, let’s define our terms. A free market is a market in which people have freedom of contract and the right to protection of private property legally acquired – that is, through free, voluntary exchange of property or labour, or inheritance of property similarly acquired. In such a system the state does not intervene by prohibiting or prescribing any contractual terms, or confiscating property. The state’s commercial role is limited to maintaining and enforcing the law of contract and property.

Voluntary agreement as a means to dispose over people’s goods and work, must as a rule trump the use of force (whether by individuals or by government). Highly convincing reasons need to be supplied to justify departing from voluntary agreement as a mechanism.

As a mechanism of protecting disposal over property and work by agreement, a free market is an extension of two desirable human states: human freedom and human dignity. An important aspect of both states is the ability of humans to determine their own destiny, in particular their own economic destiny. Self-determination through freedom of choice is a fundamental manifestation both freedom and dignity.

Two things are clear: Firstly, it is hard to conceive of any human being arguing that his or her freedom and dignity are not fundamentally important. And secondly, by its very nature a right to either must be universally accorded. One person cannot morally claim the right to either dignity or freedom for himself to the exclusion of others. That would not be freedom, and it would not be dignity. It would be arbitrary tyranny.

The universal principle that the law must not be arbitrary, is a manifestation of this principle. That is the cornerstone of what we know as the rule of law, namely that subjects are ruled by objective law, not arbitrary whims of people. This principle demands that all citizens are treated as equal before the law.

An apparent exception may be that individuals may be ordered by a court of law to relinquish their freedom, or undergo the indignity of imprisonment, or give up property (fines/compensation) in proportion to the extent to which any of them has infringed another’s freedom, dignity, property and so on.  As such it is only a quasi-exception, because it is done in service of the universal rights that have been infringed. Then it goes without saying that such redress must be done on a relevant, objective and non-arbitrary basis.

This moral principle also requires that any such limitation must be predictable in result and extent.

The state can and should be empowered to protect dignity and freedom. The right to freedom cannot be arbitrary, or be granted by the whim of the state or its officials.

Nor can dignity be protected piecemeal, or only for some, without offending against the same principle.

What is the moral underpinning of these rights? What is their source?

Without postulating a deity who wrote these rights on tablets of stone, where do they come from?

We certainly know where the desire for both comes from. There is a desire for freedom and dignity in individuals. It is an evolutionary and developmental outcome. Both are essential to our survival, and have enabled us to survive and prosper in almost any environment on earth.  It is essential to what it means to be human. We see ourselves as free agents with choices. Those choices also include the choice of voluntary cooperation.  Although animals also cooperate (lions hunting or elephants trekking together, or ants building their complex mounds), as a species we are unique in the degree and complexity of our cooperation. Cooperation is what we regard as a hallmark of what we have in mind with the notion of “civilisation”.

The urge for both freedom and dignity literally form part of our human DNA. It has survival value. It is a very powerful force, and it is almost impossible to destroy.

That of course is not evidence of their moral superiority, but indeed of their value to human beings.

But that does not make it irrelevant to locating the source of the rights. My view is that the source of the rights of freedom and dignity is their universal recognition by all people, precisely because they are valued so highly.

Here is a way to assess that.

We can test the universal acceptability of asserting and adhering to these rights as universal human rights, as opposed to any other position that denies them, with a thought experiment: We place ourselves in the notional position where we are a newcomer to life, and don’t know who we are. We don’t know if we are rich or poor, clever or not, in which country we were born and what our ethnic, religious or other heritage is. That being the case, would we rather have the benefits of universal rights of freedom or dignity, or not?

There is no question – we would want both. Moreover, that logically implies we would want both in the form set out above, namely as universal, non-arbitrary rights owned by all individuals. Given a choice, and entering the game of life by lottery as to our identity and circumstances, would we rather, together with other individuals, have the freedom and be accorded the dignity to determine our own destiny? Can there even be a debate about this?

The right to life is in a way a corollary of both freedom and dignity. In a way the denial of life (killing) is the ultimate form of denial of freedom. Integrity of the body is., most people would agree, integral to human dignity. The most fundamental invasion of that integrity is death.

An intermediate position is to intervene in someone’s freedom and dignity by restraining his movement. Anyone will agree that in principle the right to movement is sacrosanct. An important manifestation of that right is the right freely to associate with whomever one pleases.

The freedom to think and formulate those thoughts in discussion, is a further extension of the freedom that humans desire and value very highly.

In other words, people cherish the ability to use their minds and bodies as they see fit. The universal character of any notional right that makes this possible, self-evidently means that the exercise of any right is dependent on the beneficiary not invading the rights of others to do the same.

An important part of the right freely to use the body and the mind, is the choice to work or not to work, and how to do so, and with whomever one chooses, on such terms as both parties agree.

From there it is a logical step to say that anyone is entitled to keep that which he or she has made or acquired through his or her own labour, service, ingenuity or agreements with others. That includes land.

All these rights can be tested by means of a similar thought experiment, and in each case the outcome is incontestable. The fundamental right is universally acceptable.

People only start denying these rights to other people when they see an opportunity to advance their own interests at the expense of others. This applies to politicians and their supporters, who often use government power to infringe these rights.

So let us consider the state as an agent in all this. In a democracy the state or the government (used interchangeably here) is an agency appointed by people to organise themselves more efficiently – just like people create commercial partnerships, companies, committees, neighbourhood watches and clubs to organise certain aspects to promote their well-being.

It is difficult, if not impossible, in a large organisation or political unit always to take decisions by consensus. Requiring that may lead to paralysis, and the larger the unit, the more difficult it is. That has resulted in the notion of agency by majority vote. That creates problems in that the minority’s wishes are not necessarily served, and in that the wishes of many in the majority, by reason of the diversity of interests and issues at stake, are often not considered either. Add to this the problem of incumbency, namely that representatives are in positions of power for a full term, which gives them power to entrench their positions.

Because of the practical dictates of modern governance, politicians exercise huge power, which is fundamentally power over taxpayers’ money. In addition they often exercise power over how individuals have to behave – in particular how they behave in the commercial arena.

That power is jealously guarded. Long before democracy, kings demanded taxes from citizens, which demand they enforced with the might of their armies. Governments in the democratic era built on this idea by claiming that they would use taxes to benefit the populace, but we must not be quick to assume that their aims are more public-spirited than the kings of old.

Not all tax is used as efficiently as it can be. We have on the whole no choice about:

  • Whether we must pay taxes;
  • If we do, what they would be used for.

The traditional theory is of course that there is a social contract between individuals and the state, in terms of which we “agree” with the state to take our money in exchange for services it performs for our benefit. The fact is we don’t and it doesn’t. Any individual of voting age who is unwilling to grant the power to the state to confiscate or spend his income, is powerless to do anything about it. The same applies to his ability to conclude voluntary exchanges with others. From a moral point of view it is surely no answer to say that this is just how things have developed, and it has worked reasonably well until now.

Viewed like that, government power, in particular taxes and related commercial power, are serious breaches of the rights to freedom, dignity and property.

How is all this affected by the call for redress?

It is true that in past years many individuals’ freedom and dignity were infringed, for example in South Africa, where there can be no doubt that apartheid was a major infraction of both. That gives rise to the argument that the rights to dignity and freedom of disadvantaged groups can morally speaking be served only by redress in the form of differential rights accorded to groups – that is, you will appreciate, by the state using force to expropriate property or income from members of the advantaged sector.

The reasoning is that the individual members of groups are victims in the sense that their very membership of groups against whose members discrimination was practised in the past, causes them to suffer now. Similarly, although not all members of privileged groups have perpetrated discrimination, they indirectly benefit from it. And the only moral way to address that (so the argument goes), is through redress against members of groups whose members perpetrated, or benefitted from, such discrimination.

What is more, the agency who should perform this redress, is the state, by using its power. Infringement of the rights to freedom and dignity, as well as property, of members of the privileged groups is thus claimed to be justified.

Again we must remind ourselves that the question here is not whether the infringement will be more or less effective in bringing about the redress than the alternative, which is simply to accord to all the same rights. The question is whether in principle it is justified to use the power of the state in this way.

Again, we must return to the premise that the state is an agency that invades our rights to freedom, dignity and property. For better or for worse, to some extent it denies us as human beings the freedom and dignity of self-determination. To make matters worse, the state becomes the arbiter of how much infringement of our freedom, dignity and property is justified.

Bear in mind this is not a case where an independent court adjudicates disputes between individuals, namely to place the previously disadvantaged in the position that they would have been but for discrimination of the past.

Membership of a group cannot be used to determine guilt on the part of individuals in the group regarded as privileged. It is impossible to assess the guilt of each affected individual in such a large group. Guilt by association is universally regarded as morally reprehensible. Needless to say, it is a gross violation of the injunction against arbitrary treatment. Guilt can therefore not be the justification for redress.

Proponents of a group-based redress scheme are thus driven to rely on the principle of unjustified enrichment. But whilst the principle is well-known in our law, it works only between identifiable individuals, in respect of identifiable wealth, goods or other material benefits gained, whereby the estate of one individual has been enriched, without justification, at the expense of another identifiable individual. Laws that use group identity as a proxy for respective enrichment or impoverishment, offend against the moral imperative of non-arbitrary treatment embodied in the moral principle of the rule of law.

There is no symmetry between the treatment of individuals of either group. For example: Many whites today are members of groups that historically enjoyed the doubtful benefits of apartheid. I say these benefits are doubtful, because both the perpetrator and the victim suffer due to economic discrimination. In SA, for example, in the absence of discrimination, the trained workforce, and the affluent purchasers’ market, would have been five times bigger, as blacks became part of both.  That would have benefitted both groups. Whites would have been even wealthier in such a market.

In such a group-based scheme no affected individual necessarily benefitted or suffered in proportion to the redress effected. Many blacks benefited in other ways, or suffered in ways unrelated to past discrimination. Many whites did not benefit from the offending discrimination (immigrants or children of poor parents, for example). Many whites benefit from their fortuitous descent from immigrants from Europe who, when they arrived here, were already privileged due to the historical happenstance of the development of agriculture and subsequent technological advances thereafter.

Ethiopia and Liberia are two countries in Africa that were never colonised. These two countries are very poor, more so than many countries that fell prey to colonialism. The whites of Switzerland, Sweden, and Luxembourg, countries that never colonised anyone, are ages further advanced in educational, technological and economic terms than citizens of Liberia and Ethiopia, and for that matter, many whites of colonial powers. In many ways this disparity is the result of no more than dumb luck. People in both groups of countries are simply better off or worse off as the result of a series of mostly coincidental factors. The same applies to many individuals in South Africa, whether black or white.

The result is that it is simply impossible to quantify the required extent of redress.

The difficulty of quantifying the redress needed is no small matter.  Redress, being group-based and arbitrary (having regard to the vast number of imponderable variables distinguishing individuals) will always leave room for complaint, namely that some previously disadvantaged individuals benefit more and others less than they should be.

An even bigger problem is that as a matter of sheer logic we do not know at what point redress will be complete. How do we ever know that we have reached the ideal outcome where that mythical state is achieved where both parties will be in the position that they would have been but for the offensive discrimination? We will never, ever know, which must mean that there is no logical or evident point at which the process will stop. Any attempt at stopping it will, by reason of its arbitrary origins, be just as arbitrary in turn, and lead to the predictable claim that the redress is not complete. The result is that the entire system will be arbitrary.

But perhaps that does not matter. The authorities would get it more or less right, not so?

That is by no means clear. Without having to defend the utilitarian benefits or disadvantages of either system, what we can say is: Just as we do not know when redress will be complete, there is no earthly way to know that race-based redress would be more effective than the alternative. Then a moral principle akin to the medico-ethical injunction should apply: First do no harm.

That means that the best we can do, is to say that all participants should play under the same set of rules.

In such a world everyone would enjoy the same rights of freedom, dignity and protection of property.

Let’s then test how such a system would operate, while all the time resisting the temptation of empirical or utilitarian argument.

Fundamental to the free market is a system of voluntary exchange – freedom of contract. In principle at least no one is compelled to enter into a contract. The interventionist’s retort to this is of course to say that previously disadvantaged people do not have a free choice, because their bargaining power is so weak that it amounts in effect to no power at all. At the very least, they will say, they can be exploited.

This issue is best understood in the labour context. What does it mean to say a worker can be exploited? Conceptually it is impossible to get our minds around this. Conceptually, exploitation means that employees are paid too little. Too little compared to what? There is no objective standard by which we can measure whether a worker is paid “too little”. The worker’s needs do not determine that, not least as not all workers have jobs. That means they get no wage at all, and we cannot force employers to employ all workers. Unemployed workers have the greatest need of all, yet they get no wage. Moreover, not all workers have the same needs, and assessing those objectively is impossible.

The purpose of the worker’s service is to create value. That is what he is paid for. No more and no less. The relevant criterion for the wage is therefore the assessment made by the employer of that value, and the employee’s assessment of the value of the wage. The easy way to test this, is to ask: What if the employer does not want to employ the worker? Then we know that he does not offer sufficient value. The wage offered for the unemployed worker (nil) reflects the commercial value he represents to the employer.  If that is so for the unemployed worker, why would it change for the employed worker? The relevant criterion remains the value he adds.

Weak bargaining power is a reflection of low demand for services. It means that the worker’s productivity is low, causing his labour to be priced very low by employers. One way or the other the value for money that he or she offers is low, which in a free market gives the employer a choice between employing the worker at the market wage, or not at all. There is no other reason for any low wage offer.

Having said that, neither of the two would enter into the deal unless they both believed that in the net result they would be better off after the exchange than before.

Let’s for the moment leave aside whether in the real world they are correct in this assumption. Leaving that decision to the parties is morally justified. It accords with the value of dignity and freedom outlined here. We cannot prescribe to grown people what is good for them. That would be to treat them like children.  That is not dignified. Adult people should – from a moral point of view – have the freedom to choose what to do with their lives, and how to improve it and those of others. As we have seen, both parties believe they are better off pursuant to a market transaction, than without it.

The need for redress does not affect the outcome of this exercise. The employer will still have to decide whether employing the worker will be worth the expense.

At least in a free market the parties have more choices than where they are constrained by state prescriptions, and the parties apply their minds to improving their own position to best effect. That they may sometimes be wrong, doesn’t matter. A free market creates more opportunities than any alternative, for participants to improve the collective welfare of participants.

Since value for money is the relevant criterion for the employer’s decision whether to conclude a particular employment contract, it is only natural to expect that group-based redress in the form of black empowerment (BEE) legislation, employment equity (EE) rules and labour laws in the form of trade union protection, minimum wages and anti-dismissal laws, will benefit the stronger set among the previously disadvantaged. The market will always give preference to the best-qualified and the highest-skilled in such a group, as they will invariably offer better value for money. The employer will tend to choose to employ more powerful workers. As the latter would then get their benefits at the expense of the weaker set, that is fundamentally unfair.

We do not need empirical evidence to make this point. It is axiomatic that investors’ working capital is a scarce resource. That being so, any employer will always reach a point where no single further worker can be appointed. Where the law increases the cost of that appointment, whether by way of BEE, EE or labour regulation, that point will come sooner, excluding more workers.

The law denies freedom of contract to the parties in this way. This denial disproportionately affects the weakest set of the workforce, the very ones the law is meant to benefit and uplift. That is unfair.

I started out by making the point that freedom as a fundamental right cannot be granted to some, and not to others. The law in effect permits the better-endowed portion of the previously disadvantaged – those who are better qualified through study, training and experience – to get jobs in BEE, EE and labour-law protected jobs. The weaker workers who lack these attributes can compensate for their disadvantage in productivity only by discounting their wages. But if the law makes their labour too expensive, they are not free to contract on the terms that they and the employer are prepared to agree in the absence of the law.

Arbitrarily benefiting the strong at the expense of the weak is always immoral.

Perhaps because the government is alive to the unfair treatment of the weakest set, the answer in a country like South Africa is then to use taxpayers’ money to provide welfare grants to the unemployed. Assuming for the moment that it is possible to pay all of them grants, and ignoring the question of the utilitarian value of this, is that morally fair?

Again, insofar as this forms part of the process of redress to the previously disadvantaged, it suffers from some of the same moral deficiencies as BEE/employment equity and labour law. To the extent that it aims to restore the weak and the powerless victims of past discrimination to the position they would have been in but for such discrimination, it is impossible to know when the redress will be enough. It will never stop.

Here we should pause and remind ourselves that the infringement of freedom, dignity and property of the privileged does not occur with their express permission. It conceivably occurs with what can best be called quasi-permission. In other words, even though the privileged have at no stage given permission to the state through its power to limit their freedom of contract, take their property in the form of taxes and otherwise, they nevertheless tacitly permit these infringements by complying with commercial rules, paying their taxes and otherwise complying with the law. They do so in part because not doing so is likely eventually to earn them imprisonment or other punishment.

But that is not all. The other reason they comply with the law is because it enjoys some kind of legitimacy, partly because the privileged appreciate the point of redress, both from a loose moral perspective and from a pragmatic perspective. It is also, when weighing the costs and benefits, worth the sacrifice in order to carry on with life, in particular commercial life.

Meanwhile the state is on the horns of a dilemma. The more it seeks redress from the privileged, in particular where its completion is not defined and therefore indefinite, the more the legitimacy of the redress in the minds of the privileged is eroded. It is fair and reasonable for the privileged at some stage to ask: But when will this end? How will we know that we have paid our debt?

A crucial part of the definition of tyranny is the feature of arbitrariness of action. Tyrants are irrational and unpredictable. They will in the scenario sketched, either not tell the privileged victims of infringement when the redress will be complete, or if they do, it will not be a reliable assurance. The reason is that the redress will never actually reach a point it will be to the legitimate satisfaction of all.  It is no small matter that in the absence of a measure of when redress is complete, there is literally no accountability. One of the basic tenets of the rule of law is that a subject should be told what to do to comply with the law.

We must remember too, that beneficiaries receive grants in exchange for no productive work in return. That does not restore them to the position they would have been in but for discrimination. But for discrimination they may well have had jobs and businesses. Certainly no proponent of redress would want it otherwise. They would have made a dignified contribution, by free choice, to the collective production of the economy. As recipients of free handouts they are a net drain on that same economy, at the expense of their dignity of person and freedom of action. They become subjects enslaved by the state and bereft of meaning to their lives.

There is a not-so-subtle insult inherent in a handout. It implies that the recipient is incapable of making his or her way in the world on merit. We would never have treated these beneficiaries like this in a fair dispensation from the start. Why now?

Even if we could determine when the redress through handouts is complete, the recipients will by then be incapable of starting with jobs. They will have been hooked into perpetual addiction, incapacitated by kindness. That alone destroys the moral justification of such a system.

Returning to the privileged set: It is inevitable that conflict will escalate between the state and the privileged, as the latter increasingly evade and avoid their legal obligations due to the progressive erosion of the legitimacy of the process, and as the state feels compelled to take more draconian steps to increase the scope and the impact of the redress. For example, if labour laws do not work, it introduces employment equity. If that does not work, it introduces BEE. If that does not work, it introduces social grants paid to the growing unemployed proletariat. And if that does not work, it introduces the seizure of property without compensation. And so on.

Avoidance and evasion by the privileged may take many forms. Black markets, emigration, tax evasion and avoidance and the increasing use of illegal immigrants as labour, are conceivable examples. The point is that freedom cannot increasingly be infringed without a loss of trust. The amount of trust a government enjoys is a loosely calibrated measure of its legitimate power. Legitimate power to intervene in citizens’ rights of freedom, dignity and property, depends on trust. The social democracies of Scandinavia, for example, are repositories of that kind of trust in a homogeneous society, despite huge intervention in the freedom and property rights of their citizens. It is no coincidence that these societies have very few divisions demanding redress of previous disadvantage.

Where trust is gradually eroded, the state needs to rely on brute force more and more to enforce its scheme of redress. Somewhere along the line the thin veneer of the “social contract” that covers the relationship is stripped away, and it is exposed as a power struggle.

Logic dictates that  perpetual infringement of freedom, dignity and property of subjects is likely ultimately to lead to extreme force to impose infringement, namely imprisonment and death. Long before that point is reached, all moral force on the state’s part will have been lost.

Even if we assume that there is no evidence suggesting the utilitarian superiority of one system over the other, redress by the force of the state is morally wrong. The only moral alternative is a free society, including a free market.

0

Website created by Blog Meistress