Louisiana governor Blanco is now holding hearings on the problem of poverty. Since she is a mainstream politician, she will likely arrive at the wrong answers for its cause and adopt fascistic solutions for its cure. Worse, this initiative will cost hundreds of thousands of dollars or more and thus exacerbate the very poverty she is supposedly fighting.
In 1776 Adam Smith wrote An Inquiry into the Nature and Causes of the Wealth of Nations. The governor might do worse than cancel her meetings and read this book instead. Smith said that those countries that rely mainly on the free enterprise system of private property rights and the rule of law prosper, while those that do not are consigned to a life of grinding poverty.
Research I conducted (Gwartney, James; Lawson, Robert; and Block, Walter. 1996. Economic Freedom of the World, 1975—1995) finds a statistically significant relationship not only between the degree of economic freedom in a country and its per capita income but also between liberty and income equality.
Smith, who was not as free enterprise-oriented as his reputation implies, hedged on this basic insight with too many exceptions and too many concessions to government, but the general rule he articulated was as true in the 18th century as it is in our own and applies as much to countries as to states and cities.
Why do markets work to alleviate poverty and governments fail?
The main reason is the profit and loss system, the automatic feedback loop mechanism of free enterprise. If an entrepreneur does a bad job, people avoid his firm. If he does not mend the error of his ways, bankruptcy is the inevitable and usually swift result. In sharp contrast, if a politician makes mistakes in satisfying a constituency, he can stay in office for up to four years; a bureaucrat, practically forever.
The situation regarding pizza, pens and pickles is pretty satisfactory; those who could not provide these goods at a competitive quality and price went broke. But what of the post office and the motor vehicle bureau? Poor service for decades, and nothing we consumers can do about it.
Why do free markets tend toward income equality? The only legitimate way to earn vast sums of money under free enterprise is by enriching others. Yes, Bill Gates, Sam Walton, Henry Ford and Ray Kroc make billions, but they do so by economically uplifting all those they deal with. If people did not benefit from dealing with Microsoft, Wal-Mart, Ford and McDonalds, they would not continue to do so.
In contrast, in politics, vast fortunes are made not by attracting customers but by raising taxes and siphoning off the lion’s share of them. The wealth of the politician rises, and that of everyone else falls.
But do governments not give money to the poor in the form of welfare? Doesn’t that help the poor? First, only the crumbs go to the poor. The rich, after all, run the government. It would take quite a bit more benevolence than they have for them to orchestrate things against their own interests.
Second, what little money does go to the poor impoverishes them; it does not lift them out of poverty. The key to understanding the direction of causation in this paradoxical situation is the family: Anything that supports this vital institution reduces poverty; anything that undermines it increases poverty.
Family breakdown is causally related to all sorts of poverty indices besides lack of money: imprisonment, lack of educational attainment, unemployment, lower savings, illegitimacy, etc.
And what is the effect of welfare on the family? To ask this is to answer it. As Charles Murray has shown in his insightful book Losing Ground, the social worker makes a financial offer to the pregnant girl that the father of her baby cannot even come close to matching. But they do so on the condition that this young man be out of the picture. A recipe for family disaster if ever there was one.
Slavery was not able to ruin the black family (poverty is disproportionately a black problem), but insidious welfare had that very effect. The black family was just about as strong as the white in the years following the War of Northern Aggression, but fell apart after Johnson’s War on Poverty.
Similarly, social security weakens intergenerational family ties. Public housing, with its income cutoff points, evicts intact families. The remaining female heads of families are no match for gangs of teenaged boys lacking adult male role models.
The government is also a direct source of poverty. Its minimum wage and union legislation makes it difficult if not impossible for poor youth to get jobs. Its rent control makes cheap housing scarce. Its tariffs make all basic necessities more expensive, and its subsidies to business have the same effect.
Want to cure poverty, Governor Blanco? Reduce government interference with the free enterprise system.
Dr. Block [send him mail] is a professor of economics at Loyola University New Orleans.