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Displaying posts with tag WelfareState.Reset Filter
Life and Liberty
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Economic Myths #9 - Social Safety Nets

[First published on Free Life]
It is often trumpeted as a virtue that “civilised”, social democratic countries offer their citizens one or more types of “social safety net” in an attempt to eliminate the most dire effects of, say, unemployment, illness or some other kind of incapacity that could inflict a condition of extreme poverty upon the individual members of the citizenry. The idea is that the most basic wants will always be guaranteed by the state should one be unable to provide them for oneself and no one need have any fear of hunger or lack of shelter – situations that are said to be “intolerable” in a modern, twenty-first century society.
The first problem with this theory is that poverty is not some selectively appearing disease that makes a magical appearance every now and then to infect an otherwise healthy and wealthy society. Rather, poverty is the natural state in which human beings first found themselves. When Adam and Eve were expelled from the Garden of Eden they saw that the world was a barren and harsh place that is capable of providing precious little – may be just air to breathe – without the conscious effort of its inhabitants. The only way to alleviate this terrible situation is for humans to work to produce the goods that they need and, eventually, to bring about capital investment in order to expand the amount of consumer goods that can be enjoyed – whether it’s cheap food, housing, education, holidays or whatever – a process that only really got underway in any significant form in the 1800s.
If, therefore, the individual beneficiaries of a social safety net are not able to produce these goods themselves then it follows that somebody else must do so. Legislating the welfare state into existence does not, unfortunately, create the goods and services it needs to dispense to the poor and needy in order to banish poverty and want. Rather, existing goods have to be forcibly confiscated from those who have produced them and dished out for free to those that haven’t. Social safety nets are compulsory redistribution programmes, not wealth creation programmes and any benefit one receives under them will be at the expense of another person.
The economic effects of this are familiar to economists not only in the “Austrian” tradition but of other free market persuasions also. The most naïve error made by any proponent of redistribution is to believe that people’s behaviour is somehow hermetically sealed from the government intervention that seeks to achieve a certain end – i.e. that increased taxes on a certain activity will not discourage people from carrying out that activity; or that increased funding to eliminate a “dire” situation will not, in fact, exacerbate that situation. Whenever a new tax is proposed the estimations of new revenue to be raked in are often based, incorrectly, on the assumption that people will still wish to carry on doing the taxed event just as they did before, as if the tax makes no difference. And if some new programme to be financed by this revenue is proposed, they will calculate the amount of money needed to cure only the existing problem without considering whether throwing money at it will make that problem worse. All else being equal, if you pay people to do something they will do more of it; if you charge someone to do something they will do less of it.
Applying this understanding to the case of social safety nets, if people are charged to produce wealth in order to fund them then the cost of creating wealth is forcibly raised. Relative to other activities such as engaging in more leisure time, the attractiveness of producing more goods, more capital and more resources is reduced. There will, therefore, be less production, less capital investment and fewer consumer goods at higher prices – hardly the situation that one would expect to be conducive to the abolition of poverty. Similarly, if you grant a guaranteed right to be paid upon the occurrence of a bad event – such as sickness and unemployment – then you lower the cost of that event while the relative cost of preventative measures is raised. All else being equal, you will have more sickness, more unemployment and so on. Indeed, most of the afflictions which may cause a person to fall into hardship are not sudden accidents but are, in fact, a consequence of the lifestyle and environmental choices that a person may make – choices that are influenced by relative costs/benefits.
For instance, children, in particular, appear to be little more than a metaphorical blank cheque that the state writes to “protect” them from poverty and hardship (indeed, the focus of many social safety nets today appears to be on so-called “hardworking families” – never mind the fact that single people or childless couples may also work hard and struggle to make ends meet). Children, however, do not appear out of nowhere and, but for the most exceptional of circumstances, a conscious decision must have been made at some point to have a child – or at least to carry out the act of procreation. The economic effects that we outlined will therefore result from any safety net that benefits parents with children. If you pay people when they have children then all of the existing children will not suddenly be transported to the land of milk and honey. Instead, there will be more children in more families struggling to pay the bills who are desperate for a handout. The resources to feed these hungry, young mouths must be confiscated from those who do not have children – either through inability, a lack of desire or as the result of a financial decision – and redistributed to those who do.
The running theme through all of this, therefore, is that throwing free money at a problem in which people have at least some kind of influence will only aggravate that problem. Indeed, in spite of more than half a century of the welfare state the Western world still seems to be afflicted by the scourge of poverty – although a rather bizarre form of it where those who are poor appear to suffer more from obesity rather than from starvation. Moreover, it is also the case that expenditure on healthcare and other entitlements is shoving most states down the road to bankruptcy. Should it not be the case that “progress” is characterised by a reducing, rather than an expanding social safety net?
A powerful weapon in the arsenal of proponents of the welfare state is the false dichotomy – that the choice is either between a government social safety net motivated by “care” and “compassion” on the one hand or some kind of selfish, greedy, sink-or-swim and dog-eat-dog society on the other. This is plainly ridiculous; the free market exists precisely because people have needs and others are willing to advance the means to fulfil them. The whole edifice of investment and capital accumulation is not to benefit only the well off – rather, its task is mass production of more and more goods and services at lower prices for the ordinary person. Moreover, the purpose of insurance – presently and regrettably distorted by government interference – is to protect you from genuinely catastrophic events that are not your fault in return for a premium paid in advance.
Opting for the alternative of the free market does mean the abolition of care and compassion and the sudden appearance of selfishness and “rugged individualism”. Rather, it gives people the freedom to be caring and compassionate. Indeed it is such private benevolence that is discouraged by the social safety nets as they obliterate the need to cultivate familial and personal relationships upon which you can rely. Real benevolence, selflessness and caring for one another springs from these relationships and from private choice; the forced redistribution demanded by the state, however, leads to the very opposite – bitterness, antagonism and cynicism when your hard earned money is taken to be given to others, all of whom – in spite of whether they are genuinely needy or not – are tarnished as work shy, endless breeders. It is no accident that many of the great charitable foundations and mutual organisations appeared in the nineteenth century, the most relatively free and capitalist period in history – and not in the era of the welfare state. As for the argument that social safety nets are necessary for civilisation, what could be less civilised than wrestling something you want from someone at the point of a gun?
The social safety net therefore needs to be realised for the destructive force that it is; not as a hallmark of economic and societal progress but as one of retrogression of civilisation and as a retarding influence on the very real cure for poverty and illness – more capital, more production and more goods for everyone to be able to buy at cheaper prices.
Next week's myth: Taxes Benefit "Us"
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Life and Liberty
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Freedom – The Real Third Way

The economic history of the twentieth century is often summarised as some kind of big battle between unfettered capitalism on the one hand (as supposedly demonstrated by the United States) and full blown socialism/communism on the other (as the Soviet Union was supposed to have been).
Each extreme is touted to have its unique, positive aspects while being weighed down by equally unique disadvantages. Capitalism, for instance, is able to raise the standard of living by several-fold in a person’s lifetime, showering us with more goods at more affordable prices than previous generations could possibly imagine. On the other hand, it supposedly promotes a consumerist, materialist, “sink or swim” society that has no regard for the unfortunate and less well off. Hence the vision of the US as the kind of place where – if you are lucky enough to have money – you can buy whatever you want; but should you be struck down by poverty or illness then you are on your own.
Socialism, for its part, stagnates and reverses the standard of living, destroying capital and productivity so as to drive the population down to a level of permanent poverty. On the other hand, everyone is apparently more equal, benefiting from a “fair” system of distribution of any goods that are actually produced. (Of course, there is also the small matter of the tyrannous nature of socialism which, in the Soviet Union, resulted in the deaths of tens of millions of people. One might have thought that such a negative feature, being so completely off the scale, would warrant the summary dismissal of socialism as a serious proposition. But we will leave that to one side.)
Thus, if one accepts the nature of these two extremes as we have described them, a better society is seemingly reliant upon combining the economic growth of capitalism on the one hand with the supposed equality and fairness of socialism on the other. Such a path would allow us to discard the negative aspects of each those two systems in order to arrive at we have today: a social democracy, a “third way”, an economic order that is somewhere in the middle between greed and need.
The first problem with this type of thinking is that neither of the two polar opposites of capitalism and socialism have ever really existed, or at least not in the manner that their proponents imagine them. Capitalism – by which we mean here the private ownership of property, voluntary trade and exchange, and the complete absence of state privilege from any economic relations – has never blossomed in this idyllic format. State interference in the economy has always been present, just in lesser or greater quantities at different points in history. Often the interferences at lesser points have provided the catalyst for more intense state activity in later periods. For instance, the booms, busts and stop-start flirtation with centralised banking in the last half of the nineteenth century paved the way for the Federal Reserve System that dawned in 1913, just in time to print enough money to pay for World War One. Pure socialism, on the other hand, has never existed either because – as Ludwig von Mises told us so convincingly a century ago – it is, quite literally, impossible to build a socialist commonwealth without economic calculation, which, in turn, relies upon market prices for capital goods. The Soviet Union always had the benefit of being able to refer to international markets for the prices of factors of production. This enabled the Soviets to provide at least some kind of functioning economy for the seven decades of its existence, albeit at a vastly reduced rate of output compared to the rest of the world. Indeed, a joke at the time told of communism aiming for total world domination, but with the exception of one, single country whose market economy would generate the prices that everyone else could use.
A more accurate description of the two systems we have endured in recent centuries is not unfettered capitalism and unfettered socialism but, rather, state corporatism on the one hand and state socialism on the other.
State corporatism – the alignment between government and private business – has its epitome in economies such as those of Nazi Germany and Fascist Italy. However, it describes also the imperialism of nineteenth century Britain and the evolution of the United States, which received corporatist boosts during the War between the States, World War I and the New Deal, the latter of which was modelled on Fascist Italy. The combination of these has served to seal the fate of the US as a permanent “corp-tocracy”.
State socialism, on the other hand, is not public ownership of productive assets for the common good. Rather, it is ownership by the state and the bureaucracy, with productive capacity devoted to their ends (such as missile parades in Red Square) rather than the ends desired by the people. The latter, far from benefiting from equality and social justice, end up as expendable public slaves whose disobedience warrants a one way trip to the gulag.
As I have explained before, the historical development of these systems has, in fact, served to distort or misrepresent the extremes of “capitalism” and “socialism”. All of the positive aspects of capitalism are generally true; its negative aspects, however, owe themselves to state interference in the capitalist system, not to the capitalist system itself. In particular, the magnification of greed, inequality, and the general trend of the rich getting richer while the poor get poorer are consequences of state control over money. With socialism, it is the other way round: all of the negative aspects are true while the positive are completely false. If the poorest and least well off in society achieve a higher standard of living under socialism, this must always be in spite of the degree of socialisation of the economy, not because of it.
In light of this, the second problem with the “mixed economy” is that the actual blend that has been achieved by modern, social democracies is not one of capitalism on the one hand with socialism on the other. Rather, it is a mixture of state corporatism and a democratised form of state socialism. On the state corporatist side, we have central banks printing massive quantities of money, lining the pockets of the financiers in the midst of creating artificial booms and busts. At the same time, large swathes of industry are subject to state patronage and privilege to the extent that in sectors such as energy, transportation, finance, healthcare, and so on there is no genuine competition. To top it all off, armaments manufacturers profit from the continued proliferation of invented and unjustified foreign wars. On the state socialist side, however, we have politicians bribing voters with other people’s money, with demands for social justice, fairness, equality, and anti-discrimination met through the forced redistribution of wealth, income and political privilege.

The attempted synthesis between these two systems hasn’t produced any kind of successful mixed economy that selects the “best” aspects of each. In fact, the result is the complete opposite. With the lion’s share of state welfare lavished upon the very top, wealth and power is concentrated in an ever dwindling number of elites. Those clamouring for state corporatism, fake privatisations and state support for business simply want to keep their profits flowing through state protection. Rising stock prices and GDP figures – which are really just consequences of monetary inflation – can be trumpeted as proof that the system “works” to produce “sustainable” growth, but it results in very real resentment from those it leaves behind. The crumbs of welfare thrown to the very bottom, however, tend to perpetuate poverty by trapping people in the limbo of welfare dependency. But the response to this is often a clamour for more state socialism. Noting that state corporatism (which they think is “capitalism”) seems to do nothing except make the rich richer and the poor poorer, its advocates want to end the anti-democratic structure of state corporatism so as to return key industries to “public ownership”. If there has been any reconciliation at all, then it is evident in corporate obeisance to “woke” priorities and the left wing bias of “big tech”. Left out of everything is the productive middle classes, who tend to shoulder every bill.
If the two, dominant social systems have been state corporatism and state socialism (with the postulated “third way” of blending the two having failed), then what, we might ask, is the real third way? There are only three possibilities. First, unfettered socialism; second, unfettered capitalism; and third, a mixed economy of genuine socialism and genuine capitalism (what we might call “interventionism”).
The first option, socialism, is a non-starter for the reason we mentioned earlier: its inability to perform economic calculations mean that it is suitable only for creating chaos out of order. Indeed, a socialist economic order is no order at all; it is a disaster that would quickly relegate the human race to the Stone Age.
The third option, interventionism, is also a no-go, as it produces distortions that must lead either to further interventions or to a complete abandonment of the intervention altogether. For example, if the state intervenes to set a price ceiling on a certain good that is below the market price, the result – all else being equal – will be a shortage of that good. In response to this, the state has one of two options in order to restore supply: to intervene further by taking over the entire supply chain, or to abandon the price control. If it takes the first option, this requires further interventions in other industries which will create similar distortions and disarrays which will, in turn, breed even more interventions ad infinitum. If this process continues then we end up with full state control over everything - i.e. socialism. Socialism, however, is impossible, and so will collapse almost immediately. If, however, the state takes the second option of abandoning the price control, then capitalism and freedom are restored.
It’s worth mentioning in this regard that, in our contemporary societies, we are reaching the apex of state interventionism. Decades of excessive money printing and perpetuated malinvestment through the resulting credit expansion have driven financial markets to a zombie-like existence bathing in a sea of insolvency. We are now close to the point where states will either have to completely socialise financial markets – probably through touted “Central Bank Digital Currencies” – or abandon their policy of cheap credit and restore sound money.
This leaves, then, capitalism, the genuine free market, as the only prospective and sustainable economic order. Only capitalism, based upon voluntary trade resulting from each individual peacefully pursuing his purposes, is able to avoid the pitfalls of socialism, of the pseudo-capitalism of state corporatism, and of the pseudo-equality and fairness of state socialism. All of these latter systems – being nothing more than the attempts of some people to live at the expense of everyone else – are based on force, fraud, antagonism, and are ultimately responsible for all of the alleged pitfalls that are ascribed to too much freedom: inequality, greed, selfishness, and so on. Only the restoration of a genuine free market capitalism can therefore lead to a peaceful and prosperous society.
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