Does the ‘free market’ lead to public sector corruption? Of course not - Automotive Business Review

Martin van Staden
In 2020, Buddy Wells, a musician and MMT-enthusiast, wrote an article that, in broad terms, argues that South Africa’s pursuit of ‘neoliberal’ free-market reforms is what inevitably led to out-of-control tender corruption and state inefficiencies. This is obviously wrong.

Buddy and I are regular sparring partners online. One of our enduring points of disagreement is about the value of money.

Whereas I believe anything (including money) only has the value subjectively attached to it, which is greatly (perhaps overridingly) impacted by scarcity, Buddy believes that government can ordain valuable money from thin air.

The reality is that when there is more money in circulation, it is perceived as (and thus is) less valuable, hence governments should not as a general rule inject more money into the economy. This is doubly problematic because voluntary society is but a receiver of this policy determination and cannot – unlike in all other market phenomena – control or influence it.

Rules of the game

Buddy’s 2020 article, however, relates to another matter.

You see, Buddy is disquieted by the apparent success of the ‘narrative’ that South Africa’s government is hopelessly corrupt, inefficient, and incompetent, and that as a result, privatisation and liberalisation are viable routes out of the state-induced mess. This is completely backwards, reasons Buddy, because all this is in fact happening due to ‘neoliberalism’ and private sector profiteering.

I must however start by agreeing with the sentiment that Buddy closes his article off with:

‘No matter who plays the game, corruption will remain, unless the rules of the game are changed. To reduce corruption and ensure government spending benefits all our people and all our businesses like it should, we must change the rules of the game.’

There is nothing to disagree with here.

But the rules that Buddy wants will not solve the problem, and completely miss the point.

The nature of the state

The key error Buddy makes, which runs like a golden thread through his article and his online engagements, is that he conceives of the state as just another, ordinary institution that should create value for the community and ‘do good things’ in general. This is a mischaracterisation of government, which is, by its nature, a coercive institution.

Every aspect of government is coercive: its establishment (conquest), and its continued operation and sustenance (taxation). Whereas one can flatly ignore or oppose a private enterprise (which only could be harmful), attempting to do so with government may in some way or another end up with you dead or in prison. While it might only be inadvisable to ignore or oppose a private business, it is illegal to ignore or oppose government.

Undermining a business is called competition. Undermining a government is called treason. These two things are not alike.

Because the state is by nature coercive, it is and must be subject to a special set of rules that do not necessarily apply to voluntary society. We call this ‘constitutionalism’ and its inseparably associated notion, ‘limited government.’

The state cannot, simply, be allowed to engage in society as the rest of us do.

Separation of economy and state

We realised this with the separation of church and state. We understood that the state should not be allowed to have a religion, because it can (legally) promote its doctrine using violence, whereas everyone else would have to use the power of persuasion.

The Islamic world is contemporary evidence of how this goes disastrously wrong for human freedom and prosperity.

But, similarly, liberals realise this with the state and the economy.

The state should not be allowed to do business, because it can (legally) defend its market share and interests using violence, whereas everyone else would have to compete and try to provide a superior service.

Liberalism has long understood that the best way to get money out of politics is to get politics out of money: a separation of economy and state.

This notion might seem off the reservation, in the same way that the separation of church and state seemed a bizarre proposition a millennium ago to those who believed the protostate’s coercive enforcement of sectional religious morality was a core feature of government.

But just as the separation of church and state was important then, the separation of economy and state is both necessary and doable today. And just as it was back then, the answer today is constitutionalism.

The only things the state should not be separated from are crime (properly conceived) and defence. These are coercive phenomena for which a coercive institution like government is aptly suited. They are why the state exists. Everything else is, at best, distortive of voluntarism and, at worst, an onramp to totalitarianism.

Free-market tenderpreneurship?

Buddy describes South Africa’s tendering system as a ‘free market reform,’ focusing on how officials can procure from the private sector without going through a centralised oversight board. Rather than doing the work, they themselves are outsourcing themselves.

Outsourcing is certainly a good, market-related phenomenon, but the way South Africa does it is just another example of opportunistic and corrupt statism.

When a private company – or even a family or community – outsources some of its work to another, it has skin in the game and would tend not to enter into contracts that it cannot afford, in exchange for shoddy goods and services.

In South Africa’s public sector, however, the officials have no skin in the game and freely and casually enter into contracts that the government cannot afford, often for shoddy goods and services.

Buddy correctly identifies the lack of skin in the game by officials and the presence of skin in the game by private enterprise. He writes:

‘The tender market is different, in that government officials trade in public money they have no stake in, while the companies they transact with can benefit to the tune of billions.’

But he has no intention of solving the problem at the root. He wants a ‘highly regulated’ tender market. But simply regulating the tender market is dealing with the symptoms of an avoidable problem, not the cause.

Foundational problem

The problem here is basic: society, has, in error, let certain vital responsibilities vest with the state rather than with itself.

It should not be some government official outsourcing, for example, the paving of a road, or the collection of refuse. It should be the community where the road is located, or where the refuse is being collected, that does the outsourcing.

Outsourcing is about specialisation and the division of labour – a wonderful, necessary phenomenon of capitalism. Only with government involved can outsourcing become an existential threat to a whole society’s wellbeing.

Buddy wants ‘limits on profits doing business with the state’ and even a salary cap on private executives who happen to work for those companies that do business with government.

I would go a step further than Buddy, and say that private companies should in fact not do business with the state at all. When they do, they expose themselves to co-option in the government’s ideological games, and become complicit by implication in any state-related inefficiencies and corruption.

These enterprises should instead contract directly with end-beneficiaries where the latter can afford it. For others, government should,rather than tendering on those communities’ behalf, extend significant tax breaks to those enterprises that provide services at reduced or no cost to the indigent (who, being adults with agency and skin in the game, negotiate on their own behalf).

The only real way to limit tender corruption, is to eliminate government in areas where it does not belong by virtue of its coercive nature.

Insourcing

Buddy’s solution – ‘that the state in-sources as much as possible’ – is a recipe for even more corruption, not to mention the undiluted incompetence and inefficiency that the South African government has become known for.

Buddy does leave some scope for outsourcing, but only under these and other conditions:

The company must be South African-owned; Government must enforce a pay cap on that company and require it to pay a ‘living wage’ to its employees; and the company must be audited by the state.

The last requirement is perhaps the most comical. Virtually no organ of the South African government can pass an audit on itself, even under ideal circumstances. The notion that it must in turn audit private enterprises is laughable.

To be honest, I am not necessarily too worried about any of these conditions.

Any company that willingly does business with the state has forsaken any claim to victimhood it could ever rely upon. After all, to me, it is not a pity that IG Farben was unable to complete some of its projects in Nazi Germany.

If you do business with the South African government, resign yourself to the fact that you will be complicit in the things that it does wrong, and ultimately you will get hurt.

Neoliberal bogeyman

Buddy’s proposal that companies that do business with government should be properly audited (he says that they are not) is obviously unobjectionable.

That he would pit this against the South African ‘neoliberal’ bogeymen – the Free Market Foundation (FMF), the Institute of Race Relations, and one or two opposition parties – is dishonest.

Can anyone name a ‘neoliberal’ (Buddy invariably also means classical liberals) in South Africa who has argued that companies that tender to government should not be properly audited, by auditors, not state officials? Of course not.

Buddy goes on to don his tinfoil hat and conclude that state inefficiency and corruption in South Africa are part of a plot by ‘powerful neoliberal lobby groups’ to create a justification for privatisation and deregulation.

Eskom is not failing because it has been predictably mismanaged by political deployees who have no skin in the game – the profit motive or accountability to real shareholders – but because some nefarious private sector conspiracy has driven it to ruin. The civil servant sitting behind the counter at the Post Office, chewing bubble-gum and rolling her eyes as a long line of South Africans desperately wait for service, is not just an incompetent consequence of a vacuum of market forces, but part of an intricate anti-state operation being orchestrated by the ‘neoliberals’.

Buddy makes the ‘new world order’ and ‘Pfizer wants to kill us all with the vaccine’ conspiracy nuts look like sensible scholars.

Big business is often part of the problem

Buddy might believe that I am a shill for big business, but I firmly agree that parts of South Africa’s private sector are complicit in the ruination of our society. Of course, for wildly different reasons from Buddy’s.

Elements of the private sector – specifically big business – have been in cahoots with the African National Congress government since the transition. They pride themselves on their ‘access’ and their ‘partnerships’ and their ‘workshops’. They endorse virtually every new, insane policy proposal that the administration comes up with.

Yes, even property confiscation (misnamed as ‘expropriation’ without compensation), has the implicit agreement of some in big business. In 2020, while consulting with a big business association, the FMF was told that the association endorsed the principle of confiscation without compensation, but was worried about some aspects of the implementation.

This is ridiculous.

Every time big business gives a hint of approval to bad policy, the government seizes that as a strong tool for legitimation.

Big business also uses the power of government to keep their competitors out of the market.

Many years ago, a Johannesburg-based health insurer asked the FMF to oppose some public health policies, but to leave others alone because these made it more expensive for new entrants to gain entry to the market and compete with the insurer.

We declined.

More recently, Takealot, rather than explaining how it will outcompete new foreign competitors in its industry, has begun to lobby government to find ways of extending the industry’s regulation. Takealot’s time would have been much better spent pushing for deregulation if it felt that it was unfair for it to be regulated while its foreign competitors were not.

Most business leaders are contributing substantially to South Africa’s economic success. But many in big business – and certainly big labour – are inseparable from big government. They all form part of the statist plague in our society that is drying up savings and employment, and causing rising costs, emigration, stagnation, and despair.

Big business, however, is at least salvageable. Business leaders have a rudimentary understanding of how things work (as opposed to collapse) because they do have skin in the game. There is a chance of convincing big business to abandon big government – as it did in the 1980s in South Africa.

But there is virtually no hope – within our present statist paradigm – of convincing big government to voluntarily limit itself. Limiting government harm is something we will have to get done ourselves.

Martin van Staden is the Head of Policy at the Free Market Foundation and former Deputy Head of Policy Research at the Institute of Race Relations (IRR). 

https://abrbuzz.co.za/buzz/23941-does-the-free-market-lead-to-public-sector-corruption-of-course-not

This article was first published on the Daily Friend.