Socialist Recipes To Continue Being Poor

Some weeks ago, the leftist "think-and-do" tank "New Economics Foundation" (NEF) published a report that aims to rebut the supposedly generalized idea that poverty can only be battled through economic growth. According to the NEF, only income redistribution can bring poverty to an end while also sustaining the environment. The problem, thus, is not how to make the pie bigger, but how to cut it up correctly.

The report, however, is full of fundamental economic mistakes that even seem to have been promoted by the authors. The confusion in the data is treated with pampering and maliciousness in order to prevent the reader from arriving at the proper conclusions.

Inequality, not poverty

The first error appearing in the report is that the NEF wants us to believe that they are concerned with the reduction of poverty, when its real objective is inequality. In this sense, not every growth which pumps wealth for the poor can be considered "profitable" growth for them; to the NEF, we should only say that growth is profitable for the poor when they obtain in absolute terms the majority of the new wealth.

This means that if, for instance, the aggregate growth of the whole society increases by 10000 monetary units and 4000 of them go to the lower classes, the NEF will not consider this growth as profitable for the poor. Or, even more ridiculous, if every individual doubles his wealth, the NEF will not state that this growth is profitable for the poor.

The fundamental mistake behind this way of reasoning is that the NEF deliberately ignores that those who create wealth are individuals and thus the relative position of each member of society is irrelevant so long as that individual increases his welfare. Following the NEF’s egalitarian argument, we could also say that in case that some people consume 5000 calories per day, those who just consume 1500 should be close to starving to death.

The essential point for the poor is to increase their own wealth, independently of how much other people have increased theirs. Anyone who is happy only when surpassing the rest is not poor but envious.

Misinterpretation of the data

The central thesis of the report consists on proving through its figures that growth has not been in the last decades a useful tool to end poverty. For example, the report tells us that "for every $100 worth of growth in the world’s per person income, just $0.60 found its target and contributed to reducing poverty below the $1-a-day line." The conclusion seems obvious: just 0.6% of growth benefited the poor, so we must look for other ways.

We are facing a holistic conception of society and the economic system. The NEF tries to separate production from distribution, that is, it wants to sell the notion that wealth is created in limbo (and not by concrete individuals) and that afterwards it is redistributed in an inequitable way.

Unfortunately for the NEF, reality is quite different. 99.4 dollars out of every 100 are in the pockets of Westerners because they have created those 99.4 dollars of wealth. There is no secret or mystical operation: the increase in wealth benefits those who make it increase.

The report, thus, reminds us of a platitude. If poor countries do not grow, international growth does not reduce poverty. This is very different from saying that growth does not reduce poverty, because the problem is precisely that poor people cannot create wealth due to government interventionism.

The report even recognizes that African countries have become poorer during the last 20 years. How can anybody sensibly expect world growth to reduce poverty if poor countries do not growth?

It is sad to have to remark upon something so elemental. There is just one way to fight poverty: economic growth, the creation of wealth. But when economists speak of economic growth as a way to eliminate poverty, they mean the economic growth of the poor, not of the rich! Economic growth among the rich can make it easier for the poor to progress, but if they, for whatever reason, are prevented from generating wealth, they will not get out from the well of necessity, even though their neighbors use sausages to leash their dogs.

In fact, the NEF should think about whether the same causes which have sunk into misery many countries all around the world are not the same causes which prevent them from growing and, thus, getting out of poverty.

The environment needs private property

Another obsessive concern of the NEF is the environment. According to the report, our development is not sustainable because it degrades nature. Thus, when we speak about growth we should take into account social costs in order to calculate if it is acceptable.

The curious part of the argument is that every entrepreneur makes use of a cost-benefit analysis before starting to produce; if NEF were coherent with its own premises, they should demand a greater penetration of capitalism and private property into environmental issues.

However, leftists do not seem to accept the above conclusion, as they prefer to speak about "social costs" which do not relate to market prices. The issue is that no one points out how to measure those costs, and this is a not trivial problem: socialism failed precisely because of its inability to value the costs of its policies in absence of market prices.

The rhetoric of the NEF shares the vacuity of the environmentalist thought: there are not enough resources to maintain the present path of growth so government must rationalize them. But socialists forget that the scarcer the resources, the greater the incentives to protect, economize and restore them.

We only need private property over natural resources in order to allow entrepreneurial judgment to increase productivity through capital accumulation and technological developments, something that the NEF seems to not have understood.

All the power to the State

In the end, the report ultimately becomes just a case in favor of the State and its economic interventionism. To the NEF, wealth and welfare are not produced by entrepreneurs and capitalists, but by politicians and bureaucrats. That way, public offices are exhorted not to focus their interventionist policies on growth, but on redistribution instead.

Without a doubt, statists have unlimited faith in political means: everything they want to achieve can become a reality thanks to the State. This is the reason why the NEF asks to "control capital flight, tax havens and tax competition," calls for "international taxation" and the "introduction of a new global currency" to expand inflation in order to develop the Third World.

To sum up, this report by the NEF calls for using poverty as an excuse to restrict freedom through redistribution and political control. This is a disastrous economic recipe that ensures that Africa will remain poor and that the rest of the world will follow tits path.

Politicians and organic intellectuals such as the NEF devote huge efforts to block the creation of wealth by the poor. They need the fiction that the State is necessary for solving all the problems of humanity –poverty, disease, illiteracy and famine– in order to keep their jobs and their power. The State is a lie concocted by a minority to plunder the majority, a lie which needs reports like that of the NEF to seem plausible and credible.

Economic science must refute these socialist and enslaving fallacies to establish a free and prosper society, and this goal, despite the NEF, must include the poor.

This article was originally published in Spanish in Libertad Digital.

May 2, 2006

Juan Ramón Rallo [send him mail] is a student of economics and law. He is a founding member of the Spanish libertarian think tank Instituto Juan de Mariana and writes weekly for the Spanish newspaper Libertad Digital whose English version is The Spain Herald. His weblog can be visited here.

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