Is socialism the right answer?

"The common people of England," once wrote Adam Smith, "are very jealous of their liberty, but like the common people of most other countries have never rightly understood in what it consists."

I always find it very difficult to make myself read the newspapers, ironically enough, it is more difficult to do, the closer to Economics – which is my field of study – the article is.

I am really overwhelmed by what they write in the financial, business and economic newspapers and magazines. It is a confused rhetoric, with no clear vision of either the reality of our current situation, or worse – how the future ought to be like.

Enough complaining about the status quo. What we need here in an intellectual debate that will be the first step on our journey towards civilization, that is; to reason, and to form our own independent concepts.

Let us check last Sunday financial and economic newspapers. One very controversial paper – and provocative, to me at least – is Alam Almal (the financial world). One of the first page headlines goes a little something like this: The Monetary Subsidy is a Lie!

The article goes

“These dangerous facts reveal that there is a possibility of a government conspiracy behind shifting to a monetary subsidy, since the government is looking for ways to lower the amount of subsidy that burdens the government Treasury. Therefore it would not apply the monetary subsidy if it was going to increase its subsidy burden.”

I will now skip to the part where economic experts comment on this outrageous prospect.

“ Dr. Mohamed Farghali the Dean of the faculty of commerce, Cairo University, ascertains that it is a Big Risk if the gover nment thinks about shifting to monetary subsidization, even if it was a partial shift. This is because of the economic rule of thumb that says that the more monetary units available for the individuals, the more purchasing power they will think they have, and they will demand a higher level of consumption. Therefore supply will not be able to meet demand.

And he adds that the best policy that the government should adopt, regarding the issue of subsidies, is to fix prices…If the monetary subsidizing means that the government will provide extra funds to compensate citizens for the increase in prices, and to help them buy at the higher prices, why not fix the prices instead? In this case a monetary subsidy will not be needed. The government is adopting a flawed financial approach, since not all employees and workers are subject to the same labor and economic laws.

Dr. Salah Al-Desouki the economic expert and the head of the Arab Center for management and development sees that it would be a huge mistake to shift from in-kind subsidies to monetary subsidies, because in this case the amount of subsidy will not necessarily go to satisfying the basic nutritional needs, therefore it will lose its role in guaranteeing the minimum level of calories that each individual needs…This kind of subsidy does not fix the real problem, and that is the big discrepancy between the wage levels and the price level.

Dr. Fat’hy Nady the economic expert and management professor in the Arab Academy for science and technology assures that the government is heading toward gradually withholding subsidies all together…Government should either choose a free-market approach where supply and demand and people’s needs are organized based on the market supply (whatever that means!), or it should follow the directed market approach and intervene through organizing prices. But what the government does now is mixing both approaches…this will only lead to chaos…

Finally someone is saying something decent. For all the wrong reasons, but still! Thanks Dr. Fat'hy!

Dr. Abd-Al-Rahman Alyan the economic expert and the costs professor ascertains that any monetary shift will be an intervention into the subsidization issue, and is considered to be definitely a crime against the citizens…He ascertains that the way the government is considering to shift from in-kind subsidies to monetary subsidies is a rejected approach by all economists, because it will lead to a violent surge in prices, and the citizens will be conned into what we call a spiral increase in prices, that is a continuous increase in prices.”

First of all, I do not appreciate that Dr.Abd-al-Rahman claims to talk on behalf of all economists. I do not remember giving him my vote. But, again I have a very bad memory, so let’s not grill him because of something that insignificant. Let’s also ignore the non-rigorous rhetoric rampant here.

Subsidies, What Are They?

I will count on the above newspaper piece to inspire me with a good argument against subsidization. An argument that might sound new for a non-economist, but will certainly make perfect sense to him.*

What is a government subsidy? It takes two forms: it is either a direct transfer of purchasing power, or a resource using subsidy. The transfer subsidy (the type of subsidy the government might be shamelessly promoting) takes the form of directly transferring money to a particular group of people. I will not discuss the difference between both types of subsidies now. I will discuss the concept in general.

Now, how can people acquire wealth? There are only two ways of acquiring wealth: the economic means, and the political means. On the free market, only the economic means can be used, so you earn only what other participants in the market are willing to pay for your product. On the free market there is no separate ‘distribution’ process. There are only 2 processes that take place in the free market: production and exchange. Therefore, on the free market wealth is the resultant of 2 things: the extent to which man serves the needs of others, and the voluntary choices of individuals. Let government intervention enter the scene, however, and the situation changes. Now the political means to wealth become available. This possibility opens the way for an allocation of wealth according to the extent to which an individual can gain control of the state apparatus.

Government subsidy therefore creates a separate distribution process (not ‘redistribution’ as some would be tempted to say). For the first time earnings are severed from production and exchange and have become separately determined.

Should We Have A Subsidy Program?

Now the rightful question is: is it desirable to separate earning from production and exchange? To find out the answer of this question, we need to understand first at least the very basics of how people earn the money they do in a free market. On what basis are prices set? And, subsequently on what basis do people earn the money they earn?

I believe most of you will agree with me that if every piaster a man earns/doesn’t earn is proven to be his rightful share of income- or its lack thereof-, then it will be inefficient AND unfair to forcibly change that.

But some of you might find this point arguable still, some might argue that sometimes a certain individual might have all the potential in the world to earn income but for some very extraordinary circumstance he was prevented from doing so and therefore is entitled to some boost from an outside source. Very well, I find this to be a very legitimate argument. In this case the question should be: does intervention from an outside source that forcibly alters the outcomes of the market exchange process help that individual?

In a nutshell, everybody is both a producer and a consumer at the same time. In our capacity as producers we try to produce things that others will be willing to buy. But how can producers stay in-touch with consumers’ wishes? Price is the numerical valuation of our product by others. When prices go up this means that more people want the product or that people value it more now than they did in the past. This presents an incentive for the producer to produce more of that product- in accordance with the consumers’ valuation. When prices go down; this means that either more people want to buy the product or that people value this product more now than they did before. This presents a disincentive for the producer to produce the product – again in harmony with the consumers’ wishes. Prices are the barometer that obliges producers to always stay in touch with consumers demand. It provides incentive for producer to either look for more resources to produce the same product, to research the potential of producing more innovative products, or to direct current resources to other more efficient uses.

In this manner the earnings gained through the production and exchange process are a reflection of the productivity of individuals. If we try to severe this connection two problems will definitely occur: the efficient producers (the providers or subsidy money) will have less incentive to produce, the inefficient producers (the recipients of subsidy) will have less incentive to be more productive.

Therefore, overall there will be less production, less innovation and much less transparency in the economy. On the long run, there will be less to consume by anybody including the group that was supposed to benefit from the subsidy program in the first place. This mechanism is called ‘the price mechanism’. It is a spontaneous and continuous process that is behind all economic progress anywhere on this planet. Taxes, subsidies, and all forms of government intervention ‘distort’ this price mechanism, making it impossible for the market to produce whatever it is that consumers need.

This mechanism cannot be simulated by a government institution, and luckily so, if I might add. This is very fortunate because it is not only economically impossible to produce efficiently in the absence of a free market, it is also morally wrong to initiate the use of force against others to achieve ‘noble social goals’. I will write about the immorality of government intervention in other articles.

If There Are No Subsidies, What Will Happen To The Poor?

Now, how about less-privileged groups who might not have the good fortune of producing something that other people want? and how about minorities and people with disabilities and women and children? Having compassion is a human trait that is entrenched deep in our genes and existence. It is not even exclusively human; we apparently received it from our ancestors in the animal kingdom.

But let me tell you this; from an economic point of view there has been no social model applied or even constructed that can provide for those seemingly less-privileged ones on the long run. There is no system that can make them better off, without making the whole economic system worse off, and therefore they too will be worse off on the long run. On the long run, only a free-market system increases the possibility of everybody being better off. This means that on average less people will have to suffer. I will discuss that matter more elaborately in the coming articles.

This only shows the economic impossibility of providing for the havenots through a forced distribution of income - whatever form this distribution takes. What if we did not even need to deliberately distribute wealth at all? What if all we think to be flaws in the free market system are flaws in the ‘mixed economic system’ we have everywhere not because of the free-market component but because of the socialist component added to the mix? Would that not make much more sense? After all, the free market system did develop naturally – unlike any other statist or socialist system.Think about that.

But how about the moral point of view? Ethics are essential after all. I have a question for you. How safe would the world be for you if you know that the moral value of your co-citizens is to take from him who has to give to him who needs? Or how fair would it be if you know that regardless of how much effort you make or how productive you are, it does not really matter because, at the end of the day, you can only have as much as ‘the society’ – represented in whoever is in control at that time- deems just for you?

My message is this: we do suffer from dozens of problems. You are right, there are forces that push us off track continuously and more so here than some other countries. Sometimes the hurdles can seem insurmountable. But I am optimistic, because life is stubborn, it has a tendency to withstand more troubles than we can imagine. The problems we have here are caused by a strong state and a socialist system that we inherited from the Nasser era. The only wonder is that we still have some economy going despite all of this.

If some economic life could survive all of this, then I have a reason to be optimistic.

*I will direct my speech to the layperson, and I will assume that all my readers know absolutely nothing about economics. If my logic is clear enough for a non-economist to understand, hopefully so-called economists will have no excuse when they claim that these questions are subject to ‘value judgment’ or that they do not belong to the arena of economics. Although the economic arguments can stand on their own, I decided to discuss both the economic and ethical aspects of the subject.If someone wishes not to follow what is logical, it’s their decision. But what is not up to them is to declare that this argument is illogical without refuting the logic behind the argument recoursing to sound reasoning.