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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.



This is a response to an article by Montier and Pilkington ( 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
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.


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.


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.


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.



The Democratic Alliance at its recent congress raised and debated the policy proposal that child grants paid to poor parents should be increased in value and in due course doubled. The justification is a laudable one. The DA is concerned about high rates of malnourishment that is prevalent among poor children, and that manifests as stunted growth. That in turn has a number of deleterious consequences, including diseases and educational disadvantages suffered by young people.

It is important that we remind ourselves at the outset what it is that we want to achieve: We want to avoid the poverty trap that is making this endemic developing-world state of affairs possible.

Being a poverty trap, it is only fair that we should point out the obvious: If we can turn poverty around, we can deal with this problem. The first point to note therefore, is the simple one that the higher the per capita GDP of a country, the lower the malnourishment. Here is a list of African countries, selected at random save for the deliberate inclusion of SA and our neighbour Namibia, showing their GDP per capita and their rate of malnourishment according to the statistics of the World Bank:

Country Per capita GDP Malnourishment 2015
Mauritius 9822 5.2
Gabon 9569 7
South Africa 7488 4.6
Botswana 7483 26
Namibia 6045 28.8
Ave 1st quartile 8081 14.32
Angola 3582 14
Congo 2798 28.2
Nigeria 2455 8
Ghana 1707 7.6
Cameroon 1495 7.9
Ave 1st quartile 2407 12.14
Kenya 1143 19.1
Zimbabwe 917 44.7
Tanzania 867 32.3
Rwanda 738 41.1
Burkina Faso 663 20.2
Ave 1st quartile 865 31.48
Uganda 662 39
Mozambique 515 26.6
Ethiopia 511 28.8
Malawi 481 25.9
Liberia 352 42.8
Ave 1st quartile 504 32.62


It is fairly clear that in Africa at least, it is the relatively wealthy countries that have best dealt with the problem of malnourishment. That problem will best be tackled then, by growing our economy.

The second point is that even in poor countries, per capita growth improves countries’ response to malnourishment:

Country PC GDP % Δ Mal % Δ
Ethiopia 160 +44
Mozambique 101 +34
Nigeria 90 +11
Ghana 76 +52
Mauritius 76 +27
Ave 1st quartile 33.6
Tanzania 74 +14
Angola 70 +72
Namibia 61 -9
Uganda 60 -28
Burkina Faso 52 +20
Ave 2nd quartile 13.8
Botswana 51 +36
Kenya 37 +68
Rwanda 31 +34
Cameroon 28 +74
South Africa 28 +2
Ave 3d quartile 42.8
Malawi 23 +4
Congo 18 +13
Gabon -5.6 +25
Liberia -10 -10
Zimbabwe -27 -3
Ave 4th quartile 5.8


The next question is whether social spending (welfare payments) improves malnourishment. Here is a table setting out social spending of the same list of countries, together with their levels of malnourishment:

Country Social spend ($) Malnourishment 2015
Mauritius 626 5.2
South Africa 408 4.6
Namibia 334 28.8
Botswana 232 26
Angola 117 14
Burkina Faso 31 20.2
Gabon 31 7
Ghana 26 7.6
Rwanda 25 41.1
Liberia 23 42.8
Ethiopia 16 28.8
Malawi 16 25.9
Mozambique 15 26.6
Uganda 14 39
Nigeria 13 8
Kenya 11 19.1
Tanzania 11 32.3
Zimbabwe 8 44.7
Congo 2 28.2
Cameroon 1 7.9


At first blush it seems as if the countries in the first quartile have low malnourishment because they have high social spending, which seemingly vindicates the proponents of the doubling-down hypothesis. But under scrutiny this hypothesis fails:

  • The countries in the first quartile are all wealthy countries, that have low malnourishment. This accords with the correlation between per capita wealth and low malnourishment that we see in the first table. It may well be the relative wealth of their citizens that improves malnourishment;
  • That this is so, is demonstrated by Ghana, Gabon, Congo and Nigeria, that disprove the idea that it is grants that achieve the beneficial results. These countries are all relatively wealthy countries (in the African context at least) and they have low malnourishment figures. Most importantly they have very low social spending. That supports the idea that what matters is wealth created by people themselves, not social grants.
  • The 2nd, 3rd and 4th quartiles do not continue with the trend of high levels of social spending correlating with low malnourishment. If there was anything to the theory, we would have expected lower social spending progressively to deliver more malnourishment. There is no such correlation. The bottom quartile is as successful as the second in fighting malnourishment.
  • Unfortunately we do not have figures to compare the change in social spending in the different countries. But what we do know, is that in South Africa social spending increased exponentially. Here is how a 2014 report of Statistics SA titled ‘Poverty trends in South Africa : An examination of absolute poverty between 2006 and 2011’, describes the growth of welfare in South Africa:

“South Africa’s social assistance system has expanded tremendously since 2000, growing from around 3 million grants to 15 million by 2011. Growth in grants has been primarily driven by the expansion of child support grants which increased from roughly 150 000 recipients in 2000 to over 10 million in 2011. The coverage of this grant has successively been extended to children in older years, reaching those between the ages of 15 and 16 in 2010 and thus increasing its ability and reach to improve the lives of those living below the poverty line. Between the IES [Income and Expenditure Survey] 2005/06 and IES 2010/11, the number of grant holders increased by over 46%, growing from 10.2 million in 2006 to 14.9 million in 2011”.[i]

Against the background of such growth, if these grants were necessary and effective in dealing with the problem of malnourishment, one would have expected that malnourishment would have been much worse in 2000, and would have been drastically reduced since then. Instead, as we see in the above figures, SA already had relatively low malnourishment by African standards, and it was not reduced by any significant degree between 2000 and 2015.

The authors Deveraux and Waider show[1] that while there has been some reduction in the prevalence of out-and-out hunger, the rate of stunting due to malnutrition was almost constant over the period 1993 to 2008, with a very modest decline in 2012.

The point is if grants were such a powerful instrument to fight malnutrition, should we not by now have seen a far more dramatic improvement?

We must remember that over the same period (2000-2015) unemployment in SA (on the narrow definition) increased from about 4 million to 5.5 million. That means that while it is true that many people were lifted out of absolute poverty by means of social grants, these grants went to an increasing crowd of jobless workers. (Theoretically of course they went in aid of children, but remember it is the parents who spend the money, so all the unemployed adults in an extended family are likely to benefit too). The result is not only that an increasingly unproductive process is taking place (as fewer people work for the food so distributed), but the number of mouths to feed (other than targeted children) is increasing all the time. This creates a classicwelfare trap. While fewer produce, more become dependent on consuming.

What is more, given the need to spread the meagre produce purchased with a grant in this way, is hardly likely to achieve the aim of good, balanced nutrition for children.

So inevitably the proposal is now to double the benefit. That must mean that there will be an increasing burden on the fiscus. According to the South African national budget for 2017/18, out of total income of R1 414.1 billion, R180 billion already goes to welfare[ii].

That amounts to about 11.5 per cent of the budget.[iii] It is not clear where the saving should come from to fund the doubling og the grant.

In this context it is worth revisiting evidence that amongst South Africa’s peers, countries with high state consumption spending invariably have higher unemployment:

In other words, the more the state spends (as is likely to happen if the suggestion of the DA comes to fruition), the more the takers are likely to be. The economic principle is known as “the tragedy of the commons”: As soon as a resource is free and available to the public, it tends to be exhausted as more and more people make use of it. There is no check on the consumption. Long before any economic benefits of improved child nutrition will be felt, those benefits will be swamped by the growing idleness that feeds on it.

What is more, there is a strong case to be made that welfare grants contribute to our reprehensibly low start-up rate of small businesses.

Here are the percentages of the population intending to start a business in South Africa compared to the other African countries cited in the Global Entrepreneurship Monitor 2016/17 Global Report (GEM Report):


Country Entrepreneurial intentions (%)
Burkina Faso 63.7
Cameroon 34.4
Egypt 63.8
Morocco 36.2
South Africa 10.1
Average, excluding South Africa 49.5

Source: Global Entrepreneurship Monitor 2016/17 Global Report[iv]


It is clear that the vast majority of our unemployed do not even consider starting a business.

The same story is told by the figures showing ownership of new businesses:


Country New business ownership rate (%)
Burkina Faso 13.5
Cameroon 10.9
Egypt 6.6
Morocco 4.3
South Africa 3.3
Average, excluding South Africa 8.8

Source: Global Entrepreneurship Monitor 2016/17 Global Report


Someone sitting at home (possibly in a free government house) who receives a grant providing enough to buy food for the family, may well have felt compelled to start a small business in the absence of that grant. It is clear that there is a perception that the government will provide. There is no urgency to start new businesses.

Is South Africa exceptional in this regard? Here is a list of various African countries (selected on the basis of availability of data) and the percentage of GDP paid towards social welfare by each:


Country Total public social expenditure as % of GDP Total public social expenditure per capita (US$)
Burkina Faso 1.200 20.35
Central African Republic 2.800 17.32
Djibouti 0.100 3.49
Ethiopia 1.100 17.91
Ghana 0.500 21.05
Kenya 2.500 77.22
Morocco 0.900 70.57
Namibia 3.400 353.97
Nigeria 0.300 18.01
Senegal 1.000 24.10
South Africa 3.000 396.27
Sudan 0.600 26.32
Tunisia 0.500 58.09
Uganda 0.600 11.10
Zimbabwe 0.400 7.15
Average, excluding South Africa 1.057 51.90

Source: World Bank[v]


Save for Namibia, South Africa is by far the highest spender of state funds on welfare in terms of percentage of GDP. South Africa spends three times as much on welfare expressed as a percentage of GDP, but more than six times as much in absolute dollar terms per capita, than its African counterparts.

Looked at another way: as there are about 17 million welfare recipients in South Africa (about 30 per cent of the population), we are talking of a massive injection of cash for no productive work in return. That $396.27 per capita per year translates to about R1 350 per beneficiary per month on average. In comparison to South Africa’s $396.27, of the entrepreneurial countries identified earlier, Burkina Faso spends $20.35 per person per year. Uganda, recently named the most entrepreneurial country in the world,[vi] spends a puny $11.10. These countries have such low welfare payments that clearly there is strong motivation to work or start a business.

No country can hope to supply jobs to all of its citizens who want to work, without a growing business sector. Every single private-sector employer once was a business start-up.

There is no way in the world that we will reverse the growing tide of unemployment by means of welfare grants targeted at children, while those are gradually and voraciously eaten up by the unemployed.


In its May 2016 report ‘South Africa: A new growth strategy’, the SAIRR highlighted the following change in the relationship between the number of people in employment and the number of people receiving social grants:


“… the number of people on social grants now exceeds the number of people in employment. In 2001, before the major roll out of child support grants occurred, there were 312 employed people for every 100 on social grants. Now there are only 86 people with jobs for every 100 people on social grants”.[vii]


Welfare grants are displacing employment. The only sources for state expenditure are taxpayers’ money, state borrowing or printing cash. All of these undermine the collective purse of the country, taking up money that could have been used by the private sector to create real jobs and wealth.


Africa Check recently reported:


“There is concern over whether South Africa’s spending on social welfare is sustainable in the long term. According to research that has compared the government’s expenditure on social grants and civil service remuneration since 2008 with government revenue over the same period, these will absorb all government income by 2026 if current growth trends are not adjusted” [my emphasis].[viii]


That may well not happen. But how are we to turn the growing trend of unemployment around if we were to double child care grants? There is not a socialist policy that fails (and believe me, this one is failing) that does not sooner or later elicit the retort from its proponents: What we need to do, is just to spend more money on it.

No we do not. What we need to do is to create more jobs. Millions more. Towards which which the Job Seekers Exemption Certificate, also proposed by the DA, is an excellent start.


[i] Statistics South Africa, ‘Poverty trends in South Africa: An examination of absolute poverty between 2006 and 2011’, 2014, available at (last accessed 22 March 2017).

[ii] Budget 2017: Budget Review, National Treasury of the Republic of South Africa, 22 February 2017.

[iii] Ibid.

[iv] Global Entrepreneurship Monitor 2016/17 Global Report (Global Entrepreneurship Research Association, 2017), available for download at (last accessed 20 March 2017).

[v] World Bank, Social Security Protection Indicators, available at (last accessed 22 April 2017).

[vi] Megan Kurose, ‘The most entrepreneurial country in the world (hint: it’s not the U.S.)’, StartupRounds, 19 January 2017, available at (last accessed 26 April 2017).

[vii] SAIRR, ‘South Africa: A new national growth strategy’, May 2016, available at (last accessed 20 March 2017).

[viii] Louise Ferreira, ‘Factsheet: Social grants in South Africa – separating myth from reality’, Africa Check, available at (last accessed 12 March 2017).



I have always puzzled as to why some formerly communist countries came out of the bloc so much more quickly (pun intended) and effectively than others.

Estonia –the flavour of the month amongst commentators – is a wonderful prototype of successful reform. No one knows exactly how much the per capita income of Estonia was before the introduction of market-based reforms in the early nineties. But anecdotal accounts suggest that it, and life quality in general, was poor. But we do have decent statistics from 1995 onwards.

What we also know, is that the country’s economic system changed from a communist/socialist one in the years up to 1989, to a free-market system. Today its economy is the tenth freest in the world.

Here is a table setting out the change of Estonia to a free-market system, according to the Freedom of the World Index, together with its per capita GDP over the period (The freedom rating components of 1990 are sparse, and the average does not contain all the elements available):

1990 1995 2000 2005 2010 2014 2015 2016
Economic freedom 4.49 7.60 7.96 7.82 7.80 7.95
GDP per capita (Constant 2010 $) 7313 10108 14681 14282 17453 17733 18094
Unemployment 1.5 10 15 9 16 9 7 5


What we note is that:

  • Economic freedom gradually increased;
  • The country’s real per capita GDP grew by 150% between1995 and 2016;
  • After volatility in the years of the transition and the financial crisis, unemployment has declined steadily.

A point that should not be left unmade, is about basic education.  In 2015, Estonia was ranked in the top ten nations in both math and reading in the PISA international educational rankings, and in science it was ranked third in the world behind Singapore and Japan.

Estonia has one of the most decentralised education systems in the world. This extends not only to school management, but also to teachers. Promotion and appointment of teachers, curriculum, time allocation and testing procedures are mostly decied at school level.

Moreover, Estonia has school choice. In addition to a guaranteed place in a local public school, a learner may also apply to any private or selective school, each of which receives a state subsidy, but may charge extra. That has the benefit of introducing competition into the education arena, resulting in incentives for both private and public schools to improve.

The combination of a free market and good education has predictably unleashed the growth potential of the Estonian economy.

A comparison of Estonia with its peers – ie former Soviet satelite states that emerged from the former East Bloc – shows how important a free market is. The graph below compares average annual real per capita GDP in dollar terms. That way of measurement is more useful than percentage growth, because to a large degree it eliminates the phenomenon of convergence – namely that poorer countries, all things being equal, grow percentage-wise faster that wealthy ones.

Country Average economic freedom rank (90-15) (EFW) $ per capita GDP growth 1995-2016
Estonia 13.8 1207
Georgia 18.75 591
Lithuania 29.2 1503
Ave 1st quartile 20.58 1100
Latvia 30.4 1306
Slovak Rep 40.8 1116
Romania 51.5 502
Ave 2nd quartile 40.9 974
Czech Rep 51.6 652
Hungary 54.33 481
Poland 67 934
Ave 3rd quartile 57.64 689
Bulgaria 68.33 419
Slovenia 73.22 726
Croatia 79.4 484
Ave 4th quartile 73.65 543


There is no question: Those countries that maintained a high level of economic freedom in the post-communist era, and did so over a number of years consistently, on the whole reaped the benefits.

Having said that, Georgia is an outlier. Despite its considerable economic freedom, its performance (as measured here) was average at best. That is largely the result of the fact that it started off a lower base than any of the other countries. If measured in percentage terms, its per capita GDP grew at a phenomenal 12 percent per annum, higher than any country on the list. That is despite the fact that it has relatively poor education, as the next graph shows (It is ranked 105 out of 139 in the Global Competitiveness report). By contrast, Poland (with 4th best education among the countries shown) does quite well despite a lack of economic freedom:

Country Education rank $ growth
Estonia 5 1207
Slovenia 52 726
Czech Rep 59 652
Poland 72 934
Lithuania 73 1503
Bulgaria 87 419
Latvia 88 1306
Georgia 105 591
Hungary 111 481
Croatia 112 484
Romania 115 502
Slovak Rep 118 1116


None of this should come as a surprise. In South Africa we also, like these former East Bloc countries, emerge from an era of economic mismanagement. We too need to reform our economy in order to create jobs for all. As the above evidence shows, that will only produce optimal dividends if we – besides drastically improving education – reform all aspects of the economy, including taxes and high state spending, inflation (especially of asset prices), international trade and business regulation including labour, and the rule of law – an essential part of market freedom. Needless to say, the right to protection of private property is a cornerstone of the rule of law, and its threatened abolishment will destroy any ambitions of productive reform.

By way of comparison, this is where South Africa stands:

Average free-market rank 1990-2015: 75.33

Education rank: 114

Average annual per capita growth in dollars 1995-2016: $98.

In other words: Our average free-market rank would place us second last on the list, if we were to be compared to the former communist countries.

Our education ranking is just about doubly as bad as any on the list.

And our annual per capita growth in dollars is less than 10% of the freest countries, and less than 20% of the least free group. Even percentage-wise, our per capita GDP is worse than any country on the list.

Click on this link for a graph showing just how badly we compare:

It is fair to say our reform project is in trouble, and a drastic U-turn is called for.



I am still writing and publishing a critique of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 3: Most people in rich countries are paid more than they should be.

In this chapter the author makes the point that in rich countries people are paid dramatically better for doing the same job, only because the system of the economy in rich countries is more “advanced”, and because their governments exercise protectionism in the form of immigration control. The fallacy that the free marketers commit is that they wrongly claim that people are paid better for their relatively higher productivity, which is not the case.

The implication is that government practices intervention in the form of restricting labour mobility into the country, which is a necessary thing, and that discredits the idea of a free market. In other words, if the market had been truly free, it would have permitted everyone who wished to enter, to do so. And then all workers entering that society would have been paid low wages as in the poor countries of their origin.

Central to the argument is the assertion that a capitalist system needs this kind of intervention in order to be optimal. The author believes that: “Too rapid an inflow of immigrants will not only lead to a sudden increase in competition for jobs but also stretch the physical and social infrastructures, such as housing and healthcare, and create tensions with the resident population.”

If I understand the argument correctly, then it is that this is a good thing, because the sudden influx of low-wage competition would be bad for social cohesion in that country. It would make workers in the rich country unhappy because their wages would be suppressed.

What does not seem to bother the author, is what happens to the workers of the poor country. He seems to be quite sanguine about the fact that they are paid at the relative level of their productivity, even if that brings about huge inequality of income between workers of the two countries.

Surely if he is concerned about social justice, he should rather worry about the poor country’s workers?

Let’s start with the point about competition. The puzzling aspect is that Mr Chang sees an increase in competition as a problem. Why would that be, especially as he says the workers in the rich country are paid more than they are worth?

Competition is beneficial, because it improves the cost-efficiency of labour, and lowers consumer prices in the economy. It has been shown repeatedly that immigrants are a boon to any economy[1]. It is not clear then why Mr Chang wants to keep the wages high by way of government intervention. It is almost as if he sees the country as a kind of trade union that operates to benefit its members at the exclusion of non-members.

But let’s examine whether free immigration would cause the disaster the author fears: does it mean we are likely to see a race to the bottom as immigrants drive down wages?

That is very unlikely.

First of all we must remember that all workers in a rich society like Sweden get paid higher wages than workers in, say, India. Everyone in Sweden is better off, because the economy is more advanced and more productive. That means that employers have to offer higher wages than they would in India, because otherwise the wages offered would not be competitive in the Swedish economy. In Sweden no-one would sweep the streets, or drive a taxi, for the same price as in India. Because everyone gets paid more, the cost of living is higher in Sweden, as higher labour costs make things more expensive. So Swedish employers have a limited choice. They have to pay more, or forego the benefit of the service.

But having said that, workers in Sweden are not necessarily rich because of such an arrangement. If we apply the principle of purchasing power parity, then a taxi driver in Sweden cannot buy all that much more in Sweden than his counterpart in India can, when it comes to basic necessities. Yes of course the quality of goods, services and housing is better in Sweden than in India. But the worker has to pay high Swedish prices to get those things.

But is it entirely correct to say that the productivity of a taxi driver is the same in Sweden? Of course, taken literally, it is. A taxi driver in either society covers only so many miles per time unit. He cannot really achieve better output than the Indian driver can.

But surely that is not the end of the story, is it? The passenger still gets much more value for money in Sweden. And the reason for that is that he or she gets from point A to point B in Sweden, not in India. We know that the general quality of life is higher in Sweden. Being transported where you want to go (or getting any service) in Sweden is for that reason alone, more valuable in Sweden than in India. Productivity narrowly defined is not the only reason why consumers get more value for money out of a taxi ride. Which partly explains why workers get paid more in rich countries. Consumers are prepared to pay for the more expensive service, after all.

That also explains why workers want to emigrate to free, wealthy countries, rather than the other way around.

Even so, immigrants to a rich country would probably still charge less for the same job – in other words, undercut their local competition to some extent. The evidence is for example that immigrants to the USA are paid less when they start working, (even though they typically soon surpass the locals)[2].

But there are severe constraints on immigrants undercutting local workers. Immigrants still have to make a living in the new economy, which is vastly more expensive than where they come from. That being so, they will discount the price of their labour only enough to create a competitive advantage at the margin. They are hardly likely to ignite a “race to the bottom”.

In the meantime investors and consumers benefit from the cheaper services, as the former make more profit (leading to more investment) and the latter enjoy cheaper services. In a competitive market taxi rides will ultimately become cheaper.

More serious problems occur when the taxpayer has to pay for social welfare made available to immigrants. However, no free market would permit that. Creating a taxpayer-funded safety net for immigrants creates a moral hazard and an economic risk of freeloading. In a truly free market there would not be such a risk.

Will unfettered immigration lead to social unrest?  Bear in mind again that we are talking about a free market. In a truly free market there is prosperity and a high demand for workers. It is a well-known phenomenon that unskilled immigrant workers often do jobs that locals do not want to do. Locals who lose their jobs due to immigrant competition will mostly find other jobs in a free market. Truly free markets have jobs and rising incomes for everyone, including the poor.

It is further so that free markets attract by far the highest numbers of immigrants. While about 3% of the world population are migrants, close to 30% of the population of the top ten free-market countries are.  The world is replete with examples of free markets that absorb immigrants all the time, and where unemployment is still extremely low. That alone testifies to the success of a free-market economy, and shows that the supposed danger posed by incoming labour is vastly overrated.

But even so a situation can be imagined where unfettered immigration would, at least in the short term, put pressure on the social fabric of a free-market country. But the only reason why that would be so, would be because the countries from which these migrants come, are not free markets with similar levels of prosperity in the first place. Migrants only leave their home countries for free markets because they realise that the latter offer better jobs and business opportunities. As we see, to some extent that has already been happening for years. For many years free-market countries have served as the refuge of poor people: The US, the UK, New Zealand and Australia, for example, have been havens to Mexican, Polish, Irish, Indian, Chinese and Japanese immigrants.

The question is whether we can say that an economic system that does not allow all and any comers to join it, is not a free market. In our current setup what we refer to as an economic “system” is normally one that is run by a government with jurisdiction over a particular territory. Such a system is therefore assessed according to how well it provides a living to its citizens, not to all and sundry putting up their hands and saying “me too”. To expect such a system to be judged for both its economic freedom and its economic success based on the life quality it provides to millions who do not even form part of it, is grossly unfair.

Indeed, one of the driving forces behind economic reform is precisely the fact that we have jurisdictional competition. The very fact of jurisdictional competition has spurred governments of unfree countries to reform.

The fact that the free market of one country is not able to accommodate and provide a living to all manner of citizens of other countries that do not similarly have free markets, can barely be laid at the free market’s door.

On the other hand the answer to the problem is not to exclude all immigrants by force either. It may lie in helping to make the immigrant’s country of origin so attractive that he does not want to leave in the first place – in other words, to encourage that country also to have a free market.

Nothing stands in the way of a free-market country, for example, doing what free–market countries already do in respect of trade, namely to conclude agreements that eliminate protectionism – except that, instead of free trade, they permit a mutual flow of labour, on condition that any new member to the pact undertakes to reform to a free-market economy. (Or it can be done in stages: X number of immigrants for Y number of reforms, etc).

Of course in such an event there will be much less need for immigration. Then there will be so many more job opportunities in the new member countries, that workers might be happy to stay where they are. Such a pact will eliminate the income disparities between India and Sweden much more rapidly than any other solution.

It follows that if Mr Chang is interested in social justice (and it is by no means clear that he is) he should not engage in semantic games by trying to prove that markets where governments exercise sovereignty over who may cross its borders, are not free markets. Perhaps we can even concede that he is right. Maybe immigration restriction is an intervention in the market. But that would only be necessary because workers in unfree, poor countries are oppressed. That is where his attention should be focussed.

The main reason why workers in Sweden are paid more than workers in India, is because workers in India are paid much less than they would have been paid if India had been a successful free market like Sweden. We should not blame the successful system for that state of affairs. Much less can we say that that system is not free.

For the time being, we can conclude by saying that the statement that people in rich countries are paid more than they should be, holds no water. The very fact that they are paid more in a free market, is a force for the good. But for that, the poor citizens of unfree societies would have no incentive to ask for, and their governments to give them,  a better system.

[1] The effects of immigration on the United States’ economy’, Penn Wharton Budget Model, 27 June 2016, available at (last accessed 19 April 2017).

[2] Gwynn Guilford, ‘Immigrants are getting more out of America’s recovery than native-born households are’, Quartz, 20 September 2016, available at (last accessed 17 April 2017).


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