Free Market Capitalism for Sustainable Development Goals

Originally written for The Arthniti Essay Writing Competition. Prompt: Altruistic Capitalism or State Financing – The Way to Finance Sustainable Development Goals. 

The provision of binary options suggests that our choices are limited to the two, which is a misconception. This article attempts to address the limitations of the given options and suggest alternate solutions to the same. 

The term “Altruistic Capitalism” suggests that we must rely on the benevolence of people making profits to meet the Sustainable Development Goals (SDGs). A question that we need to ask ourselves, the people fortunate enough to be able to have full stomachs and healthy enough lives, do we rely on the “benevolence” of the capitalists for the same? No. As Adam Smith had pointed out back in 1776, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” [1]

“State Financing” suggests that the State/Government meet expenditures associated with the SDGs. But we need to understand that the State does not majorly produce, it reallocates resources. To finance SDGs, the State has three options: 

  • Reduce expenditure in all other non-crucial areas
  • Increase revenues by taxation
  • Finance revenue shortfall through debt (which is basically deferred taxation)

There are political and more importantly fiscal limitations to the extent to which each of the above three options can be carried out. There is also a need to resist having a paternalistic attitude towards the state. People are people, whether in the private systems or public ones, this is the key insight from James Buchanan’s Public Choice Theory. [2]

Instead of looking at the 17 goals as a whole, it makes sense to look at them individually/in smaller groups.

When it comes to the goals of Gender Equality, Responsible Consumption and Production, Peace, Justice and Strong Institutions and Partnership for the Goals, these are goals that do not necessarily require heavy expenditures. Structural changes are required to achieve these goals. While the State does not have to play an important role in terms of financing, it is imperative that the State builds strong institutions and rules to achieve the goals.

The State must pave the way for free-markets to play the crucial role in meeting the SDGs. Free-markets (and not necessarily perfectly-competitive ones only), through the mechanisms of property rights, prices and profit and loss, achieve the highest allocative efficiency of the resources in an economy. Allocative efficiency is important because there is a scarcity of resources. If there were no scarcity, there would be no question of having SDGs.

Two important sustainable goals, Zero Poverty and Zero Hunger, are capable of being met through the free-market mechanism. Economic freedom produces economic growth and it can be increased by the elimination of excessive regulation by the State and reduction in its unnecessary expenditures, wherein the Market can take over for the State.

It is not to be misunderstood that the State’s programs and policies play no role in the achievement of the SDGs. But for the State to attain these, it needs to earn higher revenues, which can come from higher economic performance of the country. Every 1% increase in the GDP in India reduces poverty on an average by 0.78%[3], which means that every percentage increase in GDP brings 17 lakh people in India out of poverty. With the GDP growth allowing the government to generate more resources, it can spend the same on multiple socio-economic programs. In the period of 2004-11, when India sae its fastest and most sustained period of GDP growth ever, nearly 150 million Indians were pulled out of poverty, and in such a short amount of time[4]. 

Source: The Heritage Foundation

The figure above clearly indicates the strong relationship between economic freedom and the standard of living of the people measured by the GDP per capita. It has already been indicated above, with the statistics for India how increased GDP has strong implications for poverty reduction.

As shown by the next figure, with increase in economic freedom in a country, there is also better performance on the Multidimensional Poverty Index. 

Source: The Heritage Foundation

With greater incomes and after exiting poverty, people will also be able to escape problems of hunger and they will be more productive in the economy, encouraging more growth and creating a virtuous cycle.

Addressing the SDGs of Quality Education and Good Health and Well-Being, while these are thought to be Public Goods in the common discourse, School Education and Hospitals can have a degree of rivalry and excludability. Thus, they are not purely Public Goods. An ample amount of evidence has shown that Private Schools in many developing countries such as India[5] and developed countries such as the USA[6] perform better in terms of education outcomes than Public Schools. With better standards of living and lifestyles, economies will also be able to achieve the goal of Good Health and Well-Being. 

Although only the three goals of Affordable and Clean Energy, Decent Work and Economic Growth and Industry, Innovation and Infrastructure, explicitly mention Innovation, they are ultimately tied to it. Clean Technologies such as the electric car Tesla were brought into the market for the profit motive and their innovation was driven not only by the fact that Carbon based fuels are polluting but also that they will soon be exhausted and there will be a demand for these products. The switch from coal to the relatively cleaner petroleum was not made due to environmental reasons, but for the pursuit of profits.

The chart below also indicates the strong and positive relationship (correlation = 67%) between economic freedom and better environmental performance. 

Source: Author’s calculations based on data of Environmental Performance Index (2020) and Index of Economic Freedom (2020)

Free-markets may have a tendency to overexploit resources such as the Commons and not have enough care for the biodiversity on land and inside water, but that does not again indicate that there is a need for the State to intervene. The community that uses those resources have the specific knowledge of the particular circumstances of time and place[7]. Elinor Ostrom’s Nobel Prize was awarded to her for she “challenged the conventional wisdom by demonstrating how local property can be successfully managed by local commons without any regulation by central authorities or privatization.”[8] So, the goals of Preserving the Life Below Water and Life on Land can also be met through other mechanisms than State Financing and Life Below Water. There is also a strong applicability of the Coase Theorem in this arena through which the externalities can be resolved through private individual mechanisms provided that the State has given well-defined Property Rights and institutions to enforce contracts.

The State also has the imperative task of setting up institutions and rules to tackle problems of excessive pollution and emissions of greenhouse gases to tackle Climate Change, and to bring policy measures with lesser leaks for better redistribution in the society for Reduced Inequalities

It is undeniable that there is a requirement of State Expenditure for meeting the SDGs but it is not to be equated with State Financing for them. It is also true that one cannot rely on Altruism of the capitalistic system for achieving the goals but as Adam Smith pointed out, we do not have to rely on it. The key insight is economic growth through the free-market mechanism will pay for the goals to be achieved and there is also a strong role for communities and the civil-society to meet them.

– Samrudha Surana (Guest Writer)

TYBA, St. Xavier’s College (Autonomous), Mumbai

Edited by: Vedant Shukla (Chief Editor, Econ Declassified)

References

[1] The Wealth of Nations Vol: I by Adam Smith in 1776.

[2] https://www.econlib.org/library/Enc/PublicChoice.html

[3] https://publicpolicyindia.com/

[4] ibid

[5] https://ccs.in/demand-private-schools-rise-even-rural-india

[6] https://www.publicschoolreview.com/blog/the-15-biggest-failures-of-the-american-public-education-system

[7]  The Use of Knowledge in Society by FA Hayek

[8] https://www.nobelprize.org/prizes/economic-sciences/2009/ostrom/facts/

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