Monday, September 27, 2010


You can teach people how to fish. You can give them fishing gear and bait. But you cannot teach or give them a willingness to fish. And you certainly reduce this willingness if you give them fish without holding them accountable for catching their own. This is the simple logic of empowerment: you give people the means, the ability and then hold them accountable for the catch.

Again we see the folly of any system, structure or policy that does not take into account individual human behaviour. Without any doubt most of the unemployed would prefer to work. But the more we rely on systems to determine our destiny, the less we are masters of our fate and the easier it becomes to blame the “system” for our own shortcomings.

The inherent danger of a welfare state; of a “mixed economy” or “developmental state” is that they can become disempowering. Admittedly, the latest evidence I have has been isolated and anecdotal but I have a sense that a growing number are becoming unwilling to work while others are expecting more for less. I do not believe (as many appear to) that this has anything to do with culture, race or nationality. My experience in South African gold mines contradicts this view.

While the chorus for restructuring the South African economy is reaching a crescendo, I keep hearing a false note, or the absence of a very important one. The same note was absent in President Zuma’s latest solo. The disillusioned masses are being promised more fishing skills, gear and bait. They are even being promised more fish. But no-where do we hear that important note of holding them accountable and unleashing a willingness to catch fish.

Of all the institutions in society, democratic governments are the most vulnerable to the virus of expectations. If these expectations are unrealistic, the government’s position becomes untenable. Perversely, the ruling parties in governments are mostly responsible for creating those expectations in the first place. What is often missed by the seduced is the potential trade-off between satisfying inflated expectations and individual freedom - a trade off between liberty and equality.

The role of the state is at the centre of economic debate. Time was that this was informed by the belief that laws reflect poorly on social behaviour and the more laws you create, the more criminals you create. While not separate from lawmaking, government’s economic role was defined as creating the conditions for maximum wealth creation and redistributing wealth to bring relief to society’s destitute who cannot be cared for by other means. Not even ardent champions of laissez-faire have much of a problem with that.

The debate about state versus private endeavour often loses touch with what happens at micro level. So it might be useful to examine the dynamic at that level – where individuals and companies create tangible wealth and have to cope with the macro economic weather.

clip_image002In the Contribution Account the role of the state is measured at 15%. This is company tax only although this allocation should include spending on social investment and other forms of government. It does not include payments to state owned enterprises, or “user-pays” government services. These are allocated to “suppliers”. The central government further gets revenue from individuals in the form mainly of personal income tax and receives 14% VAT on the R100 wealth created. This illustration shows the folly of nationalising to expand government income. In practice the state loses R15 company tax (taxing itself) to gain a R15 dividend…unless it intends stripping the asset by reducing retained income!

Of the three contributors: capital, labour and state, the government can act the most arbitrarily. But the account shows clearly how it could impact on others and discourage them to the detriment of wealth creation itself.

It needs repeating that ultimately all tangible wealth is created at this level and in this way. It is here where the rubber hits the road. It is here where behaviour gets shaped and forged, where expectations meet reality, where innovation is nurtured or destroyed, where trust or distrust is engendered, where we spend most of our lives and which, for most is the only means of expressing our contribution to others.

Tangible wealth creation is rooted in ancient logic, is axiomatic and incontrovertible. It is, has always been, and always will be based on service to the greater other - irrespective of motive. Wealth distribution or any tinkering with the status of the contributors or beneficiaries has to support that process. If they all see their purpose as maximising reward sometimes to the extent of squeezing from one another, the process becomes inward looking and parasitic.

Conversely a focus on wealth creation becomes outward looking and progressive. It actually makes no difference who the owners are: government or private enterprise. If there is an external focus the result should be the same. This seems to be absent in the current rhetoric and grand planning. There is little mention of how the size of this cake will be increased by baking it differently. It assumes that a change of asset ownership itself will achieve this.

While government should not automatically be excluded from investing in ventures where private initiative may fear to tread, the focus should still be outward looking and market driven. The cost of capital in business cannot be bypassed simply by using taxpayers’ money or public debt. Ownership comes at a cost, including skills recruitment and sound enterprise leadership. Also, what’s the point of owning high priced assets in market-reliant enterprises if the real pressure is on current expenditures such as education and social services? It’s a bit like having a “Yup-mobile” or two in the garage while your children are starving.


If a “mixed” economy means greater dependence on the state, then most of the developed world has been on this road for many decades. The United States, that bastion of free enterprise, has seen total government involvement (Federal and State) nearly double since the 50’s. This was triggered by the great depression in the early 1930’s. Before then, Government’s involvement as measured by spending to GDP was only 3%!

South Africa’s government spending to GDP is just over 30%, one of the highest among published African figures, but below countries like Denmark (37%) and Holland (40%). These comparisons are arguably meaningless under a growing acceptance that “one size does not fit all”. Whatever “mix” is deemed appropriate one cannot controvert some basic fundamentals. The first is embracing the logic of maximum wealth creation and sensible distribution, and another is protecting Constitutional rights.

There clearly is a need for addressing imbalances in South Africa and financial controls are being tightened across the globe. The concept of a “mixed economy” should not be dismissed out of hand. But it demands far greater honesty, integrity and accountability from governments because they can act arbitrarily, are not subject to market scrutiny and are not dependent upon consumer choice in the moment. If the government is not trusted, or individuals in that government are not trustworthy, only the certifiably insane would give them more control of their lives. Any system should appeal to the best in us, not the worst. The best is that which unleashes prudence, an enthusiasm to work and celebrates service. The worst is that which appeals to self gratification, greed, idleness and celebrates material wealth.

Perhaps we should sort out these things first before implementing grand restructuring plans. We must take care that the so-called “mixed” economy does not create a suicidal concoction.

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