Dr. Harsha de Silva has said the present government believes in a social market economy. He probably said so because Socialism as an ideal is embedded in the mindset of our people. Even President J.R Jayewardene called the State the "Democratic Socialist Republic of Sri Lanka. We take for granted that socialism is a good thing. Several of our intellectuals claim not only to be Socialists but also Marxists. But is Socialism such a good thing?
Socialism, particularly its Marxist version involves the ownership of the means of production by the State and not the private sector. Its non-Marxist version is a vague belief in the pursuit of the welfare of the people in a so-called welfare state which involves too much control by the State over the economy.
The Marxist version of Socialism is what inspires people. Capitalism is branded as involving the exploitation of labor by the capitalists in their drive to maximize profit. The interests of the workers are supposed to clash with that of the employers. But is it so? In Japan workers who return to work after a strike work harder to catch up on the lost production.
The fallacies of Socialism
Socialism is said to make every one equal. As one writer said "Marx thought that the ownership of property was the cause of inequality and that money was the root of all evil; that the workers needed more of it; that religion was the opium of the people but that Jesus was the first Socialist; that the family was a bourgeois conspiracy but it needed defending from untrammeled industrialization; that individualism was to be deplored; that capitalist alienation reduced people to undifferentiated atoms".
Adam Smith however pointed out that in the past societies were more equal but also poorer. The modern capitalist world is more unequal but affords a higher level of consumption - a per capita income to many which is much higher and a standard of living and comforts which even ancient kings did not enjoy. As globalization spread to more and more countries and as the former Communist societies collapsed, world output increased and through trade which is mutually beneficial, the benefits spread to more and more countries. Growth has slackened owing to the financial crisis but is recovering in USA and China has not floundered.
The right to own private property enables people to enjoy the fruits of their labor and to improve their position in life. So it gives people the incentive to work harder, save and become richer. Commerce and its development increased the size of the market as the railroads, the ships and airplanes made international trade convenient and cost effective. If you produced more you could earn more income because there always was a market for the larger production. Thus trade by increasing the size of the market helps to increase both agriculture and manufactures. Division of labor is the key to the increase of productivity not only in the factory but throughout the economy. There must be specialists in trade, in finance, transport etc. The extension of the market makes possible for the higher production to be sold. Smith argued against putting any type of restraints on the movement of goods. Socialists want more holidays and leave for the workers and we have the fewest number of working days in the world. No one worries about the loss to the GDP.
Smith also argued that in the earlier societies people were dependent, particularly those who labored and created wealth, be they peasant farmers or workers. The farmers were dependent on their landlords. The powerful were above the law and thus took too much of the fruits of the people. It is the development of commerce and the merchant class that enabled freedom for the individual. Liberty meant independence from such oppression. With a legal framework for ensuring security of property and the treatment of all as equal before the law, the powerful could no longer oppress those who were considered the lesser breed. The modern society emerged with personal freedom for the individual and secure property rights for the individual. These are sine qua non for a modern society. The takeover of private enterprises sends the wrong message to both local and foreign investors and makes investors cultivate politicians.
People pursue their self interest. There is nothing wrong in such pursuit and it cannot be termed as greed. In previous societies people’s dependence on other people was direct and visible and their obligations were clear and enforceable. In a modern society the relationships of people are indirect and obligations are purely contractual. There is still a complex set of relations but it is invisible. So Smith referred to the "Invisible Hand" in his work "The Wealth of Nations". The ‘invisible hand’ is a metaphor by which Smith sought to explain two propositions that are both true and important; one, that economic order or pattern can arise without any central direction (therefore there is no need for State planning); and two, that in the process of free exchange a man may promote the interests of others even though the interests he seeks to promote are his own. So the pursuit of self interest is not detrimental to the benefit of others in society. There was a complex system of relationships behind the exchanges that took place in society. "It is the pursuit of self interest by the baker and the butcher that enabled the satisfaction of the wants of the consumers".
Economic progress is going on behind this system of persons producing and serving the wants of the consumers. Today economists refer to the complex of relationships as the free market system and stress that it is a sine qua non for economic growth and development which is why China adopted it. The Communist States that did away with the market failed to develop. Development was also weaker in States which interfered too much with the market through controls and regulations.
The most foundational rule of trade is that consumers get to spend their money as they see fit and hence only those producers who best satisfy consumers (as judged exclusively by consumers) get to stay in business. But under Socialism the State intervenes presumably to protect the consumers who are supposed to be exploited. The answer if it is true is to promote more competition not price controls.
Economists and do-gooders in our society who would turn over to politicians’ greater control of the economy are making a huge mistake. The Russians and the Chinese have learnt the hard way. Although we went through something similar during the United Front Government in 1970-77 with the ‘haal polu" (rice barriers) and other direct controls, we don’t seem to have learnt. Our Marxist Socialist intellectuals are misleading the JVP and our people. They decry the market and want the State to intervene. The budget reduced prices of certain goods by reducing the taxes on them. The government expects the traders to reduce their prices immediately ignoring the fact that they would lose money if they were to do so since the existing stock has paid the previous higher taxes. Surely the traders can’t be blamed for not reducing the prices? They have to do so when stocks are replenished cheaper.
It would have been better to insist that the prices must be reduced on a future date taking into account their average stockholding and the daily demand at the wholesale and retail level. Would it not have been better to consult the traders rather than threaten them with raids? I remember when Alvapillai was the Permanent Secretary to the Food Ministry, he would have regular consultations with the traders who imported food. They were given notice of the reduction in taxes from a future date and if the wholesale prices had not been reduced by then, the goods were requisitioned and handed over to the CWE. Socialists prefer to berate the traders and argue that they were profiteering when they were only seeking to avoid losses.
State Intervention in business fails
Economists justify State intervention where markets are said to fail. They fail to realize that imperfect competitive market process still outperforms all other methods of directing economic activity like what the CWE used to do. Government officials spend other people’s money. They are less driven than consumers, entrepreneurs, and investors to spend money prudently. Government officials also specialize in pleasing their elected bosses - a specialization that rewards a talent that is quite different from what is required to run a business or to direct investment funds to their most productive uses. The EPF made bad investments because they probably misjudged the stock market. Government officials have no exposure to markets and do not have the skills to function in markets. Dr Saman Kelegama has pointed out that while only 2.3 percent of GDP was allocated for education, nearly 3 percent of GDP was allocated to cover losses of state owned enterprises - CPC losses amounted to 1.2 percent of GDP, CEB losses 0.9 percent of GDP, SriLankan Airlines and Mihin losses 0.3 percent. "Had these losses not been there, at least an additional 1 percent of GDP could have been allocated to education expenditure to be on par with Korea," Dr. Kelegama said. Yes bureaucrats can’t run businesses and there is no case for State enterprises unable to make profits to cover the cost of capital. They should be closed down as China did in the 1990s.
"Investing is easy to learn, but it takes a lifetime to master."