Liberals say that they love the poor, needy, and disadvantaged. Unfortunately, however, the economic philosophy that liberals favor constitutes a direct assault on the economic well-being of the poor, along with nearly everyone else in society.
Liberals claim to combat poverty in two principal ways.
First, they use the force of government (e.g., income taxes) to take money from those who have earned it in order to give it to the poor.
Second, they restrict people’s use of their property to enable the poor to have access to such property.
What liberals fail to understand, however, is that the very means they choose to combat poverty — socialism and interventionism — actually exacerbate the problem that they claim to address. Their war on poverty hurts the very people they say they are trying to assist.
In proposing welfare-state programs, by necessity liberals always make an important assumption. They assume that there is wealth in society. After all, if there is no wealth then what good would welfare-state policies do? The welfare state operates on the assumption that there are people who are earning wealth or have accumulated wealth. Those are the people from whom the government takes money in order to redistribute it to the poor.
Let’s consider a hypothetical case based on science fiction. Astronomers discover that an inhabitable planet is hurtling toward our solar system and will soon join the other planets in orbit around the sun. Faced with overcrowding of its prisons, the federal government decides to exile 50,000 prisoners on a spaceship to the planet. Everyone is given six months of supplies on which to survive — food, water, and clothing — and nothing else.
When the prisoners arrive on the planet, they call into existence a federal government, democratically elected. Federal officials are empowered to do everything and anything they can to combat the extreme poverty that is immediately facing society.
Liberals are elected to the presidency and to Congress. They propose a massive welfare-state program modeled on Franklin Roosevelt’s New Deal and Lyndon Johnson’s Great Society. Social Security. Medicare and Medicaid. Public housing. Food stamps. Grants to education. Agricultural subsidies. Unemployment relief.
Do you see the problem? The federal government isn’t a fountain of wealth. It has no money. Its coffers are empty. In order to get the money to distribute all these welfare benefits to people, it must first impose a tax on people.
But do you see the next problem? There are no wealthy or even middle-class people who can be taxed because everyone in this society is poor.
In proposing their array of welfare programs to help the poor, liberals operate under the mindless assumption that wealth exists naturally in a society. Even worse, they give nary a thought to the possibility that a society in which wealth is growing is the greatest benefit to the poor. Worst of all, they don’t consider the distinct possibility that their own tax-and-redistribute policies tend toward destroying the base of wealth in society, thereby relegating everyone to poverty.
Let’s return to our hypothetical example regarding the prisoners on the new planet. Everyone is poor. Welfare-state policies to combat the poverty will obviously not work because there are no wealthy people to take money from in order to redistribute it to the poor. So what can be done to combat poverty?
Ownership, collective and private
The liberals come up with a novel solution. They adopt a system by which the government owns everything and by which everyone works for the government. People will be assigned houses to build, businesses to run, or places in fields to grow crops. Government officials will be in charge of planning everything — which crops will be planted, which occupations people will be assigned to, which houses will be built, which consumer goods will be produced. Central planners will distribute food, housing, clothing, and other essentials in accordance with the needs of each person and each family.
Everyone seems happy with the scheme, especially since it mirrors much of the prison life to which the prisoners had been accustomed. But a problem arises, one involving human nature. No one feels like working very hard. Agricultural workers are constantly getting sick. People are doing jobs for which they are ill-suited. Goods and services are scarce, and the situation is getting worse for everyone.
Actually, this hypothetical society isn’t far from reality. It is pretty much what happened when the first colonists arrived at Plymouth Rock. They formed a society in which most property would be collectively owned and shared.
The result? Starvation and famine.
One day, Governor Bradford changed the system. From that day forward, everyone would be entitled to own his own property and keep the fruits of his labor for himself and his family. No longer would people be forced to share their earnings with others.
Immediately, everyone began working harder and accumulating wealth. No more starvation and famine. The bounty produced by this private-property system formed the foundation for the first Thanksgiving.
What would be the solution to poverty in our hypothetical example? It would a libertarian one, a solution based on private property and free markets. Everyone would be free to go into any business he chose. In that way, people could pursue their own interests and talents in an attempt to provide goods or services that other people would be interested in purchasing.
People would be free to engage in any economic trade with anyone else, without interference or regulation by the government.
People would also be free to accumulate the fruits of their earnings. There would be no income tax imposed on the people.
Obviously, at first there would still be manifest poverty, given the difficulties in accumulating wealth. People struggling to survive have a difficult time saving any money. But by the time of the second generation, things will have improved a bit, with families actually accumulating savings that they would then be free to pass down to the third generation.
Within a few decades, such a system of free enterprise would not only generate millionaires but also raise the standard of living for those at the bottom of the economic ladder. Equally important, the poor would know that they had a chance to join the ranks of the middle class and wealthy simply by working hard and providing a product or service that other people were willing to pay for.
This, too, is not as hypothetical as it sounds, as it pretty much describes the situation in the United States after the adoption of the Constitution in 1787 and continuing through the early 1900s. For the first time in history, people were able to engage in enterprise freely (that is, without government regulation or control) and accumulate unlimited amounts of wealth (that is, without their incomes’ being taxed).
That’s not to say, however, that the process of wealth creation was an immediate one. For the first few decades, life was very difficult, as it would be in any society in which there exists only a small base of wealth.
Liberals often point to the Industrial Revolution as an example of the horrors of the free-market system. Factory conditions, for example, were horrific for those working there, including wives and children, as liberals are so fond in reminding us.
But liberals miss an important point. Those factories, as bad as they were, offered a chance for survival to those who were working in them. A society in which there is no foundation of wealth and no chance of accumulating wealth will inevitably have people starving to death.
A society in which there is limited wealth but in which people are free to engage in enterprise and accumulate wealth will inevitably have people struggling to survive but at least having a chance to survive.
That’s what was occurring during the Industrial Revolution. American husbands and fathers were sending their wives and children into factories not because they hated them but because they knew that that was the only chance they had to keep them alive.
Then, as families began accumulating wealth, the need to send the entire family into the factories became less desperate. It was not government but rather capital — the accumulation of savings — that ultimately brought wives and children out of the factories.
The key, then, to a rising standard of living in a society lies in savings and capital. Let’s examine how this is so.
The role of capital
Let’s assume that a farmer owns a 100-acre tract of land on which he grows various crops. He employs one worker, whose sole piece of equipment is a hoe. The farmer pays the worker $10,000 per year and has additional expenses of $5,000. At the end of the year, the farmer sells his crops at market for $20,000, earning him a profit of $5,000.
Since the farmer has earned a profit of $5,000, he can use part of that money to give his worker a raise. But let’s assume that a $5,000 profit is the minimum amount of profit that the farmer has concluded he needs to remain in business. Since farming is a risky business, one in which a crop could sell for much less than anticipated, the farmer just doesn’t feel it’s worth his while to engage in farming if he can’t earn at least $5,000 for himself and his family.
Assuming that things stay the same from year to year, that means that the worker’s income simply cannot go up. It must remain the same, given that the farmer lacks the financial means by which to pay the worker more money.
But what if the farmer can somehow increase production? Suppose he can double the output on his 100-acre tract of land? If he’s able to do that, he’s then able to give his worker a pay raise.
So how does the farmer pull that off? That’s where capital comes into play. Each year, the farmer puts away $500 of his profit. After a few years, he uses his savings to purchase a used tractor. Now, the worker is no longer using a hoe. He’s got a tractor to plant, cultivate, and harvest the crops. Let’s say that production doubles, which increases the farmer’s profit to $10,000.
That means that the farmer now has more money at his disposal to increase the pay of the worker.
Does the worker need to rely on the beneficence of his employer to guarantee the pay raise? No, because the worker knows that there are surrounding farms that are also employing workers. All that he has to do is check around and see what competing farms are offering and ask his employer to match it. If the farmer fails to do so, the employee can accept a competing offer, leaving his employer with no one to work on his farm.
Thus, the people who are among the primary beneficiaries of capital accumulation are the poor — those who are wage-earners at the bottom of the economic ladder. They have as much interest in the success of the company they’re working for as the owner has. The more the company invests its profits in productive capital, the more profits the company stands to earn, enabling more money to be devoted to pay raises. Moreover, the more other companies are doing the same, the more they are able to bid up the real wage rates of the wage-earning class.
Return to poverty
Now, let’s return to our science-fiction example where the prisoners are living on that new planet. Let’s propel them forward by 100 years. By that time, people have accumulated massive amounts of wealth and everyone has a very high standard of living. There are, of course, those who are much wealthier than others but by the same token, those who are the poorest have a nice living standard. Everyone understands that the high standard of living depends, in fact, on the savings and capital accumulation engaged in by the very wealthy and by everyone else.
Reenter the liberals. Seeing all this wealth, they exclaim, “Notwithstanding God’s injunction against coveting, it’s simply not fair that some have more when others have less. We wish to declare war on poverty. Let us rid ourselves of this libertarian free-market scourge and establish a socialistic welfare state, one in which the federal government will take from those at the top of the economic ladder and redistribute it to those at the bottom of the economic ladder.”
People succumb to the liberals’ siren song. At first, everything works fine. Old people are getting free retirement payments and health care. Poor people are getting free housing, food, and clothing. Producers are getting free subsidies. Children are getting free education.
People fail to notice, however, a disquieting phenomenon. The ranks of the wealthy slowly start dropping because those who are barely on the margin of the wealthy and middle class drop back into the lower category, owing to the new income taxes imposed on them to fund all the free programs.
As the process grows, the tax base shrinks, causing federal officials to extend their income tax to the middle class. That causes people on the margin between the poor and middle class to begin dropping back into the lower category.
Gradually, taxes continue to expand and rise to keep the socialistic system going, bringing about an ominous development — a gradual reduction in savings and capital accumulation, the keys to a rising standard of living.
In fact, our hypothetical case is not so hypothetical. It describes the economic history of the United States for most of the 20th century. After 19th-century Americans had brought into existence an unprecedented accumulation of capital and, consequently, the highest standard of living in history, 20th-century liberals saw a golden opportunity, one that would enable them to tax the wealthy, and later the middle class, to help out the poor. That is what Roosevelt’s New Deal and Johnson’s Great Society were all about — using government to take money from those who had earned it and giving it to those who had not earned it.
Over time, socialism returns people to a state of poverty, one in which everyone is equal by virtue of everyone’s having nothing. Cuba is a good example. By taking everything away from the wealthy and middle class, including their businesses, homes, and bank accounts, with the alleged intent of helping the poor, Fidel Castro carried the socialist principle to its logical conclusion.
The result? Manifest poverty. In fact, if it hadn’t been for loans and grants from the Soviet Union (which itself was based on the socialist confiscation-and-redistribution principle), Cubans would have faced the same result as the people at Plymouth Rock — starvation and famine.
The only reason that the U.S. standard of living continued rising during the era of American socialism was that the private sector continued accumulating savings and wealth faster than federal officials were confiscating it. The invention of computers, for example, almost immediately made workers much more productive.
But it is impossible to say how much more productive Americans would be — how much higher our standards of living would be — if the wealth-producing process that our American ancestors had brought into existence had been free to continue. If Americans had never adopted the income tax and the welfare state, it boggles the mind to think how much better off the American people would be, especially those at the bottom of the economic ladder.
When it comes to economic policy, liberals suffer from two major weaknesses.
One, they believe that all that matters with respect to policy are good intentions. As long as liberals mean well, they think that the policies they implement, especially with respect to the poor, are justified.
Two, they have a woeful lack of understanding of economic principles, which inevitably leads them to think that they can change the natural laws of economics through the simple act of enacting legislation.
Arguably, the people who have paid the highest price for these two liberal weaknesses are the poor, the class of people around whom liberal domestic policy has claimed to primarily revolve since at least the time of Franklin Roosevelt’s New Deal.
It would be difficult to find a better example of all this than minimum-wage laws. These are laws by which liberals claim to help the poor by requiring employers to pay their employees a minimum hourly rate set by the government. The notion is that this helps the poor by preventing employers from paying less than a subsistence wage. In the absence of a minimum-wage law, the liberals say, employers would be paying workers so little that the poor would be starving in the streets.
The truth, however, is that no matter how well intended liberals might be, a minimum-wage law actually serves as a monumental attack on the poor. It is a classic example of how a lack of understanding about economic principles leads liberals into harming the very people they claim to want to help.
Let’s examine some fundamental economic principles to show how the poor — those at the bottom of the economic ladders — are damaged by minimum-wage laws.
In every exchange, both sides give up something they value less for something they value more. It’s a natural principle on which trade is based.
Let’s assume that I have 10 apples and you have 10 oranges and that I give you 7 apples and you give me 3 oranges. Someone might say that that’s an unequal exchange because I gave up more than you did. Not so. I gave up something I valued less — 7 apples — for something I valued more — 3 oranges. But you did the same — you gave up something you valued less — 3 oranges — for something you valued more — 7 apples.
Both of us have benefited from the exchange. We have both given up something we value less for something we value more. We have improved our respective standard of living through the simple act of exchange.
Employment and subjective value
This principle applies not only in the trading of goods, but also in the trading of labor services. When an employer and employee enter into a labor agreement, each of them is giving up something he values less for something he values more.
The employer gives up a certain amount of money in exchange for the labor services of the employee. He values the money less than he values the work that the employee is performing.
By the same token, the employee gives up his time and labor in exchange for the money he receives from the employer. The employee places a higher value on the money than he does on the time and labor he’s devoting to the employer.
There is an important economic principle involved here: Value is entirely subjective. It lies in the eyes of the beholder. The value that I place on a particular item is likely to be different from the value that you place on it. Thus, I might well be willing to pay a higher price for certain things than you would, and the same applies to you.
This principle of subjective value applies to employers when they’re hiring employees. When contemplating whether to hire a certain worker, employers subjectively determine the applicants’ value. By the same token, the subjective determination of the worker will determine whether he takes the job.
Whether a person is hired or not will ultimately turn on the subjective determinations of both employer and worker. An employer might think to himself, “That person is worth $5 an hour to me.” The worker might think to himself, “I’m worth $6 an hour.” If neither side budges, then no trade will take place. That means that the worker will not be employed at that business and must seek other employment where the employer says, “That worker is worth $6 an hour to me.” And the first employer has to continue looking for someone who will work for $5 an hour. There will be a meeting of the minds when each side gives up something he values less for something he values more, enabling an employment contract to come into existence.
This is an area in which liberals go astray. They simply do not understand the concept of subjective value. They think that everything and everybody has some sort of objectively determined value, one that can be legislatively imposed.
Let’s consider an example. Suppose an 18-year-old man is looking for a job. He comes from a very poor family, dresses very badly, and speaks poor English. He has no work experience.
Everywhere he goes looking for a job, he is met with the same answer: No. No matter how many businesses he visits, he simply cannot get a job.
Finally, he walks into a business and says, “I’m willing to work for a dollar an hour. I’ll do whatever you want me to.” For his part, the employer finds that offer extremely attractive. He has menial tasks to be performed and it is worth it to him to pay $1 an hour to get them done.
Thus, both sides — the employer and the worker — have arrived at a meeting of the minds. Each is willing to give up something he values less for something he values more. Their decisions are based on their subjective valuation of the elements being exchanged — labor and money.
Will the deal go through? Not today. The reason? The federal minimum-wage law, which requires employers to pay workers at a minimal rate of $7.25 per hour.
The reasoning employed by liberals goes like this: Nobody can survive earning a dollar an hour. To sustain one’s life, liberals say, requires a minimal rate of $7.25 an hour. Therefore, liberals enact a law that requires employers to pay their workers that minimal rate. In the process, liberals portray themselves as great heroes for the poor.
But there’s obviously a problem here, one involving subjective value. In our example, that 18-year-old is unable to find any employer willing to pay him $7.25. All they’re willing to pay him is $1 an hour, a rate that he is willing to accept but is precluded from doing so because of the minimum-wage law.
What happens to that 18-year-old? As a result of the minimum-wage law, he goes unemployed, permanently. He simply cannot get a job at the federally established minimum because employers do not place that value on his labor.
That leaves the worker with the following choices: die by starvation, live on charity, engage in criminal conduct, or go on government welfare.
Keep in mind that when a minimum-wage law is enacted, the government does not require employers to hire people at that rate. Instead, what the government does is to require people who are hired to be paid at that minimal rate.
The obvious question arises with respect to subjective value: What happens to people whose labor is valued by employers at less than the governmentally established minimum?
The answer is as obvious as the question, but unfortunately it’s one that liberals simply fail to consider. Those people are laid off and, even worse, permanently locked out of the labor market, assuming that valuations remain the same.
That is, as long as employers place a subjective value on the labor of unemployed people that is lower than the governmentally established minimum, those people are going to be out of work. Employers will simply refuse to hire them.
To make the matter clearer, suppose that Congress enacted a minimum wage of $1,000 an hour. Wouldn’t that be a great thing for workers? No, because it’s easy to see that lots of people would be laid off. The reason? Subjective value. All those workers whose labor is valued by employers at less than $1,000 an hour would be terminated.
Liberals will rail against this natural law of economics. They’ll exclaim, “Every employer should place a high value on the work of employees. The value they place should at least equal the amount we set in our minimum-wage law.”
But that’s not how life works. Again, value is subjective, not objective. Employers have their own personal, subjective valuations. For their part, so do workers.
Thus, in an unhampered market economy — that is, one unhampered by such governmental interventions as minimum-wage laws — there will be no permanent unemployment because people will be able to find jobs at wage rates that are acceptable to them and to their employers, even if it is at rates that liberals consider too low.
Liberals say that it is abhorrent that that 18-year-old would have to work at a dollar an hour. They say that no one could survive at that rate. They say that it’s unconscionable that anyone should have to work at that less-than-subsistence wage rate.
But in their paternalistic approach to this situation, they block out of their minds some important things. Even though the young man is making only a dollar an hour, he’s not only earning a bit of money he’s also learning work skills and a work ethic. He’s learning the business he’s working for. He’s building up his stock of knowledge, which will enable him to become more marketable down the road or perhaps even open his own business to compete against already-established businesses.
Unemployment and crime
But when a teenager willing to work is locked out of the labor market, thanks to the minimum-wage law, he doesn’t acquire any of those things. As a result of the supposedly good intentions of the liberals, the minimum-wage law locks him out of the labor market and relegates him to a life of charity, illegal activity (e.g., theft or drug dealing), or welfare.
Liberals cry, “But the boy could never survive on a dollar an hour.” Nonsense! There are all sorts of things he could do to make do, especially knowing that the situation is likely to be temporary. He could live with family or with a large bunch of friends who are sharing expenses. He would do what was necessary to survive during the time he was improving his work skills.
With their minimum-wage laws, liberals never give that 18-year-old a chance. With their supposedly good intentions, they make him permanently unemployable.
Is there a real-life example of this phenomenon? Last October the New York Times published a news story about runaway teenagers in America (http://www.nytimes.com/2009/10/26/us/26runaway.html?_r=2), the number of which has soared because of family financial problems arising from the recession. Citing federal studies and experts, the article stated that 1.6 million juveniles become runaways annually.
According to the article, “Legitimate employment was hard to find in the summer of 2009; the Labor Department said fewer than 30 percent of teenagers had jobs.” The runaways supported themselves by selling drugs, panhandling, and prostitution.
Why weren’t the runaway teenagers choosing to work at legitimate jobs to support themselves?
The answer: minimum-wage laws. There are no jobs being offered at low wage rates to 14-year-old runaways with minimal education, rates that many of the runaways might well be willing to work at. All the available jobs are being offered at the minimum wage because that’s what the law requires. And employers simply do not place that value on the work of runaway teenagers who lack an education and work experience.
(A related factor here is teen work permits, another ludicrous regulation that most states require.)
Suppose there was no minimum-wage law. Then there would be all sorts of jobs being offered on the market at hourly rates of $5, $4, $1. Runaway teenagers would have an array of available options open to them from which to choose.
But those options are never permitted to come into existence because of the government’s minimum-wage law. It relegates runaway teenagers to surviving by working in such activities as drug dealing and prostitution.
Liberals say that in the absence of minimum-wage laws, employers would pay everyone below-subsistence wages.
But that’s obviously ridiculous, for the labor market is filled with instances of employers paying their workers more than the minimum wage. How do liberals explain that?
In other words, if employers would pay everyone below-subsistence wages in the absence of a minimum-wage law, why would so many employers today be paying many of their workers more than the minimum? Wouldn’t you think that they would be paying the minimum amount established by law and not a penny more?
The answer lies, again, in the concept of subjective value. The reason that employers pay some workers higher than the minimum wage is that they subjectively place a higher value on the labor of such workers. Thus, some employers are willing to trade, say, $20 an hour in exchange for the labor of their employees.
Why would employers do that? Why not pay less rather than more, even if you place a higher valuation on the labor of the workers? Because there are other businesses that are competing for the labor of those workers, which tends to send labor rates upward.
Thus, it is in the interests of workers to have as many businesses operating as possible. More businesses mean greater competition for workers.
Yet, because of minimum-wage laws and other such governmental interventions, many businesses cannot survive. For example, a company that is barely operating at the margin cannot afford to give its workers a governmentally established pay raise. With the increase in the minimum wage, such a business has no choice but to close down, thereby laying off its workers.
Add to that all the businesses that have to shut down as a result of other governmental interventions. Among the people who are hurt are the poor because there are fewer businesses competing for their services.
Liberals operate under the quaint notion that such natural laws as the law of supply and demand can be repealed by public officials. They cannot be.
Minimum-wage laws are just one example among many of a government intervention that hurts the poor. Other examples include price controls, welfare, protectionism, licensure, and subsidies.
Good intentions don’t matter and a lack of understanding of economic principles is no excuse. What matters are the actual consequences of government policy. Those whom liberals claim to love — the poor — are the ones who suffer the most from liberal economic policies.
Reprinted from The Future of Freedom Foundation.