It is moral to state aloud what you are, it is moral to be consistent in affirming your own beliefs, it is moral to think in the long run, it is moral to affirm your own identity. It is moral to have the courage to say you are different from the others, even if the others represent, for the time being, the majority.ccording to economic theory and to the comparative analysis of economic systems, there are only two systems of organizing economic activity: free market economy or Capitalism and state-directed economy or Socialism. Naturally, the two are ideal types, and are only rarely found as such in practice. With the exception of the last remaining Communist states, North Korea and to a lesser extent Cuba, Communist planned economy no longer exists as a coherent economic system. Likewise, Capitalism as an ideal type cannot be identified anywhere, although certain economies with a high degree of liberalism, such as Singapore or Hong Kong, do resemble the theoretical model.
Two ways
Capitalism is the economic system based on the individual or private rights to property, the free exchange thereof and the effects these create both within and without the borders of a country, on entrepreneurial initiative and private enterprises, unconstrained prices and monetary stability, all of which allow capital accumulation and hence economic development. Socialism (for ‘communism’ is merely the Leninist-Soviet title of this economic and political system) replaces private property with public, state property; free exchange is prohibited and economic coordination is no longer dictated by the system of prices, but by centralized planning issued by a core of bureaucrats, who are true dictators in the field of economy. Due to the abolishment of the system of prices, money loses its purpose as intermediary of exchange in the planned economy, and capital accumulation is no longer rationalized by economic reasoning, being the uncertain and inefficient result of the acumen demonstrated by planning committees.
The fall of communism has demonstrated, even for the fiercest advocates of Socialism, that planned economy is a failed concept, just like great economists such as Ludwig von Mises or Friedrich Hayek had anticipated since the 1920s. In spite of this blatant truth, the failure of the Socialist system has not been followed by the decisive return to a free, capitalist economy, although in the US and in the UK great strides had been achieved in this field in the 1980s and early 1990s.
The current economic system, both in developed and emerging countries, including Romania, is mixed: ‘interventionist’ or ‘directed’, in which free, capitalist economy cohabitates with the state-controlled one. Naturally, the size of the state-own assets and the level of its involvement vary from one country to another. In the US, in Central and Eastern Europe and in South-East Asia the involvement of the State in the economy is relatively lower than in some states of Western Europe, although the pressure exterted by international competition has led to fiscal relaxation, liberalisation and a relative decrease of the role played by the state in certain fields even in these countries.
The instability of interventionism
The mixed economic system – or interventionism – does not represent a self-standing economic system, an alternative to capitalism or socialism, but merely a hybrid between socialism and capitalism. Consequently, it is marked by multiple tensions created by the numerous interventions of the state, with unintended consequences which are hard to anticipate. It is characterised by the existence of a huge public sector, varying between 20% and 50%, depending on the country. This distorts economic allocation – i.e. guided by prices – of resources and hampers economic development through consumption of resources which might have been more efficiently directed towards the private sector, as well as through its inevitably bureaucratic, hierarchical character. Most of these resources are directed towards so-called social subventions, whose effect is to undermine work and individual initiative, or towards public goods inefficiently provided by the state, such as medical or education services, which could – and in many places have been – offered by the private sector. Equally, interventionism is characterised by direct and indirect control over prices, in the form of customs taxes, excessive or distorted taxation, regulations dictating production, the sale and consumption of goods, minimal wages, legalised cartels, such as the guilds of public notaries, accountants, lawyers etc., licences and permits and other barriers blocking free enterprise. In many cases, the economic system also entails large, inefficient, anti-competitive state-own businesses, led according to political rather than to economic criteria.
The hampering effect on economy exerted by state intervention and the rise of the public sector is easily demonstrable and has often been measured. The states which allow greater economic freedom, such as the US or certain states in South-Eastern Asia have seen, constantly, an increased rate of economic growth compared to the overweight states of Western Europe. The high level of minimal wages demanded in Western Europe are responsible for the high structural unemployment present in those countries, as opposed to unemployment in the US.
Interventionism, however, is not limited to real economy. It is also present – perhaps even more so – in the financial-monetary sphere. Although the Left and the State-supporting Right claim that deregulation in the financial sector is the source of the current crisis, in reality the opposite is true. The financial sector is one of the most highly regulated sectors, being closely monitored by the National Bank, the state monetary monopoly and directly influenced by actions undertaken by it – in turn determined by the actions of the government. Although in the 1980s and 1990s liberal-leaning economists have forced national Banks maintain low inflation, the expansion of the monetary mass created by the desire to cover budget deficit or other short-term priorities, including in developed countries, have distorted economic activity. Herein lie the causes of the present crisis and of the crisis of advancement and fall, periodically experienced by interventionist systems. As we know, the basis of the current crisis has been provided by the expansion of monetary mass undertaken by the Fed and by the Central Banks of Europe, by the failure of financial regulation according to the Basel II standards and the monetary policy, which has generated the famous moral hazard, inciting banks to take extraordinary risks, under the assumption that the state would not allow them to fall. Which the state has actually done, eroding the sanitary system of capitalism, which imposes discipline and efficiency.
The priorities of a liberal reform
The enhancement of liberalism must be initiated by a cut of the state revenues, i.e. the reduction of the fiscal burden bearing down on the contributors. The fiscal system must be simple, uniform (flat tax), non-discriminatory, avoid double taxation and reduce the level of taxation. All supplementary taxes, besides the flat tax, ought to be gradually eliminated. Secondly, the state’s ability to resort to deficit and increase public debt ought to be curtailed. Thirdly, the National Bank ought to concentrate exclusively on inflation, while being unable to monetise public debt, reducing the purchasing power. The state should not – at this stage – collect more than 20% of GDP. Under these circumstances, the entrepreneurship and private sector will be able to develop at full potential, in a predictable and attractive environment, characterised by fiscal and monetary predictability.
At the same time, grand structural reforms ought to be initiated, in order to reduce the proportion of the public sector, finishing the process of privatising state-owned companies, deregulation and bureaucracy reduction. It is also necessary to have a clearer definition and better protection of the right to property and infusing the principles of competition in the services provided by the state, with an eye to their privatisation, in the fullness of time.
The education system may be transformed into a creative and dynamic sector, by introducing a system of vouchers, in which the money from the state would follow the student, irrespective of whether the school is state-owned or private. Likewise, fiscal credits may stimulate the involvement of the private sector in every level of education – school, high school, university.
With regard to pensions, the transition to a system of compulsory private pensions through capitalisation ought to be accelerated. The advantages would reverberate throughout the economy, as the capital in the pensions fund would be directed towards investments.
In the field of health insurances, we should make the transition to individual accounts, based on contributions, whereby every employee would benefit from a minimal package of medical services. Hospitals should be privatised, in order to be used efficiently and responsibly, or transformed into private foundations, which function on the basis of donations and sponsorships.
Bogdan Enache
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