Wednesday, November 25, 2015

Capturing Rents, or Creating Wealth?

Real wealth consists of tangibles, like cars, food and commodities, as well as of services like social care (of which we can only provide so much). This real wealth can only be consumed if its creation is adequate. We can't consume wealth that has not been created. So wealth creation really matters.

People's needs, however, are unrelated to the levels of wealth created in the economy. These needs are finite. Being physiological, social and intellectual (ie identity/spiritual). However as primates of 60-90kg we tend to be rather limited in perspective and so can be greedy, self-seeking, narcissistic and often inconsiderate. Especially when confronted with a choice of placing a small burden on many others and extracting a large personal benefit. Or, particularly, in avoiding a large perceived personal loss.

Thus, when confronted with a choice of paying the full cost, or of placing a burden on society, students in South Africa felt that education should be seen as a low cost "right" (#FeesMustFall). However, there are very real direct costs and great opportunity costs in providing education. An excessive education sector will reduce wealth creation - and so, necessarily, will deprive other people of the fruits of the economy - and make most people poorer.

Similarly in the outsourcing dispute in South Africa (#OutsourcingMustFall), which was framed as black workers getting their rights - but, actually, doing away with outsourcing just redistributes money (ie tokens or promises to pay) (and the consequent consumption) without any compensating increase in wealth creation. And, in practical experience, will lead to losses of efficiency. It was a dispute about pure economic rents - in other words about capturing a surplus - pitted against efficiency savings and so consequently against wealth creation.

This socially engendered sense of entitlement to rights, and of passive expectations, may be the fundamental defect in the South African economy.

Fortunately markets (which arise legally or otherwise for scarce resources or real wealth) give incentives to be: i) productive (with rewards for efficiency and wealth creation); and to be ii) frugal (being able to access more resources or real wealth, by spending less). And the scarcity of resources usually leads to crisis, so that pure rents tend to be swept away in history.

What South Africa, and perhaps the whole world, needs is some way to reward virtue (or "being good") rather than the narrow perspective of the market (just productive and selfish). The students and strikers lose nothing by disrupting exams and lessons - but destroy much real wealth. As well as do damage to norms and values, that maintain a just society.

Tax - a fraction of the flow of money (promises to pay) in the economy - seems to be an inadequate source of financing redistribution by the state (which is absolutely fundamental to just society). So we see addictions to growth through deficit financing - with all of the undesired incentives for excessive consumption and obscene waste. For this, there are likely better types of economy (allocation system), beyond capitalism and socialism.

And the appeal of rents - pure redistribution or capture of surplus - leads to imposing short-sighted burdens on the rest of society (like "cheap education" and "ineffective services"). In this situation it is the poor and truly deprived who suffer most, because education is underprovided and less wealth is created.

As the elite of the next generation, and leaders, one would hope that students and activists can see the full cost of these short-sighted actions. And be insightful and considered, rather than follow the examples of obscene rent capture we see by financial and political elites.

But appeals of seemingly simple matters of "rights" often obscure the bigger picture of norms, wealth-creation and redistribution.

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