Company tax has been a declining source of government revenue in South Africa.  When some companies are in a position to limit their tax liability through tax avoidance and tax evasion it not only affects government revenue but also equity and the efficiency of capital use.  The case for a minimum tax on gross fixed assets is investigated and the study shows that on the basis of national accounting data, a presumptive tax of between 3 and 4 percent would not be too onerous on businesses.  This study also argues that the minimum tax could possibly help to address horizontal inequities in the corporate tax system.

This paper reports the results of an exploration of the distribution of income and extent of poverty in South Africa using a 1995 survey of income and expenditure.  The data on household incomes are highly disaggregated by income source, race, province and residential location.  Techniques of Gini decomposition are used to determine the impact of income source upon the distribution of income.  These methods prove valuable in measuring the effect of transfers into the household of welfare income, whether this is as a result of state provision of welfare payments or intra-family alimony and remittances.  It is shown that the effects of such payments are equalising in some cases and unequalising in others.   The marginal effects of a change in any income source are also quantified.   This approach is of special interest to policy makers, since it provides a way of determining the likely outcomes from employment initiatives and other poverty reduction programmes.

This paper uses a production function approach to evaluate the success of the University of Cape Town's Principles of Economics development course.  There are three main findings.  First, students coming from disadvantaged educational backgrounds (DET schools) perform significantly worse than students from more priviledged schools.  Second, school science is shown to be highly indicative of success in university economics.  School mathematics, on the other hand, is only significant and positive for non-DET students.  This, while economic academic programmes are successful in improving students' economic performance, the improvement may not be significantly better than "a sink of swim" alternative.

If government is to address South Africa’s unemployment problem, it must identify appropriate policy changes and implement them in a way that ensures their effectiveness and sustainability. South Africa’s liberal trade stance will generate jobs in the medium term; little will be gained by changing it and this would come at a cost given international commitments. But employment gains could be expected from easing up monetary policy, restricting disruptive capital flows and decentralising wage determination. It has been suggested that a social accord between government, labour and business could ease the passage of such reform. However, given the organisational weaknesses of these parties and the disappointing performance of Nedlac and the Presidential Jobs Summit, this would be of little value. Government has both the means and responsibility to make these changes alone.

As far as I know, Professor Lachmann never used the word delicate to describe markets, at least in his published work. It may in fact seem that the theme I have chosen to deal with today is perversely inappropriate for commemorating a man who was a great advocate of free markets. By delicate I mean easily damaged, prone to damage and also subtle and refined as are most of the manifestations of civilization. Free market advocates may often contend almost the opposite. The fact that black markets frequently develop where prices are regulated or transactions are otherwise circumscribed or that ‘sanctions’, as we have come to know them in our day, often do not work if there are potential buyers and sellers who may mutually benefit from trade, is surely evidence that markets are extremely robust. But even here Professor Lachmann would probably have felt that the conclusion needed qualification, namely, that certain conditions are presupposed. He was always careful to distinguish between the heuristic devices an analyst uses, such as a particular concept of what constitutes a market, and what the analyst perceives as the actual historically unique situation to be analysed. In two contributions to ORDO, sixteen years apart, he came close to saying that markets are vulnerable to and may even be vitiated by apparently fairly unrelated developments elsewhere in society.

In the last few months of his life he was particularly preoccupied with the question of how social institutions may be handled within economics. It was the time of the great changes in Eastern Europe and he often spoke about what he considered to be a general under-estimation of the difficulties of recreating market institutions there. He thought that this would be a problem particularly in Russia (where of course the biggest crunch was to come only in the following year) because there market institutions had been absent longer and had in any case been less widespread and well established than in the other countries. If he had lived longer and been in good health, he might well have written something on the matter. I do not therefore consider my theme inappropriate to the occasion, but of course, I do not claim that Professor Lachmann would have agreed with what I am going to say.

I shall also take my cue from Lachmann in another respect, which I shall have to explain. Many years ago I gave a short talk to an open audience - I have forgotten the occasion and the subject but not the sequel. When next I saw Lachmann, who had been present at the talk, he wagged a finger at me and said (these are not his exact words):

"You tried to say something difficult; you tried to say something new that the audience was unfamiliar with. You must never do that in a public talk because no one will know what you are talking about. At most one should take familiar material and present it in a new perspective."

I shall try to heed this good advice on this occasion.

II

I shall have to do some considerable preparing of the ground before I can get to my point about the delicate nature of markets. I propose to use a device usually associated with Max Weber. It is called an ideal type, where the adjective ideal, it will be important to remember later on, refers to idea and not to perfection. I must admit that I have always had difficulties with ideal types, in so far as that I have never been quite sure what they are for and consequently how one should use them. But I shall try to use them here because they were a very important element in Lachmann’s conception of how to do economics.

There seem to have been innumerable occasions - it became almost a joke - when Lachmann would say something involving an ideal type and I would say: "But I don’t know what to make of this ideal type". Invariably he would then say: "Think of it as though it were a cartoon. If a politician has a rather large nose, he will be depicted in a cartoon as an enormous nose with a little body attached to it". The one thing one may glean from the bewildering intricacies of typology is that an ideal type involves the accentuation of some feature or point of view. As Lachmann understood ideal types, their prominent features seem to be the following: (a) what is accentuated may be taken from observation, but more commonly, it is "primarily a figment of our imagination", it consists of "contrivances of our minds". Presumably, the contrivances involve idealization, such as that a point has position but no size. (b) There may be as many ideal types of an entity as the entity has features or there are points of view on it. (c) An ideal type is something very different from a model as currently understood in economics. (d) Following on from this, ideal types allow a way of doing economics that is rather different from the current longstanding orthodoxy.

In The Legacy of Max Weber, Lachmann had said:

"It is readily seen how different is Weber’s ideal type from the model, a methodological device currently in fashion in many of the social sciences. Both are ‘mental constructs’, both are gained by abstraction. But the virtue of models rests in their being ‘testable’. They must serve the purpose of predicting concrete events. In choosing between different models, we must choose the one, which enables us to make predictions, which come nearest to events actually observed. With ideal types this is not so."

But then, wherein does the ‘virtue’ of ideal types lie? Lachmann thought very poorly of the modern economist’s aspiration to predict and his idea of the economist’s role reflects his Austrian School heritage, particularly that of Menger. The economist had the rather more humble task of providing the concepts, mainly in the form of ideal types that others use.

"The simplest way to describe the relationship between the analytical social sciences (praxeology) and the various kinds of history is in terms of the respective parts they play with regard to the production and use of ideal-typical conceptual schemes. Briefly, the former produce and the latter use them. They are used, as it were, as a foil against which to hold ‘real events’, so as to bring out particular properties of the latter by comparison."

In this passage, he mentions only historians as the users of the economist’s output. But he had in mind also politicians, bankers, industrialists and others who have to make their way through the maze of life. To him the concept-producing function seemed quite a fulfilling occupation. It is doubtful whether many modern economists would relish having their status reduced from respectable scientists, or at any rate, scientists, to under-labourers or perhaps Shakespearian court jesters who help big and powerful men of action see the implications of what they are doing.

However, it would be a mistake to belittle the task of creating ideal types. The following remark and quotation by Anthony Giddens may put the matter into perspective:

In setting forth the formal characteristics of ideal-type concepts, Weber does not consider that he is establishing a new sort of conceptual method, but that he is making explicit what is already done in practice. However, since most researchers are not fully aware of the sort of concepts they are using, their formulations often tend to be ambiguous and imprecise."

He then quotes Max Weber:

"The language which the historian talks contains hundreds of words which are ambiguous constructs created to meet the unconsciously conceived need for adequate expression, and whose meaning is definitely felt, but not clearly thought out."

III

Let us consider some ideal-typical constructions of markets or market economies, even if their creators did not intend them to be ideal types. One may consider orthodox general equilibrium theory as an ideal type rather than as an attenuated description or a hypothesis, which stands or falls by whether it yields reasonable predictions. What is being accentuated here and taken to its logical conclusion is co-ordination or the optimum allocation of resources. It is quite an achievement when considered as a way of showing what efficiency must mean when that notion is applied not merely to the relation between the inputs and outputs of a single firm but to an economy as a whole with its myriad consumers and producers. When held up as a foil or a contrast against, say, what we now know of the planned economies before 1989, it reveals, by comparison, huge misallocations of resources. We could not make such a judgement, or even speak in such terms, had not a Walras come along to show us as a contrivance of his mind what an absence of misallocation would have to look like.

In other contexts, however, rather too much can be made of the allocative feature of markets and its accentuation to the exclusion of almost all else in neoclassical economics is rather questionable. Adam Smith made quite modest claims for markets in this regard - each individual in his "local situation" would be able to judge much better how to use his capital than a distant administrator can do for him. Keynes put his finger on the problem in a much-quoted passage:

"I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future."

What will the price of gold be in ten years time? The answer to this question would be very useful to some people in this country who are responsible for allocating large chunks of resources. But unfortunately, in Keynes’s simple but famous words: "We simply do not know." All that equilibrium theory as ideal type can indicate to us is that the ultimate in efficiency is beyond our reach. In terms of Herbert Simon’s ideal types, we need to consider procedural rationality because substantive rationality is unattainable.

There are of course many other conceptual schemes that may serve as ideal types of markets. One that Hayek made much use of accentuates the information-dissemination feature of markets. A system of markets harnesses innumerable bits of detailed information about each individual’s immediate surroundings - knowledge which no single mind could encompass - by passing on to others in the form of prices whatever is economically relevant in all these ‘local situations’ (to use Adam Smith’s expression). This ideal type served Hayek well in his arguments against centralized economic decision-making and his frequent assertions to the effect that any sensible social order allows individuals to use their knowledge for their own purposes are ones that Adam Smith might have been proud of. However, Lachmann and his friend George Shackle (both of whom had at one time been graduate students of Hayek) came to the view that too much can be made of this as well, and for similar reasons. It is future prices and future conditions that are relevant for economic decisions and, for forming expectations of these; present prices are merely one and not necessarily the most important input.

Lachmann himself of course put forward a large number of ideal types for getting an intellectual grip on markets. His last book, The Market as an Economic Process was specifically written for this purpose. From a neoclassical point of view, I suppose one could say that they accentuated the human element in markets. Lachmann himself said that they accentuated the subjectivism of interpretation and that they were intended to put the human element back into economics.

One could probably distil many ideal types of markets from the ‘contradictions’ Marx saw in the capitalist mode of production. One that has a prominent part in the Götterdämmerung of capitalism may be of particular interest in the present state of affairs. The picture is something like the following, where I shall venture to update the language: The chief executive of a corporation, in order to keep his shareholders happy and make his lucrative job secure, is forced by circumstances to raise the productivity of his workers. He does this by giving some of them more capital to work with and retrenching the rest. This gives him a competitive edge for some time, but it is in the nature of competition that other chief executives in the industry are forced to follow suit and that the prices of the industry’s products fall relatively to other prices. So, the chief executive is brought back to square one and the cycle continues over and over again while all the time productivity increases immensely and the number of the unemployed ever rises. Some people may find this ideal type useful for making sense, in our era of globalization, of the worldwide frenzy of mergers, acquisitions and cost cutting, but others may prefer sociological ideal types of power play and empire building.

No list of ideal market types can omit Schumpeter’s perennial gale of creative destruction. It accentuates the dynamic, innovative as well as monopolistic features of a market economy. Monopolistic practices make it hard for any would-be entrepreneur merely to copy and reproduce and so he is forced to innovate thereby creating new products, new technology, new methods and so on while destroying the old in the process. Schumpeter’s scheme appears to bear out the thesis that markets are robust - even though it is introduced in a book, in which Schumpeter argued that the whole system in which creative destruction is at home will inevitably destroy itself. But the apparent robustness presupposes a condition, which is not accentuated, namely, that the socially acceptable forms of restraint of trade must be heavily circumscribed. To take an extreme case: if an intrepid entrepreneur should launch a creative-destructive attempt on a monopoly owned by the Mafia in Sicily or New York, the perennial gale, one should think, would soon be turned into a deadly calm.

The ideal market types I have discussed do not bring out what I regard as the delicate nature of markets. For that we have to turn to a conception that, to my mind, is so obviously behind that early and influential vision of a market economy to be found in the Wealth of Nations.

IV

I shall begin not with Smith but with a quote from Bastiat, the nineteenth century French popularizer of free markets. It is from one of a series of essays which also contains his famous petition of the candle makers in which the legislature is requested to pass a law requiring all windows to be boarded up to afford the candle makers protection against the unfair competition of the sun.

"There are only two ways of obtaining the means essential to the preservation, the adornment, and the improvement of life: production and plunder.

"Some people say: ‘Plunder is a ... transient evil, condemned by moral philosophy, punished by law, and unworthy of the attention of political economy.’

"Yet however well disposed or optimistic one may be, one is compelled to recognize that plunder is practised in this world on too vast a scale, that it is too much a part of all great human events, for any social science - political economy least of all - to be able to ignore it.

"I go further. What keeps the social order from improving ... is the constant endeavour of its members to live and to prosper at one another’s expense." [Original italics]

Political economy in fact did not ignore it and in Marx’s monumental theory of history, various techniques for doing it became the basis on which history was divided into stages. But little is made of living at one another’s expense in modern orthodox economic theory. Monopoly and trade union activity may sometimes be presented in this light and, since the advent of the Public Choice School, the terms free rider and rent seeking have drifted into more general use. By and large, however, as Edward Nell suggested, the picture is one of an orderly shopping centre. The omission, I think, is no accident. However different equilibrium theory may be from the contents of the Wealth of Nations, it is still a part of the legacy of what in one place Adam Smith admitted was a utopian vision of a market economy. That vision, I want to suggest, was created by imagining a state of affairs in which living at the expense of others and getting others to do the dirty work for you were deliberately excluded - the most basic ideal type of a market economy is quite simply the social order where that kind of thing cannot or does not take place.

Of course, it has always been accepted by all but the most ardent anarchists that governments have the duty of protecting citizens against violence and fraud. But as this has come to be seen by many of the friends of free markets, such protection is merely a precondition that has to be met before a mystical invisible hand can kick into place. I do not think that Adam Smith had any such notion and he would certainly have been surprised to hear that he had a doctrine of the invisible hand, as it has often been called. The words were after all merely a throw-away expression he used once in each of three of his works. On another occasion, I tried to show in some detail that the context in which the words were used in the Wealth of Nations is really a very simple and purely logical one. It would take far too long to repeat the argument here. Briefly, it appears from the words used in the paragraph in which the invisible hand expression occurs, and from what Smith had said in the five preceding paragraphs, that he was merely saying that the national product is the sum of all the individual products, so that where all are exerting themselves to make their individual products as large as they can, all are exerting themselves to make the total available product as large as they can, which he took to be in the interests of the whole society. This is then easily reworded, by way of a rhetorical flourish. Each individual is "led by an invisible hand to promote an end which was no part of his intention". The logical point would be quite trivial were it not for the recurrent theme of the book expressing the vision of market order I indicated above. Where half the people of a country were continually exerting themselves to make their rent seeking or other predatory moves successful, it would not be true that all are exerting themselves to make the available product as large as they can.

Why the invisible-hand expression caught the fancy of so many generations, it is hard to say. There were so many other ways in which he expressed his vision. There was, for instance, a particular turn of phrase, which, unlike the invisible hand, recurs in many places. What is essential, what, as he said in one place, "is alone sufficient to make any country flourish" is that the ordinary person should have the assurance that he may "enjoy the fruits of his own labour". With this in mind, let me rephrase what I think Adam Smith’s vision of market order amounted to: If the laws, conventions and other institutions of a country made living at other people’s expense so odious and hazardous that honest work would seem the lesser evil, then every person would be forced, as a last resort, to produce something himself and exchange it for what he wants. That, I think, is all there is to it. It may not seem like much, but of all the ideal market types we have, it seems to me to be the one most consonant with the spirit of classical liberalism and with the Just Price literature stretching back to antiquity and its notion of commutative justice or justice in exchange.

The vision contains more than the customary assertion about a government’s duty to prevent violence and fraud. Smith’s targets were the "wretched spirit of monopoly" and the policies of a mercantilist state, neither of which one would ordinarily consider to fall within the ambit of either violence or fraud. Living at the expense of other people covers a wide spectrum. At one end, there may well be violent plunder like car hijacking. But at the other end there are infinitely more subtle ways, such as when the great mendicants of our age, I mean academics, invoke the aura of science and of intellectual pursuits to get the funding for travelling the world chatting to interesting people - a most agreeable pastime that, I am sure, the people who actually produce the goods and services that make it possible wish they could afford to indulge in. All forms of plunder, whether violent or ever so gentle and covert, have it in common that they are of the nature of a zero-sum games - what one party gains, the other loses. Moreover, they tend to lead to an overall negative-sum game, i.e. to impoverishment. The sight of someone lazily enjoying the fruits of other people’s labour is likely to make a hard-working producer feel he is a fool and switch sides. As the ranks of the predators swell and those of the producers shrink, there will be less and less to plunder until predator and prey alike are left grovelling in the dirt (though the more enterprising among them may contrive to smuggle themselves into countries where there is yet something to plunder). In some actual cases one could think of, things did not go so far. Some kind of security services cum protection rackets came into being, out of which aristocracies were eventually born.

One must remember that the vision of market order I have been describing is in the nature of an ideal type, a scheme of interpretation, as Lachmann would have said. Its weakness is that in a setting of co-operative production it is almost impossible to say what any one individual’s productive contribution is. How much does an individual academic contribute towards what is available for consumption? It may be that he is actually short-changed when proceeding on his sojourns (to return to the provocative remark I made earlier), that he is taking less out of the system than he is putting in. There can be no way of telling. Instead, the scheme of interpretation is used to impute, to guess at, motives. Was plunder the motive? When Adam Smith dealt with his pet aversion, the apprenticeship laws of his day, and when modern, Public Choice economists write about the lobbying industry in Washington, the imputation of motives is really not a difficult matter.

V

However, you may remember that I wanted to use this ideal type to make my point at long last about the delicate nature of markets. I shall proceed as follows: There is obviously an element of Thomas Hobbes’s war of all against all in what I have said. So, I shall put the matter in a very cosmic and purely imaginary historical setting, as was fashionable in Hobbes’s time. In a state of nature, a war of all against all rages until eventually various forms of government establish themselves more or less spontaneously. These governments maintain peace and order within the various communities, if not among them. But the communities are small and, because of the well-known problem of the division of labour being limited by the extent of the market, they are not very productive. Gradually, therefore, people begin to trade, communities amalgamate and a more open society is created. These changes, however, open up new opportunities for resuming the war of all against all, conducted now in a devious and concealed manner and mainly through economic relations. Much later still, various mores, some of which are later called classical liberalism, evolve to restrain this new war of all against all as well - and this was a great advance of civilization.

1. With this setting in mind, one can state in the most general way why markets are rather delicate flowers of civilization. The reasons, as far as I can see, fall into two categories:
1. People find themselves in a prisoners’-dilemma type of situation. On the one hand, it is in everyone’s interest that there should not be a covert war of all against all and to have the benefits of free competition. On the other hand, it is not in any one individual’s interest to forgo whatever opportunities there may be to prosper at the expense of others. The tension inherent in this situation, I think, will always harm the market economy.
2. People find themselves with at least two sets of moral rules, or rules of conduct as Hayek liked to call them. One is applicable within the family and a circle of friends and associates. The other applies to everyone else in the open society and includes the rules of conduct governing market or economic relations. (One does not have economic relations with family members and close friends.) This duality is a source of confusion and much bitterness and, I think, will always undermine market order.

I shall discuss these in turn, starting with the second.

VI

Most English speakers probably understand the expression Business is Business and know more or less how to use it. But what does it actually mean? Perhaps, that in certain capacities one suspends certain rules of conduct under certain circumstances when dealing with people one does not know very well. But if so, how little does one have to know the person and which rules are suspended in which of one’s capacities? If a complete stranger is in danger of losing his life, would one haggle with him over a price for saving him, because business is business, or would the suspension of rules itself be suspended? The point I am making is that rules of conduct are extremely complex, involving a huge classificatory system and a vast number of criteria for making the classifications.

Moreover, rules of conduct are cases of knowing how rather than of knowing that, to use Gilbert Ryle’s terminology. Just as people know how to follow the rules of an intricate grammar when they speak without necessarily being able to state that the rules are such and such - often without even being aware that they are following rules - so also following the rules of conduct of a market economy is an expertise about which we really know very little (in the sense of an articulated knowledge). For this reason and because they are so complex, they cannot be looked up in a manual or downloaded from the internet. They may be acquired only by imitation and long experience. In so far as they are essential for making an industrial market economy work, and in so far as it is only that kind of economy that can keep alive the vast numbers who now inhabit our planet, they must be regarded as a precious cultural asset. Was it not because such an asset still existed in Europe immediately after World War II that the Marshall plan was a success whereas much of the aid going to other parts of the world since then has had indifferent to poor results. The difficulties of creating physical assets of an established technology are small, it seems, compared to the difficulties of spreading the culture to make effective use of the physical assets.

While a business-is-business morality and the rules of conduct in an open society may seem like an asset from one point of view, there certainly are other points of view from which they seem to be either reprehensible or simply very odd. An aspect of political life may serve as an illustration. The candidates in an election go about their constituency disparaging the other’s record in public life, warning of the dire consequences of his being elected and in every way making his opponent seem disreputable. Then, when one of them is elected, the other congratulates him with a warm handshake and promises to support him in his onerous duties. Such behaviour must seem extremely odd to one not used to it. No wonder then that in countries where elections are a new thing, the losing candidate, in order to save face, must at the very least claim that the election was rigged (which of course it may have been) or take to the hills to organize an insurrection. The one rule of conduct maintains the peace, the other does not.

Similarly, a taxi owner resents a newcomer who is taking some of his business and therefore he wants to get rid of him. It is socially unacceptable, and in fact a crime, that he should pick up an AK 47 to achieve his end, but perfectly acceptable, even admirable, to achieve the same end by lowering his prices or offering a better service. The one rule of conduct is the way of plunder, the other is not. Somewhere in his voluminous writings, Max Weber recorded when attitudes to this kind of thing changed in Europe. At one time, apparently, a cloth maker or a dyer, for example, who found a cheaper method of production, was perfectly entitled to enjoy the benefits of his higher profits. But it would have been regarded as quite despicable if he used his advantage to drive other cloth makers or dyers out of business. The advent of the business-is-business morality changed all that. But that does not mean that competition does not create hardship and that it does not run counter to values, which in our private lives are held up as high ideals.

Bernard Mandeville, who wrote in the early 1700s, became notorious for his tongue-in-cheek rendition of this clash of values. In the Preface to his main and much-read work, Mandeville wrote that his satire was meant to...

"shew the Vileness of the Ingredients that all together compose the wholesome Mixture of a well order’d Society; in order to extol the wonderful Power of Political Wisdom, by the help of which so beautiful a Machine is rais’d from the most contemptible Branches ...[and to] shew the Impossibility of enjoying all the most elegant Comforts of Life that are to be met with in an industrious, wealthy and powerful Nation, and at the same time be bless’d with all the Virtue and Innocence that can be wish’d for in a Golden Age..."

Hayek listed Mandeville among the writers from whom he traced his thought and he also was preoccupied with the question of moral values and the market economy. On one of his visits to this country, he gave a talk on the atavism of moral values (I have forgotten the exact title). Like everyone else who was there that day, I went home and looked up this word atavism in a dictionary. It means reversion to an earlier type. Hayek’s contention was that many of our most prominent values evolved in face-to-face tribal kind of societies where everyone knew everyone else’s circumstances so that genuine hardship would be recognized and no one could surreptitiously live at the expense of the others, but that these values were inadequate in the anonymity of the open society. Professor Lachmann told me at the time that Hayek had once confided in him that he (Hayek) felt frustrated by the way left-leaning opponents of his views could always find tear-jerker stories to back up their contentions and that it was not as though he had no compassion or felt no pity - it was just that what was done in response to such stories usually made matters worse. Late in life, Hayek even suggested that the judgement of morals was a matter for dispassionate science. But I do not think that markets can be shielded in this way from what is a genuine problem. Schumpeter remarked that the strength of utopian socialism was that it appealed to the "irrational longings of the hungry soul - not belly".

VII

I turn finally to the tensions inherent in what I called a prisoners’-dilemma type of situation. When I wrote the bit I said earlier about Adam Smith’s vision of a market economy, I could almost hear, in the back of my mind, Chris Torr saying: ‘But didn’t Smith assume a co-operative economy, and is that really the sort of economy we live in, at least nowadays. Don’t we have an entrepreneur economy?’ As I understand the matter, a co-operative economy is one in which everyone may take economic initiatives, whereas in an entrepreneur economy the important initiatives that lead to employment are taken only by entrepreneurs, who make up a small portion of the population. Now, I have great admiration for the enterprise shown, against all the odds, by all sorts of people in the informal and small-business sectors. But one has to admit that the difficulties of starting a sizeable business nowadays are so immense that for a majority the decision whether they are to be producers is not really in their hands. And so they sit around waiting for the entrepreneurs to do something, or perhaps they roam about as small-time hunter-gatherers of the market economy. It seems that the technical facts which in many industries give an advantage to large production units are not compatible with the classical liberal vision of a market economy, according to which everyone contributes to the overall product.

Perhaps it was also difficult to start a business in Adam Smith’s day, though for different reasons. What, however, has changed since then is that democracies have become established in many parts of the world and that the franchise has become universal. In terms of our scheme, this means that those who for technological reasons have become incapacitated or at least impaired as producers now do have another option. They may turn into political predators and try to vote themselves a better life. Whereas the classical liberal prescription was that institutions should make living at the expense of others so difficult that people are induced to work, the present position in some countries is more or less the opposite. Production on an individual initiative is so difficult that people are induced to use the political institutions to live at the expense of others through political action. All this, I suppose, is just a round-about way of saying that the market economy and the welfare state co-exist uneasily, which is well known. But it illustrates my point that markets are delicate and prone to damage by a tension between production and plunder.

Now, one has to remember that the vision of a pure market economy is in the nature of an ideal type and, as I have already pointed out, this is merely an idea and not an ideal of perfection. The monist bias of western thought makes us long not only for one principle that can explain everything but also for a single principle by which we may organize our lives. But can there be such a principle? The great and difficult art of life is surely to find a good balance. Nothing in excess, as it was put by the ancient Greeks of the classical period. There is therefore nothing wrong in itself with the co-existence of incompatible social systems. Certainly, in the countries of Western Europe, where the welfare state seems to be most advanced, life appears to have been very pleasant over the last thirty to forty years, especially for those who had jobs. However, just as there was a time when claims were made that libertarian market principles were being applied to excess, so now is a time to consider whether welfare-state principles are being applied to excess. I suppose that is being done in terms of labour market flexibility and so on. In fact, it is probably the driving force behind New Labour in Britain and the similar, though apparently more shaky, movement in Germany.

But I want to make the point with a little story out of my recent experience. This last July, my wife and I spent a night in a pretty-looking country hotel some distance east of Innsbruck in Austria. After booking in, we made our way to the bar for a drink and the same man who had officiated at the reception desk now appeared as the barman. When I inquired about dinner, he said: ‘Fine, give me your order.’ ‘ So, you’re also the waiter’ I said and he replied: ‘Oh yes, and what is more, I’m also the chief cook’. Then, in his capacity as manager of the hotel, he began to rail against ‘those politicians in Vienna’. He claimed, and perhaps he was exaggerating, that the social taxes were now 120 per cent of the payroll. (In other words, if you pay someone R 10 000 a month, you have to pay the government R 12 000.) In an industry which by its nature has to compete to some extent internationally, that is indeed a burden. He told me that the hotel used to have a staff complement of about twenty five, but that it was now down to eight, including members of his own family. As I found out later, the place was built in the year 1515 specifically as a hotel (or Herberge as it would have been called then) and has now been owned by the same family for three hundred years. So, here is this very venerable little business which has gone on and on for more than 480 years, while all around it wars and social upheavals periodically raged. But it is now being brought to its knees by the welfare state. If the facts of the case are correct, then this surely is excess. Markets are not robust enough to withstand an onslaught of this magnitude from a co-existing system.

VIII

Having said all that - to use the currently fashionable longer version of the word But - I want to make a qualification. I think that markets are delicate but nevertheless resilient. The best evidence of this is the remarkable revival of free-market philosophies over the past twenty years. I can remember a time in the early 1970s when making a profit was represented quite widely as almost an anti-social activity, like depriving starving children of a meal. Chairmen’s Reports used to ramble on about all sorts of matters and add at the end, almost apologetically, ‘And, oh yes, we increased our profits’. All that is left of that now is the ‘social-responsibility’ idea which markets can certainly live with.

Another sign is nearer to home. I think many people were rather surprised over the past five years, and perhaps not quite as many, pleasantly so, by the rather good appreciation of a market economy shown by the very bourgeois government of (one-time) Comrade President Mandela. The deadly labour legislation was obviously an exception. But then politics has always been the art of the possible. Some while ago the present Finance Minister, when still in his previous portfolio, was reported to have said, in the context of tariff reductions: "If we’re going to have markets, then let’s really have markets". The sentence has stuck in my mind because it seems to me to express the right spirit.

I do not know whether I have persuaded anyone of the delicate but resilient nature of markets, but at this point I intend to stop.

Public Economics for South African Students, dedicated to the well-known Dr DG Franzen, fills a gap in the South African market where most of the textbooks available are overseas books, with text and examples pertaining to other countries. The book provides an analytical introduction to a number of areas in the field of Public Economics with numerous graphical illustrations, tables and schematic illustrations. The subject matter of this highly readable and interesting book is addressed not only to academic economists but all those interested in Economics as a discipline.

Part II deals with public expenditure, where the phenomenon of public expenditure growth in South Africa (Chapter 6) is discussed against the background of international experience. Theories of expenditure growth are studied with a view to determining their explanatory value for South Africa. The authors attempt to explain growth of government expenditure in an innovative fashion, with reference to Keynesian and the new growth theory. Chapter 7 focuses on the efficiency of expenditure and the nature and use of cost-benefit analysis. The text largely mirrors similar texts commonly found in international textbooks. The discussion of cost-benefit analysis is somewhat disappointing, since no applications to the South African economy have been included.

In Part III, taxation is dealt with at some length. Chapter 8 examines the principles of taxation and equity, while Chapter 9 addresses tax efficiency and related aspects of tax reform. Chapters 10 to 13 analyse the different types of taxes, with the emphasis on both theory and South African experience. The problem with textbooks is that often by the time they are published, much of the content is outdated. The discussion of the various taxes and their impact on the economy are no exception to this problem. This is understandable, as many changes have been made to South African tax laws and tax policies during the past number of years.

Perhaps the most outstanding contribution of the authors is their discussion of fiscal and social policy in Part IV. Chapter 14 gives a most useful account of fiscal and social policy issues in South Africa from a historical perspective. The authors contend that the debate on fiscal policy and the role of government in the economy has been strongly influenced by two seemingly opposing forces. On the one hand, there are great demands on the fiscus to deal with poverty, unemployment and a skew income distribution. On the other hand, there are severe constraints imposed on the fiscus by the need to maintain macroeconomic stability, at the same time promoting sustained economic growth, within a very competitive global economy. Chapter 14 deals with fiscal and social policy issues pertaining to poverty, socio- economic development and the distribution of income in South Africa. The other two chapters, public debt (Chapter 15), and fiscal policy and the national budget (Chapter 16), are particularly pertinent to the second objective of this book, namely, to highlight the dynamic interaction and tension between macro- and microeconomic considerations. However, the discussion of budget deficits in Chapter 15 does not include any reference to the dynamics of the public debt. This is unfortunate, since much of the debate on fiscal stance centres around the snowball effect of deficit financing and its impact on variables such as the growth rate, interest rates and inflation.

The authors conclude with a discussion of intergovernmental fiscal relations. This only chapter of Part V (Chapter 17) explains the theoretical issues pertaining to fiscal federalism, with specific reference to the structure of government, as embodied in the Constitution and the implications for inter-governmental fiscal relations in South Africa. This is currently a hotly contended issue in the South African economy and although not discussed in great depth, the text is quite informative and could serve as a valuable source of information both for economists and non-economists.

Despite a few typing errors and the misprinting of some page numbers in the index, Public Economics for South African Students, is a welcome addition to the literature for those studying the role of government in the economy. It opens up the apparent mystery behind the very dynamic and sophisticated fiscal environment in South Africa.