(Economist) The Nexus between Politics and Economics Original unequal land capital distribution developed into unequal industrial capital distribution. This, according to Karl Marx, is the original sin of present-day capitalism. Westerntype politics, the centerpiece of which is majority-vote political democracy, is based on this initial inequitable economic foundation. According to Marxist thinking, western-type politics was not only built on this unequal economic base but it has also perpetuated the original inequality to this day.
The beneficiaries of the system have formed distinct social and economic classes at the top rungs of the social and economic ladder whereas the victims have been doomed to languish at the bottom of it. Hence, the justification for Marx’s theories of class struggle and labor value became more self-evident than ever, thus leading to experimentation with an alternative social, political and economic system in the form of socialism – cum – communism. However, some seventy years earlier another genius in the person of none other than Adam Smith had neglected the original sin of capitalism and come up with the magic wand of the invisible hand.
He ignored the perpetuation of inequality caused by the original unequal land distribution and ownership and concentrated on the almost magical outcomes of enlightened self-interest, individual effort, free competition, free markets and the division of labor. He considered land, labor and capital all as factors of production as opposed to Marx’s monistic labor theory of value.
Adam Smith did recognize profit as a return to capital (stock as he would call it). By contrast, to Marx profit was (is) the surplus value created by workers which, however, is appropriated by the capitalist. In other words, profit is equal to unpaid labor which represents the Marxist notion of economic exploitation. Modern national income accounting attributes wages to laborers, rent to land, interest to capital and profit to entrepreneurship.
Marx would say land is God-given (pardon, nature-given, Marx called religion the opiate of the people), interest is unearned income, etrepreneurship is a special kind of labor, and profit, as pointed out above, is economic exploitation. As labor is the sole source of value according to Marx, in the production process capital as ‘dead labor’ receives depreciation for replacement, the capitalist receives a large wage relative to his labor (mainly mental) contribution, land gets rent and does not create value without labor, but where does profit come from? As indicated above, profit, in line with Marxist economics, represents unpaid labor (or economic exploitation).
On second thought, isn’t labor ultimately the source of all value? Aren’t human beings the source of all value? Would land or indeed nonhuman nature have any value without human beings? Isn’t capital the result of human labor? Why make a distinction between labor and entrepreneurship when the latter is nothing more than a special kind (talented, educated and skilled) of labor? Why would profits all accrue to the special kind of labor when they are actually generated by both etrepreneurship and labor together?
Admittedly, entrepreneurship is a higher form of labor and should receive a higher proportion of the profits generated (say 70 – 80 percent) but shouldn’t labor have a share in profits over and above its wages? Remember, the entrepreneur gets a fat salary in addition to all of the profits? Is this fair? After all, profit in excess of the cost of production is essentially a result of underlying scarcity in the demand/ supply based free market. Even so, socialism as a transitional social-economic phase to communism is a non-starter as it kills the growth dynamics of capitalism.
After all, a capitalist is a talented or trained worker who has saved a large proportion of his relatively large wage to buy physical capital and start a business enterprise in order to make a profit and further build up his capital to make even more profit. Under socialism, a worker gets a wage equal to his labor contribution and is not allowed to own capital which, however, is the main source of growth of production and productivity. Hence, those who think that socialism is the only path to communism are doomed to failure as we have witnessed to our cost all across the globe.
In fact, on the basis of historical and current trends, the only path to communism, which many believe is unattainable, is through a reformed capitalist system with its dynamic nature left intact. Both Adam Smith and Karl Marx were correct. Rampant capitalism brought about human progress never before seen in history, but as Marx correctly predicted the social costs in terms of income and wealth inequalities and political instability have been horrendous.
As the degree of individual effort and differences in innate abilities and capacities alone cannot possibly explain the massive inequalities observed, elements of Marxian economic exploitation must have been in operation all along. As for communism, just think for a moment of Marx’s observation about the contradiction between the mode of production ( technology) and the production relations (income and wealth distribution). What if all labor is replaced by robots and the capitalist is forced to sell his products to robots instead of to human laborers? Is organic intelligence of human beings to be redundant in the age of inorganic (electronic) intelligence of robots?! It takes the genius of Karl Marx to see that far ahead in the future, and the penetrating insight of Adam Smith to observe the intricate workings of the invisible hand with his mind’s eye.
So, where is the nexus between politics and economics? In developed countries politics mirrors the economic competition for profit in the shape of political competition for power. In free and fair political elections, the most able and the most convincing persons are expected to win in pretty much the same fashion as the most entrepreneurial business persons are likely to make the most profit. As the ultimate objective of political activity is economic prosperity, and capitalism in its various shapes and forms has delivered on that objective, politics in its liberal or non-liberal version has been heavily informed by the dominant capitalist status quo.
Neoliberal politics does not shy away from claiming that extremes of income and wealth inequality are the results of basic differences in individual innate talent, ability, intelligence and effort. Liberal politics (democracy) identifies differences in social background, quality of education and training, and healthcare as important causes of wide gaps in income and wealth.
Social democracy politics, as well as recognizing the foregoing factors, goes as far as advocating significant government intervention to regulate unfettered capitalism to correct market imperfections and provide public goods. Social democracy as reflected in the form of welfare economics is sometimes criticized for rewarding indolence, and therefore blunting the growth dynamics of competitive capitalism. High taxation to finance affordable healthcare, unemployment benefits and low-cost housing, etc. tends to act as a disincentive to high-octane entrepreneurial innovation.
The real problem, it seems, is the apparent lack of intellectual giants on the level of Adam Smith, Karl Marx and Keynes to perhaps demonstrate the tradeoff between taxation and a potential share of labor in profits over and above its due wages. A putative share in profits of labor of up to 15-20 percent after profit allocations for innovative research and development may reduce the need for high taxation, as in Nordic states, for welfare benefit. All that is, of course, for the advanced economies of the US and Western Europe and similar other countries.
The situation is completely different when it comes to underdeveloped countries like Ethiopia where political power is seized by force of arms and is used as a crude instrument of economic exploitation. In Ethiopia, Emperor Haile Selassie who was traditionally groomed to become King of Kings of Ethiopia from childhood, did succeed in building a historically legitimate feudo-capitalist economy in a fairly united Ethiopia whose unity guaranteed better prospects for development through economies of scale enhanced by the Smithsonian “extent of the market”. The Emperor’s main shortcomings were his reluctance to bring about land reform and to institute the then timely constitutional monarchy.
By contrast, Mengistu Hailemariam espoused socialist-communist ideology which he little understood, killed the capitalist growth dynamics by curbing private capital accumulation and was finally beaten at his own game by local guerrilla fighters. Meles Zenawi’s political hodgepodge of Marxism and liberalism, and economic dirigisme and capitalism in a toxic political environment of ethnic apartheid gave rise to the most egregious kleptocracy on the African continent.
The State of the Political Economy of Ethiopia As would be expected, Prime Minister Abiy Ahmed is grappling with the legacies of Meles Zenawi’s kleptocratic economic patronage system and his combustible political ethnicism, strangely, under the same constitution which is believed to be Meles Zenawi’s own handiwork. Let us first look at the four factors of production, namely, land, labor, capital and enterprise.
Land is constitutionally the property of the government and can only be held by private citizens on lease from the government. Obviously, land lease rights can be granted to people favored by the government. Hence, there is no equal access to land. In fact, land is a major resource of the government’s political and economic patronage system. On the other hand, an important proxy for capital in Ethiopia is bank credit.
There were four governmentowned banks until a few years ago, but one of them, a mortgage bank (CBB), was merged with the Commercial Bank of Ethiopia (CBE), another government-owned bank, in mysterious circumstances, although it was rumored at the time that bankruptcy was the cause of the merger. All governmentowned banks lent money on orders from the higher ups in contravention of bestpractice credit procedures.
Accounting and financial reporting systems have been tweaked and tampered with to underreport critical indicators such as baddebt ratios, loan/deposit ratios, bad-debt provisions, etc. The National Bank of Ethiopia (NBE) Ethiopia’s central bank, has long abdicated its statutory duties of controlling inflation and maintaining exchange rate stability in addition to regulating all other banks. As a result, over the last twenty-seven years cumulative inflation has surpassed the 4000 percent mark and the birr exchange rate vis-à-vis the US dollar has plummeted by nearly 94 percent.
The CBE’s outstanding loan to the government is estimated at 500 billion birr and it is feared that it may never be repaid! The Development Bank of Ethiopia (DBE) has registered a worrisome 40 percent bad debt ratio, prompting dire predictions about its future viability. By contrast, private banks, now numbering seventeen, have tried to play it safe, but their operations have not completely escaped government interference and pressure. As to the other two factors of production, labor and enterprise, they can be treated together as enterprise is nothing more that labor with certain desirable attributes such as being trained and talented. There may be few flashes of talent here and there, but by and large Ethiopia’s labor resources are mainly unproductive because of lack of quality education, training and natural talent development. Hence, the quality of factor resources and access to them are woefully low and poor. Efficiency is negatively affected by resource allocation via the patronage system rather than the competitive free market mechanism.
In short, the state of the political economy of Ethiopia is shambolic. Economics is dictated by politics. Politics sets the rules of economic engagement. The land tenure system is predetermined by the constitution. The importance of quality of education is de-emphasized for political reasons. (“No Ethiopian should speak English better than Meles Zenawi!”). Bank credit (proxy for capital) is extended on orders from above instead of on the basis of credit risk analysis.
The micro and macro-economic outcomes of such a state of affairs cannot be mistaken: low levels of economic activity including low levels of production and productivity; low and poor quality investment; low savings; high inflation; balance-ofpayments deficits; low foreign exchange reserves and therefore shortage thereof; fiscal deficits; relatively high population growth; high unemployment rates, especially among the youth; currency depreciation; generally a shortage economy; high external debt; excessive monetary expansion; and so on! The Way Forward Over two hundred years ago the great Adam Smith told us that economic development is partly determined by the size of the market alluding to what in economics are called economies of scale.
So, there is no earthly reason why the economic space called Ethiopia should be carved up into smaller economic enclaves on the basis of ethnicity. Another thing to remember is that, particularly in Ethiopia, land is a major factor of production and therefore its productive powers should not be shackled by sole de facto government ownership. So, have a second look at the country’s constitution.
Take no time to overhaul the government-sector banking system including the National Bank of Ethiopia (NBE); re-instate borrowing limits on government debt to the NBE; transfer long-term CBE loans to government to a restructured DBE; improve accounting and financial reporting systems of government owned banks on bestpractice international models; restructure the DBE; re-establish the CBB as a viable mortgage bank; take no time to formulate sound monetary and fiscal policies consistent with economic growth with minimal inflation; consider establishing a stock exchange and currency shops; etc. Never compromise on the quality of education, training and talent development; reform the education and training sector accordingly, effecting qualitative changes in curriculum, teacher training, facilities including internet connections, etc. Also, listen to the echoes of the great Karl Marx’s admonitions on measures against economic exploitation which may be mitigated by adopting the following policies:
- Equitable land distribution according to a national (country-wide) land use plan;
- Introduction of education and health taxes and increased budget allocations for quality education for all and provision of basic health care;
- Revival of strong labor unions to fight for their rightful share in profits;
- Home ownership policies for low-income groups, etc. In conclusion, one can, without fear of serious contradiction, say that theoretical capitalism is fair enough, but practical capitalism does contain some very significant facets of economic exploitation as clearly manifested in the wide income and wealth disparities, especially in the USA. By contrast, socialism is a non-starter and an incentive killer. However, surprisingly enough, communism is a distinct, if distant, possibility!
Herald FEBRUARY 3/2019
BY TEKLEBIRHAN GEBREMICHAEL
