ACTUARIAL LENSE: The greatest flaw of capitalism

ACTUARIAL LENSE: The greatest flaw of capitalism
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Have you ever wondered why it is that since the 1890s, we have been exporting raw minerals without meaningful value addition?

CAPITALISM is an economic system that advocates for the individual ownership of factors of production and is grounded by the desire for one to maximise their profit. Economists call it maximising ones ‘utility’ which can be considered a sense of satisfaction. Indeed if one were to create an economic model of an industry or an economy, that model will one way or the other, have to assume that every individual or company makes economic decisions in a way that aims to maximise its utility/profit. In my humble opinion, I believe that this basic tenet, on which all of capitalism rests on, is its greatest flaw.

Most proponents of capitalism argue that the mere fact that each and every one in the economy tries to maximise their gain, means that an optimal equilibrium will eventually be reached. The forces of supply and demand will lead to an optimal price and there will be no waste or shortage of goods since manufacturers will produce that which is being demanded by the market. Under that reasoning, government should not interfere in markets by enforcing price controls or trading restrictions since this leads to the market drifting away from its optimal position. The mere existence of monopolies is in itself sufficient to reveal cracks in this way of thinking. If a government does not intervene in a market ruled by a monopoly, everyone will be basically doomed, but then again, governments have a knack of monopolising certain industries themselves. As I write, the diamond industry is in the midst of a major shake-up.

I have studied the goings on in the Zimbabwean economy and I have reached a conclusion that there is a flaw within our own system. A desire to maximise self-gain by everyone in the economy does not always lead to an optimal scenario for the economy. It might actually result in suboptimal decisions that can sink an entire nation. Nearly every problem you see in the press today, is due to the desire of a fellow Zimbabwean to maximise his/her individual self-gain. Mega salaries, poor service delivery, dilapidated infrastructure and proliferation of unauthorised settlements can all be attributed to a human desire to acquire wealth by any means possible.

Recently, the Central Bank has decided to put in place measures to try and restrict the externalisation of liquidity out of our economy. Someone who decides to use offshore bank accounts or investments for his personal wealth will be simply (and rightfully) making a financial decision that aims to maximise their utility. They look at the ZSE and see that it has lost over one and a half billion dollars in just over a year. They look at the money markets and all they see are Non-Performing Loans, property is also marred with rent defaults so they do not see any malice in their decision to look offshore. The result on the economy however will be a disaster especially if many people decide to do the same. Our local pension funds are also seeking approval to invest a portion of their assets in offshore investments. It remains to be seen if their wish is to be granted. Just look at what a quarter of a per cent interest rise by the Federal Reserve in the U.S.A did to emerging economies like South Africa when international investors decided to move their money out of those markets. I wonder what the effects will be on our economy if pension funds are granted permission to ship their monies offshore.

Have you ever wondered why it is that since the 1890s, we have been exporting raw minerals without meaningful value addition? An exporter of minerals will simply strive to maximise their utility in the easiest way possible. The country has even been exporting some minerals in the form of unprocessed mineral ore. The exporter undoubtedly benefits and can post millions in profits, but the economy as a whole sinks since someone else in the economy will import the same minerals albeit as a finished good. The list of examples where what may appear good to one person can collectively become detrimental for a whole economy is endless.

I am not a fan of socialism or nationalisation of industries. I also believe in hard work and the right to acquire wealth as a reward of that hard work, but I still see the desire for self-gain as the greatest flaw of capitalism. Zimbabweans however seem to have adopted a deep desire for personal gain. Maybe it is just a culture that was inherited from the hyperinflationary era or something being spurred by the prosperity gospel that has enveloped the Pentecostal church movement.  One thing is for certain however; the desire to maximise self-gain can cause more harm than good.

Thomas Sithole is an Actuarial Analyst (Enterprise Risk Management) at Bluecroft Actuarial Solutions. Please refer to his corporate profile on this web address to contact him: thomas.bluecroftsolutions.com

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