Despite a plethora of evidence that economically free societies are better off by virtually every measure of wellbeing than societies that are directed and controlled by a central authority, there continues to be significant opposition to ideas of political and economic freedom. Indeed, in the South African context much of the thinking still suffers from a planning paradigm and a persistent insistence that development is in a fundamental sense, up to the government rather than individuals.
Those that oppose the virtues of individual freedom often use compelling anecdotes to win the “hearts” of their followers. For example, politicians continue to emphasise the need to provide further funding for “pet schemes” and to provide “essential” social services. Generally, there is little recognition that private individuals and firms are willing and able to provide water, transportation, education, and other "public" services. And few recognise that individual and private enterprise, as opposed to government largesse, is the real engine of economic growth.
Government spending fails to promote growth in any meaningful manner because every rand the government "injects" into the economy must first be taxed or borrowed out of the economy. No new income and therefore no new demand for goods and services are created in the process. Money is merely redistributed from the productive sectors of the economy to the non-productive sectors. Government cannot create new purchasing power out of thin air. It is not government but private firms and individuals that generate wealth and drive economic growth. The mistaken view that fiscal stimulus is good persists because we can actually see the people who are put to work with government funds. What we cannot see are the jobs that would have been created elsewhere in the economy with that same money had it not been taxed or borrowed by government.
Considering SA’s high rate of poverty and unemployment, some may well ask, “How will the government support the 13-million odd individuals currently benefiting from the fruits of others’ labours?” The best way to improve conditions for the poor is not by taxing those who are producing wealth in order to redistribute the proceeds, but by allowing people to work and by pursuing policies that promote economic growth. In SA, when we combine all taxes, many people are paying upwards of 40 per cent. This means that for the first five months of the year they are working to support someone else. Only from June onwards do they begin earning an income to support themselves.
High marginal tax rates reduce the incentives for entrepreneurs to risk their capital or sacrifice their time and energy to earn higher incomes. High marginal tax rates also interfere with the ability of individuals to pursue their goals because they result in less disposable incomes. Less disposable income means less saving; less saving means less capital formation; less capital formation means lower labour productivity, and lower labour productivity means lower real wages.
In this economic climate, government, like business, should focus on its core activities. Part of government’s core functions is to ensure that there is sufficient policing, the courts are impartial and efficient, and the rule of law is respected and enforced. The security of property rights is essential for economic growth. If individuals know that their land and possessions are protected, they have an economic incentive to go out and earn a living.
In order to promote freedom for all in South Africa it is essential to win the “hearts” and “minds” of South Africa’s citizens and provide them with the knowledge and understanding of the benefits of individual freedom. One of the key messages is that economic growth is not hindered due to investment gaps or technological gaps but rather due to very real gaps in human liberty imposed by oppressive governments. These gaps result when leaders impose barriers that hamper entrepreneurship, restrict property rights, interfere in the ability of individuals to trade freely across borders, and deter the free movement of people and capital.
Individuals that have dedicated themselves to promoting ideas about individual freedom have gained significant victories by winning over the “minds” of many of today's prominent opinion leaders with first-hand accounts of what actually “works” in development. These individuals gather theories, statistics and graphs to show why markets work, but fail to garner the same successes as those who appeal to the hearts of individuals. Indeed, experience proves that efficiency arguments are not sufficiently compelling to influence the majority. In addition to providing the intellectual ammunition demonstrating that markets have superior outcomes to state-led and controlled economies, there is also a need to relate powerful stories of individuals educating poor children, fighting disease, supplying clean water, and doing the myriad other things they do to generate wealth and improve standards of living. This is imperative to counter the very vocal claims of individuals espousing state-led growth as the most effective way to alleviate poverty.
Promoting individual freedom in SA requires a combination of media and public debate, which targets both the “mind” (using evidence based on sound scientific knowledge) and the “heart” (using anecdotal evidence that the “man on the street” can relate to). By disseminating information on “what works” it is possible to begin to reshape the belief systems of policy makers and opinion leaders as well as the population in general by making “real” what has appeared to be abstract. Ultimately, effective reform is generated internally, by individuals within SA, who work to change their environment and who succeed in overcoming the resistance of vested interests.
AUTHOR: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 14 June 2011