The Economics of Hope and Despair

The French word for hope as a verb is espérer. Its opposite in old French was despérer from the Latin desperare—to despair, to lose all hope. Hope is used in numbers of contexts which don’t quite match the import of this Latin root of its opposite. For example, we all tend to hope that happenstance will work in our favour. We have even flimsier hopes that the weather will be fine for our visit to the beach or that our sporting team will win.

Paul in Romans had a heavy-duty application of the meaning of hope which matches the Latin root in import: “tribulation produces perseverance; and perseverance, character; and character, hope”. That hope is the promise of the grace of a loving God interceding on our behalf.

Economics also provides a heavy-duty application on a secular plane. It is the hope that we can prosper and earn deserved reward by developing and applying our talents and skills and by working hard. Properly told, economics is the story of hope built around our own actions. It must have concrete foundations; it has built great and prosperous societies. It is no accident that the Tea Party movement has sprung up in the United States, the most prosperous of all countries. The movement’s call for less government is essentially a call for a resumption of hope built around self-reliance.

Talk to young people undertaking tertiary education or training courses or entering the workforce in whatever capacity. It would be difficult to find many whose ambition is to live off the work of others. They would nearly all hope to prosper by their own efforts. Their hope is personally energising as it is also energising for the economy as a whole. 

Economics was regarded as the dismal science. This was all Malthus’s fault. He assumed that food production would increase in arithmetic progression against population’s geometric progression, keeping us on the brink of insufficiency. He was wrong about production. Man’s ingenuity has been a vital part of seeing to that. The other vital part has been free markets allied with property rights. These have nurtured man’s natural and beneficent inclination to pursue profits and earthly rewards. Forget the doomsayers, of whom the Greens are the latest embodiment. No constraint of technology or resources has yet prevented material progress. Nor will it, while free markets hold sway.

Economics is in fact not a dismal science. It is, quite the contrary, a science of hope. It explains how free markets work to guide resources to where they can be best used and best rewarded. It explains how shortages are dealt with, circumvented and overcome. It explains how the savings of the most productive can be used to make everyone more productive and better rewarded. At the same time, it keeps expectations grounded. It allows us to understand that sharing wealth, whether justified or not, has the cost of reducing saving, investment and future economic growth. It rids us of false hopes and utopian fantasies by reminding us of the scarcity of resources and of the constraints we face, even when those resources are used in the best possible way. 

Importantly economics allows us to understand the despair that results when the operations of free markets are subverted; when hope in our own personal achievements is replaced by dependency on patronage and on the delusion that we can share more than we collectively produce.

A combination of merit and variants of patronage wielded by government characterises the economic affairs of most societies. The balance matters. The primacy of merit is the key to hope; the primacy of patronage, the key to despair.

Merit and free market capitalism are inseparably linked. Capitalism is business Darwinism. It is an economic system which weeds out the unfit and rewards the fit and particularly rewards the fittest. Only merit counts. There is no moral angle to this except to say that, by definition, no other system can produce as much prosperity and, therefore, no other system allows society as much scope to support those in need of assistance; or to provide public amenities; or to support the arts; or to improve the environment or, as regrettable as it is, to accommodate the excesses of environmentalists.

The reason no other economic system can compete with capitalism is that it operates on the margin. Businesses only grow to a point where the value they add in employing resources—labour and capital—is equal to the value that other businesses could add by employing those same resources. Jockeying for position is a constant theme. Businesses that develop innovative products or that can operate more efficiently, and which therefore can add more value, attract resources away from less innovative or less efficient businesses. A business that is profitable today might become unprofitable tomorrow, as its competitors advance. Staying still is just not an option in a capitalist society. 

What about people under this system? Are they just commodities? Well, if they are commodities they are precious ones. Businesses depend on people. Businesses are forced to hire on merit; all else makes them less fit to compete in the marketplace. Businesses are forced to pay people their worth. People have the option of moving from one employer to another. They have the prospect of advancement through their own efforts and abilities. Critics might say: Does it really work like this? Isn’t it the case that lots of people dislike their work and feel stuck in their job and under-rewarded? Yes, it is true. Capitalism isn’t perfect; it simply offers the best option. It is the option which ties reward to merit. By doing that it gives people ownership of their own prospects, and concrete hope in their own abilities and efforts. The alternative is reliance on government patronage.

Government patronage takes a number of forms. It is distortive when it takes the form of favouring particular businesses. The US government’s recent bailout of motor vehicle manufacturers is an example, as is the Australian government’s connivance with three mining companies to impose a tax on some hundreds of others; or the contrived and costly schemes to advantage inefficient green energy. However, free market capitalism is resilient and can survive this kind of feckless government interference. What it may struggle to survive, if it were to continue, is the insidious growth of extravagant entitlements. This has become the Left’s new way to engender dependency on the state, now that ownership of the means of production is off the agenda.

One expression of love in parenting is to nurture and build self-reliant and independent young people. Parenting which is over-protective and therefore keeps children dependent into adulthood might be construed as the opposite of love, even if unintended. The path to hell is paved with good intentions. Keeping children dependent into adulthood is analogous to instilling dependency into populations at large. 

Sharing is good. You might remember as children being encouraged to share. Our parents knew that we were selfish little so-and-sos and had to be civilised. We didn’t like sharing too much, or at least I didn’t. I later put my parents’ actions into perspective and followed the same course with my own children. That perspective was that it was a civilised and decent thing to do to voluntarily share with others. It was never the case in my parents’ mind, I don’t think, and certainly not in mine, that others had a right to what was mine or my children’s. The direction of action was voluntarily from the giver to the receiver. That kind of sharing has everything to recommend it and we should encourage our children to do it, even at the cost of their childish discomfort. This of course is not the sharing that underpins the steep and continuing rise in entitlements, which is a forced sharing that finds its extreme expression in socialism. This extreme form of sharing is evidently best enjoyed from the outside rather than from within. Few of those on the Left give away their possessions to the dispossessed and I somehow doubt they would personally contemplate seeking sanctuary in the kind of sharing societies they so admire. Those who have ever lived in socialist societies seem to find them less attractive than do onlookers. I look forward to the day when the Michael Moores of the prosperous and indulgent West volunteer to live in Cuba, while dispensing most of their wealth to the worthy poor in that particular socialist paradise. 

One of the leaps that those of the Left never make, apart from the leap to Cuba, is between actions and consequences. Palliative care is the sine qua non of the Left. The moral high ground is captured, even if it debilitates the patient. Indigenous people need assistance; give them welfare. It is a pity if that leads to dependency and despair. 

Unskilled workers need minimum-wage laws to protect them. Minimum wages put people out of work who otherwise would gain the dignity and hope that come with being employed and self-reliant. Of course, again, those who set minimum wages feel good about themselves. After all, they have protected vulnerable employees, even if that means putting them out of work. 

The complexity of modern economies makes it easy to avoid seeing the consequences of minimum-wage laws. In a rude state of society it would be easy to spot the consequences. Wanting ten coconuts an hour from the owner of the coconut trees when you only pick nine and others pick twelve, would see you out of work tout de suite. Everybody on the island would know why.

Minimum wages work also in despairing sync with welfare. Higher minimum wages mean that more low-skilled workers join the long-term unemployed. This leads to agitation for more welfare. In turn, this means we have to have higher minimum wages to encourage people off welfare into the workforce. And so it goes; it is a vicious circle of despair. The answer is to make it harder to obtain welfare and to do away with minimum-wage laws. But that would be bucking a very powerful trend towards providing palliative care allied with an even more powerful trend of vote-buying through dispensing entitlements.

Politicians are increasingly adept at tapping into a “cargo cult” mentality. If we only elect them we can, after all, have more of what we want without paying for it. Nor is it only parties of the Left who promote and prosecute the growth of an entitlement society; though they have elevated it to a fine art. Those alluring entitlements are too often dangled by parties of the Right, as they are sucked into a bidding war for votes.

Entitlement spending was originally devised to help the poor and those unable to work. It is a noble cause and no civilised society would turn back to an uncaring age. But it has now run amuck. If things continue as they have been, we may well get to a tipping point, not too far distant, where half the populations in Western countries will be dependent on entitlements. OECD figures show that the proportion of GDP spent on social welfare grew from an aggregate 16 per cent of GDP across all OECD countries in 1980 to 21 per cent in 2005. This is a big proportion of GDP but these summary figures tell only part of the story. For example, the UK think-tank Civitas reported in 2007 that one third of UK households depended on welfare for at least half their income. The German newspaper Bild reported in 2006 that 42 per cent of households in Germany relied on welfare payments of various kinds. Peter Saunders (Australia’s Welfare Habit, 2004) wrote that “forty years ago, only 3% of working age Australians depended on welfare payments as their main source of income. Today it is 16%. There used to be 22 workers to support each person on welfare. Now there are five.” 

Entitlement spending has gone far beyond providing a safety net. It has made mendicants out of people who would otherwise be self-reliant. This is quite apart from the devastating effect it has had on national budgets, as governments have progressively lost the ability to add up. (In economics there is a concept called the adding-up problem, otherwise referred to as Euler’s theorem. It is an obscure theorem about the sum of the marginal products of factors of production adding up exactly to the total product. I mention it only to distinguish it from the more prosaic adding-up problem which governments seem to have had in abundance in recent decades.)

The OECD published a paper in 1998 (“Forces Shaping Tax Policy”) which said that budget deficits and government indebtedness had risen faster than GDP in virtually all OECD countries during the previous thirty years. It noted that most of the growth in public expenditure had been social welfare spending. In 1998, the OECD-wide budget deficit was 2 per cent of GDP and net indebtedness 44 per cent. The comparable projected figures for 2010 are 8 per cent and 58 per cent. Governments seem to be incapable of living within their means. 

Why do governments and their public service advisers think they can spend and borrow more than their budget allows? They know that, as individuals, they have to live within their means. They know this applies to everyone. They would know that, on a desert island, if each of the ten inhabitants picked ten coconuts, there would be just 100 coconuts to share. But once the number of inhabitants reaches, say, ten million and coconuts become one of, say, fifty thousand products, everything apparently becomes possible. At this point their minds must go through an Orwellian transformation where two plus two can indeed equal five; where the whole is greater, and sometimes much greater, than the sum of the parts. They are loosed from the shackles of irksome arithmetic. 

One of the problems has been that left-wing and Keynesian economic advisers have dominated public services, while conservative economists have remained in think-tanks or as endangered species in academia. But leaving this aside, why do normally sensible people think, as a community, that they can have things they can’t afford as individuals? It is clearly a by-product of the growing entitlement culture. We should be despondent about it. No end is in sight because most politicians succeed by pandering to it. And voters are addicted to it. 

Some so-called post-GFC stimulus money was given to Detroit residents in 2009. The money was provided to a limited number of people who could show that they were homeless or on the brink of eviction. An interview with one recipient was revealing.

When asked about the money and where she thought it had come from she said it was “Obama money … from Obama”. When asked where she thought he got the money she said, “I don’t know, his stash.”

Let us be generous; people can be confused about where government money comes from. My maternal grandmother once told my dad that she couldn’t vote for the British Labour Party because they had no money. She thought the Tories had a “stash” that the Labour politicians did not have.

Perhaps people are entitled to be confused if they listen to governments and to those who want things from governments and to sections of the media. The political discourse is all about what government has done, will do, must do, and should do. When I lived and worked in Papua New Guinea in the middle 1970s, a “cargo cult” attracted some marginal support. It was based around goods coming out of the sky in aircraft and the closely-guarded secret behind this. Being privy to this secret was the key to receiving cargo. Here and elsewhere, the real key is getting the ear of government. Governments apparently can provide “cargo” as they choose.

This is not about the government providing and funding a range of services like law enforcement, public transport, schools, and a welfare safety net. It is about the multifarious and extravagant add-ons and about who pays for them.

Government can splash money around seemingly at will, as most did following the GFC. Who wouldn’t want to line up, businesses and individuals, and get their cut of the stash? This is the greatest cargo cult there has ever been. This isn’t a few goods coming down by aeroplane. This is billions of dollars; all provided “free” by “the government”.

Governments are fond of claiming credit for what they spend and, in fact, often seek re-election on that basis. When did you last hear a government, seeking re-election, trumpeting that it will or has cut expenditure on health, or social security benefits, or hospitals, or aged pensions, or roads, or public transport, or libraries, or anything? Of course they will all claim an intention to cut waste. Waste is that one area of public expenditure that everyone wants to cut. No political party so far as I know has ever promised to increase waste. 

Everywhere you find governments claiming credit for providing benefits without mentioning where the money is coming from. The Detroit lady’s observation and my grandmother’s seem not so silly in the light of this. In this world, the government will feed you, will protect you, and save you from perfidious fate. Look not to yourself but to your government. Become less than you can because the government will fill the gap. That sounds like despair to me.

A similar entitlement culture exists between rich and mendicant nations, as it does within nations. There is an agreed international aspirational target for developed countries to provide 0.7 per cent of their national income for international aid. Few countries have met this target. In total, international aid is about half the aspirational target. The United States is the largest donor in absolute terms.

For developed countries to double their aid to reach the aspirational target would mean a massive additional annual transfer of wealth. And, there will be additional demands if ever an international carbon emissions agreement is concluded. The failed Copenhagen draft treaty would have obliged developed countries to provide continuing aid to developing countries, in part recompense for “the burden on developing countries” imposed “by the historical cumulative emissions of developed countries”. Numbers of figures were thrown around in the draft treaty but, for example, 0.5 and 0.7 per cent of GDP per year for “adaptation” appeared as two options. Adaptation was only one of the imperatives. Aid in money and kind was envisaged for “mitigation” and for combating the impact of “deforestation”. 

The need for more foreign aid (and to forgive debt) has been a constant refrain since the end of the Second World War. Climate change has become yet another reason for aid.

Aid, assistance to others, can generally be put into two categories: transitional aid to alleviate temporary incapacities, and continuing aid to relieve permanent incapacities. Advanced societies provide support for their own people. They provide support to some people and families on a temporary basis and to some on a continuing basis. There is a sharp difference between the two. The original assumption was that the able-bodied would only ever require temporary support. Societies didn’t set out with an intention to provide continuing support to those who can take care of themselves. The idea was to provide a bridge; even if this now has been subverted by the entitlement culture. 

What category of assistance is foreign aid? Is it a bridge? Or is the assumption that countries receiving aid yesterday and today will need aid tomorrow and into an indefinite future? This latter alternative seems to have been the script so far. There is no sign that demands for aid and more aid have any sunset clause.

There is no case to be made for providing foreign aid on an indefinite basis. Societies have a responsibility to take care of themselves. Millions of people working constructively inside open non-corrupt societies, allowing free market forces to operate within the rule of law, will achieve economic progress. Societies which are closed and corrupt will not. Providing continuing aid to the former set of societies is unnecessary. Providing continuing aid to the latter is effectively pandering to dysfunctional behaviour. That is no way to bring it to an end. It is akin to building dependency within populations through entitlement spending. It undermines self-reliance and creates a despairing sense of inadequacy when, in fact, the hope of self-sufficiency can be embraced by any society. 

The economics of hope emphasises making and achieving rather than sharing the spoils. Two alternative ways of measuring poverty illustrates the difference. One is based on a basket of goods and services; the other, on relative income.

In the former approach, a basket of goods and services is identified representing a standard of living which provides a base acceptable level of nourishment, clothing and shelter. Those earning less than necessary to acquire such a basket are deemed poor and in need of assistance. This way of measuring poverty allows the prospect of progress. There is hope in enterprise, hard work, growth and development. These things can lift people out of poverty.

In the relative-income approach, the poverty line is struck where income is a certain percentage below median or mean income. This latter measure is fraught with frustration. Poverty becomes intractable unless the distribution of income can be narrowed. No matter how rich we all get if, say, 20 per cent of the population earns less than, say, half of median income, then they will remain poor, even if they take Mediterranean holidays each year. There is no hope here in enterprise, hard work, growth and development. Only narrowing the distribution of income will do the trick.

The obvious question is how narrow before a halt can be called. How much collective income and hope has to be lost before some arbitrary measure of equality has been achieved. Socialism, that extreme system of patronage, sets out to make us all more equal whatever the cost in replacing excellence with mediocrity. On this measure, earning fifty roubles when your neighbour also earns fifty roubles is better than earning 100 roubles when your neighbour earns 500 roubles. Equality of mediocrity is judged better than having the hope of moving up the ladder and emulating your neighbour.

That hope of moving up the ladder is a driving force that goes right through capitalist free market economies. It is not something which applies only to the intelligent, to the wealthy, to the entrepreneurial, to professionals. It applies across the board. Blue-collar workers, secretaries, waiters; whatever their occupation, people in capitalist economies have around them examples of success that they can aspire to emulate—and they do. 

The more reward is tied to patronage, and the less to merit, the more hamstrung is capitalism and the more prosperity suffers. Try planting a system of patronage on the sporting field where human endeavour is on view openly and without artifice: “Nancy and Julia aren’t nearly as good as Jill and Michelle but we will put them in the team anyway … Bill and John want to stay in bed this morning so we we’ll pay them half their fee and play the match with two players short.” We would quickly and clearly see the deleterious results. They would be hard to hide. The comparable effect on economic prosperity is just as marked, though of course not as transparent. But the effect on prosperity is by no means the end of the matter. Government patronage gnaws away at self-reliance and demeans the human spirit. It also creates the most unrealistic expectations of the power of governments. Where is King Canute when we need him?

People build and buy houses in flood-prone or forest-fire-risk areas. When the worst happens they look to their government for help. It is a rule that governments never come up to the mark; how can they? So much is expected of them. You name it, whatever the disaster: the aftermath of 9/11, New Orleans floods, bushfires in Victoria, Pakistani floods, the Gulf of Mexico oil spill. I remember one news item after Hurricane Katrina which criticised the lack of buses to carry people to safety. It was as though some wise authority should have had thousands of empty buses parked at the ready in case a hurricane occurred. There is always surprise and outrage that the incompetence we see in government doesn’t disappear once a disaster hits. Just why didn’t governments do better is the lament. People invest in get-rich schemes. When the schemes flounder they look to their government to bail them out. Tourists get stuck in a foreign country because of bad weather or civil unrest and immediately ask their government for help and complain if that help is at all tardy in coming. In an earlier age people despised the reach of government, now they snuggle into its embrace.

The political Left builds its constituency around undermining individual self-reliance. There is no hope with them. They would lead us closer towards a socialist utopia and the material and spiritual impoverishment this brings. It can happen because it is happening. A few more decades of more of the same and the constituency of dependants will be too strong to turn the tide. Hope lies in grass-roots movements like the Tea Party in the United States, inspiring conservative politicians, whatever their past infidelities, to re-embrace the economics of hope. 

Peter Smith is a frequent contributor to Quadrant and Quadrant Online.

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