Welcome back to school, everyone! This was my research paper for last semester. In it, I detailed the causes of poverty and present a solution. I was researching this paper while debating Mr. S and what I found greatly helped in regards to this paper. If you find any errors, or have any feedback whatsoever, please leave a comment. Thank you.
05 May 2014
The Light at the End of the Tunnel: Is an End to Poverty Possible?
What if you were told that it’s possible to not just help the poor, but to eliminate poverty altogether? If so, how could this be done? The answers are much simpler than you think. No matter whether we look at poverty in a rich country like the United States or a comparatively poor country like China, underlying causes always remain the same. More amazingly, not only is this true for every country on Earth today, but for history as well. When all is said and done, the one common factor in poverty, no matter where or when you look, is excessive government intervention in the market. The solution to poverty, simply enough, is liberty. That’s it. There are no complicated mathematical formulas.
Of course, in order to discover why these tenets are true it is necessary first to define five key terms so that we can work within a set framework. First, the word market refers, not to a place, but to the means by which persons are brought into contact for the purpose of buying and selling goods or services, as well as carrying out other actions such as investing, lending, and borrowing. A free market is one in which no central authority (read: government) dictates what transactions can and cannot take place. In practice, every country on Earth has at least a tiny bit of government regulation. Next, liberty is the balance (or “happy medium,” if you will) in which an individual is allowed by law to carry out whatever action s/he wants as long as such an action does not physically harm another person or that person’s property. Similarly, property rights indicate that each individual has a right to enjoy his or her rightfully-owned property unmolested. A government or other organization which protects property rights seeks either to prevent a person from harming another’s property, or to arbitrate a dispute over alleged infringement. The most complex definition among these belongs to poverty.
Here we shall deal with wide-sweeping poverty (i.e., China is a poor country whereas the United States is rich), and shall ignore the causes of poverty affecting an extremely small portion of the population such as handicap or natural disaster. Asking why a specific individual is poor and finding the answer to be “house fire” would not benefit the rest of the population wiho have not met the same fate. We will also consider not just abject poverty, with its lack of clean water and safe food, but also with relative poverty, where one has a refrigerator and means of transportation but still lives at a standard far below the rest of that country’s populace. As far as human behavior goes, we shall assume that no person wishes to be poor and, given the choice, would like to be well-off. This assumption eliminates the consideration of monks and other persons who choose to be poor for reasons spiritual or otherwise. This definition of poverty must also ignore the technicality that everyone is born poor—without a bank account, without work experience, and without a source of income besides his/her parents. Failing this, we would be forced to say that being born is the cause of poverty; that definition would certainly be useless. We work within the assumption then that poverty is a relative, involuntary condition which every human wishes to escape and, once out of, wishes to stay out of. Now that these key terms are defined, just how can we see that government intervention (above and beyond protecting property rights) makes people poor?
According to the Fraser Institute, there is a strong positive correlation between economic freedom and prosperity (figure 1). This applies to every country on Earth, not just those in a specific region. The Fraser Institute annually releases a report called “Economic Freedom of the World” which ranks each country based on how economically free they are. Because the ways in which economic freedom can be measured may differ slightly, it is important to look at a second source: the Heritage Foundation’s “Index of Economic Freedom.” This index uses slightly differing criteria in order to rank countries by level of economic freedom, yet its conclusion is still that economic freedom correlates strongly with prosperity. In any instance where interventionism is increased past the threshold of defending property rights and preserving liberty, prosperity begins to wane (Gwartney, et al. 21).
Fig. 1: A clearly positive correlation between economic freedom and prosperity
This is true not only of type, but degree—whether that “extra” interventionism comes in the form of increased taxation, regulations, or welfare (Gwartney, et al. v)–these are the primary three kinds of government intervention in the economy. Although correlation does not prove causation, it is important that we look at correlation first in order to help prove causation. And looking at history will help to show that this correlation goes beyond mere coincidence.
Following the Bolshevik revolution in Russia, Lenin instituted strict communist policies collectively known as “War Communism.” These policies, which outlawed private enterprise, private property, and worker strikes, took effect in 1918. Economist Paul Roberts outlined the results of these policies: By 1920 large factories were producing 18% of their 1913 output. By 1920, the average worker had a productivity rate that was 44% less than the 1913 figure. In the countryside, most land was used for the growth of food. By 1920, the number of acres given over to cotton production had dropped by 87% (Roberts). Factories producing cotton related products were starved of the most basic commodity they needed. This was a demonstration of a world without capitalism. The people had no incentive to produce a surplus as profit had been abolished. War Communism only managed to survive until 1921, when Lenin was forced to free the market in the wake of Russia’s collapse. Sadly, China did not learn from this. From the time Chairman Mao Zedong took power in 1949 until the late 1970s China was a communist country, meaning that its economy was entirely controlled by the central government. During this time the percentage of China’s population living in abject poverty (meaning less than USD 1 per day) was over 50%. (World Bank 76) Beginning in 1978 the Chinese government gradually moved away from central economic planning and adopted policies more respectful of property rights. The effects of these freer policies were almost immediately felt, as China’s percentage of abject poor fell from 54% in 1981 to 24% in 1984. (World Bank 76) As China became increasingly supportive of a free market, the number of abjectly poor Chinese persons continued to drop and by 2007 had been reduced to a mere 4%. From this, we can extrapolate that as China continues to grow and industrialize the population will continue to get richer. Of course, this can only happen without other governmental actions.
Aside from interventionism by way of regulations, the government may also intervene in a market via taxation and public spending. Economists belonging to the Austrian school of economics have long argued that all of these things negatively affect prosperity, albeit in different ways. A writer going by the penname Publius wrote for “Being Classically Liberal” that government spending must not exceed 25% of a country’s GDP or else the economy’s growth will slow; the effect is only increased along with an increase in spending. To support this claim Publius referred to surveys conducted over several decades in OECD (read: wealthy) countries that found an inversely proportional correlative link between government spending and economic growth. Despite these clear findings, however, the detriment of public spending is often denied by members of the Keynesian school of economics, who claim that a decrease in government spending, known as “austerity,” resulted in a double-dip recession in Europe following the 2008 market crash (Masse). Using publicly available data, however, Martin Masse writing for Mises.org showed that government spending actually increased or stagnated following 2008, and this led to the double-dip recessions, not austerity (Masse). Economist Thomas Woods, Jr. wrote that during the depression of 1920 the US government sharply cut spending and did nothing to help the economy recover. As a result, the depression ended within 18 months while Japan’s economy stagnated for seven years under interventionist policies (Woods 23). If government actions could save an economy then the Great Depression of 1929 would not have lasted 16 years. But last it did, first under the interventionist hand of Hoover, then under his successor FDR.
Of course, government spending was not the only problem with the FDR administration. Throughout the Great Depression (1929-1945) the government also attempted, via the New Deal, to direct actions of businesses and individuals—you may remember this is as the cause of China’s enduring poverty during the reign of Chairman Mao. One of FDR’s actions was the implementation of the minimum wage in 1938 (Grossman). The minimum wage, which today sets a minimum allowable wage for any kind of labor, can serve only to upset the economic balance that occurs as a result of voluntary human trade. According to the Congressional Budget Office around 500,000 jobs would be lost if the minimum wage were raised to USD 10.10 per hour (CBO 5). No matter how noble the intentions of politicians may be, nor how vocal union organizers are, there is no denying the fact that limiting economic freedom also limits prosperity. Any argument to the contrary relies on false evidence and logical fallacies.
One such argument was posed by David Cay Johnston, writing for Al Jazeera America. Johnston claimed that the minimum wage doesn’t have a negative impact on employment. To defend this position Johnston referred to several studies, most notably by economists Card & Krueger, showing that overall employment didn’t change in New Jersey after a raise in the minimum wage in 1992 when compared to Pennsylvania, which had no raise (Johnston 2). The chief problem of this study is that New Jersey had an unemployment rate higher than both Pennsylvania’s average and the national average, and was in the midst of a recovery when the minimum wage was raised. Under stable circumstances, however, hiring would be tempered by the laws of demand and supply. The law of demand states that, ceteris paribus (with all other factors remaining equal), a decrease in cost will increase the level of demand for that product or service. The law of supply states that, ceteris paribus, an increase in cost will encourage a producer to produce more of a good or service. The market reaches equilibrium when the amount of goods and services produced sufficiently meets demand without resulting in a surplus (glut) or deficiency (shortage).
The inherent problem with the minimum wage is that it does not affect the amount of supply (workers willing to provide labor). As the minimum wage rises—that is to say, as the cost of labor goes up—the quantity of labor demanded will fall. This results in a glut of labor (an excess of persons willing to work but who remain unemployed). This is why in Singapore, which has no minimum wage, unemployment is at a paltry 2% and the GDP per capita is almost USD 50,000, with a poverty rate of near-0%. (Officail Singapore Statistics) Low-wage jobs serve as a gateway to more skilled and higher-paying employment. Raising the minimum wage prevents non-skilled workers from gaining the experience necessary to command higher salaries later. There is no way for a central planner—a bureaucrat living hundreds of miles away from you or I—to understand the market and direct it better than millions of informed and actively participating individuals. Thus the problem with the minimum wage is really the same problem with all government actions not having to do with preserving liberty. But how can we become rich simply by engaging in the free market and respecting property rights? Let us turn to the immortal words of the author Adam Smith.
In his 1776 book The Wealth of Nations, Smith pointed out that if an exchange is voluntary, it won’t take place unless both parties expect to benefit from it. (Smith 1.2.2) When a man exchanges his money for a pair of shoes it is because he would rather have those shoes than his money. Conversely, when a cobbler sells shoes it’s because the customer’s money is more valuable to him than the shoes he just made. This means that every voluntary exchange is mutually beneficial. If we can imagine thousands or even millions of mutually beneficial exchanges taking place every day for years on end, it is not difficult to see how those exchanges will leave everyone much better off than they were before. This is why economist Arthur Brooks stated, “In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure.” (AEI) What is important to remember is that a free market will not automatically make everyone rich beyond their wildest dreams. The free market, simply put, will make each of us better off than we were before.
It is for this reason that sweatshops, long vilified for employing children at low wages to cheaply make consumer goods, instead ought to be viewed as forces for good. During an interview discussing his book Out of Poverty: Sweatshops in the Global Economy, Benjamin Powell explained that sweatshops allow workers to earn their way out of poverty. He states, “I find that sweatshops in the third world today benefit the workers who toil in them and aid in the process of capital accumulation that leads to higher living standards in much the same way that factories in Great Britain and the United States did during the Industrial Revolution.” (Powell) When we remember Smith’s declaration that voluntary exchanges are mutually beneficial, we can understand that sweatshops leave workers better off than they would have been otherwise; this is precisely why those persons choose to work there. They are not becoming rich beyond their wildest dreams, but they are becoming better off. The longer they spend being benefitted, the wealthier they will continue to become. Therefore any attempt to benefit people with the free market ought to be admired. As China has shown us, the free market has real results. These real results are the solution to poverty.
It must be repeated that no government action can help the economy or the poor; it can only hurt them. This is because government actions are antithetical to liberty. Anything that is mandatory is the opposite of liberty, and when individuals are compelled to furnish funds for an involuntary transaction, they are not being benefitted. When an employer pays a worker to make things of value, the economy is benefitted and that worker retains gainful employment. When the government takes our money and pays people to do nothing, that money is wasted. Every dollar spent on welfare is a dollar not spent on creating jobs and adding value to the economy. Consequently, welfare has not decreased poverty in the 50 years that it has existed (figure 2). Contrary to most political ideologies and popular opinions, the solution to poverty does not lie with the government. In fact, government actions are what cause poverty. The one and only way to eliminate poverty is to protect and preserve liberty and to allow all persons to engage at will in the free market. This has been shown to work in Singapore and everywhere else with economic freedom. The benefits of liberty are crystal clear, and the detriments of interventionism are equally clear.
As long as we are willing to transact voluntarily instead of forcing participation (as governments are so wont to do), we shall forever prosper. Thomas Jefferson said something to the same effect over 200 years ago during his first inaugural address. “[W]hat more is necessary to make us a happy and a prosperous people? Still one thing more, fellow-citizens –a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government….” Of this, Jefferson shall have been found to be everlastingly right.
AEI. “Rockstar Capitalism in the Developing World.” Values & Capitalism, 2013. Web. 28
Congressional Budget Office. “The Effects of a Minimum Wage Increase on Employment and
Family Income.” CBO. 2014. Web. 15 March 2014.
The Fraser Institute. “Economic Freedom of the World: 2004 Annual Report.” Free the World,
- Web. 30 March 2014.
Grossman, Jonathan. “Fair Labor Standards Act of 1938.” Monthly Labor Review. 1978. Print.
“Index of Economic Freedom.” Heritage Foundation. 2014. Web. 12 March 2014.
Johnston, David C. “Raising the Minimum Wage Does Not Destroy Jobs.” Al Jazeera America,
- Web. 05 March 2014.
Masse, Martin. “Is Austerity Responsible for the Crisis in Europe?” 2013. Web. 21 March 2014.
Powell, Benjamin. “Sweatshops: A Way out of Poverty.” 2014. Mises Institute. Web. 21 March
Publius. “Sorry Liberals, Big Government Isn’t Good for the Economy.” 2014. Being Classically
Liberal. Web. 27 March 2014.
Roberts, Paul Craig. Alienation and the Soviet Economy: The Collapse of the Socialist Era.
Independent Studies in Political Economy. 1971. Oakland. Print
“Statistics Singapore – Latest Data.” Official Singapore Statistics. 2014. Web. 29 March 2014.
US Census Bureau. “Table 3: People in Poverty by Selected Characteristics.” US Census. 2013.
Web. 03 March 2014.
Woods, Thomas, Jr. “Warren Harding and the Forgotten Depression of 1920.” The
Intercollegiate Review. 2009. Print.
World Bank. “China: From Poor Areas to Poor People.” 2009. Web. 29 April 2014