On the 27th of January 2015, IDEAS in collaboration with INTI College hosted Dr. Wolfgang Kasper, Emeritus Professor at The University of New South Wales and a former economic adviser to the Malaysian treasury. Around 100 undergraduate students as well as a few senior economists from the Malaysian Economic Association (PEM) were present at the event.
Professor Kasper spoke for approximately 40 minutes on the topic of “Public Choice for Prosperity” and was joined by Dr. Teo Wing Leong and Dr. Daniel Schoch from Nottingham University, and Dr. Carmelo Ferlito from INTI College for a panel discussion which ensued thereafter. The talk revolved around 3 main issues, namely; the role of the state in governing a free and democratic society, the harmful side effects that often accompany government intervention, and finally, the underlying principles that allow free markets to foster better economic outcomes for society compared to active meddling in the economy by the state. The panel discussion on the other hand, was a means for the discussants, who were primarily Keynesians by research, to challenge and rebut the policy recommendations that were proposed by Professor Kasper.
The first portion of the talk was in essence a history lesson. Professor Kasper outlined the legitimate, classical liberal conception of the role of government. The state’s first and most important role is to protect its citizens from external aggression and internal coercers (by commissioning a standing army, police force and independent judiciary). Second, the provision of public goods that are non rival and non excludable (for example by providing lighthouses and street lights). Third, to provide a mechanism to deal with externalities that arise from market forces (for example when you drive your car, external parties also pay a cost in the form of air pollution and traffic jams), and finally, a re-distributive function via taxation and disbursement for the small fraction of society (invalids, waifs, etc.) who cannot rely on unfettered market mechanisms alone to live in dignity.
He highlighted the fact that in theory, government action is essential and may indeed bring many positive effects. In reality however, outcomes are often disappointing at best, and harmful at worst. The primary reason for this is the principal-agent problem. The state acts on behalf of the citizenry (the principle), but it does so using bureaucrats and politicians (agents). These agents often pursue their narrow self interest, which may be in conflict with that of the principle. The net result is corruption, cronyism, nepotism, special privileges for particular groups and other rent seeking activities wherever governments intervene in the market – to the gain of the agents, but to the detriment of the principle (i.e the citizenry as a whole). Professor Kasper put it rather succinctly, ” government is of the bureaucrats, by the bureaucrats, for the bureaucrats”.
Another problem with government intervention is that it changes the incentives and constraints that individuals typically face. Welfare payments by the state for example, pay people to fail. Insofar as the recipient remains unskilled and unemployed, he continues to receive state benefits. If the person succeeds in finding a job, the benefits are quickly taken away. What this does essentially, is it kills the incentive for those at the bottom of the economic ladder to study, work, acquire skills and save for the future. It teaches them to become dependent and entitled. On the other hand, taxing to finance the aforementioned welfare payments imposes unintended costs and punishes the most efficient individuals within that society. The welfare state dynamic thus creates a perverse set of incentives, where failures are rewarded handsomely whereas success is punished harshly.
Professor Kasper also spoke briefly about the race based preferential treatment of the Bumiputra’s (i.e the NEP) and the effects that it has had on Malaysia. While he maintains that early intervention was necessary because the Malay community “needed to be given the nudge”, he went on to say that over time, the expansion of the NEP has resulted in greater marginalization among the poorest Malays, high levels of ethnic tensions and has spawned a small class of wealthy Malay elites, thus exacerbating the income gaps within the country. He also said that, “it is easy to hop on to the back of a tiger like the NEP and such policies….but it is very hard to get off that tiger. The tiger will turn around and bite you”.
The discussants also brought up some brilliant points. Professor Daniel Schoch noted that sometimes public ownership is the only means to ensure a service is provided efficiently, as is the case with railway tracks. It would be wasteful, perhaps even dangerous, to have private operators build separate railway tracks that might intersect or run in parallel. In this case, the government can plan and oversee the construction of railway lines better than private contractors can. On the topic of protection for infant industries, everyone on the panel agreed that tariffs and quotas are an inefficient long term solution, and that free trade is a better alternative. Professor Schoch said that “if you continuously spoon feed a baby, it will never become an adult, it will grow to become a big baby”. Professor Teo Wing Leong on the other hand, provided evidence in the case of Japan and South Korea, where the state actively imposed protectionist policies on foreign imports to protect its (then) infant automobile industries. This allowed Japanese and Korean manufacturers to compete with, and later surpass, established Western automobile producers. He concluded by saying that government intervention may bring great benefit to industry, provided it is done in a targeted fashion and within a specified time frame. On the topic of inequality, Professor Teo argued that it is indeed legitimate for the government to intervene in redistributing incomes to a certain extent, because income and wealth inequalities impose external costs on society. As an example, wealthy individuals (via their high purchasing power), can artificially boost demand for housing, cars and other consumer durables, leading to higher prices (which is a form of negative externality) for the rest of society, and that governments can and should play a role in mitigating this effect.
During the lively Q&A session thereafter, a student asked, “What is the best way to help the poor?”, to which Professor Kasper responded, “by providing good starting opportunities to them through education….and not cash handouts”. A member of INTI’s faculty also asked, “Is there a legitimate role for the government to intervene in the economy, for example was the US government’s action justified when it bailed out the big banks during the 2007 financial crisis?”, to which Professor Kasper coolly replied “no one is too big to fail”.
Towards the end of the event, Professor Kasper spoke briefly about the role of knowledge in making decisions, namely on how private choices make the best use of scarce knowledge compared to public choices. He also made the point that economic prosperity results from competition and the ability of individuals to engage in mutually beneficial interactions, and that any attempt by the state to meddle with this evolutionary process is bound to hurt overall economic growth. He ended by saying that the key to economic progress is the quality of a country’s institutions and reiterated the imperative of a limited, unbiased, rule bound government.
Report written by Yohannan Nair