The vital need to restore and protect free functioning markets.
Locked in sorrowful limbo one can be forgiven for clutching at straws of hope for a better future. But if there's one feature of the global and South African response to the Covid19 pandemic that is much more than a straw but a clear and tangible indication of positive evolution, it is the outpouring and demonstration of human empathy.
Seldom if ever in our lifetime have the two basic instincts of empathy and survival merged so seamlessly to show their absolute co-dependency. It is indeed our capacity to empathise with one another that has made us the dominant species on the planet. The remarkable feature of what has happened is that while human contact has been massively reduced human connection has blossomed. It demonstrates a capacity to have empathy with each other beyond physical contact or blood ties and other close relationship. Of all of the fundamental shifts in our socioeconomic lives brought about by the pandemic let the most fundamental one be recognition of the power of empathy above survival; of contribution above reward, and of giving above getting. That cannot be coerced or imposed. Empathy thrives on freedom and the true genius of Adam Smith's invisible hand was not that it was driven by selfishness and short term self-gain but that prosperity flourished in freedom of choice, despite and not because of motive. Empathy is a state of identifying with others and a willingness to contribute to each other’s lives. Generosity, charity, compassion and philanthropy are reactive expressions of that state. There's only a small step between turning the war on Covid19 into a war on the people. That step will be taken when trust erodes or collapses. We know the President's greatest gift is his ability to forge consensus and for many he is the hero of the day. This has been counterintuitive to the very low level of trust in government prior to the pandemic. Sweden has shown how valuable a high trust level is. While it is early days to assess their ability to contain the virus, Sweden has introduced purely voluntary lockdown, social distancing and other counter measures. It has also taken special measures to protect the vulnerable. South Africa, by comparison has been much more heavy handed and invasive with police and soldiers enforcing the rules and tens of thousands new "criminals" on record. While enjoying some 85% support for the measures, that trust is still fragile and will be eroded by incoherent and confusing measures and also by adding other objectives such as radical economic transformation and BEE. It’s a moot point whether South Africa should qualify for soft global institutional loans if these will be used for purposes other than purely salvaging the economy from the effects of the pandemic. It is also tempting to use the huge shift in economic thinking and planning to introduce a Soviet style command economy or some other conventional ideological model. With their unprecedented powers under a state of disaster, bureaucrats may be tempted to hold on to as much power as they can. The last thing that should happen is to abandon free markets. Rather the fundamental rules of freedom of choice, maximum suppliers, competition and free moving price discovery and purity should be protected against speculative manipulation, excessive financialisation and debt creation. It was the latter, I would argue, that has muted wealth creation and the ability to confront the pandemic. Even before the pandemic they had brought the world to the precipice of financial collapse. That threat is still there. It’s a valid question whether we are witnessing the end of excessive financialisation of economic activity.
Ever since we went off the gold standard, the world used record levels of debt creation and money supply to stimulate economic growth. And it went much further than countering natural and essential economic cycles: including political and electioneering pressures and particularly the growing power of the financial elite putting pressure on the monetary authorities to issue more debt and reduce interest rates. Pure price discovery has been largely destroyed in key markets by a massive overhang of derivatives and speculation.
From a real economic growth point of view, it hasn’t really worked. While some economic growth may have been a spinoff of increased money supply and increased debt, the bulk of extra money creation did not find itself in the hands of the public or even production capacity where real value is created; but rather with the rentier financial elite where it was deployed in reinvesting in assets and causing some big bubbles in stock markets, upmarket property and bonds.That broadly left us with two economic systems: financial and real, where the former has increasingly become disconnected from the latter.
Tangible wealth creation is in essence an act of empathy, relying as it does on adding value to people's lives after identifying their needs and wants. Individual motives, as Smith argues, are irrelevant. But clearly the ability to see beyond self-gain is far more powerful and consequential in identifying and exploiting opportunities. The measurement of value creation (revenue less outside costs) is the most powerful in accounting. It measures both contribution and reward. There is no other metric that does this. (See: The Magnificent Metric here)
It is scientific proof that contribution and reward are one and the same thing: that empathy and survival are inseparable.