Democratic societies and economic growth

Saturday, 15 September 2018 00:10 -     - {{hitsCtrl.values.hits}}

There seems to be a direct relationship between free and open democratic societies where there is freedom of speech and association on the one hand and faster economic growth on the other. Communist countries which did away with free markets found their economies were not working and black markets were thriving. Lenin restored free markets using the war as an excuse. 

The centrally-planned Communist societies had criticised the market economy as responding only to the needs of the wealthy and ignoring the production needs of the poor and less well-off. They wanted to do away with the free market price system and replace it with central planning since the free market prices were said to reflect the needs of the wealthy and not the needs of the poor and less well-off. But they soon realised that they could not fix prices on their own, ignoring demand and supply as reflected in the market and only going by their own subjective opinion of the needs of the poor and their own determination of the priorities of the poor.

The market prices reflected demand and supply for a particular goods or service and if the market price rose demand would diminish (other things being equal) and supply would increase bringing about balance between the two and a stable price for it (other things being equal). 

If the free market price determination was abolished by government and flat prices were fixed by some central authority, how will such central authority determine the appropriate price? Such central authority would need to know the demand and supply for a product. But there is no way to determine such demand and supply unless these forces are expressed in the market. So, abolish markets and have only a central authority means such authority will not have any guide to demand and supply for a particular goods or service.

It is this problem that made central planning to allow free market prices to operate despite their criticism of such free markets earlier. If prices was to be carried the task would be too enormous and distort relative prices leading to black markets. Central planners needed some guide to what constitutes demand and supply for particular commodities. Otherwise they would only reflect their particular views of what the people want which would be subjective rather than objective. 

People are not always rational and do not adopt the same guides to what they should buy. How would the central planners determine what goods to produce and how much to produce when allocating resources for their production? If resources are inadequately allocated to the production of a particular good where the production is carried out by a government enterprise, then there would be shortages and black markets. So the central planners had to determine the demand of the people for the multiplicity of goods used in the economy. 

How could they do so if there was no market price system and instead only central purchase and sale of goods produced domestically or imported? Imported goods had such a guide in the import prices but how would domestically produced goods be priced? Some guide was necessary even to the central planners for they knew only their own preferences which may not reflect the demands of the people. So the early Communists who discarded the market price system found the central planning economy unworkable and Lenin restored the free market system using the war as an excuse. 

He adopted the free market prices as a guide to the allocation of resources in the economy despite their earlier criticism that it was serving only the needs of the wealthy in the society and not responsive to the needs of the poor and less well-off. So Lenin restored the free markets despite the previous criticism of the Communists using the war as an excuse.

 – R.M.B. Senanayake

The less-intelligent Stalin fixed prices centrally and resorted to compulsory purchases when the peasants refused to sell to the government at the approved prices when the market prices they could obtain were higher. Stalin resorted to force and carried out compulsory purchase of grain from the peasants to supply the towns and thereby caused great hardship to the Russian peasants. Thousands were exiled to Siberia with its harsh climate to suffer and died from the cold. Stalin is remembered for his harshness but also for winning the war against the Nazis. 

We often hear well-meaning people condemning the free markets because they provide for the rich to get richer although not necessarily for the poor to get poorer. In fact the poor have become much better-off under Capitalism than under the Communist regimes where production and national income either fell or failed to grow adequately to overcome the continuing increase in population in many developing countries. Actually economic growth itself has led to a slowing down of the population growth as the better-off families began to practice birth control and family planning despite the teachings of the Church. 

Let us appreciate the free market system we have although it is far from perfect. There don’t seem to be any perfect human institutional arrangements possible to satisfy our idealistic value of equality. Human beings are born unequal with different aptitudes and traits. So while inequality caused by institutional arrangements in society can and must be reduced or even eliminated, yet a society where there is perfect equality of incomes seems to be an impossible goal unless it is enforced by the exercise of the State confiscation of all higher than average incomes.

Paying equal wages irrespective of the nature of work and the application of the workers efforts seems to be a disincentive to economic growth and development. Also the people who take risks by launching into new fields need to be compensated or rewarded for their efforts with higher incomes for otherwise they would prefer to follow the tried and tested norms of action in society instead of launching into new avenues where there will be risks. 

Risk-taking needs to be rewarded if successful for if it fails the loss is certain and has to be borne by the person who took the risk. If there is no greater reward there is no incentive to risk taking to launch into new ventures where the future is uncertain as to gain or loss. So don’t condemn the free market system for there is no feasible alternative. Of course it is not ideal but are there attainable ideals in human society?