Here’s Why You Should Question What You’ve Been Taught About Capitalism

If we want to attain longer and better life outcomes for most people, we should push South Africa onto a radical path of capitalism.

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South Africa has a highly mixed economy in which the state controls many of the levers of economic activity. South Africa certainly does not have a free-market capitalist economy. Capitalism, property understood and applied, demands the clear separation of state and the economy, the objective application of the rule of law, and a respect by the state of the voluntary interactions between private individuals and businesses.

If we want to attain longer and better life outcomes for most people, we should push South Africa onto a radical path of capitalism, unlike the tired ideas of state dependence and decay that have been tried until now.

Thuli Madonsela recently added her voice to others that have, in recent times, called for rethinking capitalism.

But there’s only one way to reconsider capitalism: We need to understand that, given the mixed economy in which we live, we do not have a free market as it should be rightly conceived and applied. As to calls for a more “inclusive” economy; the way to get there is by implementing the policies that encourage and allow people to create wealth for themselves. Ever-increasing state regulations and barriers, in concert with those larger corporates that have the resources necessary to handle said regulations, are not those policies.

To the extent that South Africans have had some measure of economic freedom since 1994, they have done remarkably well. As the world tries to recover and grow after the devastating government-imposed COVID-19 lockdowns, our government needs to remove the shackles currently in place that inhibit economic activity.

In the 2020 edition of the Fraser Institute’s Economic Freedom of the World (EFW) report, South Africa was ranked 90th out of 162 countries and territories. In the year 2000 we were ranked 58th. In the Heritage Foundation’s 2021 Index of Economic Freedom, South Africa ranked 99th (part of the ‘mostly unfree’ category). We are nowhere near capitalism – and too many citizens’ quality of life is poor as a result.

From a practical perspective, depending on what one wants to achieve, one has a choice to make: if progress, innovation, improved quality of life, and respect of individual rights and group rights is important, one will lean more towards capitalism. Capitalism means cooperation, robust diversity, the pushing of boundaries and ideas – and yes, at times the breaking down of older businesses and interests as new values arise – all within the broad sphere of respecting and protecting people’s individual rights and property. Where coercion and control thrive, there you have less capitalism.

If we desire economic growth and competition, we should be incredibly wary of the state stepping in and interfering with economic activity. When the only way to ‘get ahead’ and ‘win’ is through having the necessary political connections, you will always see corruption and, in the South African context, state capture. Those corporates with the necessary resources will be drawn to a big, controlling state, and try to influence it to prevent any competition – in most cases new and relatively small businesses – from entering the given market.

One can advocate for some measure of social assistance for citizens who desperately need it, while at the same acknowledging that, without robust growth, those same services cannot be sustained and will eventually fall away. Recall in the 2021 budget from finance minister Tito Mboweni the cuts to education and healthcare, to fund vanity state projects such as South African Airways.

We aren’t going to redistribute people into prosperity. The fiscus is under great strain, mostly notably from the debt incurred by ineffective, bloated state-owned enterprises, and from ever-higher wage- and benefit-demands by public sector unions (again, the mixing of state and economy). A basic income grant, while intended to assist those in desperate need, is not the kind of policy direction and thinking we require to generate meaningful economic growth. With a growing government debt-to-GDP ratio – probably breaching 100% within the next three years – and a junk-status credit rating, pushing for various forms of increased state spending now entails being comfortable with leaving a probably unpayable debt-burden on future generations, which is unconscionable.

In our mixed-economic context, rising inequality is indeed immoral. The state capture saga serves as a painful lesson (if people are willing to take heed) of the dangers of an ever-expanding state and the mixing of politics and economics. We should never be surprised that, when political pull is the only way to create wealth for individuals, fewer and fewer people will find favour and only the most corrupt and conniving will get ahead.

The ideology that a given government implements colours the policies that government would seek to implement and, further along, results in either positive or negative effects on people’s lives. In April 2021, the wealth intelligence firm New World Wealth, together with Mauritius-based AfrAsia Bank, released their Africa Wealth Report 2021. According to their findings, the total private wealth held in South Africa declined by 25% between 2010 and 2020; around 4,200 high net-worth individuals left over the past ten years.

Capital will flow to where it is easier for people to create and accumulate more thereof. With South Africa’s anti-business, anti-innovation, and anti-wealth-creation policy climate, it should come as no surprise that such a massive wealth drain has taken place. And, without capital formation and investment, government spending and welfare will eventually disappear. Thus while we might have generous welfare policies on the books like many other African states, the reality will be that the cheques will never come in mail.

The very existence of wealth, of surpluses in terms of foods, goods, and services, should never be taken for granted. Their existence flies in the face of what many experienced throughout human history. Poverty, and mere subsistence, is the default state of nature. In the free market, with specialisation, private property, and legally enforceable agreements, we have found those ideas and policies that enable wealth creation.

To make any kind of inroads into this country’s over 42% unemployment rate, we need on average 5-7% growth for the next five years. This in turn will need the sinking-in of serious capital investment, whether that comes from local or foreign sources. And you simply won’t attain capital investment in an environment with onerous regulations and threats to people’s private property. Rising living standards requires capital formation and investment – all the ideological and semantic debates cannot get away from reality.

Capitalism does not pretend to be utopian. We should be suspicious of any idea that presents a picture of perfect employment and complete equality of economic outcomes. But for any society that wants people to interact morally with one another, you should want more capitalism because it places individual agency, dignity, and voluntary engagement between people at its centre.

South Africa’s problems will not be solved by giving the state more control over our lives. We need radical, transformative growth, and the only way to attain that is through free-market capitalism. Investment, long-term saving and building, entrepreneurship, and transformational growth should be South Africa’s objectives – not increased state dependence, increased state-enforced inequality, rising unemployment, poverty, and hunger. In a post-lockdown world, those societies that are more open and pro-growth will thrive. Those that call for a bigger role for their respective governments will falter.

Capitalism rests on this: Outlaw force from engagements between people, and it will be to their benefit to work together. Does the South African government trust citizens’ ability enough to give economic freedom a real chance?

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  1. Thomas Richards Reply

    The Economic Freedom of the World chart is not displaying?

    1. Nicholas Woode-Smith Reply

      Unfortunately, it seems the graph was lost during the move to a new host. But the details given are illustrative.

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