Blog

Friedrich Hayek: The Use of Knowledge in Society (II)

It will at once be evident that on this point the position will be different with respect to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts.

 If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.

We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques.

And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries.

This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.

It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?

The fairly widespread belief in the affirmative is not, as far as I can ascertain, borne out by the practical experience of the businessman. In a competitive industry at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an inefficient manager to dissipate the differentials on which profitability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be allowed to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work.

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability.

The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

Read more

John Locke (1824): Two Treatises of Government (1)

John Locke (1632-1704) was an English philosopher who is considered to be one of the first philosophers of the Enlightenment and the father of classical liberalism. In his major work Two Treatises of Government Locke rejects the idea of the divine right of kings, supports the idea of natural rights (especially of property), and argues for a limited constitutional government which would protect individual rights.

Though the earth, and all inferiour creatures, be common to all men, yet every man has a property in his own person: this nobody has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men. For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others.

He that is nourished by the acorns he picked up under an oak, or the apples he gathered from the trees in the wood, has certainly appropriated them to himself. Nobody can deny but the nourishment is his. I ask then, when did they begin to be his? when he digested? or when he eat? or when he boiled? or when he brought them home? or when he picked them up? and it is plain, if the first gathering made them not his, nothing else could. That labour put a distinction between them and common: that added something to them more than nature, the common mother of all, had done; and so they became his private right. And will any one say he had no right to those acorns or apples he thus appropriated, because he had not the consent of all mankind to make them his? was it a robbery thus to assume to himself what belonged to all in common? If such a consent as that was necessary, man had starved, notwithstanding the plenty God had given him.

We see in  commons, which remain so by compact, that it is the taking any part of what is common, and removing it out of the state nature leaves it in, which begins the property; without which the common is of no use. And the taking of this or that part does not depend on the express consent of all the commoners. Thus the grass my horse has bit; the turfs my servant has cut; and the ore I have digged in any place, where I have a right to them in common with others; become my property, without the assignation or consent of any body. The labour that was mine, removing them out of that common state they were in, hath fixed my property in them.

But the chief matter of property being now not the fruits of the earth, and the beasts that subsist on it, but the earth itself; as that which takes in, and carries with it all the rest; I think it is plain, that property in that too is acquired as the former. As much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property. He by his labour does, as it were, enclose it from the common. Nor will it invalidate his right, to say every body else has an equal title to it, and therefore he cannot appropriate, he cannot enclose, without the consent of all his fellow commoners, all mankind. God, when he gave the world in common to all mankind, commanded man also to labour, and the penury of his condition required it of him. God and his reason commanded him to subdue the earth, i. e. improve it for the benefit of life, and therein lay out something upon it that was his own, his labour. He that, in obedience to this command of God, subdued, tilled, and sowed any part of it, thereby annexed to it something that was his property, which another had no title to, nor could without injury take from him.

Read more

Friedrich Hayek: The Use of Knowledge in Society (I)

A claim for equality of material position can be met only by a government with totalitarian powers.

F. A. Hayek (1899–1992) is undoubtedly the most eminent of the modern Austrian economists, and a founding board member of the Mises Institute. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian School theorists, Hayek was more successful than anyone else in spreading Austrian ideas throughout the English-speaking world. He shared the 1974 Nobel Prize in Economics with ideological rival Gunnar Myrdal “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.”  Among mainstream economists, he is mainly known for his popular The Road to Serfdom  (1944). From Mises.org.

 

What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But, as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.
II
In ordinary language we describe by the word “planning” the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system.

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning— direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.

Read more

Frederic Bastiat: The Candlemakers’ Petition (Part 2)

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.
It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle that guides your entire policy. Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense? We have our answer ready:
You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well! Surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.
“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well! If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: +×=+–; in other words, it would be to heap absurdity upon absurdity.

Labor and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labor that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market. Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labor withstand the competition of foreign labor when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product—coal, iron, wheat, or textiles—comes to us from abroad, and when we can acquire it for less labor than if we produced it ourselves, the difference is a gratuitous gift that is conferred upon us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us.

The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

Read more

Frederic Bastiat: The Candlemakers’ Petition (Part I)

As described by Andrew Beattie, The “Candle Maker’s Petition” is a satire of protectionist tariffs written the by great French economist, Frederic Bastiat. In many ways, it expanded on the free market argument against mercantilism set forth by Adam Smith, but Bastiat’s target was government tariffs that were levied to protect domestic industries from competition. In Bastiat’s “Candle Maker’s Petition”, all the people involved in the French lighting industry, including “the manufacturers of candles, tapers, lanterns, sticks, street lamps, snuffers and extinguishers, and from producers of tallow, oil, resin, alcohol, and generally of everything connected with lighting” call upon the French government to take protective action against the unfair competition of the sun.

They argue that forcing people to close “all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds – in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses” will lead to a higher consumption of candles and related products. In turn, they reason, the industries that those in the lighting industry depend on for materials will have greater sales, as will their dependent suppliers, and so on until everyone is better off without the sun.

From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps, Snuffers, and Extinguishers, and from the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting. To the Honorable Members of the Chamber of Deputies. Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for applying your—what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, and, as for principles, you deny that there are any in political economy; therefore we shall call it your practice—your practice without theory and without principle.

We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly that we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honorable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged? If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.
Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honor of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc. But what shall we say of the specialties of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.

 

Read more

Can a Free Market Solution Solve Malawi’s Poverty Crisis?

By Ibrahim Anoba

The International Labour Organization (ILO) recently reported that over 12 million Malawians could become poor by 2030 if poverty reduction rates remain the same. This is despite Malawi’s slight improvement in GDP per capita since 2004, and the implementation of numerous measures to counter poverty, including increased government spendings on infrastructure and social welfare programs. Rather than reduce poverty and stimulate economic development, these policies have further impoverished the nation–half of its population earns below 687 Malawian Kwacha (less than one US dollar) per day.

The International Monetary Fund (IMF) and the World Bank have assisted Malawi with numerous economic development policies since 1981 and have given millions of dollars in loans to support their implementation. Many required an increase in tax rates to make up for bigger spending on welfare programs like the Structural Adjustment Programmes (SAPs). But despite robust spending, these policies have been ineffective, mostly due to faulty structuring.

For instance, the SAPs contain proposals for trade liberalization and privatization, which are good recommendations considering Malawi’s need for a vibrant private sector, its implementation are, however, expensive for a low-income country like Malawi. The SAPs commits the country to expensive welfare schemes like agricultural subsidy programs and social safety nets. Policies like the Malawi Growth and Development Strategy (MGDS II), the Farm Input Subsidy Programme (FISP), and the Social Cash Transfer (SCT) have equally burdened the country’s revenue. The FISP alone targets 1.5 million annual beneficiaries by providing 6 million bags of seeds and fertilizers accounting to millions of dollars; the MGDS II and SCT include similarly expensive subsidy programs and all culminates into heavy financial burden Malawi has struggled to sustain. It is unlikely that Malawi’s capacity to finance them will change anytime soon, considering its dwindling revenue. Agricultural exports, which constitute 90 percent of Ethiopia’s annual income, and 80 percent of all labor force, have sharply declined due to fluctuations in international tobacco prices and the negative effect of drought on maize and cassava production.

Malawi’s economy is paying heavily for central planning. This is evident from its placement on the latest Ease of Doing Business Index (133) and global GDP competitiveness rankings (159). The country can still beat the negatives by adopting free market solutions in key sectors, especially agriculture. Privatization would open them to more investments that would result in increased economic output. This organically injects more money into the economy and increases government revenue to support the falling export earnings. Local markets would equally gain from a competitive economic climate. The cost of basic commodities like food and medical supplies would drastically reduce while the demand for labour increases. It can result in an increased share of working-age adults in the future and possibly create a demographic dividend in the end.

This increase in employment opportunities bounds to lessen government’s burden on safety nets and job creation. It is a sure way to avoid future economic disaster since Malawi must find jobs for its 6.8 million children in the next decade. Beside the labour gains, a competitive economy is necessary to attract investors. Eighty percent of Malawi’s labor force works in agriculture. The Malawian government can disengage from the sector and review its stringent regulations to reduce tax and import tariffs. If the country can achieve a competitive agricultural industry, it will eventually reflect on household income and GDP per capita.

Exploring the possibility of economic diversification would also fortify Malawi’s business climate. Having numerous productive sectors bounds to increase government revenue and shield the economy in case of shocks in the agricultural and manufacturing industries. Malawi’s overdependence on agriculture has made it vulnerable to unforeseen international market crises. But opening up the country’s budding tourism sector would reduce the pressure on agriculture and bolster its annual revenue.  

Malawi’s tourism industry is among the most promising in the Southern Africa with numerous historical sites like Lake Malawi, Liwonde National Park and Mulange Mountain Reserve. Having more private investments in the industry would likely increase interest in sub-sectors especially entertainment and hospitality. Presently, tourism accounts for four percent of jobs and a similar percentage of GDP. If Malawi completely liberalized the sector, the country would have another prolific industry to its economic advantage.

Instead of the usual top-down strategies, Malawi should open its agricultural sector to more competition, diversify its economy, and build an inclusive business climate to help its mostly-young population thrive over the course of the next decade.

Market liberalization does not hurt. It simply gives the economy a chance to grow without the hassle of centralized economic planning. After decades of unending economic travails, Malawians deserve a better life. All the government and their donors should do is simply give free markets a chance.

This op-ed was republished from TownHall.com.

 

Read more

A Libertarian Thought on Individualism and African Morality

By Ibrahim B. Anoba

The individual in African philosophy mostly existed as a reflection of his community. He was seen as a product of his tribe less than he was an independent being. His birth and death were to satisfy the wishes of the gods on earth. Like many tribes in Africa, several cultures according to history put the individual as a unique creation with the purpose of happiness and self-realization.

In traditional Africa, it was best that the individual remained a social being. This view of man as a societal element primarily applied to his identification as a member of a united community in pursuant of collective prosperity with regards for his individual happiness. However, the expansion of groups during territorial wars and migration, increased community populations while conflict of interests among groups and individuals led to the gradual disassociation from the usual collective interest.

Hence, the idea of the individual as a communal element decreased as societies became bigger. During the hunting and gathering when community populations were very small, it was easy to commit everyone to a unified goal even as few members harboured personal interests. However, as people integrated and population augmented, the individual began to isolate itself because of the geometric increase in interests of new members against the collective. In some cases, people left their villages in pursuant of personal goals. Even, members of ruling families deserted their clans due to conflict of interest with their kin only to establish new territories later, and the conflict of interest continued to repeat itself prompting the definite decrease of collectivism.

Although, some African societies like the Xhosa and the Zulu emphasized the ideals of mutuality and community before the individual, there still existed self-interest. Classical liberals argued for a system that observes the society in light of its distinct members, for a society has no existence beyond the individuals that comprises it, while it is in itself a composition of different interests (Butler 2013).  And the socio-economic consciousness of the society is the summary of individual consciousness. Friedrich Hayek puts it clear when he explained that the “associations within civil society exists for specific end while the civil society has no purpose; it is the undersigned, spontaneous emerging result of all those purposive associations” (Hayek 1988).

Despite this similarity in purpose, contentions still exist between the two folds on grounds of economic and social morality among Africans. On the economic fold, classical liberals outrightly argued for a free market economy chiefly run by individual choices and price, and this was a position common in most economies in traditional Africa. Markets were open and less regulated. In centralized communities such as the Buganda (Uganda), Hausa/Fulani (Nigeria) Akan (Ghana) and the Zulu (South Africa), there were large and open markets such that it attracted participation from communities hundreds of miles away. Trade ensued among communities in their specialized industries with limited or no restrictions, and one can safely deduce elements of David Ricardo’s Comparative Advantage Theory – a cardinal in classical liberalism – existed in these communities even before it was theoretically developed in Europe.

One similar end to both African humanism and classical liberalism is in their emphasis on peace, progress and respect for human dignity through moral justifications. Though, the interpretation of these morals and their justifications is what differs. In traditional Africa, morality was whatever standard the community agreed to guide general conduct. To classical liberals, it is the respect for individual interests and choices, and both existed as the holding force for societal consciousness. In the former, values inherited through generations like equity and justice ensured a fair use of power and obedience to law to avoid conflicts among members and communities. Similarly, in the later, writers like Ludwig von Mises, Adam Smith and Jean-Baptiste Say stressed the anti-imperialist and anti-warfare stance of classical liberalism.

They saw economic liberty of communities in a fair market system as a way to avoid wars and foster peace.  In other words, traditional Africans percept morality as only attainable through inherited values, while classical liberals saw it in form of the peaceful decisions of individuals.  Another misconception is the purported rejection of the principle of cooperation by classical liberals, which is in fact emphasized in their advocacy. The critics argued that market competition will eventually lead to unfair distribution of wealth and that African states were not ready for such experiment.

Conversely, classical liberals saw cooperation as important as competition is to the economy. American libertarian writer David Boaz explained that both “cooperation and competition are essential elements of the simple system of natural liberty, and most humans cooperate with one another than they do competing” (Boaz 2015).

In reality, cooperation is bound to ensue in a free-market economy because individuals cannot provide all their needs themselves and they must interact with others that can provide them in a mutually fair exchange.  Then, the cycle goes round to build a system dependent on fair cooperation. Education, transportation, technology, entertainment and especially food are variables too complex in contemporary societies for an individual to produce. That an individual needs these to survive makes cooperation inevitable.  Besides, cooperation gets people their desires the way they please because, production and consumption capacities vary among individuals and it remains best when people determine these themselves.

It is much safer than to have people equally providing the general need irrespective of their interests or sharing them equally regardless of their needs. Such scenario has invoked destructive economic bubbles in many African states.

The first generation writers on African philosophy falsely interpreted goodwill and solidarity to be state welfarism and collectivism.  Even present writers usually claim capitalism has bitterly failed in Africa due to its emphasis on ‘self-interest’. An average African still see the placement of self-interest above the collective as antithetical to African morality and it will ultimately monopolize dividends of the economy to a privileged few, whereas, it is the exact opposite.

In a society where people serve the interest of others at the detriment of theirs, such society rests on an economic thread because there are always a group that would not believe in serving others due to ambition or greed. This group will get exceedingly rich while others are busy working in their favour, and those that remained devoted the common-good will eventually get exploited and poor. On the long run, the poor group will likely react to such imbalance with a potential of instigating an economic disaster.

This scenario would not occur in a lawful and competitive system where everyone was self-interested because, value and profit is a win-win of a free market economy. To be self-interested is not to be greedy or exploitative; it is fairly pursuing one’s desires for a betterment of life. Moreover, the individual best answer the question of his self-interest.  Equally, many African academics remain wrong in their notion that contemporary African states practice capitalist systems copied from Western economies (Akpan 2004; Obot 2004; Abiodun 2015).

The first lapse is that the so-called African capitalist economies are in fact social-welfarist states with policies that negate the free market economy of true capitalism. Their economic systems are acutely crony. A cabal of wealthy men dominates key industries with state legislations protecting them. Such legislations usually include the imposition of high tariffs on industrial supplies to hold back emerging firms in specific industries. They also raise taxes on small businesses with many of their cronies often guilty of tax evasion.

They enact stringent policies to limit the registration of new firms and restrict foreign investment in these industries, all in the quest of protecting the interest of the wealthy few. In return, the cabal either heavily finances their political quests or act as their economic joker.  These acts are common in the energy, petroleum, transportation and mining sectors of majority modern African states and outrightly negate anything true capitalism stands for.

Unbiased rankings and reports on economic policies of these African states continues to reveal series of economic patterns correlative to crony capitalism. In a free market economy on the other hand, policies that favours one group at the detriment of others would rarely exist, because true capitalism means giving everyone equal opportunity at individual pace without chauvinism or protectionism. Every individual would have equal access to market; tax rates on small businesses are relatively low and entrepreneurs can access foreign markets for exchange of materials and finished products. It is a complete opposite of a government controlled socialist system or a crony capitalist arrangement. Countries like of Coted’Ivore, Mauritius and Mozambique are presently experiencing massive economic growth due to commendable efforts towards a free market economy.

On social morality, a peculiar quality of the African life is the zeal to preserve culture and traditions even when in conflict with individual interest. As noted earlier, there was no unified lifestyle in traditional Africa except the common exhumation of culture and ancestral practices. In some communities, the ruling elites determined what was socially morally and what was not. In others, individuals had liberty to lead their desired life insofar it respects the liberty of others.

However, as generations, evolved, foreign influence penetrated the rigid cultures and newly inherited lifestyles influenced social moral standards. For example, practices like monarchy; forbidden of estate; genital mutilation; facial and body markings; execution of homosexuals and twins among others used to be culturally moral and formed the nucleus of social existence. But the effects of cultural interactions as communities expanded with time persistently redefined socially moral behaviours.

This is reflective in irregular changes in value and culture of modern African societies. Positions such as predetermined behavioural responsibility and blind adherence to authority ranked high decades ago, but revolts against authoritarianism, tyranny or subjective cultures in recent years corroborates this declination. Sorry enough, many traditionalists still see classical liberal principles as rather anarchist even as some African communities flourished under anarchy. Or adversative to traditional African principles: a sort of threat to Africa’s historical identity.

Unlike the total anarchy assumption, classical liberals proposed an impartial system of justice in the custody of the state, but in trust, with some monopoly of force (if needed) to guarantee relative balance (Butler 2015). This was the exact structure in most of traditional Africa. Leaders and governing councils were guardians of values and preserved the justice system through impartial adherence to laws while public revolt was an option against tyranny.

Like many other race in human history, traditional Africans despised tyranny. The central authority only existed as representative of the gods on earth, to guide the living in the right conducts only. And as Otto Lehto explained, “in addition to being a doctrine of maximizing free and voluntary human cooperation, classical liberalism is a doctrine of legal limits to coercive actions” (Lehto 2015).

In African tradition, the individual was as important as life itself, and the respect for his dignity, a virtue. The only difference was that they saw the realization of individual prosperity as more realistic when embedded in the prosperity of his community. Even Kenneth Kaunda, a staunch African humanist agreed when he said:

“I am deeply concerned that this high valuation of Man and respect for human dignity, which is a legacy of our [African] tradition should not be lost in the new Africa. However “modern” and “advanced” in a Western sense the new nations of Africa may become, we are fiercely determined that this humanism will not be obscured. African society has always been Man-centred. We intend that it will remain so (Eze 1997, 42).”

His submission serves well an historical correction for contemporaries.

 

REFERENCES

  1. Akpan, N. 2015. “Structure of Self-Organized Traditional Financial Institutions in Nigeria: The Case of Etibe”. In, Nigerians and their Cultural Heritage, edited by Akpan U. Akpan and Abiodun J. Oluwabamide, 148-154. Lagos: Lisjohnson Resources. (Akpan 2015)
  2. Boaz, David. 1997. Libertarianism: A Primer. Detroit: Free Press.(Boaz 1997)
  3. Butler, Eamonn. 2015. Classical Liberalism – A Primer.London: Institute of Economic Affairs & London Publishing Partnership Ltd.. (Butler 2015)
  4. Eze, C. E. 1997. Postcolonial African Philosophy. A Critical Reader. Massachusetts: Blackwell Publishers. (Eze 1997, 42)
  5. Hayek, Friedrich. 1988. The Fatal Conceit: The Errors of Socialism. Chicago: University Of Chicago Press. (Hayek 1988)
  6. Lehto, Otto. 2015. “The Three Principles of Classical Liberalism (From John Locke To John Thomas.” PhD diss., University of Helsinki. (Lehto 2015)
  7. Obot, J.U.. 2004. “Nigeria: The Land, its Resources and the People.” In, The Nigerian Nation: Nigerian Peoples and Cultures, edited by M.B. Abasittai, I.I. Ukpong and G.J. Even own. Uyo: University of Uyo Press. (Obot 2004)

 

Published in Africanliberty.org MAY 21, 2017: http://www.africanliberty.org/a-libertarian-thought-on-individualism-and-african-morality-by-ibrahim-anoba/

 

Read more

Can Ethiopia’s Planned Economy Stand the Test of Time?

 

By Ibrahim B Anoba

Recently, the World Bank reported that Ethiopia would be the most expansive economy in Africa for the year 2017. This forecast is because of its steady economic growth average of 10.8 percent since 2005, one of the highest in the world. But despite its commendable progress, a high tax rate and continued state monopoly in key sectors might compromise its ability to sustain the economic momentum.

Among emerging African economies, Ethiopia is prominent for its state dominated system. A 2016 Heritage Foundation report ranks it among the mostly unfree economies on the continent (142 in the world), only surpassing the likes of Chad, Eritrea and Sierra Leone. This is relatively due to the numerous legislations that restrict foreign investments in major parts of the economy. Consequently, only a privileged few – usually politicians- have access to prolific industries like telecommunication and finance. One can attribute this to Ethiopia’s relatively stagnant per capita income of $590, which is substantially lower than the regional average. Coupled with its economic stiffness, Ethiopia has a burdening tax system.

Tax rate in the country is among the highest in Africa. It currently charges 15 percent in sales tax based on the purchase price of commodities; levies a 35 percent personal income tax and holds a 30 percent corporate tax rate. These heavy figures have reduced the consumer purchasing ability as most businesses hick prices on commodities to recoup loss to the state purse, thus inflicting blows on individual income. It has also affected the informal sector that fortifies the economy.

Besides the negatives of high tax, the Ethiopian of Government’s (GOE) monopoly in key sectors like telecom, finance and logistics undermines its economic prosperity.

In the logistics industry, GOE owns 60% of imports freights and cargos while 40 percent belongs to private firms. It is however unsurprising the industry has yet to contribute more than its present 10 percent quota to the GDP or create more jobs. And this is despite its enormous potentials if completely privatized.

Likewise, the state telecom agency, Ethio Telecom controls all services including fixed, mobile, internet and data communications.  And to Ethiopia’s loss, the strong monopoly deprives the sector necessary competition that could birth profitable innovations. Moreso, the quality of telecom services in Ethiopia is on a level majority of Africa were over a decade ago. But while the rest of the continent is reaping the benefits of an increasing competitive telecom sector, Ethiopia remains stagnant.

However, a liberalized telecom industry promises more service quality at cheap prices, which many businesses crave in Ethiopia. If this happens, development in the industry might eventually influence other sectors, and of course, greatly help the 20 million unemployed Ethiopians. Similar positives can ensue in its enclosed banking sector is it extends the liberalization intent.

Although the GOE allowed the establishment of private banks and insurance companies in 1994, it still prohibits foreign ownership. Interestingly, Ethiopia’s banking system comprises of a central bank (NBE), two government-owned banks and eighteen private banks. This obviously appears sufficient for an emerging economy but, a US based financial monitor, the International Trade Administration (ITA) gave a clear picture of the banking sector when it noted:

 “…. In September 2011, NBE issued a regulation that increased the minimum paid up capital required to establish a new bank from 75 million birr ($3.4 million) to 500 million birr ($22.6 million). As a result of this regulation, all banks under formation that didn’t meet all the necessary application requirements were either dissolved or diverted to other investments. The NBE …further increased the minimum paid up capital for banks to 2 Billion Birr ($90.4 million) and advised all the 18 currently operating private banks to increase their paid up capital to that amount by 2020.”

Expectedly, the policy hampered the operation of private banks and underscores GOE’s resolve to preserve its monopoly. Yet, foreign financial giants including Standard Bank Group, Kenya’s KCB Group, Citigroup, Commerzbank and Ecobank Transnational continues to show interest in the sector, substantiating its promising potentials.

Frankly, Ethiopia is doing well on the back of its anti-market policies, but it should not be lost in the euphoria while it can improve through free market measures. Many African economies including Nigeria (1970s), Tanzania (1960s) and Zimbabwe (1990s) experimented with similar anti-market policies but despite initial economic improvements –as it is in contemporary Ethiopia-, the absence of strong private sectors to absorb the shocks in dwindling revenue eventually busted their bubbles. If Ethiopia does not take advantage of its present gains to expand it economy, it might remain stagnant as the 12th poorest country in the world.

This op-ed was republished from AfricanLiberty.Org

Ibrahim B. Anoba is Acting Executive Director of ALOD. An African Political Economy and Foreign Affairs pundit. He is an advocate with Young Voices and lives in Lagos, Nigeria. You can follow him @Ibrahim_Anoba.

Read more