Part II: Delivering Economic Democracy

will lead to controversy unless it is

defined properly

Economics Nobel Laureate Milton Friedman

Monday, 21 September 2015

Promise of economic democracy to people
As mentioned in the previous part of the article in this series under the title
of The Promise of a Social Market Economy: What does it herald
for Sri Lanka? (available at: http://www.ft.lk/article/469707/PartI-%E2%80%93-The-promise-of-a-Knowledge-based-CompetitiveSocial-Market-Economy--What-does-it-herald-for-Sri-Lanka ), the
manifesto of the United National Party has promised to deliver
economic democracy to the people by widening the frontiers
of the open economy policy being in place in Sri Lanka since the
late 1970s.
Political democracy is captured by powerful people

Political democracy has been enjoyed by Sri Lankans since independence in

1948 with the power to elect or oust governments at periodic elections.
Many draw on Abraham Lincoln, the 16th US President, to describe what it
is. Lincoln, battling a civil war, stressed to his fellow Americans in his very
short but powerful Gettysburg Address of 1863 that the American nation
shall not allow democracy which is a government of the people, by the
people, for the people to perish from the earth.
His concern was that democracy being such a precious asset should not be
dismissed lightly by any freedom loving person. Since then, his description
of democracy as peoples Government has become the standard definition
of political democracy. But the defect of this definition, as many critics have
pointed out, has been that the people under reference may not be the
masses at large but only a few individuals belonging to an exclusive class
that has captured political power through popular elections.
This is self-evident in Sri Lanka. As popular cartoons have depicted, during
election times, politicians approach the voters with bent backs and wide
smiles across faces. But after the elections, the roles are reversed where
voters approach elected politicians with bent backs in total subjugation.
Hence, democracy has been viewed as a form of government of which there
is no voice for the people. This criticism, levelled against political
democracy, is equally valid for what is now known as economic democracy
as well.
Economic democracy is ensuring freedom to choose
But the problem with economic democracy has been that it has been
captured by many interested parties to propagate their own political and
economic ideologies. Hence, there is no consensus as to what it should
consist of.
At one end, there are free market economists who believe that economic
democracy should consist of peoples freedom to choose. This was the
message delivered by Nobel Laureate in economics, Milton Friedman in his
1980 book Free to Choose: A Personal Statement written with his
economist wife Rose Friedman. The book
was based on their previous publication,
Capitalism and Freedom.
In the preface of to Free to Choose, the
Friedmans qualify their effort as follows:
Capitalism and freedom examine the
role of the competitive capitalism the
organisation of the bulk of economic
activity through private enterprise
operating in a free market as a system
of economic freedom and a necessary
condition for political freedom.

The Friedmans go on labelling both the political system and the economic
systems as markets in which the outcome is determined by the interaction
of persons pursuing self-interests (broadly interpreted) rather than by the
social goals the participants find it advantageous to enunciate.
The corollary is that the symmetry in the two systems indicates that if
political democracy fails, so does economic democracy and vice versa.
Big Government takes freedom of choice away from people
But according to the Friedmans, the cause of the failure has been due to the
expansion of the Government sector beyond what it should have been.
When the freedom to choose is taken away from people and handed to a
group of politicians and bureaucrats, the inevitable result is that choices are
made not to benefit the people but to benefit the latter group which works
in self-interest. This is known as agency problem in economics.
In terms of the agency problem, the agents, namely, politicians and
bureaucrats, who are supposed to work for the benefit of the principals,
namely, people who appoint and pay them, act in collusion to serve their
personal interests forgetting the interests of the people. Thus, after
elections, they act as masters of people instead of being their servants.
That is the source of the failure of political democracy. In terms of economic
democracy, it is the people who should make choices for themselves. But
politicians and bureaucrats who appropriate the right to choose on behalf of
people will make choices that are beneficial to them or a select group of
people and not to the people at large. But the irony is that it is the people
themselves who ask the politicians and bureaucrats to make choices on
their behalf.
Acting under those powers, they pass legislation of numerous kinds and
impose rules and regulations on private behaviour claiming that they all are
done to serve the people. But in the process, they grab more and more
powers to take the freedom to choose away from the people.
The Friedmans say that there is an invisible political hand operating to
promote the special interests of those who back politicians instead of
promoting general interests which they are supposed to do.
Milton Friedman: Governmental solutions create more problems for
people
The Friedmans claim that the solutions suggested for overcoming the
problem of abuse of power by politicians and bureaucrats do eventually
become another problem leading to a big Government.
First, a government institution is created to provide a service to people.
When that institution fails, another institution is created to check on its
work. That institution will function as a regulatory body with enormous
powers assigned to it by laws. Acting under those laws, they issue rules and

regulations in the name of protecting people from the abuses of the

governmental institutions.
But little do they realise, according to Friedmans, that their action is the
problem rather than the solution. Hence, as the Friedmans have put it they
inevitably become persuaded that they are indispensable, that they know
more about what should be done than uninformed voters or self-interested
businessmen.
It is people who give extra powers to governmental authorities
But the result is the growth of a Government in size and power affecting the
relations which a citizen is having with his Government. When the
Government becomes too big, citizens also cultivate the habit of seeking
favours from their elected politicians to move the bureaucracy that does
not move at the speed they expect it to do.
This gives extra powers to politicians and instead of working for the general
interests of the people who have brought them to power, they start working
for the special interest groups that cultivate relations with them. This leads
to possibilities for bribery and corruption. Finally, for citizens to have
services from the Government they have created, they have to give more
powers to politicians and also to high level bureaucrats handing their right
and freedom to choose to the latter group.
Thus, new legislations are introduced using rhetoric and labels that they are
intended to serve the general public whereas they are actually intended to
provide a better service to special interest groups. This natural bias in
favour of governmental intervention is the source of the failure of both
political democracy and economic democracy.
Hailing free market economy as assuring freedom to choose
Hence, according to free market economists, economic democracy can be
assured by permitting the free market to rule the world. The choice which
people have, according to them, is violated only with the intervention of the
Government in the economy in the name of safeguarding their rights.
Hence, excessive Governmental intervention is an evil and when that evil is
removed, people would naturally enjoy economic democracy. But not
everyone subscribes to this view.
The criticisms have come from non-economist leftist writers as well as from
mainstream economists.
J.W. Smith: The current world order has destroyed economic
democracy
Of the leftist writers, a key figure has been J.W. Smith, who wrote a treatise
on the subject in 2005 under the title Economic Democracy: The Political
Struggle of the Twenty First Century.

His thesis has been that in the current world economic order with
corporations and Western advanced economies choosing on behalf of
people, there is no economic democracy in the world.
Corporations have become an imperialist force taking advantage of the
disabilities and poverty of poor countries. They, by funding think tanks that
ideologically support their presence, have interfered with freedom of
thought enjoyed by people in both developed and developing countries.
Developed nations, through international organisations, unequal trade,
money and finance have suppressed the choices of people in poor
countries. To save the world from these unsavoury interferences, Smith
suggests having a system of common resources to be enjoyed by people in
both rich and poor countries in the areas of world currency, financial
system, lands, technology and also internet through Wi-Fi. For him,
economic democracy is having an egalitarian society across the world.
Shortcomings in Smiths claim
There are a number of weaknesses in this type of economic democracy.
First, it disregards the valuable contributions made by corporations in
developing new technologies and introducing innovations that have helped
people throughout the world. Hence, dismissing them with a single
statement that all corporations are exploitative, imperialistic and serving
only the interests of their owners is far from the truth.
For instance, in the modern times, the contribution made by Google or
Apple of USA in making high technology affordable to people throughout
the globe could not be dismissed lightly. Second, a common resource base
as suggested by Smith will lead to the problem of the commons where no
one has incentive to develop a common property but to enjoy the benefit
without paying. Hence, common resources are to deplete faster than
privately held resources.
Third, trade is not imposed on poor countries by the rich countries but
allowed to take place voluntarily. Fourth, international institutions which
Smith alleges as serving the interests of only the rich countries are in fact
serving the whole world equally. Hence, it is not advisable to go for the type
of economic democracy suggested by non-economist leftist writers.
Ha-Joon Chang criticising the market system
Of the mainstream economists, one leading critic has been the Cambridge
University Don Ha-Joon Chang who makes his views known through
bestselling publications as Milton Friedman has done. In his 2010 book, 23
things they dont tell you about capitalism, Ha-Joon makes a serious
indictment on those who believe in the working of the free market economy
system properly and those who believe that big governments are bad.
According to him, there is no such thing as a free market and therefore, to

believe that there is a freedom choice in the free market system is a myth.
He further contends that leaving everything to the market will not be a
good idea since markets too fail due to market participants having no
capacity to act rationally. To substantiate his argument, he draws on Nobel
Laureate Herbert Simons concept of bounded rationality. Simon says that
people are unable to make rational choices since they are constrained by
lack of information, time and brainpower. Hence, the rationality of people is
bounded by these limitations.
Ha-Joon also contends that welfare states characterised by big
governments are not necessarily bad since they allow people to take more
chances with their jobs or economic decisions. Hence, big governments,
according to him, do not restrict the freedom of choice but enhance it.
Big governments do not choose for people
What Smith, Ha-Joon and all others who write on these lines have forgotten
is that big governments taking over the function of choosing for people do
not choose for people but for those in power. Hence, it is similar to the
shortcoming in democracy power to rule others is captured by a select
group of people placing all others under their subjugation. True economic
democracy requires avoidance of this possibility.
Economic decisions being made for the benefit of special interest
groups
Sri Lanka, in promoting economic democracy, should not get into this
ideological debate. Each side of the debate has plus points as well as minus
points and therefore serves as a poor guidance for policy. If people are to
enjoy economic democracy, they should have the right to choose economic
policies that serve them well.
This is valid irrespective of whether a country is pursuing a free market
economy policy or a planned economy policy. Under any system, making
economic decisions should not be left to politicians or bureaucrats who are
simply interested in promoting their own self-interest and not the interests
of the people. As such, many large infrastructure projects that have been
undertaken to promote the self-interests of top political leaders or groups of
people associated with such political leaders have ended up in failure. Many
examples could be found in this regard from Sri Lankas recent economic
history.
Need for having wide consultations for economic policymaking
This calls for introducing suitable mechanisms to have wide consultations
on economic policies that are being implemented by the Government. That
applies to micro-level policies as well as to macro-level policies.
In the case of micro-level policies, people who have a stake in that policy

should necessarily be given an opportunity to express their views on the

policy. Once these views are known, the policy could be abandoned
completely if there is wide public opposition to it or implement it with
suitable modification having taken the public views into consideration.
At the macro-level, even the monetary policy being implemented by the
Central Bank should come under this public scrutiny. In the present
circumstances, the Central Bank implements its policies ex parte without
giving a chance for people who are affected by its policies to express their
views on them.
Empower civic society institutions to represent people
But one difficulty that may be encountered in a wide public consultation is
the diversity of views of people and their ability to make a logical
evaluation of governments economic policies. It will also be costly and time
consuming to have a wide public consultation. To overcome these problems,
two mechanisms could be suggested. One is to allow civic society
organisations to represent the public. The other is to use the social media to
gauge the views of the public on the policies being proposed. When the
internet penetration becomes universal in the country, it will not be difficult
to seek the views of the people on economic policies through social media.
(W.A. Wijewardena, a former Deputy Governor of the Central Bank
of Sri Lanka, could be reached at waw1949@gmail.com).
Posted by Thavam