A choice for economies: Freedom or socialism

Some say the global economy is slowing down due to Brexit and the U.S.-China trade war– but these developments are not the real dangers. Far more insidious is the trend toward growing government influence in economies and large public debts. These policies have been tried before and failed.

Government intervention and high debt as handcuffs
Government intervention and high debt as handcuffs. © GIS – This cartoon is available for sale in our shop.

In a nutshell

  • The path toward greater government influence in the economy is a dangerous one

Last week the OECD again cut its forecasts for the global economy in both 2019 and 2020. The organization cited Brexit and insecurity due to the United States-China trade dispute as the reasons behind its decision. Under the same pretext, the European Central Bank decided to postpone its first postcrisis interest rate hike. Officials at the ECB said they consider the two above-mentioned “threats” as damaging for the eurozone economy.

We can agree that Brexit is not helpful to the global economy and has caused quite a bit of collateral damage. Yet, it is not a major threat. The so-called U.S.-China “trade war” may soon be settled and, as we have seen before, is a dispute, not a war. True, it is louder than most trade squabbles, but we can expect a settlement eventually. In fact, an agreement could put some constraints on China that might even improve the efficiency of its economy in the long run.

In light of this more pragmatic, longer-term perspective, one can easily come to the cynical conclusion that Brexit and the U.S.-China trade conflict are godsends to the OECD and ECB: they have a ready-made excuse for the failure of their prognoses and their refusal to accept basic economic facts.

It is true that the ECB, due to the present economic and (especially) fiscal situation in the eurozone, cannot increase interest rates as it had previously indicated it would. But the dire economic situation is not caused by Brexit and was wholly foreseeable. The economic difficulties are mainly caused by the outsize role of government in the economy, resulting in misplaced incentives, overregulation – which curbs markets and competition – and public deficits caused by irresponsible budgetary policies. This irresponsibility was even supported by the ECB through its bond-purchasing program.

Dangerous doctrine

Officials at the bank say they are worried about deflation. Indeed, we are in a deflationary environment. However, deflation is only damaging if it is due to overcapacity. Today’s deflation is due to production having become more efficient: goods and services can be provided at lower cost at equal or better quality. This is actually advantageous.

A certain credo prevails with many economists that economies can be enhanced and kept stable by strong government intervention, tax harmonization at a high level, some inflation and excessive debt policies. This principalist, authoritarian, centralist, and also socialist doctrine leads to planned economies. Yet it is seemingly accepted and even promoted by the OECD. Little wonder its forecast was wrong.

Unfortunately, these practices and perspectives are symptoms of a more general global trend that has been embraced by a wide group of decision- and policymakers. Excessive regulation is blocking good regulations from being implemented.

It is an old tenet of authoritarian, and especially socialist, systems that people and economies should be planned and controlled by governments. We know from experience that we need the rule of law and legal frameworks, but these should limit rather than augment government influence and control. Here, the authoritarian regimes of the past failed. We also know that the essential ingredient for prosperity is a market economy, based on individual responsibility, competition and entrepreneurship.

The very successful German system, which helped the country rebuild and then develop quickly after its defeat in World War II, was based on the principles of a free market and personal property rights. A legal framework set parameters that were not excessive and allowed everyone, including the weaker members of society, to participate. Most importantly, it also limited government intervention. The principles were called Ordoliberalism but unfortunately it has since been watered down.

We should worry that the world’s democracies – and for this, the so-called populists or “illiberal democrats” cannot be blamed – are now approaching the same level of planning and control in which the autocrats of the past were trapped. This creeping socialism threatens free society.

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