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, property 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 reprehensive. 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.

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