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Are Planned Economies Our Destiny?

Are Planned Economies Our Destiny?

No. 7-8, Sep.-Dec. 2017 » Bridging News

“The most terrifying words in the English language are: I am from the government and I am here to help”. These were not the words of an anarchist or a person opposing the concept of the state in general. These were the words of the head of probably the largest government in the world, President Ronald Reagan. Ronald Reagan saw very clearly that government should have limits and should leave most decisions to the free choice of free citizens. He followed the principle that the state should only do those things which only the state can do.

This included the wisdom that people know themselves what is good for them and are able to choose. It also included as little intervention in the economy as possible.

These were however not policies which the successors of Ronald Reagan followed nor most of the Europeans governments. 

In the following, I will mention the limiting role of government and administration. This does not mean that I deny the validity of civil service. We have very hardworking, responsible and dedicated Civil Servants. I just question the overbearing bureaucracy. I heard the following from Archduke Otto von Habsburg: “God bless our good civil servants but beware us from bureaucracy”.

Unfortunately, we see now in the global context that not only the nanny state (a state which takes care of a lot of your personal choices as a nanny would do for kids) is gaining importance but also the state, which controls and limits freedom. It is the old principle: if you want the nanny state to do more for you, you pay for that with parts of your freedom. 

Is capitalism the problem? 

It is today frequently quoted that capitalism does not work anymore. And what is proposed is a very vaguely defined system of a guided “humanitarian socialism” or a “feel good” collectivism. The problem with capitalism is not that it does not work, it is that capitalism has lost its liberal roots. And this leads us to the issue that we have more and more administrative planning and guiding of the economies in the so-called capitalist societies.

A good, free economy, which is and was the basis of our prosperity, is based on principles such as personal responsibility, the willingness to incur risks by entrepreneurs and the concept of competition, which is not necessarily about killing competition but gives pressure for constant improvement. This should not only be in businesses, it should also be applied on a personal level by employees in their daily work lives, but also in competition between municipalities, regions and states. 

Unfortunately, we have tendencies which erode the principles of personal responsibility and the positive principles of competition. We see, on one side, the very socialist concept of an elitist administration, which believes that it knows best what is good for the citizens. What it also means is that we are getting a system of control and a system of interventionism by governments.

We described it in one of the Gottfried von Haberler Conferences of the ECAEF Think Tank in Vaduz as “when bureaucrats are playing entrepreneurs”, but they are not incurring any risks. Another tendency which is even more dangerous is that more and more people and groups tend to ask the state to fix their problems. This encourages an unlimited growth of the public administration.

Risk aversion in our saturated European society has become very high. This leads to the situation that failure is not accepted. Any new venture, any innovation includes the risk of failure. Second chances are frequently denied. This discourages.


In the old Soviet system, the planned economy required that all means of production be nationalized, everybody work for the state and the different entities receive their targets from the government. People who set the targets had insufficient knowledge of how the economy works and the whole system was one of serfdom, slavery and the subsistence of the people on a very low level. Certain outstanding achievements were possible (Sputnik, Space program), but only based on force and not to the benefit of most parts of the population. 

The planned economy towards which the world is developing today appears to be more lenient, but the long-term effects might be quite similar. The idea to have politics, government and the administration in the cockpit of the economy prevails, however. It is true that this gives means, justification and power to government. 

Worrying trends 

Free economies based on individual responsibility and healthy competition are today limited by the following factors:

- A growing public administration, issuing regulations and employing oversized control mechanisms; 

- A politicized taxation;

- An increased tendency in society towards risk avoidance;

- Moralizing: standards being set on “moral” grounds by pressure groups or NGOs and so on which might be justified in particular cases, but not generalised.

One of the important tools to achieve a planned and guided economy are regulations. Certain regulations are necessary in order to avoid harm, but the density of regulations can be described as less of a thicket and more of a jungle, which limits the free development of businesses and of innovation. The huge problem is that, more and more, we reduce or downplay competition. Excessive and strong regulation tends to further oligopolies and make it difficult for new players to enter into the market. 

Unfortunately, a good portion of businesses like this system because it makes life easier, protects them and provides market protection for them. It is, however, to the detriment of innovation and the healthy, creative and innovative incentives of competition. Certain management driven companies also like the regulatory density, as it reduces their responsibilities. Significantly-sized businesses are created to function in regulatory-dense areas and provide mediation and consulting for the regulated companies. Compliance is certainly necessary but it has become an outsized part of day to day running and working in compliance can be described as non-productive work.

It is threatening to see the growth of advisory businesses working in the area of control and compliance and to the detriment of other services, manufacturing activities, infrastructure etc. Unfortunately, the regulatory density and the wish for control by governments is not limited to the National level. It emerges very strongly on supranational levels such as the EU or worldwide. Here, the G20 is spearheading global planning. The members and the leaders of the respective states are very different. There is only one issue they agree on – irrespective of whether they are authoritarian or democratic – increasing the control over the citizens and more and harmonised regulations attempting to plan economies. 

Regulatory overreach 

We will mention a few areas of regulations and the justifications for measures proposed which lead to overregulation. Regulations are very heavy in labour law and social law, making the labour market inflexible and distorting it. The arguments are about job security. Exaggerated labour law is however the main reason for the strong youth unemployment in certain European countries. The irony of the situation is that too strong job protection is to the detriment of job creation.

We find it in competition law and product classification. The main pretext here is consumer protection. We need a certain competition law, but at present it allows the government to intervene very strongly. Consumer protection per se is ok, however a too rigid specification limits competition from new developments and the market entry of new products.

A very strong tool to manipulate the economy are the tax laws. The real justification for taxes is that citizens pay for the necessary expenses of the public administration. For this, the public administration has to give services to the people, which could be protection, internal and external security, police, legal system etc. However, the majority of tax systems have become very complex machines in order to manipulate the economies and social systems. They give the state an important tool to plan the economy and they give the political parties the means to collect votes with other people’s money. The costs which this tax system creates and the uncertainty are staggering. Taxes are not a system anymore where we acknowledge that we pay for services – they have become in many instances a threat.

A main pillar for a prosperous society are property rights. Taxation and regulations are limiting these rights. The free use of property can be heavily contained by regulations. While excessive taxations has almost confiscatory effects. This guides the economy to the detriment of rule of law and gives wrong incentives. It is to the detriment of building productive assets and savings, while redistribution furthers expectations of income without efforts. 

What are the results of these interventions as opposed to free competition? A reason given for the regulations is to make the economy safer and more stable. It is certain that, in a free economy, accidents happen, but there is enough variety that accidents do not become a general disaster. The density of regulations however will concentrate the risks, increase correlation and if these regulations lead the economy in the wrong direction, the disaster will necessarily be much bigger. 

Governments, however, have the possibility to delay disaster, but only with the price that the problem will become much bigger. We have seen that, for instance, in subsidies or protection for outdated technologies. The European steel industry was such an example. Its distortion eventually led to disruption in regional areas and especially to a problem in the wrong allocation of investment. But we have seen in the labour law that the protection of the jobs leads to the unintended consequence that no new jobs are being created. Regulations are frequently created without any consideration for unintended consequences. One might question whether this is done out of short-sightedness or on purpose. An example is in the financial system where “too big to fail” is not to be desired. The high compliance density required by regulators leads however to concentration and consolidation into larger and larger entities.  

Monetary policy 

Governments always try to control the monetary system. A good monetary policy for responsible central banks should be to protect the value of money. Stable money is necessary for purpose of savings but also to have a reliable means of exchange. And money needs to have a price, as any other product.

An example of a very successful policy was, for a very long time, that of the Deutsche Bundesbank and the German Mark. The Bundesbank really tried to stay independent of politics. The European Central Bank has in theory the same mission. As it became a supra-national entity, the hope existed that the ECB would stay independent from national politics and fulfil the mission of protecting the value of the euro. Unfortunately, just like the Federal Reserve in the US, the European Central Bank has not only become a major tool for planning the economy and also supporting fiscal policy, but it has even started to make fiscal policy itself. The idea that one can, with a flood of cheap money, enhance consumption and with that grow the economy, can only work in the very short term. It is now a tool on the path to an ever more stringently planned and guided economy.

Japan, Europe and the US have been doing it for a long time with the result of eroding savings and creating huge bubbles. The subprime crisis of 2007 and 2008 had its roots not primarily in the actions of greedy bankers, but in a policy of the US government to allow large consumer spending, based on cheap money and unsecured credits. The regulatory system also allowed the financial system to further misuse these possibilities. When the bubble burst, the financial crisis started, but we have not learned anything from it. Money which does not cost anything and which is abundant will necessarily create waste and bubbles. Again, such a crisis is fought by the same means that brought the crisis. More government and more regulations. By buying sovereign debt, the central banks are directly involved in fiscal policy. It allows governments to continue overspending. There is no pressure anymore to cut expenses.

Money can be considered a raw material. It should be precious, as opposed to what happens now. The monetary system is a typical case of having the unintended and maybe even intended purpose of creating bubbles. The big role of government and the interventions of the government in all parts of life creates huge expenses. At the moment, we do not talk very much about the crisis of public debt, but it is there. And the remedy of the government is to control and squeeze the public even further. A result of the staggering sovereign debt would be that the state will even more run the economy by limiting incomes, damaging property rights and distorting remuneration policies. The efficient reduction of debt is not through more taxation, but by lowering expenses.

This shows the adverse consequences if monetary policy is misused to lead and plan the economy. 

The inequality argument 

Very useful for the further domination and planning of the economy is the inequality discussion. One of the big principles to which political parties of all colours now pay lip service is: More equality! However, if we want to have a prospering, progressing society, inequality is a certain price for it. Reducing economic inequality is a very popular slogan without people thinking about what it means. Man is only equal before God and the law. Economic equality can only be achieved in a totalitarian system and not in a free society. The main target of a prospering economy should be to eliminate poverty and not to create equality. Because equality will finally mean poverty for everybody, as the Soviets successfully proved.

The way to the planned economy is also prepared by other phenomena: moralizing and limiting free expression through “political correctness”. There is a debate on what is legitimate, ethical or moral. These terms are very dangerous because they are very subjective and can be easily misused. It became, however, an important weapon in public debate. 

Ecology and the clean environment should be a concern for everybody and it is necessary to have certain rules. But this area is now dominated by emotionalism and secular religions which provide very strong guiding in infrastructure and economy without necessarily allowing for a clear scientific debate.

The energy regulations in Germany and the so called “Energiewende” is a typical example of a politically misguided policy. Eventually, the German industry will pay for that. A very big role in this is played by the non- governmental organisations, who work very successfully, based on organized fear. The world climate change is used as a threat. Businesses, in view of the strong position of NGOs and other groups, are limited by regulations of National, supranational and global authorities or bodies. Practices are either enforced or banned according to whether privileged pressure groups consider them legitimate or illegitimate. Administrations tend to be close with such groups and also the media in order to “leash” the market. If the legal system does not allow certain interventionist measures, then government bodies may act extralegally in collaboration with the media to “name and shame”. At certain instances it might be right, but, in many instances, it is unjustified and based on a hidden agenda.  

Conclusion 

All this might lead us to a system of a planned economy which might have similar results as the old Soviet system had, only being a lot more complex. Certainly, some planning is necessary, for instance for infrastructure, traffic and energy, but it should not be a manipulation, it should not be intervention and should not follow the increasingly popular concept of nudging. Nudging sounds very nice, because it appears to be the carrot, not the stick. But it is also an intervention, and not complying with “nudging” still has consequences, if only the stick of the “name and shame”.

What can be done to convince the public of the merits of free markets for the majority of people? We should openly and in simple words – like Ronald Reagan did – speak out in favour of the merits of being politically conservative and economically liberal. Political conservatism does not mean that one is old fashioned, but it means a system based on the rule of law and on certain principles. Economic liberalism means the system of free markets which is still guided by principles of law. We should speak out against semantic traps which confuse liberalism with socialism and conservatism with old-fashioned. The irony today is that even old communists are called conservatives. Rather than having debates on details amongst conservatives and liberals we should use all possibilities of modern media to speak out in easily understood terms. Simple, clear and true messages should be given rather than publishing too many complicated books. Certainly we need to continue to do scientific studies on the economy, but the results should be communicated in a way which is easy to understand. Economy is not that complex that it cannot be explained in simple terms.

Market economies, entrepreneurship and competition have brought us an unprecedented progress and brought a broad share of humanity out of poverty and hunger. Interventionism in the monetary, fiscal and economic systems caused the larger economic crises of the last thirty years. The lesson is ignored, we continue on the path of limited freedom, lack of trust, more control into a system of a strongly planned and guided economy. The next dangerous step might then follow: the planned and guided citizen!

 

This article, prepared for The Market for Ideas, develops on a speech delivered at the European Resource Bank meeting, Prague 2018.

 
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