Every country has the economy it deserves

Intro

The self-propelled machinery of the market economy is reducing poverty and raising prosperity around the globe. But corruption, political instability and civil war are not the right preconditions for sound business activities. Under such circumstances no help will be effective. Yet if the investment climate is right no help is needed because capital from abroad will be available for all sensible purposes.

Entrepreneurial drive

The conviction of the ordinary man that he can ultimately better his lot by dint of his own honest efforts is the deepest driving force of our economic plus-sum game. Economic competition is a stimulating surrogate for the struggle for survival, but an institutional setting is required to avoid short-sighted over-exploitation or the brutal lawlessness of the jungle. Like over-regulation, political under-performance, too, poisons economic play. Either way business becomes a political game which ends up in poor politics and a wretched economy.

A good entrepreneur feels strongly about his core business – one might even say he loves it. Given a suitable environment he generates unflagging energy and inventiveness, propelling human energies into an almost religious fervor of purposeful activity.

The selfish element in entrepreneurship is deeply entrenched in human nature, and the eternal problem is to exploit it constructively and achieve a plus-sum game for the community as a whole. In this sense every society gets the entrepreneurs it deserves. Historically, the social and political environment has usually precluded innovative investment and locked the economy into a futile zero -sum game. At worst, a minimum of self-employment had to be propped up by draconian measures: in medieval Russia free peasants were forbidden to sell themselves as slaves, which was their only way of avoiding a crushing tax burden!

In A Farewell to Alms: A Brief Economic History of the World (2007), Gregory Clark traces back the English industrial revolution to a persistent genetic change during the preceding centuries. In contrast to other peoples investigated, the affluent English had more children surviving into adulthood than the population at large. Under stagnant economic conditions, this meant that many of them ended up in straightened circumstances, squeezing out the common indigent by their cultural-cum-genetic competitiveness. Clark maintains that the slow change in genetic endowment was the mainspring of the subsequent economic development. By the same token, the less developed countries are in for a long haul. These controversial conclusions have so far evoked only muted reactions.

Business environment

No subculture, least of all a business, can thrive without the invisible support of a broad set of integrating rules, which sustains a lasting plus-sum game. The rapid growth of the Japanese economy would, for instance, have been inconceivable without the well-established value system. The link between the basic rules of the social game and economic prosperity is even more visible in the opposite case of stagnation. In many (if not most) less-developed countries, verbal usage is basically insincere, and not only in politics. Every utterance outside a circle of intimates is just another makeshift in the everlasting jockeying for position.

Worthies of various degrees seek to enhance their status by making grandiloquent promises while the people try to protect themselves with great verbal virtuosity against oppression, extortion and exploitation. The whole language game is thoroughly politicized, giving unbridled expression to lofty intentions or to humble subjection, as the case may be. The connection with any genuine undertaking or concrete action is more or less accidental and is open to constant revision.

In a bazaar environment, investments are necessarily opportunistic and short-term; every business becomes a string of isolated transactions since any lasting commitment would be suicidal. The only enduring relationships are based on the family, kin or the tribe. Loyalty to superordinate rules is almost non-existent; a man as good as his word is not a pillar of society but rather an anachronism, ready for the madhouse.

Even under the best of circumstances, a fully-fledged market economy becomes problematic in a primitive setting. It clashes with untempered epigenetic rules and is thus subject to strong culture-specific repression. Without individual initiative and accountability, greater freedom will lead to anarchy or apathy rather than to proficient plus-sum performance.

The value frame

More important than professional skill is the desire to play fair, the recognition of inherent values beyond personal interest and the profit motive. The self-organization of the marketplace is bound to break down unless the silent majority supports the spirit of the game. Cheats will gradually oust progress dynamos; escalating controls and government intervention will simply shift the foci of corruption. Deprived of personal responsibility people are reduced to the status of dependent serfs, incapable of managing their own affairs and unable to accept the risks and worries attaching to even the humblest capitalist rank.

Many if not most past civilizations seem to have been strangled by their own safety nets, skilfully created by a risk-aversive élite. Such expedients seem less offensive when the beneficiaries belong to the lower social strata, but the free supply of the necessities of life to a politically influential populace eventually undermines the self-respect and allegiance of the ordinary citizen. Constant anxiety and concern for the future, the accumulation of capital when the going is good and painful adjustment in adversity are all vital attributes of economic as well as biological life. In the name of civic solidarity we must try to soften the blows of fate, but the onslaught of supplicants must not be allowed to corrupt the core of human enterprise – our only truly renewable resource.

Irrespective of the merits of political horse-trading, we must not forget that social stability is an economic value in itself. Fear of the breakdown of law and order is the strongest economic disincentive. Every productive investment in property, education or children springs from confidence in a better future and a reliable world order, upheld by legitimate authority. When people, companies, banks or nations stand surety for one another, they are giving voice to a common credo, mutually guaranteeing their economic viability. The ultimate collateral is, after all, the conviction that the economic game will preserve its vitality as the generator of shared prosperity.

Market dynamics

In poor countries a high rate of savings is the best indication of future economic upturn. In the early 1970s, private capital formation in Japan was around 25% of GNP, while South Korea saved more than 30% in 1988. According to the International Monetary Fund (IMF), the rate of saving in China was 50% in 2005. In Latin America only Chile has exceeded 10%, if oil revenues are excluded.

In the developed countries the figures are much lower; in 2007 Japanese savings had dropped to 3% of GNP. This is in part due to the rise in depreciation which increasingly finance the investments. The economists have a habit of castigating exaggerated thrift because it strangles consumption. But most experts agree that the consumption craze in the United States was out of hand when the savings rate fell to close to zero in 2005. In 2007 it was still a measly 0.4%.

Unearned riches can be sugar-coated poison pills. They distort the perception of reality and are equal to a giant subsidy, compromising the competitiveness of the nation. Political and economic decision making goes awry, frugality is thrown to the wind and featherbedding becomes the name of the game.

The cultural legacy of Europe has an aristocratic bent, and in contrast to Americans, Europeans are still somewhat bewildered by the fact that the likes and dislikes of the common man now pull the economic levers and steer the production process. Intellectuals of all shades are agreed in condemning the vulgar appetites of the masses. Surely it must be dangerous to put too much money into the hands of ordinary people?

The occasional excesses of trade mark advertising can be pinpointed as blatant examples of market-economic waste. What eludes the critics is that the ads as such significantly contribute to consumer satisfaction. Coke and Pepsi thrive on an oxymoron: the real illusion of well-being induced in juvenile minds. Likewise, the haute couture of Cartier or Rolls Royce used to instill more blasé snobs with a specious feeling of superiority.

Freedom of choice permeates the market economy; we acquire and consume the products we deserve and, more often than not, we unconsciously connive at any double-dealing. By and large, a successful business must build upon consumer confidence, a point which is reflected in the enormous value of many trade marks. The supreme challenge is to create the customer. Her trust will soon be the only really valid capital when key production factors – money and manpower, market information and technological know-how – are freely available.

Discounting the future

The Americans will in the future have to confront each and every one of the problems they now so resolutely put on the back burner. (Originally I wrote these lines in 2006. In the summer of 2008 as I am redrafting them, it appears that the future has already arrived.)

Even if poverty is not exactly a sin, the deterioration of an economy is a certain sign of moral depravity. Wishful thinking has superseded prudent judgement when people try to take longer and longer advances on the future. Saving has been supplanted by short-sighted gambling, lotteries, sweepstakes or purely speculative investment. Success in these zero-sum games is contingent on misleading or deceiving your co-players, which makes for a state of collective economic disgrace. Only symbiotic information-sharing and fair competition will sustain and extend the scope of plus-sum play.

In modern democracies, the aspirations of governments are rising unrelentingly. This is reflected in the taxation level and in public expenditures as a proportion of GNP. In peacetime, one half should be the ultimate limit but Sweden reached 73% of GNP in 1993, a world record. In 2006 the country had retreated to 52% but was still the global leader. A serious consequence is political inbreeding. Civil servants, government employees, pensioners, students and the unemployed constitute a majority of the electorate, which is reflected in the parliament. When society has socialized itself beyond a certain point it may be difficult or even impossible to break out of the vicious circle. The situation is getting worse as the number of the elderly is increasing.

If we are unable to induce saving and unwilling to reward risk-taking and hard work, we lose the lever of economic enterprise. Competitive tension will evaporate and motivation is bound to fail. Sloth and sloppiness will spread when society loses its capability to promote by ability and the economy slips into permanent decline. An inflated bureaucracy will take over the government, haggling over the remaining spoils with militant and well-organized pressure groups. This gloomy picture may sound like an exaggeration of the dangers of excessive taxation and red tape, but the continuous expansion of the ‘grey’ economy in most countries testifies to both the incompetence and the oppressiveness of the welfare state. History, moreover, abounds in examples of such economic and cultural backsliding.