First step to SA growth: Reject pseudo-economic fallacies – Martin van Staden

Unlocking economic growth should really be common sense, especially as history has illustrated that socialist or communist styles of economic policy don’t work very well. Even China has opened up its market significantly, adopting capitalist principles. When South Africa started to do this in the Mbeki era, the country saw strong economic growth. Why then is South Africa’s political space so obsessed with reverting to socialist policies that clearly don’t work? Martin van Staden of the Free Market Foundation unpacks the country’s pseudo-economic fallacies and calls for common sense. Whether that common sense will prevail is another question. – Gareth van Zyl 

By Martin van Staden*

Murray Rothbard, economist and political philosopher, wrote in an essay that there is nothing wrong with being ignorant of economics, given the science’s specialised and often complex nature.

However, Rothbard noted, “it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

In a country facing dire economic prospects like South Africa, it is always important to return to basic principles. For this, Occam’s Razor – the simplest explanation is usually correct – is a useful rule of thumb, but it is one that has long been abandoned. Nowadays it appears that there is only one accepted ‘economic’ theory: government intervention will solve the problem.

This nation-wide notion has come about after years of us absorbing frequently-sounded mantra and legitimising pseudo-economics. Our economic growth and stability have suffered consequently.

For example, a dominant meme is that workers are being ‘exploited’ by employers. This is accepted as a truism without further contemplation.

Marxists believe in the so-called “labour” and “surplus” theories of value. Taken together, these theories dictate that the value of a product is determined by the labour of the producer (the worker), yet the capitalist pays the worker only a subsistence wage. The difference between the “real” value of the product and the wage the worker earns is “surplus” value, which the capitalist keeps for himself. In other words, workers are not paid their fair share and their greedy capitalist bosses keep the bulk of the loot – and thus exploitation is taking place.

These Marxist theories are false – objectively so – and no sincere economist, perhaps excluding some academic economists, would say otherwise. Value is assuredly not determined by the labour put into a product. An individual may spend a month assembling a rickety chair, yet it is the stable, mass-produced chair that will fetch a higher price on the market. Consumers pay for the product they believe is worth their money, regardless of how much labour effort was put into the production. Furthermore, labour often plays a small role in determining the price of a good or service, with the cost of machinery, overheads, and management also playing a decisive role.

File Photo: Supporters of the ruling ANC cheer as president and leader Jacob Zuma (not seen) arrives for the launch of the party’s election manifesto at the Mbombela stadium in Nelspruit in 2014. REUTERS/Ihsaan Haffejee

This is based on the principle of value subjectivity, which is illustrated well by the ‘water in the desert’ scenario. If someone who has been stranded in the desert for days comes across two large containers, one containing water and the other blocks of gold, which is more valuable? In most cases (but this is not guaranteed, due to the subjectivity of value), the man in the desert will choose to carry the water with him. Gold is not objectively more valuable than water, as value is in the eye of the beholder.

The “labour” and “surplus” theories of value are drops in an ocean of pseudo-economic fallacies. Another fallacy is the idea that public works programmes create employment, a popular notion from Apartheid days.

The idea of paying people with their own tax money should elicit only scepticism. What happens is that competitive private sector contractors who would have been paid with earned money to undertake the “public” works project and employ workers, are robbed of that opportunity and tax funds are extorted from taxpayers to fund something government need not be directly involved with.

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Nationalisation also makes a consistent appearance in South African pseudo-economics, right from the nineteenth century railways to the present. It is also the pet proposal of the new rock-star of left wing “economics”, Chris Malikane. But nationalisation has consistently produced detrimental results.

At best, once a company or industry is nationalised, it is marked by inefficiency and a distinct lack of respect for consumers (think Canada’s national health service queues, ditto South Africa’s Post Office), and, at worst, a complete collapse of the sector and destruction of the economy (think Zimbabwe’s mines and the Soviet Union’s agriculture). Privatisation, on the other hand, has produced more positive if inconsistent results, depending on how it is implemented.

Read also: Beware the rule of ‘quasi-law’ eroding our democracy – Van Staden

When privatisation is done in a non-corrupt fashion whereby cronies do not simply replace their government friends, it leads to efficiency. If privatisation is merely a transfer from the formal to the informal political class – with a dash of monopolistic protection – inefficiency ensues. But bad privatisation is still preferable to nationalisation, as these companies become accountable to market forces, and will surely go bankrupt if they continue to perform as they did under state control.  

South Africans now know that “white monopoly capital” was a phantom threat concocted by the political class to draw attention away from the failures of government and its private sector associates. Why we continue to dance to the tune of this self-evidently false narrative boggles the mind. But we started dancing to the tune of false economics long before white monopoly capital burst onto the scene, and this actively contributes to slowed economic growth, and worsening destitution.

Rejecting nonsensical pseudo-economics is not going to put South Africa on the freeway to growth and prosperity, but it is certainly a necessary departure point.

  • Martin van Staden is Legal Researcher at the Free Market Foundation and Academic Programs Director at Students For Liberty in Southern Africa.