China’s use of a mix of central planning and competitive
markets has increased the country’s national income dramatically for two
decades. However, recently economic growth has slowed, and some serious
planning mistakes have been made.
In the light of these developments, it is interesting that some
high-ranking Chinese economic policy makers recently asked two German
economists to let them know what policies had been used to create Germany’s
rapid economic recovery after the devastation of the Second World War, its
solid economic growth thereafter and its protection from the worst effects of the
global recessions of 2001 and 2008, implying that China’s leadership may be in
search of solutions to the problems its development model has produced.
These two economists sent to China a collection of essays, which
explain the Social
Market Economy Model (SMEM) that was used by Germany’s Chancellor Konrad
Adenauer and his Minister of Economics Ludwig Erhard to shape the country’s early
postwar economic policies in spite of much opposition from politicians who
preferred socialism and economic planning. The model presently still informs most
of Germany’s economic policies.
This model
was developed by economists at the University of Freiburg in Germany. It argues
that national income is maximized if individual and business incomes are
determined in free markets for production and distribution while government
regulations and spending are used to meet the requirements of the needy,
provide public goods such as defence and construct economic infrastructure such
as highways.
The effort of China’s leaders to improve its economic
performance by learning about and adapting policies that have been successful
elsewhere is not without precedence. Deng
Xiaoping in the 1980s considered the prosperity of market economies and replaced
the centralized planning model with one that imitates their economic system.
The SMEM model should also be considered by Canada, which is
experiencing a period of growing economic problems: low rates of growth,
investment and productivity while unsustainable fiscal deficits are growing.
These problems are in part caused by policies that violate the operating
principles of the SMEM model in several important areas.
For example, farmers wanting to produce dairy products have
to buy quotas and, in effect, join a cartel, which sets production levels and prices
at which the farmers are allowed to operate. The farmers earn high and stable
returns on their investments, but the industry operates with many
inefficiencies and consumers pay much above world prices. The SMEM model
suggests that these costs would be avoided if the production and sale of dairy
products were left to competitive markets and farmers were paid subsidies out
of general tax revenue at levels considered to be socially desirable.
Another example involves the market for medical services. Canada’s
governments effectively own and operate institutions and employ health care workers
to provide the public with all required medical services at zero cost at the
point of use. This policy is designed to ensure that all Canadians have access
to medical care regardless of their level of income. The SMEM model suggests
that the medical services should be provided by the private sector and that
subsidies should be paid to those who cannot afford to buy them.
Yet another example is the housing industry. Many municipalities
impose regulations that allow the construction of multiple housing units only
if builders spend funds on public art and build units to be sold or rented at
below-market prices. These regulations raise the cost of all housing
unnecessarily. The SMEM model suggests that builders should be allowed to
produce housing without facing these regulations so that it can be constructed
and sold at the lowest prices possible. General tax revenue should be used to
pay for socially desirable art and subsidize those who cannot afford housing at
market prices.
The drift away from SMEM in Canada has reached a peak with
the 2019 passage of Bill C-69. It requires private investors in pipelines and
other large infrastructure projects to obtain a “social license” by compensating
all “stakeholders” whose interests are damaged by these investments. This bill
will raise the cost of infrastructure investments and the services they provide
for consumers. The SMEM model suggests that these costs should be avoided by
allowing these investments to proceed without having to incur the costs imposed
by Bill C-69 and that stakeholders’ interests should be taken care of by
payments from general tax revenue.
Canadian politicians love imposing on private investors and
producers the cost of non-market benefits of the sort just described. It allows
them to buy the votes of the recipients of these benefits without having to
impose vote-costing taxes on the public. But in the process, they are
destroying the free market system that has brought Canada one of the highest
standards of living in the world and history. They should consider the cost of
the increasing abandonment of SMEM-model based policies, especially Bill C-69.
Herbert
Grubel
Emeritus
Professor of Economics
Simon Fraser
University
Senior
Fellow, The Fraser Institute
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