Prosperity according to Reuven Brenner

Tod Hoffman | McGill Reporter

Management professor Reuven Brenner bristles at superficial thinking and the ill-founded myths it tends to perpetuate. He rails against the type of academics who propagate them with meaningless jargon under the guise of science. How, he wonders, can some social scientists possibly believe what they do is scientific?

“It’s a function of them having nothing to say,” he shrugs during a conversation in his Bronfman Building office. Obscure, pompous language uttered by those with a claim to expertise is quickly mistaken for science by those without the understanding to issue an authoritative challenge. The true challenge for the academic is to make an argument clearly, without resort to obscurity.

The holder of the Repap Chair of Business for the past decade at McGill, Brenner has just published The Financial Century: From Turmoils to Triumphs (Stoddart), a jargon-free volume with much to say about how societies can achieve prosperity and some barbed observations about how governments often get in the way.

Prosperity, he writes, is a consequence of “matching talent with capital, and holding both sides accountable.” Open, democratized financial markets and access to capital promise the most benefits to the most people. Private, as opposed to public, institutions have the most incentive to distribute capital wisely and prudently. Government, he writes, “can make many more and greater mistakes, and they can also fail to correct them.”

Why? Because they have a monopoly on the power to tax. Given that, they are unlikely to face bankruptcy and, hence, the urgency to change. An exception would be the case of the Soviet Union, which survived on repression and monopoly control of the economy until the state was finally bled beyond financial recovery.

“The best system is one of stable institutions that move as fast as possible to correct mistakes,” he explains. And private institutions have incentive to act quickly; neglecting to do so means financial ruin. Governments, on the other hand, merely compound their mistakes and then raise taxes to cover them.

This discretion to raise funds takes away the incentive to change. “Only when they go bankrupt or are leapfrogged by other states will governments be forced into action. Until then they can simply carry on.”

He continues, “We are living with years’ worth of mistaken regulations that impact today. It is difficult to erase old regulations, so instead we pile new ones upon them. This is what creates the habit in people of going to government for solutions instead of responding with private initiatives,” he says.

Unafraid to raise contentious arguments, Brenner questions the root of the anti-smoking position that the current Canadian government expresses with high taxes, bans on tobacco advertising and its own publicity campaign on the hazards of the practice.

He argues that smoking would be far less prevalent were health care not socialized. Imagine, he proposes, the incentive to quit if smokers faced the prospect of excessive insurance premiums, as compared with non-smokers. The result would be removing government from the health business, which it has been mismanaging anyway, in his view, eliminating reams of bureaucracy, and leaving people free to choose how to behave, knowing they will have to bear the costs for those choices rather than having them diffused for society at large to absorb.

Another area where he sees government imposing itself because of wrong-headed decisions is culture. Two hundred years ago, the great opera houses of Europe were privately owned and sustained by adjoining casinos. Thanks to the profits earned from gambling, the impresarios were able to stage the operas.

When government stepped in and seized monopoly control over gambling, or imposed outright bans on the pursuit, they denied this integral source of revenue and had to compensate with subsidies.

For a relevant comparison he looks at today’s movie theatres, which depend on the margin from popcorn and soft drink sales for profit. What if health ministries decided to ban such junk food in the public’s interest? It would mean the death of the film industry or dependence on government funding, which they would raise through taxation. Thus does every government intervention reverberate through multiple public policies.

Brenner’s faith lies in the creativity of the individual. Give them access to capital and they will employ it to raise prosperity. Limit taxation so that the entrepreneurial spirit may thrive. And, furthermore, give people the opportunity to express their wishes through direct democracy.

“People are more intelligent than politicians would have us believe. A referendum on a specific issue would be a catalyst for focused debates,” he insists. This would require even an interventionist government to correct mistakes because the voter would insist.

He says that an open financial market is the true measure of freedom; political elections are frequently more symbolic than anything else. He refers to Mexico, which for 70 years held votes that repeatedly put the same elites in power and kept the electorate in crushing poverty. On the other hand, there’s Hong Kong before its transfer to China’s rule. It did not have free elections. However, it did enjoy freely accessible financial markets and a 15% flat tax and, consequently, one of the most dynamic and prosperous economies in the world. If you’re wondering which society most appealed to its citizenry, all you need do is look at the outflow of people. Mexicans have fled in huge numbers to the United States, while pre-China Hong Kong held on to its most ambitious and talented people.

Who would be hurt if politics is removed from finance? According to Brenner, the political class and those who have relied on its protection. As an example, he draws on Newfoundland’s fishermen, who have more incentive to take money from an Ottawa bureaucracy set up to administer a dying sector than to adopt new skills.

Obviously, not everybody will agree with Brenner’s thesis. He is blissfully unconcerned.

“The world works as it does,” he smiles. “It’s your choice whether to buy into it.”