Something that really irritates, is the obfuscation of concepts and thus of facts and reasoning when discussing free markets, or free enterprise.
It sounds something like this:
“Neo-liberalism is not working. Firstly, it has caused inequality. Trickle-down economics don’t work, because the richest 1% accumulates the bulk of all wealth, and the share going to the poor gets smaller all the time. Unbridled free markets are what caused the financial crash, and since then we have not recovered. Besides, capitalism is consuming the resources of the earth, which is causing destruction of ecosystems and will lead to mass starvation. Capitalism is also responsible for climate change, which will soon result in climate collapse.”
Much of this is the outcome of basic confused thinking. Misconceptions that are repeated by the media often enough, eventually become accepted wisdom. But the edifice of belief captured in the little passage above, which is very typical, is shot through with so many fallacies of fact, logic and meaning, that an accurate understanding of the economy is completely negated.
What is necessary is therefore to clear up the meanings of terminology, understand concepts and check facts.
FREE MARKETS/FREE ENTERPRISE
This concept is central to the debate.
The phrase denotes an economy that is relatively free from state intervention, namely in respect of the ability of persons freely to own and dispose of property obtained legally, and to exchange goods or services relatively free from state intervention.
One of the most prevalent aspects that bedevil the debate is the notion of relativity. No market is completely free, and very few free marketers propose that no government should exist. Which does not mean that in practice greater economic freedom is neither possible nor desirable. But it is important to grasp that economies lie on a spectrum of freedom. In the real world the most unfree ones are true socialist/communist societies where the vast majority of the means of production are owned and controlled by the state, examples of which today would be North Korea and Cuba, and in years gone past Soviet Russia and China. In the real world the freest ones are Hong Kong and Singapore. At both ends of the spectrum it is possible to have more extreme examples. For example, not many people know that housing in Hong Kong is strictly speaking owned by the government, and that the government pays for most education. And in Cuba and North Korea some degree of private property of especially movable things like cars is allowed. In Cuba minor aspects of economic activity have been deregulated in recent years.
Of course, the relative nature of market freedom in the real world is not an argument against it. And yet it is an astonishingly common remark that “there are no free markets anywhere anyway, so ….” (followed by a pregnant silence, and a look which conveys the flourish of a mathematician saying “QED”), implying no further words are required, the case has been proved.
No it has not. On the contrary, this is a senseless argument used to discredit market freedom, and proves absolutely nothing. It is the equivalent of arguing that no human being is 100% fit, therefore physical fitness is not beneficial or desirable. Of course it is hard even to conceive of a notion such as 100% fitness. But so what? Some people are fitter than others, and we can thus say someone is relatively unfit, relatively fit or one of the fittest we know. The real question is whether relative fitness statistically correlates with other parameters of well-being, such as longevity, freedom of disease and energy – parameters that themselves are relative. We might then find that relatively fit people on the probabilities live longer or are healthier than others.
A related argument that one often hears is that there is no such thing as a free market, because there can be no free market without the state. There must always be government institutions, they will argue, even in countries that have so-called free markets. Since free markets must have contracts, there must be a court to enforce them, for example, or an institution that protects property legally gained, from invasion or damage.
Again, the question is, so what? Even assuming that private regulation to enforce property tights and contracts is not possible, the question remains whether relatively free markets are more effective than others. Just as it is difficult to be optimally fit without enough healthy food and access to some facility like a gym, just so it may be correct that we need a minimal government to protect market freedom.
There is also a moral point here. In a range of possible choices – from most unfree to freest – the relatively freest one for all members of society that can be achieved, is surely the most moral choice. If a minimal state is then necessary to ensure that, so be it. We live in the real world.
The most concrete way to describe market freedom is to devise a way to measure and quantify it, just like we give practical content to the vague notion of fitness by measuring performance, heart rate, blood pressure, endurance and strength.
The Fraser Institute does that with its Economic Freedom of the World Index, which measures relative economic freedom by country. In order to do this, it makes use of five areas of regulation:
• Property and the rule of law;
• Sound money;
• The share of the state in the economy;
• Business regulation;
• International trade.
Each of these areas represents an aspect of economic freedom that can be measured by reference to economic and related data:
• Property rights and the rule of law protect citizens (amongst other things) against arbitrary interference in property by the state, and arbitrary interference by officials in contracts. In short, it allows citizens to get on with their economic lives, secure in the knowledge that their property is theirs, and rules are clear and known and consistent. The state cannot interfere in economic assets or activity, except in very limited and known ways.
• Sound money means that the state does not seize citizens’ money by watering down its value through inflation. To the greatest extent possible, an individual knows that his money is what it is.
• The share of the state in the economy: In a relatively free market the government owns and produces as few goods and services as possible, leaving that to private citizens, which means that taxes and transfers, loans and spending, public service employment, state-owned enterprises and other state spending are limited to the minimum.
• Business regulation: Government makes as little regulation as possible governing property and contracts.
• International trade: Government imposes as few restrictions as possible on international trade, whether by way of import tariffs, exchange rate manipulation or -restrictions, or export bans.
These practical criteria will make it further clear why, in the real world, market freedom is a relative parameter, and the government has some role in protecting it. The ideal to pursue is that the state’s role is limited, namely to protect freedom, as opposed to infringing it.
Now that we have some conception of what a free market or free enterprise is, let’s compare its meaning to other terms that are often used as synonyms, a practice that not only causes confusion, but is often used as rhetorical devices to discredit it unfairly.
“Capitalism” is often used interchangeably with “free enterprise”. That is not quite correct.
Although most dictionaries define capitalism as an economic system in which factors of production are owned by private individuals, often insufficient emphasis is placed on the essential aspect of free enterprise, namely freedom. In popular usage the term “capitalism” also conjures up notions of large, powerful corporations that became that way by accumulating capital and that hold disproportionate power, and exploit workers, consumers and the poor. In other words, the term refers to activities of capitalists, rather than the conditions of freedom under which they operate.
Ironically capitalist corporations often become powerful by lobbying government. Examples include:
• They form cartels with trade unions (in SA in the shape of bargaining councils) that impose unaffordable minimum wages on small enterprises, and force them out of business. The same activity results in growth of unemployment, as workers with low skills become unemployable at the high wages mandated by the cartels.
• Import protection enables corporations to sell goods at uncompetitive prices to consumers.
• Government grants business licenses to large corporations, which unfairly cuts out competition of smaller undertakings.
• Government grants monopolies to certain providers of utilities like electricity, transport or communication.
Apart from these examples of abusing the power of the state, most large corporations become that way because they benefit society more than any others, and provide far more advantages than disadvantages to consumers and workers. Modern examples include Walmart, Amazon, Google and Apple. These companies create huge value, the bulk of which goes to consumers in the form of enhanced life quality and reduced prices.
Tim Worstall, a Fellow at the Adam Smith Institute in London, explains it like this:
“What we need is for more value to be created in order that more value can be consumed. William Nordhaus has explained why it’s capitalism that does it:
‘The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 19482001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.’
The result is that entrepreneurs get to keep some 3 percent of the value of their creations. The other 97 percent of the value flows to us consumers out here. Value is what we consume; value is what GDP is, what income and wealth are. And the vast majority of, near all in fact, the wealth and income created by this capitalist exploitation flows to us.
Jason Furman … explains this in more detail:
‘There is little dispute that Walmart’s price reductions have benefited the 120 million American workers employed outside of the retail sector. Plausible estimates of the magnitude of the savings from Walmart are enormous – a total of $263 billion in 2004, or $2,329 per household.’ ”
So, capitalism does spawn large corporations, but in the vast majority of cases their value is inestimable in improving our lives. Others become powerful by abusing government help. In those cases capitalism therefore often gets conflated with free enterprise, which is not the same thing.
There is another reason why capitalism as conventionally understood is not the same as free markets. Free markets have been a fertile ground for cultivating a variety of business models that depend for their success on neither corporate power nor capital formation in the traditional sense. Examples are:
• the so-called gig economy, where individuals or small businesses provide services on an ad-hoc contractual basis, such as transport (Uber, for example), hospitality (Airbnb for example), construction, information technology, entertainment, catering, gardening, hairdressing, fitness instruction and commercial art;
• open-source IT and IP;
• Bitcoin and other crypto-currencies;
• on-line services;
These alternatives to traditional capitalism are possible because of free markets. It is quite likely that yet more new business models will be spawned by the free market, because there is no better environment for experimentation, competition and thus improvement in customer service and cost-effectiveness. The freer the market, the more likely these types of business are likely to proliferate and flourish, all to the growing benefit of consumers.
This term has its origin in the values of classical liberalism, and originated in about 1980, to describe the ideological position that embraced free markets and international free trade (globalisation). The resurgence of these ideas under Thatcher and Reagan probably explains the epithet “neo” attached to the term.
As in the case of capitalism, it has obtained an aura of derision, but is otherwise used interchangeably with “free markets” or “free enterprise”. As in the case of “capitalism”, examples of what are in reality state interference that occur in relatively free markets, are used as evidence of the failure of free-market policies.
The relative nature of free markets means that there is always room for interference by government. This can take various forms, but one of the most obnoxious ways is where officials in government collaborate with private citizens to interfere in economic freedom, a veritable unholy alliance;
Examples that are, sadly, all too common, are:
• Government assumes the right to perform services such as transport, financial services, electricity provision, water reticulation, cleaning, education and training or entrepreneurial support, and then gives contracts to favoured individuals, be they members of the governing party, relatives of politicians or other cronies;
• Politicians get involved in enterprises that provide armaments for war, while themselves influencing decisions to go to war, and government buying their products, which wars (invariably unnecessary) are harmful to the country as a whole;
• Central banks use inflationary instruments like quantitative easing to expand government balance sheets with stocks and bonds, which artificially pumps up share and bond values, benefitting wealthy individuals and impoverishing poor and middle-class people;
• Central banks keep interest rates artificially low in pursuit of employment targets and political support, which suppresses real productivity and real wages;
• The state is captured by rich individuals that pay government officials to give them effective power in respect of government decisions;
• Government places pressure on banks to lower mortgage bond rates in pursuit of expansion of the housing market among poor and middle-class people, which benefits property speculators and banks, but eventually distorts market values and causes property crashes – as happened with the financial crash of 2008.
• Government imposes import tariffs to protect big business or agriculture, meanwhile impoverishing poor people as prices go up.
Most of these practices have played a role in causing relative poverty in developed countries, and have discredited free markets. A combination of these is almost certainly responsible for growing inequality and relative depression of the incomes of poor and middle-class people in the US. Criticism is then often directed at systems with these features on the basis that they typify “neoliberalism” or “globalism”. Occasionally the term “unbridled free markets” is used.
None of these examples is a manifestation of free enterprise. In none of the cases is poverty caused by either free markets or globalism, and most certainly not by liberalism, whether “neo” or otherwise. In every case it took two to tango. Private individuals or undertakings were as guilty as government officials, and only as guilty as government allowed them to be.
These examples also show that we cannot conflate the US, for example, with absolute free markets. We must in every case first ask what caused economic problems: Was it free markets (namely non-interference by the state) or the opposite?
Unfortunately, malpractices of government interference such as those listed above, are prevalent in the US and other wealthy countries. These countries are still relatively free-market societies, but their governments interfere in their economies in these and other ways, giving ammunition to free-market critics. Instead critics should target the real reason for the relative poverty caused by these practices: state meddling.
A surprisingly common misconception is that national and global poverty in a period of relative free-market reform is increasing. One can only assume that people who believe that, do not read. Poor people in free-market economies get richer all the time, and often richer in relation even to rich people. Take Chile as an example: In free-market Chile, incomes of the poorest 20% rose by more than 8% per annum over the period 1990-2013, and poverty declined from 50% to 11%. Trickle-down economies actually work.
Global inequality is declining as we speak. Since adopting some free-market reforms from about 1980, real per capita GDP in China has grown by some 3000%.
As for the environmental argument, the simple fact is that wealthy free-market countries are the ones with the best environmental records by far. According to Yale University’s Environmental Performance Index (EPI) for 2016, the 10 countries with the best environmental performance in the world are Finland, Iceland, Sweden, Denmark, Slovenia, Spain, Portugal, Estonia, Malta and France. All are relatively free-market capitalist countries, with an average score of 7.421 on the Economic Freedom of the World Index and an average ranking of 42.9 out of 159 countries. By contrast, the 10 countries with the worst environmental record according to the EPI – Democratic Republic of the Congo, Mozambique, Bangladesh, Mali, Chad, Afghanistan, Niger, Madagascar and Somalia – have an average score of 5.9 and an average ranking of 133.4 out of 159.
The point need not be belaboured. It is in unfree economies that slash-and-burn agriculture takes place, water is polluted, bush meat is hunted, forests are consumed for firewood and air pollution is prevalent. All free markets go through the so-called Kuznets curve of environmentalism, namely that economic development initially leads to a deterioration in the environment, but after a certain level of economic growth, a society begins to improve its relationship with the environment and levels of environmental degradation reduces. This is fairly common knowledge amongst economists, but not generally understood.
Finally, quite apart from the merits of the argument of dangerous anthropogenic global warming: If it is correct that dangerous global warming is caused by fossil fuel, the best way to guard against that is the free market. It is free enterprise that has ensured that the vast majority of solutions to problems have been discovered and developed over the past few centuries. Whatever remedies are most likely to prevent some kind of climate catastrophe, will be provided by the free market. It will certainly not be provided by government interference. The answer probably lies in nuclear or hydrogen energy sources of some description. So-called renewable sources, heavily subsidised and supported by governments, have now proved to be severely damaging to the environment and hopelessly inefficient. Economic inefficiency is almost a guarantee of environmental damage, because it inevitably is a waste of natural resources. It is no coincidence that the most efficient, safest and long-term cheapest energy form – nuclear – is 100% sure to stop the hypothetical threat of man-made global warming, dead in its tracks. Which makes you wonder why so few governments and climate alarmists are calling for its use.
The answer is surely that they are not really concerned about the environment.
One of the most egregious examples of the unholy alliance between wealthy people and government in recent times has been Al Gore, who made many millions by first scaring the public into a state of paralysis with false and exaggerated scenarios of future catastrophe – each and every one of which has been proved false, or seems very unlikely to materialise. And yet, with government backing for his alarmist ideas, Gore has made many a fortune out of renewable energy, movies about climate change and carbon trading schemes. “Neoliberalism” in the worst sense of the word, indeed.
There is an unholy alliance between the media, politicians and scientists who promote the climate agenda. They all benefit, and they do so on the back of state power.
For that matter, the entire climate movement is a threat to the free market. It is now well-known that its proponents are in fact also proponents of government interference in order to reform the economy. The agenda seems to be to dismantle “capitalism” as we know it, and replace it with some kind of alternative, which will at the same time achieve the objects of eliminating economic growth, and rectifying the exploitation of poor people of which capitalism is guilty.
As they say in the classics: good luck with that.
But for the moment it is enough to understand that any threat of man-made climate change will be headed off by free enterprise, long before it becomes a problem. And it is not a problem. If it were, we would have expected the prices of coastal properties to have plummeted by now, as buyers ran scared of the supposedly certain catastrophe of rising sea levels.
Spoiler alert: There are no bargain-basement beach buys yet. Not in Martha’s Vineyard, not in the Maldives, not in Miami or in Cape Town.