HomeBusiness DigestFreedom, the Invisible Hand to Build Economy

Freedom, the Invisible Hand to Build Economy

THE budget presented on January 29 by the Acting Minister of Finance Chinamasa was refreshing in its attempt to restore the fundamental freedoms of the people in Zimbabwe to do business.

Granted, there still remains a long way to go towards getting our economy back on its feet again. The complementary monetary statement by the Reserve Bank governor added more energy to this attempt to get markets functioning.

In a now famous statement Adam smith (1723-1790) said that the combination of self interest, private property, and competition among sellers in the markets lead producers “as by an invisible hand” to an end that they did not intend, namely, the well–being of society.

In his legendary book published in 1776, The Wealth of Nations, Smith had a strong conviction that a market economy was a superior form of organisation for both economic progress and advancement of human liberty.

Yes markets are imperfect and there is need to regulate these markets, but the heart of Smith’s submission stands tall and largely true in 2009, over 200 later.

For economic progress, it is important that the government enhances and safeguards business and individuals to pursue their interests and capabilities in a competitive environment.

The government should aim mainly at creating equal opportunities, and protecting freedoms. Equal opportunities and freedom to pursue one’s interests are infinitely powerful motivating forces that have powered the wealth of nations for years.

The recent budget statement and the allied monetary statement, stood tall over the previous 10 or so statements in their attempt to restore the liberties of business to pursue their chosen fields.

Before going into any further details, it is key that we grasp the boldness of the budget to move in the right direction on the big issues. My A-level Jesuit priest back in 1988 always said: “It is better to be roughly right (on the big issues) that to be accurately wrong”. In other words let’s get the big issues right and not overly concern ourselves with minor ones.

This was the plausible and refreshing ingredient in this budget that should be nurtured till it bears us fruit in the form of economic growth.

Market distortions & economic demise

Over the last 10 years, we have witnessed a systematic transfer of liberties away from individuals, companies and markets to institutions that had never produced anything to support this economy.

We also bore witness to the government introducing amazing levers into the market system whose overall impact was to take initiatives out of the citizens and chipped away at the ability of Zimbabwean business to profitably engage in activities openly.

These actions by the authorities relied less on the undeniable force of markets and more on physical policing of citizens to enforce laws that ran counter to the pursuit of individual goals.

What the policy framework did was basically ‘brake’ Adam Smith’s individual freedoms. The key achievement of NIPC was to ensure that businesses were not allowed to sell products at prices that would allow them to make profits and hence sustain themselves.

In addition, farmers were not allowed to sell their produce to the highest bidder but to institutions such as GMB which then allocated the commodities to manufacturers for virtually nothing.

In other words attempts to replace the market pricing power with more human involvement ushered regrettable levels of inefficiencies and created huge price distortions whose biggest beneficiaries remained the corrupt among us.

In these well-intended attempts to cushion the poor, all we actually managed to create was a highly flawed system which went on to corrupt the best of our people and created instant millionaires who supped on the work of the majority without creating new wealth. The result was serious de-industrialisation and impoverishment of the economy.

The genius of this budget therefore was its attempt to rid the markets of NIPC, price distortions and put the country back on to a course where pricing power was handed back to businesses. This dynamism as Adam Smith pointed out motivates us to deliver lower prices through higher efficiencies born out of innovation.

There is thus far no better way of allocating resources and moving communities forward! As the monetary policy pointed out, when this power and freedom were unleashed onto the markets a sample of goods which cost US$43,45 went down a whooping 44% down to US$24,20 in the 90 days between October 28 and 26 January! The markets achieved in 90 days what NIPC has been trying to do in years!

Here is the trick: The more we free markets and people to compete and add value to goods, the more the society benefits. For as long as we appreciate this basic truth, the efforts of government and regulators becomes easy.

The prime objective of the authorities becomes the pursuit of creating an environment where businesses can compete; given the tools and freedoms to pursue their passions.

The government rightly must intervene to kill monopolistic tendencies by encouraging competition. It must come in to provide infrastructure; the roads, the power grid, and the broadband superhighway.

It is my hope that the inclusive government builds on the seeds of freedoms that the Budget of 2009 has sown to bring the economy back on the rails.

lMafukidze is the chairman and chief financial Architect of KM Financial Solutions.


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