The Poor and Socialism vs Capitalism

By: MISES

Kel Kelly writes: Socialists commonly cite the existence of the poor as a reason for socialism, and they claim that their concern for the poor shows compassion and morality. Since the topic of poverty is a key battleground in the war of socialism versus capitalism, it is relevant to examine what poverty is, how much of it exists in the United States, and how we can truly eliminate it.

Who Are The Poor?

When we hear of the poor, we envision a massive group of people without food and shelter. In reality, most of the poor in capitalistic countries such as the United States are not in such a state. Data from a recent census reveals that of the official "poor":[1]

• 76 percent have air conditioning.
• 66 percent have more than two rooms of living space per person.
• 97 percent own at least one color television.
• 62 percent have either cable or satellite television.
• Almost 75 percent of households own a car (30 percent own two or more).
• 73 percent own microwave ovens.
• More than 50 percent have stereos.
• 33 percent have automatic dishwashers.
• 99 percent have refrigerators.
• Virtually none lack running water or flushing toilets.
• 46 percent own their own home, the average of which is a three bedroom house with 1.5 baths, that has a carport and porch or patio, and the average value of which is 70 percent of the median American home.

If we observe our presumably poorest citizens on our public transportation systems we see that they have cell phones, adequate clothing, personal audio devices, and are generally clean and free of disease and deformities. They also have the comfort of using a heated and air-conditioned transportation car that has carpet and flat-panel televisions for their amusement (paid for primarily by the wealthy, of course).

If you were to compare these American poor to the poor in Bolivia, Honduras, Cambodia, or India (or even to many of the poor in Mexico, Romania, Thailand, and Russia), you would see a stark difference. The poor in these countries often literally live in open-air huts with large leaves for roofs and stacked bricks that serve as a shared stove for multiple families. For the poor of the third-world countries, there is, for the most part, no money, no exchange of goods — just basic survival by subsistence farming or by hunting or fishing for food. To these people, American street sweepers and factory workers live a life of luxury.

The difference between the "wealthy poor" in capitalist countries and the "deprived and desolate poor" in noncapitalist countries is no coincidence. The freedom that exists in capitalistic countries results in more invested capital per worker. This means that workers can produce far more wealth for themselves and for the rest of society. In noncapitalist countries today (and in the days before capitalism first appeared) poverty really means that no work is available; there is no means by which to improve one's state of being, or even to maintain it.

Under capitalism, as we see, there is almost no question of poverty existing in this sense. Anyone who is not mentally or physically disabled can perform work and earn an income if they choose (except when prevented by the setting of minimum wages by government). Today, any poverty in the world is caused by an absence of capitalism, not the existence of capitalism.

Though the poor in this country have continuously seen their standard of living rise by capitalism, anticapitalists continually point to the poor as evidence of a need for wealth redistribution (i.e., less capitalism), just because the poor earn less than do the rich. But there will always be a bottom 10 percent or 20 percent of the population in income in any society no matter how wealthy we all become. Thus, politicians and socialists always have a group to point to that are always in need of "assistance."

But even if we focus on the bottom 10 percent or 20 percent of Americans, it would still be difficult to identify who the poor are, because the composition of this group changes constantly. The "disadvantaged," the group that is supposedly made poor by the rich, are not a static, defined group. A study by Michael Cox and Richard Alm of the Federal Reserve Bank of Dallas showed that of the bottom fifth of income earners in 1975, only 5 percent were still poor 16 years later. Less than 1 percent remained in the bottom fifth for the entire 16 years. Thirty percent rose from the bottom fifth to the top fifth. In sum, few people remain at subsistence level. There are ways out of poverty for most.

Not to diminish the pains and difficulties of poverty, but in terms of the ability to achieve an absolute level of health and strength, the "poor" are usually in the same shape as the average person. Poor children take in virtually the same amount of protein, vitamins, and minerals as middle-class children; and they actually consume more meat. Most poor children grow to be larger, stronger, and healthier than the average WWII soldier. Though some poor families have temporary challenges with hunger, 89 percent of the poor report that their families have "enough" to eat; only 2 percent say they "often" do not have enough food.[2]

Further, the poor are not as poor as government statistics intentionally misrepresent. For example, the ratio of "incomes" — the primary measurement used by government — of the top fifth to the bottom fifth of income earners is 15 to 1, but the ratio of their consumption is 4 to 1. This is because the poor usually have access to money that does not fall under taxable income, including government handouts. Their assets and wealth are not considered at all. The census bureau previously stated that people it deems "poor" typically spend $2.24 for every $1.00 in (government) reported income.[3]

Though there are indeed people who are in dire straits and need immediate help, most of the people we generally call "poor" are not as poor as anticapitalists make them out to be. Depending on whom they are compared to, the poor can appear to be outright rich. Socialists make it appear as though there are many more poor people than there really are, so as to justify stealing more money from the rich to try and "equal out" society. When we speak of the poor, we should only speak of those who are physically unable to work and provide for themselves, not the entire bottom 20 percent of income earners who represent tens of millions of people.

More on the Minimum Wage

The minimum wage raises labor costs to the point where companies cannot afford to hire all the workers they previously did, since they have a limited amount of funds available with which to hire workers.

Even ACORN, the organization that claims to help the poor by, among other means, promoting a "living wage," learned this first hand.[4] ACORN sued the state of California in 1995 for exemption from state labor laws, in order to avoid having to pay the minimum wage to its own employees. The organization argued before the court that "the more that ACORN must pay each individual outreach worker — either because of minimum wage or overtime requirements — the fewer outreach workers it will be able to hire."[5] (As a comparable example, esteemed minimum-wage advocate Nancy Pelosi also refused to pay minimum wage to her own workers.)[6]

But besides the fact that the minimum wage cannot truly help low-skilled workers earn higher salaries, it's not needed in order for them to do so anyway. Low-end wages, just like high-end wages, will increase through time as increased capital accumulation brings about increased productivity, and especially as workers improve their skills. For example, wage rates for minimum-wage employees grew at more than five times the rate for those earning above minimum wage between 1998 and 2002. Nearly 66 percent of all minimum wage employees who remain employed earn more than the minimum wage after one year of employment.

Since most of the low-income earners are newer workers starting out and acquiring skills that will enable them to eventually earn more money, over 97 percent of all employees in the United States earn more than the minimum wage by age 30. Those who do not achieve this rate of pay do not acquire the needed skills for one reason or another; the explanation likely has to do with mental illness or personal motivation. Just about all workers can progress by remaining employed and gaining experience. But those who are forced into unemployment by the minimum wage often never get the opportunity.

And contrary to what ACORN, our politicians, and other socialists would have you believe, it is not usually the case that minimum-wage earners are single mothers raising children. The 1995 Current Population Survey showed that of all workers earning the minimum wage immediately prior to President Clinton's 1996 increase of that wage, 37.6 percent were teenagers living with their parents, 17.1 percent were single adults living by themselves, and 21.5 percent were adults married to a spouse who was also employed. Only 5.5 percent of workers earning minimum wage were single parents, and only 7.8 percent were married but still the sole family wage earner.[7]

The Failure of Antipoverty and Wealth-Redistribution Schemes

Our government has been "fighting poverty" for most of the last century. Tens of trillions of dollars have been spent. Yet success never comes. When it becomes apparent that "poverty" is not being eradicated, our politicians throw yet more money at the supposed problem. The increased money comes from our increased taxes (including the inflation tax).

Original tax rates in this country were 0 percent. The first official income tax appeared in 1913 with the passing of the Sixteenth Amendment.[8] It was a rate of 0.4 percent — a rate that Congress deemed "fair." The original marginal tax rate on the super rich was 7 percent. It eventually reached a peacetime high of 92 percent (Sweden reached an unbelievable 102%). Once our effective tax rates reach 100 percent, we will effectively be a communist country.[9] Year by year, working persons have had to pay a higher proportion of their incomes for their own compulsory "insurance," or to support other people.

But year by year there are still more people in need of government support. This is partially because as more people understand that incomes can be had without working for them, more people position themselves as poor so that they can receive benefits. No matter how much money is thrown at the problem, there will always be both the government-defined poor as well as the natural nondisability poor; there will always be people who choose not to better themselves, due to various psychological or mental desires to remain in their current state.

Yet any attempt to equalize people by redistributing wealth must result in a destruction of capital and of the ability to create jobs and prosperity, and thus reduced incomes. Even Leonid Brezhnev, First Secretary of the Soviet Communist Party, stated that "One can only distribute and consume what has been produced; this is an elementary truth."[10] What he failed to learn, as history shows, was that only the protection of private property and free markets can bring about the coordination of people and physical resources in a way that increases the production of wealth, while government economic planning and forced redistribution reduces production.

But besides the fact that so-called poverty will never be eliminated simply because at least one person will always be poorer than all others, politicians have a vested interest in preventing the alleviation of poverty. If Americans are fully employed and earning continually increasing wages, who needs the thousands of welfare bureaucrats in Washington? Though socialists believe that these bureaucrats (at least the Democrats) are truly benevolent individuals concerned about the well-being of others, in reality they are there to gain power, live off of taxpayer money, and advance their careers. Why else, for example, would Congress vote to repeatedly give itself wage increases — along with lifetime pensions in the millions[11] — that far outpace the consumer price index and the wages of workers?[12]

Thus, politicians will always claim that masses of poor people need their assistance. This is why they continually redefine poverty and raise the income threshold for the "poverty line." In this way they can instantly have more poor people who need help from more taxpayer money and more bureaucrats. Our welfare and redistribution system sustains an industry of tens of millions of both public and private "aid" workers. Actual facts and outcomes of this industry's work demonstrate that its goal is not to eliminate poverty, but to expand government dependence through increased taxing, spending, and regulation.

Why do voters not see that the welfare policies of the last hundred years have failed to alleviate "poverty" and that something different should be done? Many do, but too many other people benefit (or so they think) from the current system by having money redistributed to them; they thus keep voting for it. Also, many of the people are socialists with socialist ideals detached from reality. I suppose the rest of the well-intentioned voters are simply naïve.

Real Solutions to Poverty

Very few people examine why the poor are poor. We generally give our and others' money to "the poor" because we blindly believe that they can't help the situation they're in and that they would otherwise starve or freeze to death. But if we really delve into their past and look at the decisions they have made, we would find that most of the ongoing poor are poor largely because they have, through their own actions and inactions, chosen to be. Many people think it is immoral to "judge" them and to consider the notion that they might have brought it on themselves. We don't question why we observe many of the poor visibly doing nothing day by day while we are at our offices working to support them.

Similarly, many of us workers see even coworkers who are not nearly as hard-working and who clearly just show up to collect a paycheck between nine and five without putting a lot of thought and care into their work. We don't like to admit that these work habits could be related to why these workers do not earn as much as others who work much harder.

As another example, most of us have family or extended family members who do not have much wealth because they have lived well beyond their means and have made poor personal and career decisions. We have family members that chose not to continue their education — education that is free to the poor — and chose not to work hard to have a career (granted, it's not obligatory to have a "career," but it is in fact what usually brings in more money).

We ignore these things and pretend that each and every poor person achieved their current state by being held down by the exploitative actions of others. We thus vote over and over to hand over money, not mostly from ourselves, but mainly from the rich, to the poor. The more we give the poor, the more incentive they have to rely on what we give them instead of earning more for themselves, an act which would require time, effort, and hardship on their part.

Redistributing wealth from the rich to the poor only reduces the wealth of both groups, but particularly of the poor. Every country that has ever made a serious attempt to equalize its citizens has gone to ruin, because forced equality reduces the incentive the rich have to invest capital and instead encourages the consumption of it, since it is likely to be taken from them. Additionally, as more and more people choose to become receivers instead of givers, there is not enough wealth being created by those who produce to support both themselves and the rest of society. The system breaks down and poverty for all arises.

Socialism and communism always falsely parade as systems of equality and liberty of all citizens, but they have always resulted in economic retrogression for all (except the rulers). Partial socialism, as we have today, has always resulted in stagnant or slowly retrogressing economic performance, as we have today.

The general public does not understand that taking money from the rich has a very real and negative economic cause and effect; they imagine some economic vacuum in which there is no real change in the amount of capital per worker and their corresponding wages. They think that government, not businesses, creates wealth and provides for them. They see government as a spender, not as the taker that it is.

As Ludwig von Mises stated, "spending and unbalanced budgets are merely synonyms for capital consumption."[13] The only real way to improve the lot of the poor is to replace their payments from government with payments from companies, in the form of wages.

The first and easiest step to increase the incomes of the poor would be to eliminate all laws that fix the price of labor above the market price. This alone would create full employment. The average poor family with children is supported by only 800 hours of work each year. This is equivalent to 16 hours of work per week. If the average poor family was able to increase the hours worked to 2,000 hours each year (i.e., one adult family member working a full 40 hour week), nearly 75 percent of poor children would be lifted out of poverty. This could be achieved by eliminating labor laws that require potential employers to pay workers wages higher than the market price they would otherwise pay.

If poor workers were able (and willing) to work as many hours as a lot of middle- and upper-class workers do — 50, 60, or even 70 hours per week — they could afford to live on minimum wage and below, especially if they had few or no children (the government currently gives them the incentive to have children by paying them for each child).

The second step towards helping the poor would be to cease all redistribution payments. This would cause workers' real wages to increase because the money that was previously consumed by being redistributed through antipoverty programs would be used by companies to purchase more capital goods and pay more wages, resulting in increased productivity and thus more consumer goods, resulting in lower prices relative to wages.

This is true even if we take into account that the government might still be printing money, causing all prices to rise. In this case, all prices will rise, but the price of labor — our wages — would rise faster, because the supply of labor would not be increasing as fast as the supply of goods; in other words, inflation would not push prices of goods higher as fast as it pushes prices of wages higher.

Changes in real wages always follow changes in productivity. When real wages don't keep up with inflation (such as right now), the explanation is almost certainly that real productivity is not increasing.[14] This is ultimately because we are consuming capital as fast or faster than we are replacing it.

Real wealth is created only through production. Thus, the only possible way to help the poor is to provide jobs that are profitable. Providing jobs without the corresponding creation of more goods — such as unprofitable, government-created "green jobs" — does not help anyone. These, and other government-created jobs involving public-works projects result mostly in the destruction of capital and wealth. The few government jobs that involve improving roads, ports, and railways do allow us to produce more goods, but these projects could be performed more cheaply and efficiently by individual firms.

More importantly, government does not use market prices to determine which projects need to be undertaken when; instead, the decisions are made based on politics. The result is too much of one good or service and too little of another. This is why, for example, we have too few roads and therefore "too much traffic."

Government-works projects are usually taken on during bad economic times when unemployment is high. Politicians "create" these jobs in addition to the ones that already existed to serve the same purpose. But what is needed is not new jobs to perform inefficient, wealth-consuming work, but jobs in private industry to create real wealth. Government-works projects hire workers who, had they not been prevented from doing so by previous government regulation and intervention, would otherwise be working for individual companies and contributing to the production of real wealth.

Real-wealth-producing jobs, which contribute to increasing real wages can come about only by allowing companies the freedom to produce as they see fit, and by allowing capital to work for us instead of being consumed in redistribution. Poverty can be solved only with profitable wage payments and lower costs of living arising from increasing productivity. As long as we are producing and as long as there are not regulations preventing employment, there will always be jobs for everyone.

[From The Case for Legalizing Capitalism]

Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe, and the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta. Send him mail. See Kel Kelly's article archives.

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