Fatal conceit of state economic interventions
Javed Hassan
Economic ideas and political philosophies that govern the course of politics evolve over long periods of time. They permeate the consciousness of society and lawmakers through the power of logic as well as how best they serve the self-interest of the people – individuals, select groups and/or entire nations. The seed of the thought may start with one person or a small cluster, but progressively spreads to determine the future course of events.
In Pakistan, the lack of understanding about the functioning and processes of free markets as well as apprehensions about the fairness of its outcomes, has meant a much greater presence of the state than is required to promote public interest.
Flawed notions about markets are widely believed, and these in turn help shape policies that are often aimed to benefit special interest groups, but presented as beneficial for society. Direct state intervention in key sectors of the economy through sclerotic regulations and state-owned enterprises (SOEs) distort prices and prevent the optimal allocation of resources for the general wellbeing of the people.
In the industrial sector, tax and trade policies are designed to shield dominant incumbent players from competition by innovative new entrants. The acceptance of oligopolistic practices has negatively impacted productivity and exports growth. Unlike in other fast-growing developing economies, free trade and global integration are commonly portrayed in Pakistan as acting against the interests of local industry and jobs, and are therefore seen as harmful to the local economy.
In the agriculture sector, the undue influence of large landowners in legislature has resulted in state intervention through support prices, import restrictions, and direct and indirect subsidies, which have all contributed to anticompetitive practices and consumer interests being adversely affected. Resultant price distortions in food commodity markets have had the perverse effect of incentivizing large landlords toward unsustainable and suboptimal usage of their holdings, which in turn has meant sluggish improvement in productivity.
Democratically elected governments are expected by the voters to enact statutes and provide regulations that promote the public interest. It is therefore vital that the perception of free markets and free trade are clarified and disseminated widely. The public needs to understand how sometimes policies presented as vital for improving general welfare may in reality only favor a few privileged interest groups.
For instance, protective import tariffs and commodity support prices are in effect indirect taxes that transfer wealth from the many consumers to the few producers, but are commonly justified in terms of providing employment to workers and income to small farmers.
When there is no broad consensus about the adverse effects of state intervention, necessary reforms required to address inefficiencies and inequalities as a result of underdeveloped markets lack public support.
It is therefore important to understand insights provided by economists such as Friedrich Hayek who not only elucidated the limits of even the most well-intentioned government policies, but also cogently argued the case for free markets and free trade through his examination of the role of prices and the essence of market competition.
One of his deepest insights is that economic agents (businesses, investors, workers, etc.) use the relative prices of different opportunities as signals for evaluating their individual choices on how to most effectively utilize their assets. The pattern of changing prices informs them how best to deploy their capital to increase or decrease their outputs at optimal costs.
Through the process of price signalling and actions by individual agents to maximize returns, efficiency is improved and a complex pattern of productive uses of resources is spontaneously coordinated. In effect without the need of the government to centrally plan or the use of any form of coercion, a free price system synchronizes utilization of assets so that producers are willingly able to offer consumers the greatest range of individual choices.
However, for prices to emerge through transactions in markets, or more simply put, the buying and selling of goods and services, individuals and firms must feel confident in the security both of their own property and that of those they exchange with, as well as the sanctity of contracts. There is market failure when any of these conditions break down, and the government has a vital role to play in preventing this from occurring.
Unfortunately, the Pakistani state’s footprint has encroached well beyond the scope addressing market failures. It presents itself in almost all spheres of economic activity without either increasing productivity or affording consumers greater choice.
There needs to be a realization among policy makers, and more broadly by the public to whom they are accountable, that the state should refrain from the fatal conceit that it can either directly control prices, or effectively coordinate the choices of millions of people to optimize their overall pattern of activities better than can be achieved by efficient free markets.