What about the Poor?!
By Duncan Whitmore
When discussing the virtues of a free society libertarians are able to expound with enthusiasm the benefits of private property, free exchange and non-violence. Most of the nagging questions – “how would policing work?”; “how would we regulate unscrupulous companies?”; or the clichéd classic “who will build the roads?!” – can be dealt with fairly straightforwardly as it is not difficult to show how such a free society would deal with these matters in a vastly superior way to one that is imbued with statism. Indeed, the struggle in this regard has less to do with formulating convincing arguments and more to do with tackling an inherent unwillingness to consider radical solutions.
However, there is one question that always presents a seemingly insurmountable difficulty – what would happen to the poor? By this, we do not just mean the accusations of a free economy being “sink or swim” or “dog eat dog”, which, again, are relatively juvenile sound bites that can be disposed of fairly easily. (Indeed, it is social democracies that are the true zero sum games as any redistribution of wealth or gain of power to the benefit of one must necessarily come at the expense of another). Rather, what we mean is the fact that a free world has no means of “caring” for the poor. In particular, there would be no “official” institution or “social safety net” to help those who were genuinely less fortunate. A libertarian might mumble a few words about the importance of charity but, with an outright declaration by one’s opponent that such a system is necessary, one may be tempted to concede that this is the Achilles’ heel of a libertarian society. After all, statists excel at conjuring the illusion that all of the care and compassion is on their side while they are able, quite easily, to paint proponents of the free market as little more than selfish money grabbers.
It is high time that libertarians (and their free market oriented fellow travellers) took the offensive against this problem by turning an apparent weakness into an advantage. By offensive, we mean not just constructing adequate rebuttals to the charge that capitalism cannot care for the poor. Rather, we need to set ourselves the more ambitious goal of proving that capitalism benefits the least well off as its primary effect, and that the poor do not benefit merely as an incidental consequence of making the rich richer.
Such an endeavour would be beneficial regardless of the current political climate. However, it is likely to become particularly important in the coming years as the siren song of socialism grows ever louder in response to the increasing wealth inequality that has resulted from nearly fifty years of the paper money fuelled corporatist state.
In the US, for example, an assortment of Democrats lining up to campaign in the forthcoming presidential race – such as Cory Booker, Kirsten Gillibrand, Kamala Harris and Elizabeth Warren – are competing to outdo each other with ever more absurd pledges to wealth grabbing, redistributionist extremities.
For instance, Mrs Warren, apparently unperturbed by her “Fauxcahontas” embarrassment, is trying to re-brand herself as a populist by taking on the “rich and powerful” with proposals such as a “brand new” wealth tax on the “tippy top 0.1%” of Americans (as if wealth taxes are an innovation). And while too young to run for President in 2020, fresh-faced, hyper-leftist nutcase Alexandria Ocasio-Cortez, who has apparently leapfrogged from kindergarten to de facto Democratic leader, has discussed raising taxes to 60-70% (for the “rich” again) in order to fund some kind of “Green New Deal” that will tackle both “climate change” and “economic inequality” (proof enough that combating global warming has always been socialism in disguise).
Moreover, when the next crash and depression occurs (which it will), capitalism is likely to take the blame once more (and with it the most visually “capitalistic” president of them all, should Trump still be in office). A more long term worry is that when we finally reach the day when the taxing, spending, borrowing and inflating state runs out of money – something we discussed in a previous essay – there is a good chance that the popular response will be for more confiscation of wealth and for more state control over trade and industry. Indeed, over here in Europe, as delightful as it has been to see the smirk wiped off of the face of Emmanuel Macron, a closer look at the nature and grievances of the gilets jaunes – not to mention the fact that they are being used as a model for Marxists – should caution us into understanding that the hitherto anti-leftist, populist spirit may very well switch to the service of socialism. And over here in the UK we are still living with the possibility of Jeremy Corbyn one day having the keys to 10 Downing Street. The future holds many opportunities for libertarians to reverse the untrammelled growth of the state, but we must prepare ourselves now to stop society from going down the wrong path.
With this in mind, therefore, let us turn our attention to the poor.
In the first place, we need to establish precisely how “the poor” are defined. It should be obvious that no discussion of poverty can proceed until we know precisely what it is that we are talking about. Unfortunately, however, definitions of poverty tend to differ depending upon who is doing the measuring. The different methods of measurement are not, though, nearly as important as the difference between the two different types of measure – that is, absolute measures on the one hand and relative measures on the other.
An absolute measure (such as those adopted by the US and the World Bank) may be the number of people in the world living on less than one dollar a day; on the other hand, those who adopt relative measures (such as the OECD and the EU) may chooses to define poverty as, say, a percentage of the median household income.
It should be clear that absolute measures provide the ability to demonstrate that poverty has been eradicated as wealth creation will, eventually, ensure that nobody is living on the equivalent of only one dollar a day. Relative measures, however, will do the precise opposite and will guarantee that poverty will always exist. A threshold such as a percentage of median income will move higher as incomes increase, and so the bottom lot will always be classed as “poor” even if we one day reach the stage when the least well off can afford mansions that are just a tad smaller than those of the relatively richest. It should be obvious from these that relative measures are, in fact, not a measure of poverty at all but, rather, of inequality.
While we will touch on relative poverty later for the sake of completion, we must be emphatic at the outset that this discussion is a separate issue and that any sensible discussion of poverty must begin by assuming that it is defined absolutely. A social system in which the poorest are scraping around in the dirt for scraps of food needs to be judged very differently from a system in which the least well off can afford, for instance, a home, a computer, a car, and an annual foreign holiday. Let us therefore proceed with how capitalism tackles poverty in an absolute sense.
The first hurdle to jump over is the criticism that capitalism is actually the cause of poverty. This is plainly nonsense, even though it is not an uncommon complaint. Poverty is the state of humans in nature. When the first person walked the earth the only tools he had available were his bare hands. There is no “capitalist” system to speak of and his lack of food, shelter, clothing, and anything even remotely enjoyable in life owes itself to the fact that nature dealt him this hand. Only the long, slow process of capital accumulation brought humans out of this situation to the level of wealth that we enjoy today.
The idea that capitalism is the cause of poverty has its origins in the nineteenth century backlash against industrial working conditions. The problem, however, is that this backlash came from onlookers and observers of the middle class intelligentsia rather than from the working class themselves (indeed all of the prominent socialist theorists of the period, from Saint-Simon and Fourier to Marx and Engels, as well as social reformers such as Lord Shaftesbury, Charles Dickens, and Sidney and Beatrice Webb, were of the middle, not the working class). The mistake that these intellectuals made was to compare the lot of industrial workers with their own comfortable existence – as if the latter was somehow the state of nature – rather than with the realistic alternatives that the working class faced.
Far from being idyllic, agrarian life prior to the Industrial Revolution was mired in such extreme poverty that infant mortality was as high as one third, and a similar proportion of families were without a major breadwinner owing to death or abandonment. Indeed, most of the industrial workers who were supposedly mired in abject poverty would not have even been alive in pre-1800 conditions, as it was only the superior productivity of mass production that enabled the explosion in population figures after this date. The jewel in the crown of these middle class complaints was, of course, the Marxian “exploitation theory” – the idea that capitalism deliberately benefits the capitalists at the expense of the working class, and that the latter are systematically consigned to a live a life of dire poverty.
The reality is that capitalism, far from being the cause of permanent and everlasting poverty for the least well off, is in fact the very system that has moved the poorest away from the state of nature and allowed them to enjoy hitherto unimaginable riches.
A typical conservative or neo-liberal justification for this state of affairs is that the poor benefit from the “trickle down” of the wealth of the rich – as if the poor are little more than dogs who are able to enjoy a few scraps that are thrown from their masters’ tables. This is not only an incorrect characterisation but it completely understates the case. Capitalism exists primarily to benefit the poor, and that, rather than the poor getting a bit richer as the rich get massively richer, it is, in fact, the poor that benefit the most from the wealth of the rich without them having to own that wealth. Indeed, examinations of who benefits from any particular distribution of wealth always assume that the benefits from that wealth flow only to its owners. In the capitalist system this is not true.
The reason why this is so is that all of the wealth owned by the rich in a capitalist society does not consist of billions of pounds lying around in bank accounts ready to be spent on luxury consumption. Rather, it consists of the sum total of all of the capital goods in existence – factories, machines, tools, equipment, and so on – which are invested in producing more and more goods at lower and lower prices for ordinary people. The nominal wealth of the rich simply consists of the sum of the market prices for all of these productive assets, i.e. what they could get for them in money if they chose to sell them (and even this is often something of a fiction – for instance, if Jeff Bezos attempted to sell all of his Amazon stock in one go the price would plummet).
Indeed, if you were the beneficiary of a serious redistributionist scheme you would not, in fact, receive consumption goods that you could enjoy immediately. Rather, you would find yourself owning a lorry, an office block or shares in a copper mine. Do you really want to be in this position?
The reason why the rich have this wealth is not because they get to enjoy it but because they are the ones who have consistently proven their ability to direct those capital goods to the production of consumer goods that are most urgently desired by everyday people. Hence, you, I and everyone else are able to enjoy cups of coffee without having to own and operate a coffee plantation; we can buy cars without having to own a car assembly line and transporters; and we can buy books without having to own the sawmill that produces the wood that makes the paper.
Thus, ordinary people in the capitalist system benefit from all of the wealth of the rich that is invested by the latter in businesses that produce things we want to buy, things that are produced in more abundant amounts at ever lower prices. Indeed, it is, in fact, far better that ordinary people do not own all of this wealth as then it would be us, rather than the entrepreneurial rich, who would have to turn our attention to working out how to make these things productive – a process that is fraught with difficulty, uncertainty and the spectre of loss. Rather than being exploitative, the wage system is in fact a blessing – all you and I have to worry about is selling our labour in exchange for a definite monetary reward that we can choose to spend on an increasing array of mass produced goods. We do not need to give even a moment’s thought to the complexities of how those goods are produced – where to site factories; how many workers to hire; which production methods should be used; from where to source raw materials; and so on.
The results of all of this have been nothing short of astonishing. On the eve of the Industrial Revolution, 85 percent of the world’s population survived on less than a dollar a day in today’s money. That figure is now down to 20 percent1. Blaming capitalism for the remaining poverty is like blaming a treatment for cancer because it has “only” cured 80 percent of cancer cases. The conclusion one would draw from such statistics is not that the treatment should be abandoned but rather that it should be extended to the remaining 20 percent as quickly as possible!
Therefore, one answer to the problem of “what to do” about the poor – defined in an absolute sense – is to say that capitalism will simply make poverty irrelevant, a phenomenon that will be vanquished and consigned to the pages of history books. It is precisely those areas of the world that do not possess the institutions necessary for a functioning of capitalism – strong private property rights and the rule of law – that are still mired in poverty. Furthermore, those countries that have experimented with socialism experienced nothing but stagnation, decay, environmental destruction and a permanently low standard of living. So for a statist who questions what a capitalist system would do about the poor it is incumbent on that person to explain why he favours a system that would keep the poor very much in poverty, or at least lift them out of it much more slowly.
It is in this light that we are better able to discuss the “problem” of social safety nets. For the effect of continued wealth production is that such safety nets become superfluous. In the first place, the more that the very poorest can afford to buy with the same wage then the more they can afford to set aside for a rainy day. Even the very lowest earning manual workers would have the ability to fund, say, a period of sickness or unemployment. Thus, the role of charity or any formal safety net would be necessary only for the very worst cases of bad luck (and even then a string of the most catastrophic events occurring in succession can be compensated by ever more affordable insurance programmes). Second, if everybody else is also able to buy more with their money then they too have more left over with which to either spend on helping others (such as family and friends) or to give to charity. Indeed, a capitalist society is one that becomes more caring because people simply have more with which they can devote to caring instead of trying to eke out a bare living. It is no accident that many of the West’s great charitable and philanthropic foundations had their origins in the nineteenth century – the relatively most capitalistic period in history. Indeed, the irony is that, under a capitalist system, the very selflessness and altruism that its critics say are destroyed by capitalism would in fact receive an almighty boost! The capitalist system is simply one of human co-operation; its just that this co-operation is voluntary rather than enforced. People do not simply stop co-operating because they aren’t forced to do so, and when the relationship is voluntary it leads to human beings that are more understanding, caring and friendly towards their social counterparts. On the other hand, it is force, confiscation and redistribution that is likely to result in bitterness, hatred and resentment.
Having discussed poverty in its absolute terms let us turn our attention towards relative poverty – that some people get ahead while others are left behind to languish. One the on hand, there are areas of the world where a capitalist system has failed to flourish and so relatively more capitalistic societies will be markedly ahead compared to less capitalistic societies. The only solution to this is to extend capitalism to the latter. However, when it comes to gross inequality within a single system, the primary reason for this is that our own political/economic system is not a capitalist one.
In the UK the political landscape was formerly split between the Tories, who reflected the attitudes of the aristocratic, landholding caste, as well defending the strength of the monarchy and the Anglican Church, and the Liberals, who were born out of the Enlightenment. When the liberal philosophy was eclipsed by socialism after World War I, the emergence of the latter created a (seemingly) distinct contrast between the interests of businessmen and “capitalists” (now represented by the Conservatives) on the one hand and that of the working class (Labour) on the other. This perception (which really served to mask the differences between various types of statism rather than the difference between capitalism and socialism) continued for the next seventy years until the collapse of socialism in Russia and Eastern Europe left socialism as an empty and unworkable philosophy. Beginning with the Thatcher era and culminating in the Blair government, the ideological shift was to the centre – that, not any more was it “the workers” vs. “the bosses” but, rather, the state would allow business to pursue profit while preserving the welfare state and the nationalisation of certain industries such as healthcare. What has resulted, therefore, is a very rich stratum of society and a very poor stratum of society both supported by the state, and ultimately all paid for by the middle classes.
It is this “corporatist, welfare state” that has caused the bifurcation of wealth rather than any vestige of that system that could be referred to as capitalist. We have already seen in the 2007-8 financial crisis how the rich – usually connected with a financial system propped up by the legalised fraud of central banking and fractional reserve banking – are bailed out when they make huge entrepreneurial errors instead of being left to suffer the losses. Their gold-plated situation is one of “profit and profit” rather “profit and loss”, increasing the propensity to gamble recklessly and plough scarce resources into loss-making ventures.
At the opposite end of the scale the poor are also bailed out of their situation, increasing the attractiveness of unemployment, consumption over saving, and the dissolution of traditional institutions such as family and friendship. The net result of all of this is a permanent rich and a permanent poor, all supported by the state and, ultimately, the middle earners who are not “too big to fail” but also not poor enough to receive government welfare handouts. This is the real cause of the inequality between rich and poor in the western world today – a gap that is mandated by the extant political system, not by capitalism.
A capitalist system, in contrast, would be strikingly different. In the first place, the rich can only stay rich by continuing to devote scarce capital goods to the ends that are most urgently desired by consumers. No bailouts and no socialisation of losses, in other words. But also the whole purpose of a capitalist system is mass production for the masses. It is not a system of trading phantom assets denominated in paper money. It is this mass production that extends what were once the luxuries of the rich to the rest of society.
In the pre-capitalist era, a rich man may have had a horse and carriage and the poorer man may have had nothing but his bare feet on which to walk. Today, the difference is that the rich man may have a Ferrari and the poorer man a VW Polo. But the contrast is now far smaller for they both have a means of transportation. Whereas before the difference was one of how quickly it would take one from get from A to B, the remaining difference is simply one of comfort and style – a Ferrari being more plush than a VW – as the basic ability to get somewhere quickly has been equalised. The relative gap has, therefore, narrowed.
We see this happening all around with the shortening of time between the development of a luxury item and its dissemination amongst the wider population. For instance, it took several decades after the invention of the computer before every house and office had a PC; yet the smartphone revolution has taken only a few years. As capital becomes more ubiquitous, therefore, the result is a practical narrowing of the gap between rich and poor.
Critics of capitalism should therefore be met head on with the facts that a free economy a) reduces absolute poverty by allowing production for the masses to be unleashed, b) reduces relative poverty by permitting luxury items and innovations to be mass produced, and c) increases the wherewithal for people to look after themselves in times of difficulty yet also encourages family, friendships, empathy and understanding between human beings who will be more likely to help each other out when they are in genuine need. Given all of that, it becomes incumbent upon the statist to explain why he favours a system that, in contrast, preserves poverty and creates a society of selfish, bitter and uncaring individuals.
1Tom G Palmer, Interview with an Entrepreneur Featuring John Mackey in Tom G Palmer (ed.), The Morality of Capitalism, Students for Liberty and Atlas Economic Research Foundation (2011), p. 26.