TheMarketForIdeas

The economy does not exist in isolation

The first thing we must understand is that the economy does not exist in isolation. It exists only in relation to society and, at the same time, is inevitably shaped by politics. Put differently, it is the social sphere that confers or withholds the mark of relevance upon economic activity. The economy’s mission is to provide the conditions for a good life. Its role is instrumental, never an end in itself.

The crude economism once celebrated under communism was itself a form of ideological fetishism. Endless statistics about the production of cement, steel, coal, milling machines, and planers per capita, each triumphantly reported as rising year after year, fed the illusion of growing prosperity. In reality, nothing could have been more hollow or misleading.

It is easy to acknowledge that the relationship between the economic and the social, mediated through politics, is fundamentally symbiotic. Yet within this relationship the economy operates according to a colder and more disciplined logic, governed by stricter causal relationships. The social sphere, and even more so the political one, often opens the door to extravagances. Among these, ideological adventures have proven the costliest. Their experimentation has repeatedly confiscated the present and the future of entire generations by diverting societies from the objective causalities that underpin economic life.

The economy as a self-regulating organism

To understand how such distortions arise, we must first accept that the economy behaves like a living organism – a complex system of interconnected circuits capable of self-regulation. It is therefore no accident that the first true macroeconomist was a physician, François Quesnay. With the anatomy and physiology of the human body in mind, he designed the Tableau Économique, the first brilliant schematic representation of how an economy, through flows of goods and money, can function when properly structured, set in motion, and then allowed to operate.

In other words, the economy possesses its own automatisms, born of the intellectual foundations laid by those who conceived its architecture. We are speaking here of the free-market economy, one of the greatest discoveries of the civilized world. It is not perfect, but it remains unmatched as a system for generating prosperity.

The communist economy knew nothing of such automatisms. It was a command system, normative in every respect and everywhere incapable of delivering genuine prosperity.

The episteme of wealth: production, not redistribution

Those who designed the “engine” of modern economic prosperity belong to the classical and neoclassical liberal tradition, whose intellectual descendants remain influential today. What, then, do we learn from them?

Above all, we learn that there exists an episteme of wealth, a functional and coherent recipe for prosperity. At its core lies the primacy of labour as the fundamental condition of economic success. Recognizing the primacy of labour leads naturally to recognizing the precedence of production, of supply, over redistribution and consumption. In practical terms, societies must first encourage accumulation, investment, and production.

It is production and productivity, not the quantity of politics per capita, that open the path toward prosperity. The long-standing debate over the primacy of politics or economics has occupied generations of thinkers across the ideological spectrum.

Perhaps the most elegant resolution was offered by Deng Xiaoping: “It doesn’t matter whether the cat is black or white, as long as it catches mice.” In practice, that cat has been China’s market economy, which, within the limits permitted, has generated wealth at a relentless pace. Meanwhile, the ideological red of the ruling party, now surrounded by billionaires, slowly fades and erodes of its own accord, drop by drop.

The foundational pillars of prosperity

The acceptance of the division of labour, including its natural forms, together with its natural corollary, cooperation, completes the classical recipe for prosperity. These principles stand as fundamental economic facts.

Equally important is the recognition that the founders of modern economic thought placed three pillars at the foundation of economic dynamism: private property, the free market, and money. The freedom to purchase what one wants, when one wants, and how one wants is inconceivable without clearly defined property rights.

It is also worth recalling that money itself is not the domain of the state. The state does not create wealth and it is certainly not a bottomless purse. The stewardship of money belongs to the central bank, which is entrusted with technical autonomy in this domain and is meant to operate outside the reach of political interference.

Institutions and the minimal state

Both the founding thinkers and their intellectual successors, particularly within the tradition of New Institutional Economics, have demonstrated, an insight recognized with multiple Nobel Prizes, that institutions matter deeply in the process of development. By institutions we mean rules, norms, and established practices. Not only must the rules be sound, they must also be stable.

At the centre of this institutional architecture stands the state. But the state envisioned by classical economic thought is a minimal one in bureaucratic terms: responsible for citizens’ security, for their education, and for extending assistance to those struck by misfortune. Its principal economic task is to establish a legal and regulatory framework that encourages productive enterprise.

The institutional matrix favourable to the market economy also presupposes a certain degree of elitism. Leadership belongs to elites, the most capable among the capable. The working class has its indispensable role, but it does not govern. Within the dynamic space of economic life, individuals occupy positions broadly aligned with their abilities and competencies.

Social harmony and balance therefore presuppose a hierarchical structure, one marked by upward and downward mobility. Individuals improve or worsen their circumstances according to what they contribute. In economic life we do not participate as equals in outcomes. We enter the world unequal, and we leave it the same way.

Egalitarian fervour has never been a central element of the philosophy of the market economy. Even equality of opportunity is viewed with caution. At best, as Friedrich Hayek argued, justice may be demanded in the conduct of the players, not in the results of the game. What sustains a healthy economic dynamic is difference, not uniformity, though ideally without excessive social fractures.

The entrepreneur: the catalyst of economic dynamism

Within the episteme of wealth, the entrepreneur occupies the central role in economic life. Classical thinkers repeatedly warned that entrepreneurs are rare. Societies must therefore protect and cultivate them, ensuring that the legal environment allows them to create wealth. Through the wealth generated by their initiative, and through its redistribution, society as a whole prospers.

The entrepreneurial adventure is one of the defining achievements of the modern civilized world. Communism failed not least because it destroyed this vital catalyst of economic dynamism, transforming the entrepreneur, Marx’s bourgeoisie, into an enemy.

Economic freedom as the fundamental freedom

The framework of the free economy also acknowledges the existence of common goods whose stewardship, through the state, concerns society as a whole. These belong to the collective foundation of social life and should not be set in opposition to private property.

Within this framework, the guiding principle remains that the general good is achieved through the pursuit of individual good, not the other way around. Only communism believed that every individual could receive a satisfying portion of the social cake once it had been collectively baked. History has demonstrated the illusion.

Finally, the free-market economy must be understood as an environment of freedom, freedom of thought as well as action. And among all freedoms, economic freedom remains the most fundamental. Without it, none of the others can truly flourish.

It must also be acknowledged that the contemporary market economy no longer resembles a competition among equals. It tolerates monopolies and forms of economic dominance. Yet despite these imperfections, the core institutional recipe described above continues to stand.

Post-1990 Romania: a delayed transition

Within these conceptual parameters, the recipe for prosperity appears almost disarmingly simple. Yet not all societies have chosen to follow it. Roughly a third of humanity experimented with an alternative model, pursuing equality through collectivism and ultimately losing freedom in the process. The Western world embraced the Smithian path and prospered.

Romania, like many other countries within the former socialist bloc, was forced to experiment with the utopian egalitarian model, with predictably disappointing results. After 1990 it began the transition toward a market economy. Yet along this path the influence of social pressures and political intervention has rarely been beneficial. On the contrary, constant interference from these domains has produced repeated disruptions and has kept Romania persistently near the bottom of the European economic hierarchy.

Typically, analysts rely on widely accepted sets of indicators to assess a country’s economic standing. In Romania’s case, however, two simple facts speak with unusual clarity.

First, the number of citizens who have emigrated since 1990, an unprecedented figure by global standards.

Second, the persistent nostalgia among segments of the population for the Ceaușescu era.

The explanation is straightforward. People do not leave better conditions for worse ones. Nor does a society long for a vanished past unless the present feels, in some respects, more precarious or disappointing than memory allows it to appear.

A distorted division of labour

Measured against the broad outline of what Romania’s market economy ought to have become, but did not, it is worth pausing, point by point, on the relationship between the social and the political, on the one hand, and the economic, on the other.

To begin with, Romania accepted the market economy reluctantly, grudgingly, and with visible resistance. The political factor was plainly hostile to it. That hostility had, and continues to have, severe consequences. The choice of a gradual transition was itself a symptom. Poland had Balcerowicz, the Czech Republic had Havel; Romania had a cohort of nostalgics, and then wondered why those countries pulled so far ahead.

Dependence on the past remains one of our heaviest burdens. In 2007, the European Union admitted Romania while politely overlooking the fact that the country was not yet a functional market economy. Romanian governments, for their part, have behaved as though they do not see that the same objective remains incomplete even today. One cannot claim that the market is functioning properly while failing to secure clear and enforceable property rights. Nor is Romania functioning effectively, and certainly not to its advantage, in the way it relates to the balance of supply and demand.

The purchasing power of Romanian actors remains far behind that of the competitors with whom they are forced to contend. When prices are formed elsewhere, reflecting supply-and-demand tensions sustained by incomparably higher incomes, the effects become immediately visible. Delayed development, and above all the preservation of that delay, renders Romania vulnerable and, predictably, a loser. Nor does the weakness stop at consumers. Producers too appear disadvantaged by the country’s frail purchasing power.

An incompletely functional market

It is now clear that producers themselves do not feel strong enough to face free competition without the shelter of protectionist tariffs. Their opposition to the Mercosur Agreement is telling in this regard.

The economic sphere is also distorted by social and political pressures in the way the principle of the division of labour is implemented. The reason is simple enough: the art of meddling remains far stronger than the natural inclination to devote oneself to the work for which one is actually suited, whether by hand or by mind.

The destructive effect is all the greater when the phenomenon reaches the top. Appointing people to positions on criteria that mock meritocracy would not merely irritate Adam Smith; it deforms the economic organism itself, burdening it bureaucratically and condemning it to inefficiency. Political appointments, the ruinous logic of deconcentrated agencies, dismissals that accompany every change of government, and the occupation of positions devoid of substantive purpose, none of this can possibly generate progress.

Examples are not hard to find. Romania’s Ministry of Education has often been populated by engineers or by generic “specialists” in everything and nothing. During the severe financial crisis of 2008–2011, the Ministry of Finance was headed by a metallurgist; only a year earlier, the office had been held by a theologian. At one point, the law itself was changed so that an engineer could head the Audit Authority.

And for those who may not know, it should be said that even in communist Romania only the top tier was packed with political loyalists; below that, there were professionals who were not replaced every four years. The broader point is straightforward: once the principle of the division of labour is suspended and the economy ceases to be treated professionally, good results cannot reasonably be expected.

Economic efficiency versus social efficiency

Third, the market economy is, by definition, an economy of efficiency. Yet it becomes the innocent victim of politics whenever, through a lack of professionalism and vision, the principles of efficiency and accounting are imposed where they do not belong. As suggested earlier, fetishizing the economy is as distasteful as diluting its role in the service of social well-being. The intimacy of the bond between the economic, the social, and the political requires a more open and intelligent use of economic categories.

Money, for instance, has only relative value precisely because its significance depends on judgments of this kind. Economic efficiency means little if it is not also social efficiency. A national budget may well be optimally balanced, but what good is a full treasury if individual accounts and wallets are empty? GDP may rise like yeast, but to what end if the share that reaches each individual is hollow in substance and poor in quality?

It is both discouraging and conceptually misplaced to calculate profitability indicators for hospitals or schools in the same way one would for a bearing factory or a brick plant. In such sectors, efficiency is measured in different units; investment there follows entirely different recovery horizons and rests on different criteria of validation.

To understand why a school or a hospital should not be shut down merely because a certain number of beds remain unoccupied, or because three children are missing from what bureaucrats would call a standard-sized class, one might do well to revisit the model of Spiru Haret. He assigned two positions, husband and wife, to a small village even if the local number of children required only a single teacher. The couple would settle there, become local leaders, build a family, and place both knowledge and dedication at the service of the community. An inefficient model? France itself borrowed it.

Entrepreneurship misunderstood

Fourth, Romania’s persistent inability to understand the entrepreneurial vocation has imposed heavy costs on the economy’s dynamism. Economic thought on the matter is clear enough: entrepreneurs are special individuals, and the well-being of all depends, in no small measure, on what they create. They are not expelled from history by dialectics; they are born with a sense for enterprise.

Romania has not excelled at assigning the entrepreneur the place he deserves. Neither at the beginning of the transition nor later on was the entrepreneur actively courted by Romanian governments. It is worth recalling that he entered the post-communist scene under the faintly infamous label of bișnițar, roughly, a hustler or small-time wheeler-dealer.

The equally misguided belief that anyone can launch and run a business was embraced with ruinous enthusiasm from the very start. In the 1990s, workers were encouraged and empowered to take over the management of former state-owned enterprises. The outcome is well known.

Or consider another illustrative episode: during the tenure of Industry Minister Radu Berceanu, several coal mines were closed. The minister, an aerospace engineer by training, advised the laid-off miners to start businesses using the compensation they received, some twelve to twenty average net salaries. The miners did with the money what they knew best how to do. Had they possessed entrepreneurial skills, they would never have gone underground in the first place, descending into galleries to dig out coal. But who was there to know the difference?

A permanent institutional crisis

Fifth, one is compelled to note that in Romania the institutional crisis has proved a permanent, if unwelcome, companion of the post-1990 economy. The impasse was particularly difficult to overcome because people trained under the old regime were suddenly tasked with designing and implementing new rules.

From this standpoint, accession to the European Union was immensely beneficial. On that basis, Romania today cannot claim to lack sound rules. The problem lies elsewhere: in implementation, in the weak disposition to respect the rules, and in the ease with which they are interpreted, circumvented, or changed.

Institutional instability, fed by the recurring habit of each new government to assert itself through fresh laws and normative acts, has destructive effects on the economy. A fiscal code amended to the point of exasperation cannot possibly inspire either domestic or foreign investors.

There is a broader lesson here. China, governed by a communist party, was for decades one of the world’s leading destinations for foreign investment. Institutional stability was, at root, a decisive reason why.

A culture of evading the rule

Consolidated democracies tend to have constitutions that have remained unchanged for centuries: stable, that is, and solidly grounded, thereby providing the basis for the predictability any healthy society requires. Romania stands at the opposite end of the spectrum.

The research program of New Institutional Economics suggests that advanced societies address the problems arising from educational deficits through a simple formula: behaviour in relation to rules. A prosperous economy does not require 99 percent of the population to be highly educated; it requires all citizens to behave in accordance with rules. The indispensable condition is that the rule itself be rational.

For Romania, with its now well-documented army of functionally illiterate citizens, such a technique would fit like a glove. And yet there remains, thriving within our social landscape, what Alain Peyrefitte called that contrarian spirit: the urge to stand crosswise to things, to cultivate sterile dispute instead of participation, and to take false pride in deceiving or circumventing the rule.

Otherwise, nothing would prevent Romania from borrowing Belgium’s rulebook wholesale and applying it from Monday morning onward, especially since Belgium once served as an interwar model. What would happen then? Something touching, perhaps, but certainly not salutary.

Leadership and institutional drift

To this barren vanity in leaping over rules must be added another destructive habit: those who ought to model institutional conduct frequently do the opposite. A revealing example is the impromptu visit paid by Romania’s former sailor-president to the bridge at Mărăcineni after it had been destroyed by floods. True enough, his presence on an otherwise lifeless construction site gave the project a jolt of energy. Yet institutionally speaking, he had no business being there. Other officials, not the president, had that responsibility in their job description.

The dependence on the strongman, on the paternal figure, once again made itself felt. Or take a more recent example involving the current president: in a televised appearance, he committed himself in writing that, once president, he would not allow VAT to be increased. The journalist, guileless in matters of institutional economics, did her job: she wanted ratings, and she got them. Properly speaking, however, the question should never have been put to a future president, since the issue lies outside presidential competence. And why would the future president not enjoy the opportunity to pose as a guarantor if it was offered to him? The correct answer would have been that the matter falls exclusively within the remit of the future government. But the urge to meddle once again carried the day.

In the first case, the president’s gesture was positive in a narrow practical sense; it bore the mark of a good steward. Institutionally, however, it was disastrous. In the second, the performance was more troubling still: a head of state seemed not to know the boundaries of his own office. In both cases, the destabilizing effect on the social and economic organism derives from what might be called the authority of the idea, a force here borrowed from the authority of public figures meant to serve as institutional safeguards and models for imitation. Whatever a president does acquires the force of alignment: others will follow.

Populism and the economy of claims

Taken together, in a country where a president can visit a school and tell students that he became head of state without ever excelling academically, or where, driving along a mountain road, one sees not a safety net securing loose rocks but a candid roadside sign reading “Falling rocks,” it is naïve to expect steady institutional progress.

One should add, sixth, that populism and egalitarian temptation do no less damage to economic dynamism, quite the contrary. It is well known that levelling impulses arise from the social sphere through politics. The economy resists uniformity by its very nature. Whenever such impulses take shape, they produce one of the most damaging deviations from healthy economic development.

Even though the communist experiment wreaked havoc in this regard, Romania seems not to have absorbed the lesson. At a rhythm more diligent than the electoral cycle itself, the egalitarian fantasy begins preparing the next vote-harvesting machine almost as soon as elections end. The primacy of the general good, social protection, social justice, and the welfare budget are played like familiar strings. Resentments are mobilized, dormant grievances awakened, and happiness is promised to all, even when the country is bent under debt and full of dependents. Success is guaranteed once the state is summoned to centre stage.

If the state is also left-leaning, room opens up for the most dismal and self-defeating form of populism. Elites no longer have any place in the picture. Some Herzen (the “father of Russian socialism”) bearing a sturdy Romanian name arrives, posing as an “ordinary,” “normal” man, and empties the treasury in the name of universal happiness. Meanwhile a labour minister, with tears in his eyes when speaking of the fate of “our parents and grandparents,” deploys an emotional and carefully targeted discourse that aligns perfectly with the poor education of those inclined to listen, shattering every last piece of economic logic. These are the moments when politicians dare to speak directly to the people.

The state, “weak and corrupt,” as Gunnar Myrdal once described the state in underdeveloped countries, no longer has the antibodies required to resist. Having transformed itself into both a consumer and a provider of fictitious jobs, it promises everything: growth through debt-fuelled consumption, employment for all, higher incomes, and assistance for everyone who asks. Captive to the seductive image of a bottomless sack, the state fosters in society a pattern of behaviour that might be called an economy of claims, a culture of entitlement and perpetual demands, with devastating effects on both economic dynamism and social peace. The picture is familiar enough.

Conclusion: the suffocated organism

This, with only minimal approximation, is the condition of the Romanian economy under the pressure of a politically disqualifying order. When the physician Quesnay operated on a patient in order to restore health, the patient thanked him. When the physician Ilie, acting as chief macroeconomist, tries surgically to restore a sick economic organism, everyone screams. The social and the political, frozen in parasitism and inertia, reveal themselves for what they are: brakes upon recovery.

Photo source: PxHere.com.