Economic Freedom

Economic Freedom Instead of “Idiocracy”

Akaki Tsomaia
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It is well known that, according to the rule of 70, a country's gross domestic product (GDP) doubles in the 70/X period, where X is an indicator of economic growth. If Georgia's economy grows by 10% annually, the GDP will double after only seven years. This means that over this time span, the welfare of people will reach the current level of Azerbaijan, provided that the Azerbaijani economy does not grow in the meantime. In the event of 2% growth, Georgia will still be a poor country after 50 years, whereas an annual 12% growth of the economy will allow us to reach the living standards of a mid-European country in only 28 years.

The standard of living shows the degree of a person's welfare. People's requirements are limitless, but they create demand according to their income. Consequently, the size of one's income provides the structure for a person's consumption of goods and services. For a person with an income not exceeding 3,500 USD a year, expensive services, like health care or education, are luxuries and, no matter how much a person desires them, they are less affordable for him/her. All in all, this translates into statistical indicators such as low life expectancy, low levels of education, et cetera. Average annual income is a nominal term because income is not evenly distributed throughout society. Consequently, the income of some is higher than this indicator, whilst that of others is lower. Moreover, the segment of the society whose income exceeds the living standard of an average European is much smaller than that segment which has an annual income of 3,500 USD.

By nature, people are free riders. This means that a person will necessarily use a service whose costs are covered by someone else. We are often under the illusion that the redistribution of accumulated wealth to the detriment of the rich and the benefit of the poor will increase the affordability of expensive services for low-income people. In reality, the process of the redistribution of wealth may, over time, take such a dangerous turn that many types of services will become unaffordable even for high-income people. In such a case, expensive services will become a luxury for every member of society because the cost of producing that service will exceed the average annual income of a person. This means that over time, the supply of those services produced by the market will shrink because the demand for them will drop due to their unaffordability. When speaking about the free provision of surgeries, medications, and higher education, this means that the current supply of such products and services will gradually decrease because the cost of supply will exceed the cost of demand. It is precisely such a dangerous tendency that can be seen in the 2014 budget of Georgia. The country has never before been so burdened with social liabilities as it is today.

The assumption that the redistribution of wealth increases the income of the poor, allowing them to enjoy those types of service that cost less than 3,500 USD a year to produce, does not mean that luxury items become more affordable for them. This is yet another illusion resulting from the incorrect perception of the relationship between cause and effect. Naturally, people want to receive such services – an individual's requirements can be considered infinite. Being a free rider, a person probably never rejects a "gift," but this does not mean that he/she deems this "gift" to be worth the same as additional income. You may give an item to your relative as a gift, which will please him/her, but that does not mean that had you given him/her money instead of that item, he/she would have necessarily have purchased that same item. Almost on a daily basis we all say no to one thing to acquire something else. We formulate, evaluate and select alternatives. This is a common decision and the degree of our satisfaction increases when the value of an item we have purchased exceeds the benefit of that additional income we rejected in favor of buying the former. As such choices are determined by an individual's personal preference it is impossible to make generalizations. When offering a free service to society, why does a simple question not come to the mind of public servants: for the majority and poor members of society is it worth receiving this gift instead of additional income? Consequently, we offer society something for which people do not create the demand (for which there is no requirement). How correct, then, would it be to say that the affordability of luxury items increases? If we understand what has been said above, we will be able to see the correct links between cause and effect and will easily become convinced that the degree and amount of those services will decrease over time, whereas the resources and effort spent on creating them will increase. With every passing year, each member of society will come to face heavier choices in saying no to those services that they can afford to receive today. Many people became rich in Georgia on the basis of the redistribution of wealth – there are probably many public servants among them too. Until the government has a legitimate right to redistribute wealth, this trend will continue – this happens in every country and Georgia is no exception. Seizing resources from that small segment of the wealthy in society, those who managed to accumulate wealth by making correct choices at their own personal risk, to implement utopian ideas and, even more so, considering the redistribution of such resources as the only chance of making poor people rich, is the greatest form of "idiocy" ever invented and realized in the history of mankind. Why does a simple question – on what account should the economy develop – not come into the mind of public servants?

The problem, however, does not lie with public servants alone. A public servant's position grants him or her the authority, or right, to redistribute public resources. This authority gives them legitimate powers. These powers need to be applied and public servants believe that they can use these for the benefit of society, which implies making the above mentioned "gifts." The problem thus lies with each of us, because it is we who express our readiness to grant power, from one election to the next, to the group of people giving us better promises or offering more "gifts." We do not want to participate in producing the "gift," to take responsibility for its creation, because, in such a case, we will have to make a "sacrifice." We prefer others to make the sacrifice, i.e. for others to take decisions for us. However, those who take decisions demand power and voters are ready to grant that power to a specific group of people – at least until the next political cycle when voters, if unhappy about the amount and quality of gifts received, will elect another group of potential public servants and grant them that same power. In this process, however, no one realizes that the problem is not the use of power, but the granting of power. The psychology of the free rider prevails over rational reasoning.

Thus, voters hope that a powerful group will manage to deliver on its promises and create "gifts" through confiscating the resources of others. Since free riders do not participate in the creation of the gifts, they are less interested in their price, i.e. in the sacrifice which society, as a whole, has to make in order to produce them. The problem is that this is merely a hope, a utopia, and can never become reality because people's satisfaction will only increase if they receive the value expressed in the form of gift through making their own choices – i.e. by rejecting one thing for something else and, in so doing, understanding that the benefit obtained will exceed that which they rejected. Whilst a gift cannot be a source of welfare, those benefits obtained in exchange for an individual's labor are indeed the basis for welfare. In the hope of receiving a gift, a free rider entrusts decision making to others and, in so doing, loses freedom. Free riders dream about and hope for gifts – and that's all that this group of dreamers can have (I cannot call this group a society, because only free people are able to form a society).

If these dreamers call the system we are now building "democracy," I call it "idiocracy." This may be an ideal system for free riders, but for free people it is a system amounting to slavery. Never before, at no stage of human development, has idiocracy (this modern concept of democracy) had so many followers worldwide as it has today. We mechanically follow the fashion, trends, and examples of such countries as the US, Germany, France and others, but we must bear in mind that, according to any study of the economic success of these Western countries, their fast economic growth happened at those times when both the extent of their "idiocracy" was lower than it is now, and the degree of economic freedom was higher. Each wasted minute costs us more than it does them, as those values which we long for are further from our grasp than they are from theirs. Consequently, we dream more than they do. We thus have to think harder about the fact that, as a result of idiocracy (modern democracy), 50 years from now we will still be at the same level as we are today. There is only one solution to this: to develop such a political system that, resting on economic growth, will exist for at least 50 years and cannot simply be changed by any new government after winning an election. A system resting on economic growth implies people granting much less power to authority than they do today, thereby curtailing the power and liabilities of the government. Consequently, people will acquire the right to distribute additional resources themselves and this, in turn, will increase the degree of their responsibility for decision making. To cut a long story short, the government must be left with the right to distribute that minimal amount of resources that are necessary to create such values that guarantee and ensure the inviolability of the personal and private property of a person. These values include: politics, regulations and rules, and an administration designed to ensure safety, security and defense, foreign policy, services for people with disabilities, and to prevent some negative external effects. These values are those public goods and services around which the majority of society agrees: a) that the state can provide efficiently and at a low cost; and b) that without these values it would be impossible to build a society which rests on private property. Thus, the liabilities and powers of the government must be constitutionally significantly curbed. Free riders will no longer pin their hopes on gifts; nor will future governments have to invent promises to win elections.

Curbing powers, first of all, means decreasing the tax burden. From five to seven percent of GDP will be enough to fulfill the above listed liabilities. The resources that will be freed as a result of that will be distributed by the market, which means a person or a group of persons who no longer pay taxes in favor of the state will decide for themselves how, where and in what amount to spend the freed resources. Given that people gain benefit from mutually advantageous exchanges, resources will be redistributed among society in such a way that they will be purchased by those who will be able to handle them more efficiently than others and thus accumulate wealth. This is the market principle. That is how a market society, i.e. a society of free citizens, is created. Among all the other possible alternatives, this is the only and most realistic way for poor people to increase their incomes and obtain the desired services.

Naturally, this would entail a very painful process that would cause huge dissatisfaction to a large segment of society; many will lose cheap gifts, whilst others will lose those non-existent promised gifts. On the other hand, any minute wasted now means that in future the government will have to make a way harder choice. The choice is made hard because of the fact that promises can be easily given, but in the idiocratic system it becomes almost impossible to refuse the fulfillment of liabilities. If we look at statistics, we will easily see that the number of promises have increased over time because it is such promises that largely determine victory in political competition. Moreover, the government assuming more liabilities provides grounds for the government to demand more power.

Today, the Georgian government increasingly talks about the so-called feigned economic growth of recent years in order to belittle the achievements of the former government. No one argues that the former government made many mistakes, but the rate of economic growth was definitely a real result of the 2005 reforms. Had it not been for the mistakes made after that, the result would have been even more impressive. This result was acknowledged by many respected international organizations in various studies. It is precisely these reforms that must be continued in order to obtain the model of limited government I describe above. To this end, the following steps must be immediately taken:

• The government must reject the additional social liabilities it assumed under the 2014 budget;

• The possibility of the government taking out additional domestic or foreign debt must be limited to the maximum extent. No voter has mandated the government to give them gifts as a result of increased debts. Therefore, constitutional guarantees must be created to ensure that the government will no longer be able to take on additional debts in future;

• The policy of providing subsidies must be stopped immediately. Subsidizing restricts competition and leads to the waste and improper use of resources. Subsidies benefit only a small group of people to the detriment of the rest of society and are an additional burden for the country's economy;

• All customs duties and restrictions must be abolished. Trade restrictions only create an illusion of being conducive to economic growth. This policy benefits only a small group of people – those who, with all other things being equal, spend more resources on creating their products than their competitors. Trade restrictions stimulate several directions of local production on the basis of increased prices that the rest of society has to pay. The losses for buyers exceed the gains of the beneficiaries. As a result, overall welfare decreases. The opinion that trade restrictions facilitate growth in exports and a decrease in imports is also wrong. Initially, the amount of imports drops and this contributes to the strengthening of the national currency, the lari, which, in turn, makes imports cheaper and exports and local production more expensive. Consequently, exports decrease too. Overall, the difference between exports and imports does not change. As a result of trade restrictions, the volume of both exports and imports decline;

• Talks about introducing regulations must stop. This only harms the investment environment. Barriers for entry into a market can only be created by that institution which has the power to coerce, i.e. the government. Permits, license, fees, the Labor Code, competition legislation, and regulatory agencies cannot improve so-called market distortion, but can create barriers to the market and decrease the size of market. Moreover, a real threat emerges that representatives of government will develop a private interest in getting benefit from the granted power, which will further decrease private initiatives on the market. This is what happens in every country and it is known as crony capitalism;

• The reinstatement of justice creates the expectation of the redistribution of wealth by the government. Those who think that the actions of the former government inflicted damage on them must seek justice only through the courts. This is the only way to reinstate justice. Any other attempt will end in a new redistribution of wealth by the government that will seriously harm the country's economy;

• Any restriction on the purchase and use of property by foreigners must be abolished, even if that concerns land or natural resources therein;

• The process of privatization must continue. Enterprises owned by the Ministry of the Economy and Sustainable Development must be sold, including the Georgian Railways company. One can cite numerous examples of the private sector successfully operating even in the field of natural monopolies;

• The transfer towards a private pension system must be done speedily. Every wasted minute means an additional year for the government's liabilities to increase instead of decreasing;

• The financing of social projects must be gradually decreased. The boundaries of the social package must be determined and no government must be able to change them in the long term. Also the terms within which the government will ensure the fulfillment of only minimal social liabilities must be defined;

• The number of infrastructure projects must be minimized. Roads and communications comprise that limited list of infrastructure projects that the state may participate in. When the aim of infrastructure projects is predominantly to decrease unemployment, this poses a threat to the long-term development of the economy;

• Strict and long-term monetary discipline must be established. The National Bank's regulatory restrictions or/and open trade transactions can also inflict serious harm on the country's economy. The increase in money supply can only be prompted by economic growth and not by any other considerations targeting the elimination of short-term fluctuations or/and the financing of election cycles. Prices of products, the exchange rate of the lari and interest rates are those important factors which represent the foundation for mutually advantageous trade transactions among people. A distortion of any of those creates false perceptions and impedes the development of the economy;

• The rules for tax administration must be simplified. No one must have the right to enter private property and stop or/and freeze production without a court permit. The terms and activities of tax inspection must be determined according to strictly defined procedures and rules. At the same time, a system of private arbitrage must be promptly put into operation. In tax disputes, the burden of proof must lie with the government, not with the respective company;

• Economic policy must be clearly defined and directed towards decreasing both liabilities and powers. Accordingly, tax rates, of which the lion's share is accounted for by value added tax, must be gradually cut year after year. The goal of economic policy must be the achievement of a point whereby, within the next seven to eight years, the size of tax revenues will not exceed some 10% or 11% of GDP;

• Such an economic policy must be guaranteed and inviolable. No government of Georgia must be able to change it.

Only after implementing the above listed measures can a high degree of economic freedom be achieved. This is precisely what the concept of limited government means. This is the only way of creating the prerequisites for fast economic growth. The model of constitutional restriction of the liabilities and powers of the government starkly differs from those principles of democratic governance that we are currently establishing.
Today we are building an "idiocracy," not a society.

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