Fight Against World Poverty
Fight Against World Poverty: How Markets and Governments Can Deal with Poverty (Author deleted) December 20, 2010 Introduction This paper presents the current thoughts on the fight against poverty, specifically the views of different economists on the role of markets and government on this issue. The discussion begins with Hazlitt’s ideas, based on the U. S.
experience. It is then followed by the works of other key economists focusing mainly on the underdeveloped world. Lastly, some concluding opinions are offered. Reducing Poverty in the Developed WorldHazlitt (1973), in his book The Conquest of Poverty makes the case for free enterprise system (Capitalism) as the solution to poverty.  Through a thorough analysis, Hazlitt outlines various remedies that have already been tried and those that have been suggested for the future poverty relief in the United States. All these fixes translate into government interventions. The most common interventions discussed by the author are establishing minimum wage rates, creating labor unions, developing welfare programs and job programs, and redistributing income.In the book, and as discussed below, the author analyzes why each of these actions not only fails to reduce poverty, but actually worsen it. Minimum wage actually increases unemployment, and specially the unemployment of those that need the most, the unskilled workers. Why is that? Simply because by forcing the employer to pay a worker more than he/she is worth, it makes it unprofitable for employers to hire those workers, and therefore forces them into unemployment. The minimum wage logic also applies to labor unions.Labor unions, without realizing it, are an anti-labor force. Wages, like any other price, are determined in the free market by supply and demand, and the demand for labor is determined by the labor productivity. Thus, if union wages exceed what employers consider to be the employees’ worth in productivity, the employers are forced to reduce the work force; otherwise, they would be employing them at a loss. So, as union wages are increased, there is a point where employers cannot afford them, and get rid of them.In situations where employers cannot reduce the work force because of labor agreements, eventually they will shut down the operation. In addition, it is only expected that the next marginal capital will either not be invested or will be invested where labor is cheaper. Thus, the bottom-line is that arbitrary labor wages, which typically are excessive, can only result in work reductions. Now, if instead the wages would be set by the market, the employers have an incentive to hire them, increasing employment.Welfare programs have continued to balloon exponentially since their inception, not only in number but also in cost. To appease the voters, government consistently enlarges these programs without regard to the consequences. Thus, they have led to higher taxes and chronic deficits because taxes have not been able to keep up with the cost of these programs, thus the government has had to resort to printing paper money, creating chronic inflation. These programs are like a chronic disease.Once on welfare, people typically stay on it. Moreover, those on unemployment compensation have little incentive to go back to work. Lastly, there is uncontrollable fraud and cheating among those on relief. Many feel that it is the government’s obligation to assure full employment. However, some degree of unemployment is always present in a dynamic economy, mainly as a result of shifts in product demands. Some industries are contracting while others are expanding, thus, some workers are laid off while others are hired.There are times, however, when significant unemployment happens, and typically, it is due to some type of the government action discussed above. Now, if the reason for unemployment is the normal downturn in the business cycle, government intervention by providing jobs to those displaced by the downturn will in essence prevent the natural adjustment of wage rates. This will in turn create an unbearable burden to the taxpayers, and the only way out would be further budget deficits and inflation.Thus, to assure that all these bad things do not happen, the author suggests that the situation be allowed to take its course in a natural manner. Demand and prices decrease will force the natural reduction in wages, which in turn will eventually result in an increase in employment. The idea of income redistribution has been proposed by some, especially those with socialistic tendencies. Any forced redistribution will create an environment where those receiving the guaranteed minimum income, whatever level it is, would have no incentive to work if it exceed what they could earn in the open market by working.And, there are a substantial number of people that even if they could earn a bit more would prefer to live in extreme poverty than to work. This problem gets worse the higher the income guarantee, as more people would see no reason to work. The above are the main actions that conflict with the function of a free competitive market in the U. S. ; and, according to the author, these actions must be removed since history has shown that it is the free competitive market that has been the driving force to reduce poverty in the Western world in the last two centuries.The government’s duties should be limited mainly to activities that protect private property, and the citizens’ safety (law enforcement); and to some degree, the preservation of the country infrastructure. However, Hazlitt recognizes the government’s need to provide adequate help to the poor to assure that they are not deprived from the minimum for their subsistence; but the government must be careful not to provide more than the absolutely necessary to prevent the needy from not working. Lastly, Hazlitt warns that it is only possible to conquer poverty, but not to eliminate it.This is because poverty is an individual issue; thus, it cannot be stopped more than death can not be prevented. Hazlitt’s model is the capitalistic, laissez faire approach. Although the U. S. has not followed a pure capitalistic approach, as he claims, it represents one of the best models of a political system that has tried to comply with his philosophy. Given that, it is surprising that roughly 13 to 17% of Americans still live below the federal poverty line at any given point in time, and roughly 40% fall below the poverty line at some point within a 10-year time span. 2] Although these statistics are not encouraging, the author makes a convincing case against the other extreme, socialism, or total government control, and was undoubtedly proven right with the fall of the Soviet Union in 1991. A recent political movement, the Third Way, which attempts to take the positive things from both capitalism and socialism, led by world leaders such as Tony Blair and Bill Clinton is currently being discussed in the political arena as an alternative to mitigate some of the weaknesses of both systems, see Whyman (2010).So far the poverty discussion still goes on. Reducing Poverty in Underdeveloped World Hazlitt bases his government model on historical data in the US; thus, one should not automatically assume that it could also apply to the underdeveloped world. In fact, there are many different opinions on remedies for poor countries, which not only involve internal prescriptions, but also suggestions on the interaction between the underdeveloped and developed world, and the shape that foreign aid should take. A summary of some of the most significant views are described below.Easterly (2008) takes Hazlitt’s views and using Hayek’s thoughts of the market process describes his approach to poor nations as follows: To conquer poverty, the creativity and spontaneity of market participants create the most effective system. This is an unpredictable bottoms up process that happens without any central organization intervening and it cannot be dictated from the top, as organizations like IMF and World Bank attempt to impose without much knowledge of the country’s local culture, issues, etc.The author explains that where the government political system allows it, the free market is able to produce the big hits in the export markets that have historically helped create wealth in poor countries. Examples are the great success in Kenya exporting cut flowers, or cotton suits in Fiji, both very much unpredicted before the businesses started. Studies have shown that capital income is highly correlated with economic and political liberty; it is liberty that causes prosperity. Therefore, the solution to poverty is to let the market act freely, without government interference.Why, then, it is so hard to convince the world of this fact and the developed world’s approach continues to impose failed tops down solutions? Because growth rates are so volatile in these countries, even for periods lasting a decade, that anyone with a specific agenda can as easily use data to prove that either liberty or the lack of it is the key success factor. O’Rourke (1998) agrees with Easterly. After visiting countries like Albania, Sweden, Russia, Tanzania, and Cuba, he concluded that it is the suppression of individual liberties that creates poverty.His view is that wealth can only be created when there is enough production of goods and services, and this can only occur when there are incentives, which can only exist in an environment of liberty. Similar thoughts are offered by Ravier (2009). Referring to Hayek’s work, he states that globalization, an important element of free and voluntary trade, creates wealth and peace among the nations. De Soto (nd), another free market economist, in his book, The Other Path, focuses on private property, and more specifically, the lack of government protection of property belonging to the poor as a key issue that keeps them in poverty.As a case in point, property, owned by the poor of Peru for generations, is very rarely legally registered, preventing this extremely important them from gaining a meaningful presence in the market, and without it, any possibility of acquiring wealth.  The point is that as long as the poor are not part of the legal market economy, the nation cannot extract itself from poverty, and in most underdeveloped countries, the poor remains outside the system all together.The elite minority enjoys all the benefits of the legal system and prospers, while the poor cannot, and stay in poverty. In Peru, where De Soto’s work is conducted, in order to survive, to protect their assets, and to do as much business as possible, the poor create their own rules, but operate outside the formal system, with all its inefficiencies, shortcomings, etc. Since this group constitutes a large percent of the country’s population, this problem severely impacts the society at large. The issue, according to De Soto, is worldwide among underdeveloped countries.He estimates that about US$ 10 trillion of dead capital could be put to use should the properties be properly legalized. Reinert (2007) and Chang (2008) consent with the above authors’ positions on liberty and private property; however, they add limited protectionism to the box of solutions, at least until these underdeveloped countries can face global competition. They explain their case as follows: To reduce poverty, sustained growth is necessary and it can only be delivered through industrialization. Why?Reinert explains that activities like agriculture, so predominant in poor countries, are subject to diminishing returns, while manufacturing is subject to increasing return. As an example, should country X decide to be in the carrot business, after all the ideal land for carrot production is used, any additional, and not as good land will become more expensive to use, increasing the production cost without any compensation for it in the market. This is not the case for manufacturing, where any addition unit being sold reduced the marginal cost and increases the return.Thus to grow, each country must choose an industrial path, then carefully nature it until it can compete in the world markets. This requires upgrading the relevant technological and managerial capabilities of the country, and while these efforts are pursued, the chosen industry/industries must be protected. Chang compares economic protectionism to the protection that parents must provide to their young children until they are old enough to face life by themselves. He claims that without this protection, these industries would have little chance to survive.He gives South Korea as a good example. Presenting South Korea as a model, Chang relates his own story: born in 1963 in one of the poorest countries in the world, while now it is one of the richest. He explains that during the years between the 1960s and the 1980s, when the major industrialization took place in South Korea, traditional economists would have the world believe that neo-liberal strategies were the reason.  However, according to Chang, Korea nurtured the new industries through tariff protection, subsidies, and other forms of government support.The banks were owned by the government, thus the flow of credit was all under its control, and further, some of the model industries were even owned by the government.  Its economy was based on export; however, Chang explains that this did not necessarily require free trade. Japan and China prove that. Both authors warn that free trade is only suitable for countries at the same level of development, meaning that poor countries should hold some sort of protectionism until they can fully compete.Chang reminds the reader that South Korea is not a unique case, he claims that practically all of today’s developed countries, including Britain and the U. S. , at one time or another, were forced to follow policies that go against neo-liberal economics. Conclusions Although, there is enough disagreement on how to conquer poverty, there is no question that the economists agree on at least two basic points are of paramount importance, the need for a free market and government protection of private property.Beyond that, one thing is clear, the struggle to reduce poverty is still very much an unresolved issue, and the solutions are highly debatable, may be because each country presents a different challenge, a unique culture with different internal considerations, needing different medicine. References Chang, Ho-Joon (2008). Bad Samaritans. Bloomsbury Press, New York. De Soto, H (no date). Commanding Heights, PBS interview. Retrieved Oct 10, 2010 from http://www. pbs. org/wgbh/commandingheights/shared/pdf/int_hernandodesoto. pdf Easterly, W. (2008). Hayek vs.The Development Experts. Manhattan Institute for Policy Research. Retrieved Oct 10, 2010 from http://www. manhattan-institute. org/html/hayek2008. htm Hazlitt, Henry (1973). The Conquest of Poverty. Arlington House, New Rochelle, N. Y. O’Rourke, P. J. (1998). Eat the Rich, Atlantic Monthly Press, N. Y. Ravier, Adrian (2009). Globalization and Peace: A Hayekian Perspective. Libertarian Papers, Vol. 1, Art. No. 10. Reinert, E. (2007). How Rich Countries Got Rich and Why Poor Countries Stay Poor. Constable, UK. Whyman, P. (2010). Third Way Economics. Palgrave McMillan.Retrieved October 10, 2010 from http://www. palgrave. com/pdfs/1403920656. pdf ———————–  Hazlitt discussing poverty solutions states: Man throughout history has been searching for the cure for poverty, and all that time the cure has been before his eyes. Fortunately, as far at least as it applied to their actions as individuals, the majority of men instinctively recognized it—which was why they survived. That individual cure was Work and Saving. In terms of social organization, there evolved spontaneously from this, as a result of no one’s conscious planning, a ystem of division of labor, freedom of exchange, and economic cooperation, the outlines of which hardly became apparent to our forebears until two centuries ago. That system is now known either as Free Enterprise or as Capitalism, according as men wish to honor or disparage it.  Wikipedia. See http://en. wikipedia. org/wiki/Poverty_in_the_United_States#cite_note-0  See http://www. amazon. com/Other-Path-Economic-Answer-Terrorism/dp/0465016103  Referring to the poor’s unregistered property, De Soto states: For it is in the legal system where property documents are created and standardized according to law.That documentation builds a public memory that permits society to engage in such crucial economic activities as identifying and gaining access to information about individuals, their assets, their titles, rights, charges and obligations; establishing the limits of liability for businesses; knowing an asset’s previous economic situation; assuring protection of third parties; and quantifying and valuing assets and rights.These public memory mechanisms in turn facilitate such opportunities as access to credit, the establishment of systems of identification, the creation of systems for credit and insurance information, the provision for housing and infrastructure, the issue of shares, the mortgage of property, and a host of other economic activities that drive a modern market economy 5] Neo-liberalism is a market-driven approach based on neoclassical theories of economics (aka capitalism) that maximize the role of the private business sector in determining the political and economic priorities of the state.  Chang states: “The Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction”