EconomyNext – Sri Lanka’s 2015 budget decree on supermarkets preventing them from asking for more than a 25 percent discount from suppliers marks a dangerous acceleration on a German Zwangswirtschaft style of intervention in business and de-liberalization of citizens.

A modern ruling class of a European-style nation-state, whether elected or not has the powers to impose almost any control on businesses owned by private citizens, through agencies such as customs and internal revenue which are implemented with the baton, the bayonet and jailhouse.

EUROPEAN IMPORTS

Since independence from British rule Sri Lanka’s elected rulers from all parties have imposed on her citizens various controls on language and their freedom of exchange, through draco¬nian legislation imported from Europe, particularly those developed in Eastern Europe up to the Second World War.

It must be said that not a few of these controls were instigated by busi¬nesses themselves, to profit through force and coercion and the threat of violence from the state where they could not compete with price and quality through free exchange.

Import duties have been the mainstay of such controls imposed on citizens, and their ‘success’ to the favoured ‘domestic producer’ comes chiefly from its effectiveness on the poorer section of society who do not have enough money to beat the import duty.

Businesses have for centuries used their ability to influence politicians and legislatures to their benefit, even long before a legislature that could rob the freedoms of citizens was established in Sri Lanka by the British.

During the days of Mercantilism, when Sri Lanka was run by the Dutch and then the British East India company, such controls and monopolies were com¬monplace. All citizens, including those in Britain had to pay the price.

Unlike capitalists who got rich from free exchange, as mass-market consumers voted with their pockets, Mercantilists used the force of the state to gain profits, by restricting the right to free trade. There are large profits to be made by destroying the freedoms of the ordinary man.

Adam Smith writing in The Wealth of Nations as far back as 1776, which is widely considered to be the first comprehensive treatise of what is now called ‘economics’, challenging the then prevalent ideology of Mercantilism, warned that business owners would try to exploit consumers through legisla¬tion.

At the time so-called capitalism and property rights were just emerg¬ing, with the breakdown of an older feudal order.

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even op¬posite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers,” wrote Smith.

"To widen the market may frequently be agreeable enough to the interest ofthe public; but to narrow the competi¬tion must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

"The proposal of any new law or regu¬lation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it."

AUTARKY

Self-sufficiency and protectionism require even tighter controls on the or¬dinary consumer and taking away their freedoms, than old-style Mercantilism.

In Sri Lanka now, nationalist busi¬nesses are expanding monopolies, especially in building materials, under protectionist taxes and at the expense of the consumer through legislation backed by the coercive powers of the state, which favour the producer against the consumer.

The budget for 2015 promised ‘anti-dumping laws’. Anti-dumping laws are the new face of protectionism import¬ed from the West. When consumers and other clear-thinking people saw through the deceit of blatant protec¬tionism, businesses resorted to ‘anti-dumping’ laws.

Protectionism for industry was invented in the United States by Al¬exander Hamilton and was imported to Sri Lanka via Europe. The ideology was brought to Europe by Frederick List who became a pioneer of what later came to be known as the German ‘historical school’ of economics.

The nationalist ideas of the pro¬ponents of this system of economics reached their peak during the rule of the National Socialist Party in Ger¬many and ended only after the Second World War, when friendship and freedom were re-established by the Ordoliberals.

Though List did not advocate protectionism for food, later his¬torical economists such as Gustav von Schmoller and Adolf Wagner did as the country increasingly went on a path of self-sufficiency or autarky.

In all fascist regimes in Europe, au¬tarky was a key foundation of policy.

Sri Lanka has been assiduously following the German program of Nahrungsfreiheit (freedom from im¬ports of food) and Ernährungsautarkie (agricultural self-sufficiency) through import duties and import controls for some time now. Import duties how¬ever raise the domestic price of goods, ultimately reducing export competi¬tiveness, while Nahrungsfreiheit can also increase malnutrition, especially in poor countries.

The intervention in business which led to discrimination and restrictions on freedoms in all walks of life in Ger¬many, did not start with the National Socialists but developed before World War I, as Prussia established one of the first linguistic nation-states in Europe conquering one city state after the oth¬er. In Sri Lanka the roots of nationalist ideas, expropriation and intervention also go back decades.

Protectionism is easier to sell to the consuming public who are hurt by it, than domestic interference in business. Though the consuming public is the ul¬timate victim whose purchasing power and living standards are reduced by higher prices, the initial target is held out to be a ‘foreigner’.

The reason German historical eco¬nomics and also classical Mercantil¬ism gained ground in Europe was not simply that it was easier to instigate hate on a people different to one’sown or play on the people’s desire to exercise force on someone else. It is also because ideas such as freedom of exchange, international division of labour, of comparative advantage, or that balance of payments troubles are the results of money printing rather than trade deficits are too complex for many to grasp.

ZWANGSWIRTSCHAFT

The control of businesses gradually gained ground in nationalist Germany even before the National Socialists ever came to power. It was prevalent dur¬ing the Hindenburg plan for example. It was an alternative to the failed outright expropriation proposed by the Marxists. Expropriated state managed firms failed miserably.

This was seen even in Sri Lanka with state textile firms, plantations, Co¬lombo Gas Company, Graphite mines, to mention a few which were expropri¬ated after independence from British rule. In the 2015 budget for example 150 million dollars of tax payer money was allocated to loss-making state airlines and another 5 billion rupees for recently expropriated sugar firms. This is in spite of sugar prices being artificially kept up with import duties.

The solution to force businesses to carry out the wishes of the rulers without outright expropriations was thought to be Zwangswirtschaft.

Under Zwangswirtschaft, through various controls, owners of businesses in Germany were reduced to mere managers who carried out the wishes of the state and rulers. Supermarkets in Sri Lanka are now not only under price control on their revenues but also getting orders on their buying price and are unable to control costs. They are being squeezed from both ends.

"Organized super markets and large retail traders have excessively expand¬ed their own inhouse brand products along with excessive margins being imposed for products of other suppli¬ers affecting local SME producers and suppliers unfairly,” the budget speech for 2015 said.

"Therefore, I propose to amend the consumer protection law to ensure that super markets will provide equal treat¬ment to all suppliers in their outlets and to limit charges imposed by them, not to exceed more than 25 percent of the maximum retail price marked on such domestically supplied products."

The proposed controls are stemming from the influence of fellow busi¬nesses with political clout to sway the legislature, under a policy of support¬ing the producers. Though the initial idea of intervention was to target the foreigner, now some domestic busi¬nesses, which have less political clout, are being targeted by the state in favour of some other sector.

Earlier supermarkets were criticized in Sri Lanka for giving discounts to consumers on items such as milk pow¬der because it hurt the small shops. The same arguments were used in pre-war Europe. While citizen owned retail chains are squeezed in this way, in the same 2015 budget a state run super¬market got a 1,500 million rupee cash injection from tax payers. They also have other tax benefits.

Entrepreneurship and capitalism, which strive to innovate business strategies and cuts costs through new and better methods die under Zwangswirtschaft. The owners of supermarkets are now reduced to mere managers who carry out decrees of the ruling class – or in German parlance, a Betriebsführer.

Similar controls on both the sale and cost sides were previously imposed on poultry farmers, with predictable results. On one side, the maize prices were pushed up by import duties to encourage domestic production at high prices, fostering inefficiency in agricul¬ture. Then price controls were imposed on chicken meat, leading to losses at feed mills and the bankruptcy of farm¬ers when raw material prices went up.

This budget promised maize at 40 rupees for poultry farmers as well as export incentives – incentives for which domestic consumers will have to pay with higher taxes and lower living standards. If maize were available at world prices – at a time when global commodity prices are collapsing due to a strengthening US dollar and weak credit such as now – no such incentives would be needed.These are the effects of state intervention.

NATIONALIST HATE

Self-sufficiency and Zwangswirtschaft does not end there either. Nationalism is an all encompassing ideology which affects the entire lives of the people.

Under the latest legislation passed by the Parliament further restrictions were placed on citizens who want to sell land to foreigners. This is a popular hallmark of European rural national¬ism. Even today countries like Hungary are struggling to fully integrate with Europe due to such restrictions on the freedoms of her citizens. National¬ist hate and restrictions even in ‘rural nationalism’ ideology is propagated by the urban intelligentsia.

Restricting the right of a Sri Lankan to sell land to a foreigner undermines the freehold rights of the citizen, that is the freedom to alienate and sell land as he or she wishes to whom he or she wishes.

Though nationalists start by direct¬ing hate against the foreigners, the hate spreads within the country eventually hurting religious and ethnic minori¬ties. What happened and is happening to Sri Lanka’s Muslims, the Tamils and Christians also happened to the Slavs, Jews and Gypsies in Europe.

Ordinary people are not generally nationalist. That is why they are willing to sell land to a foreigner, use Indian or Chinese products or buy from a Muslim shop. This is precisely the reason why nationalists have to use compulsion and coercion to stop the people from selling land to foreigners, buying for¬eign goods or visiting shops owned by minorities.

All leaders and politicians who want everyone to live in peace and happiness should therefore be careful about interfering in economic deci¬sion-making of the people of which discrimination against foreigners and minorities are inevitable companions.

Economist and philosopher Ludwig von Mises summed-up this problem in a few sentences.

"In a world in which people have grasped the meaning of a market society, and therefore advocate a consumer’s policy, there is no legal discrimination against Jews,” he wrote in 1944.

"Whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers. On the other hand, in a world of interventionism only a miracle can in the long run hinder legal discrimi¬nation against Jews.

"The policy of protecting the less efficient domestic producer against the more efficient foreign producer, the artisan against the manufacturer, and the small shop against the department store and the chain stores would be incomplete if it did not protect the ‘Aryan’ against the ‘Jew’.

This column is based on ‘The Price Signal by Bellwether‘ published in the November 2014 issue of Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.