SANE Views

Vol.5 No.3, 11 February 2005

Backing up the Free Market

Margaret Legum

Pity the poor business owner, whether industrial, commercial or – especially - agricultural. On top of all their woes, they are now being asked to contribute to the national effort to reduce unemployment.

The free market, spurred by competition, is by and large the only way goods and services can be efficiently made and distributed. Fair enough: you are an entrepreneur and you like competition. So you work hard to get your costings right and your market mapped out, and you start to produce. (If you have shareholders you note you have to keep them happy as they can leave at any time.)

Then you are faced with an array of unforeseen and largely unpredictable factors. Your product is matched by another country’s that can be produced cheaper over there. Sometimes that competition is ‘fair’ in the sense that their workers will accept even lower wages than yours; sometimes it is ‘unfair’ because their governments provide subtle or obvious subsidies for those products.

In any event World Trade Organisation rules – whose terms have been negotiated a million miles from your factory - mean your government may not keep them out, even if you can prove you are being unfairly disadvantaged. Your government advises you simply to become yet more competitive: cut costs and staff, tool up, outsource… (Whatever you do, remember to keep shareholders happy.)

Then the value of the rand changes sharply. If it rises and you are an exporter your solution is again to become more competitive by cutting costs etc. (But don’t forget to protect the shareholders.) Same thing applies if you are an importer and the rand falls. For reasons outside of your control, you are suddenly in a worse position. Or of course you might get a bonanza: if you are an exporter with a falling rand or an importer with a rising rand. (Either way, don’t forget shareholders come first.)

Then there is a strike in your sector, because jobs are under threat. Or a climate-induced disaster somewhere, which affects your product. Or an epidemic of disease or a large new player in your market area that suddenly depletes – or enlarges – demand for your product. Not to mention being involved in the collapse of a bank.

Now imagine you are in agriculture. In addition to all that you have the weather. Supply of your product is ‘inelastic’: it cannot be changed because the price has dropped or the rain has failed or a blight has descended. Those unpredictable factors can happen anywhere in the world – not just at home – to produce a roller-coaster in your prices and profitability. Without extra investment, you may make a fortune one year because your maize is scarce and denominated; and sell at a loss the next.

The irritating injunction to ‘become more competitive’ assumes that all factors of production may be engaged or discarded at short notice, so that business owners can switch their output in response to changes in the global market. This is wholly unrealistic for everyone, but especially agriculture. It makes understandable the accusation that economic theory is ‘autistic’- meaning out of touch with reality.

Now add the suggestion that business should be doing its bit towards creating jobs. How do you factor into your sharply honed cost/output/market calculations an extra consideration – to add a few people to your pay-roll? How does that fit with the already difficult balance in unpredictable markets?

The way round this is for government to create an environment for business in which employing more people benefits business. It can use the taxation system to encourage employment. It can end all taxes on employment. It can end the massive tax-breaks for using job-shedding technology. If you are a farmer, for instance, tax breaks on buying a new tractor makes it practically free, while employing another worker is costly not just in terms of wages but also taxes and the hassle of regulation. Currently we actually penalise employment.

And we can stop hoping other countries will remove agricultural subsidies, and start supporting our own food industry. Everyone knows agriculture cannot survive without subsidy, and governments that abolish them will fall. So we need to protect our agriculture and its employment, either by direct subsidy or by tariffs.

The formal sector can never produce full employment, but the government can help make it easier for them.

You may wonder why this is not being done, when you consider the distress in several sectors due to the unpredictable burdens of the global market. The reason is that current practice suits very large multinational business, especially in the financial sector, which does not produce anything but deals in other people’s money and their debt. They are the shareholders whose interests must always be prioritised. They are suited by an unregulated global market.