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Let Market Forces Decide the Pace of Growth

If you do not create a free market, a black market will emerge. This is the motto of the Lithuanian Free Market Institute. In this article, I shall try to show that the system of market economy works best to fulfil the people’s quest for happiness by providing them free choice to meet their needs.

By Dr. Khalil Ahmad

If you do not create a free market, a black market will emerge. This is the motto of the Lithuanian Free Market Institute. In this article, I shall try to show that the system of market economy works best to fulfil the people’s quest for happiness by providing them free choice to meet their needs.

Also, to allow market economy to work in this direction requires a different kind of state than the welfare state, i.e. a state that does not intervene particularly in the business affairs of its citizens; but, of course, it must establish a rule of law, and must protect life and property rights of its citizens; because without these a market cannot work efficiently.

In other words, it means that a state must allow its citizens to earn, produce, trade, live and work as they wish until and unless someone happens to usurp this freedom of another person, then the state must step in to ensure and secure the freedom of that person.

Any state going against these norms will ultimately end in playing havoc on the one hand with the market and on the other with the lives of its citizens. Our story is the same: almost all of us favour a welfare state (or a collective state). To us it is an ideal state. Ask anybody he would say that Pakistan must be a welfare state.

Inquire further what a welfare state is, he would tell that this kind of state meets all or the basic needs of an individual, such as food, clothing and shelter, and with these, education, health, etc, too.

And, as an example, he would name some of the welfare states like Sweden, Norway, etc. But, further than that, nobody asks, nobody tells, and nobody thinks how a welfare state fulfils or can fulfil these so-called duties, or for that matter, what are the consequences of establishing such a state.

Or, how these welfare states are meeting the basic needs of their citizens, and what kind of problems are cropping up there. We are told to meet the needs of its citizens a state must possess or come to possess all of the means of production from private hands into collective ownership.

This is a collective state. We are still bearing the brunt of such an attempt at a collective state through nationalization in Pakistan. Or, we are told, to meet the needs of its citizens (and its own expenses) a state must impose taxes on its citizens.

This is a redistributive state, also known as a welfare state. This state forces its citizens to pay a big chunk of their income as taxes, and then in the name of poor redistributes this ‘income’ to specific elite groups.

We eulogize this kind of state. After the failure of the experiment of making Pakistan a collective state, all of the intellectuals and politicians, democrats and dictators are intent upon turning Pakistan into a welfare state; except a few who still cling to a paradise of collectivism.

Now, every Tom and Dick dreams of a welfare state, and cites the miracles of providing everything to the citizens by such states. The recent talk is that China is up for free electricity for everyone.

In a collective state, everything is controlled by the government. In it, the select few who come to exercise political power declare themselves as the omniscient and omnipotent, and start owning the lives of the citizens and making decisions as to what is good and what is bad for them.

This kind of state leads to extreme misery and destruction of humanity as is obvious from the breakdown and sorry state of such states. The reason is that the state ownership of the means of production means that nobody owns anything privately, and this is what brings in its wake social and moral degradation.

Further, this entails that there is no free working of the market or that market is at the mercy of the rulers. As to the welfare state, though it allows private ownership, it doesn’t let the income made out of this private ownership remain in the private hands.

Instead of being invested again to create more wealth, a large portion of this private income goes to the state as taxes and ultimately finds its way to political interests and privileged elites. This distorts the market and its mechanism.

We may liken the concept of a welfare state to a family: in a family of four, if two persons make income and the rest of the two are there just to consume it, i.e. if the income of two persons is distributed/redistributed into four, such a family can never prosper, or if it is prosperous it cannot remain so for long.

Or, if the income of a family is distributed/redistributed into another family while the distributors/redistributors too depend on the income of this family, this income-making family can never prosper, or can’t be prosperous for long. Rather, it falls into utter desperation.

Likewise, a welfare state too that redistributes the income of income-making people into no income-making or less income-making people including those who comprise this redistribution apparatus can never prosper, or can’t be prosperous for long as the worsening conditions of the welfare states attest to.

The reason is that most of the redistributed income doesn’t get invested and the process of creating wealth by using wealth stops. Thus, poor get poorer, and the politics of redistribution of tax money of people make rich richer.

This is a case of siphoning out of money from the market, and depriving the people of a chance to make more money. Apart from this, another kind of state which we have been taught to detest and dismiss outrightly without giving a thought to what it stands for, and which we call as the capitalist state, is in fact a just state.

It doesn’t steal or rob the income of the income-making people. In this state, this income remains with its owners and they can make use of this income as they will. Here the market remains intact. It is this state of affairs that causes and facilitates the creation of more wealth. This kind of state never interferes in the private and business affairs of its citizens.

Its basic duty is to protect life, liberty and property of its citizens and such a state can exist only where market is allowed to move and work freely. Neither it is regulated nor taxed to suit a special group or groups of people. Let’s consider a concrete case: A Meat Merchant Welfare Association from the largest business centre, Karachi, has filed a writ petition in the Sindh High Court.

As the petition came up for hearing, the court inquired from the Karachi city government counsel about the authority of law under which the city government was fixing prices restricting the operation of the market forces.

The counsel said that the Price Control and Prevention of Profiteering and Hoarding Act 1977 empowered the municipal government to fix prices of 62 items. Beef and mutton were listed among the items amenable to price fixation by the municipal authorities.

Submitting his arguments, the petitioner association’s counsel, described the city government decision as arbitrary inasmuch as no steps had been taken to ensure cattle supply at reasonable rates.

He also described the actions as discriminatory as no action has been taken by the city government to control prices of other items of human consumption. Only one segment (meat sellers) of a particular trade had been subjected to price fixation in isolation from the ground realities.

The most cogent argument on the part of meat sellers suggests that government must fix the prices either of everything or of nothing. In other words, either the government must control the market entirely or it must let it work independently.

But it’s impossible for any government to do so since whenever and wherever this is done, another market that is labelled as black market emerges. Any government no matter how omniscient or omnipotent it is can never replace market forces with its tentacular departments and officials, so the case must move in a direction of free working of the market.

If this happens, it will be a great victory, at least in the legal realm, for the market economy. But, there lurks a fear that may evaporate this legal victory. Everybody would argue: if market is not controlled, people will be left to be fleeced by the meat sellers, and that prices of meat will rise exorbitantly.

This amounts to saying that an authority outside or above the market should determine the price of meat. But, why the price of meat alone? Why not of other things or all of the other things as meat sellers argue?

The problem is that this once again leads to an impasse: no authority outside or above the market can fix or determine the price of everything or it does so at the cost of distorting the working of market.

Or, if an authority outside or above the market fixes or determines or controls the prices of only some of the things, this will lead to a distortion of preferences on the part of people since prices in fact are an index of the economic behaviour of people.

Controlling the price of a thing to a lower level than the market price and that too only at a point increases its demand, and this demand increases the demand of so many other things related with its production and trade, and so on and so forth; and thus plays havoc with the prices of many things.

The authoritarian system of pricing proves to be a hurdle in the creation of wealth by discouraging the profit motive, distorts the allocation of resources, and misrepresents the behaviour of the people. Besides that, it results in an economic discrimination as the meat sellers complain.

So, if we want people to prosper and be happy, and as that is what everybody needs and seeks, whether we like or not we will have to move in the direction of the market economy.

Rather, in fact we have started moving in that direction; privatization is enough to prove that. Also, recently, Prime Minister Zafarullah Jamali while talking to the traders stated that the government believes in free market economy as it is the market forces that decide the pace of economy and its growth.

Of course, it’s a welcome sign that those in the government are not only subscribing to the view of free market economy but have started realizing its importance also.

No matter they fully grasp its implications or not and let it work independently or not, it’s significant and tantamount to the fact that this view is gaining ground in the people.

We hope that soon the government would be taking steps to lessen the burden of regulation and taxation from the shoulders of a limping economy and let the market forces run their course so that the economy of Pakistan could grow and bring the fruit of prosperity to the suffering people.


Khalil Ahmad is president and founder of the Alternate Solutions Institute, Pakistan’s first free-market think tank.

This article was originally published in Dawn on May 10, 2004.