Denying the invisible hand
*The author is a senior editorial writer of the JoongAng Ilbo
Before Adam Smith published his 1776 magnum opus “The Wealth of Nations,” economics was a realm of God, not of man. Religion and morality taught men to repress greed. Interest and profit seeking was evil as they went against God’s will.
Smith freed greed from religious constraint. He claimed self interest is moderated by the “invisible” hand of the market, and it all works to benefit society as a whole. Prices are determined by supply and demand in the market and economic activities build national wealth. Faith and freedom in the market are two pillars of modern economics.
I am not happy with the economic language the Blue House uses. The most common words used in economic textbooks — like markets, efficiency, free competition and international competitiveness — are rarely heard. They have been supplanted by terms of morality like fairness, equality, democratization and justice.
Prices should be guided by supply and demand in the market. Yet the Blue House believes prices should reflect costs and “reasonable” profits, whatever those happened to be. It presses for “kind” or “reasonable” prices for wireless services, fried chicken and even new apartments. It has a philosophical approach to economics that denies Adam Smith entirely.
I want to ask them, “Is Apple an ‘evil’ corporation?” Its operating profit margin is 26 percent for smartphones. How about Samsung Electronics? Its memory chips have profit margins of 55.6 percent. Should they cut prices to become “morally fit” under the Blue House standards?
The senior presidential secretary responsible for job policy is the most bewildering of them all. Data showed an increase in jobs last month of just 100,000 from a year ago and yet he argues all is well. The Korean economy used to generate more than 300,000 new jobs a month.
The Blue House is burying its heads in the sand by brushing aside concerns about unemployment. It’s as if the Japanese government claimed that its two “lost decades” should be changed to five “lost years” because the economy grew at least more than 0.01 percent during the other 15 years except for 1998, 1999, 2008, 2009 and 2011.
The last time the new job numbers were so low was 10 years ago when new hiring growth stopped at 112,000 following the collapse of Lehman Brothers in September 2008.
At the time, the opposition and liberal media harshly criticized the Lee Myung-bak administration for failure on the job front. The opposition sneered that even the government of liberal President Roh Moo-hyun maintained new jobs above the 300,000 threshold to attack the conservative government, whose president had vowed to create 600,000 jobs. In a National Assembly address, Chung Sye-kyun, then-chairman of the opposition Democratic Party and current speaker of the Assembly, demanded the president take action to overhaul his cabinet.
The Moon Jae-in administration’s economic policy focused on stimulating growth through increased incomes in the first year. His “People First” slogan is now mordantly laughed at by the people.
Companies have turned reluctant about hiring as they cannot sack anyone until the retirement age of 60. So-called economic democratization has become a synonym for antimarket, anticorporate and pro-labor policies.
Production costs shot up due to hikes in the minimum wage, forced placements of non-salaried contract workers onto the permanent payroll and shortened workweeks. All of that discourages companies from hiring.
Excessive intervention and control of the market has backfired. Students from China are often found working at convenience stores in Seoul as shopowners can only afford to hire foreign students at a cheaper rate due to spikes in the minimum wage. When the state meddles with prices, the market becomes distorted. Local students have lost part-time jobs as a result.
The last year was a “lost” one. If policies do not change, we may see the remaining four years of the Moon administration go down the drain as well. The external front has turned perilous with interest rates, the exchange rate and oil prices all turning higher.
When interest rates go up, debt financing will become more expensive for households, further dampening consumption. Apart from semiconductors, most exporters aren’t profitable at the current exchange rate. Oil prices hover above $80 per barrel. Economists warn the economy is at a downturn.
The Blue House says otherwise. It refuses to face the music or stop its bold experiment with so-called income-led growth. Few in the Blue House can mouth the words “competitiveness” or “labor reform.” When the global semiconductor boom fizzles, the reality of Korea Inc. will be bared.
At the current pace, the economy is headed for a lengthy stagnation or massive layoffs. The fundamentals are weakening, fatigued by the policy experiments. In order to not the waste the next years, the lost concepts of the market economy must be restored. Korea Inc. was built on markets, efficiency, free competition and international competitiveness.
JoongAng Ilbo, May 23, Page 31