Some of the most prominent economists in the world have been changing their minds about the efficacy of markets. A Nobel Prize-winning economist at Princeton University, Angus Deaton, for example, had this to say in a recent article:

Our emphasis on the virtues of free, competitive markets and exogenous technical change can distract us from the importance of power in setting prices and wages.

On trade unions he said:

I long regarded unions as a nuisance that interfered with economic (and often personal) efficiency and welcomed their slow demise. But today large corporations have too much power over working conditions, wages…

The Nobel Prize winner for 2021, David Card, and his colleagues have shown that minimum wages do not in fact lead to job losses. They can be good economic policy to protect workers.

Much of this rethinking has been in response to economic policies implemented since the early 1970s that favoured unfettered markets, especially in finance and technology. These have led to growing inequality across the world, excessive corporate power and unacceptable concentrations of wealth in a small elite.

The global rethinking of economic policy recognises that to generate inclusive growth, markets need to be carefully regulated. The aim is to ensure that economic power is not concentrated, and that outcomes are good even for those who lack power in market relationships.

But policies to achieve these ends can’t be designed where there is a monopoly of political power. That leads to a monopoly of economic policy formulation, poor interrogation of policy, lip service to the idea of evidence-based policy making, and consequently poor outcomes.

This has certainly been the case in South Africa. But there may be room for optimism following the African National Congress’s loss of its majority in recent elections. What’s followed are efforts to knit together a unity government – essentially an alliance between the African National Congress, which has dominated South Africa at a national level since 1994, and its historical opposition, the Democratic Alliance.

My optimism arises from my sense that a more plural political space might bring in new voices that might generate better economic policies to address South Africa’s key challenges of economic concentration, unemployment and inequality.

Growth that tackles poverty and inequality

South Africa has over the past 30 years conformed to the pattern of high inequality, excessive corporate power and concentration of wealth in a small elite.

Measures to reduce these high levels of inequality through social transfers have been effective. But they have limited effects on the overall level of inequality.

The problem with this pattern of inequality is that it reduces the level of economic growth, because too few people are integrated into the economy. Conversely, when the economy does grow, the benefits of growth go mostly to the upper and wealthier classes. It’s a vicious cycle.

Everyone who is informed about the economic challenges in South Africa would accept that the economy needs to grow. But to address the country’s high levels of unemployment and poverty, and extreme inequality, the benefits of growth will have to be skewed to lower-income groups and marginalised communities.

The government of national unity might offer an opportunity to achieve this.

On the surface, the unity government is unlikely to agree on and implement policies that will generate growth that disproportionately benefits low income groups and marginalised communities. This is because the Democratic Alliance has a long history of arguing against policies like minimum wages.

But the country could move towards the same goal for another reason – that the space has been opened for ideas to be contested.

Political scientist Adam Habib points out that South Africa requires uncertainty and contestability in its politics to ensure that economic growth is not skewed to benefit the political and economic elite.

With greater uncertainty and contestability, political elites are more likely to respond to the concerns of citizens.

When governments are responsive to their citizens, the probability of success increases. That’s one of the findings of economist Daron Acemoglu and political scientist James Robinson, in their study on why some nations succeed and why some fail.

Why new politics may be good for economic policy

It’s worth pointing out two extremely costly errors that have been made in policy. On 16 December 2017, then president Jacob Zuma announced free higher education in South Africa. This decision went against the advice of a commission of inquiry that he himself had appointed. It’s been a costly error and is now impossible to rescind.

Another example is from the late 1990s and early 2000s, when President Thabo Mbeki, against all scientific advice, adopted bizarre views about HIV-Aids. This was a policy error that came at a huge social cost. It delayed the rollout of life-saving antiretroviral drugs, which was only overturned by brave civil society action.

The two examples illustrate the dangers when leaders can take unilateral policy action. A more plural political space will place a lot more pressure on political actors to base their decisions on evidence.

Globally, societies are having to deal with complex challenges: among others, climate change, migration, the growth of artificial intelligence and inequality.

In the coming years, South Africa’s government will be called on to make important policy choices in a complex international political space. It will need to make policy that evaluates choices carefully, based on good research and evidence.

Such an approach to policy development can draw from the country’s strong institutions outside the state. These include excellent universities, a strong and capable civil society, highly capable legal institutions, trade unions with good policy capabilities, and an adept business community.

Cautious optimism

Nothing is certain. There are, however, good reasons to feel a little more optimistic, because of the new pluralism, about being able to address current challenges and those that will emerge.

Whether it happens will depend on how the government performs and also on how institutions outside the state use the political space that has opened up.

And, as the complexity of economic challenges comes to interact with the turbulence of politics, it would be advisable to bear in mind the quote by the famous economist John Maynard Keynes:

Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Written by Imraan Valodia, Pro Vice-Chancellor: Climate, Sustainability and Inequality and Director: Southern Centre for Inequality Studies., University of the Witwatersrand

This article is republished from The Conversation under a Creative Commons license. Read the original article.