How Capitalism Fights Poverty

“Capitalism causes poverty” say the economically ignorant. “We need more unions and more leveling of the playing field!”… But is this true? There is this idea within statist circles that one only has to make such baseless assertions and one can be considered “intelligent”. Being able to memorize one liners that belong on a bumper sticker  does not make one a philosopher, an expert, or smart. Being able to back up claims when challenged does. Along with that, decent character is demonstrated when one realizes they are wrong and makes the needed intellectual modifications to their assertions. I have noticed that when I engage people who spout such silly one liners, I am never met with a logical defense. Usually the responses consist of buzzwords like racist, misogynist, and greed peppered in sentences that mean nothing and prove nothing.

Well I can back up what I say and I mean to do so here.

Economic Principles

Before we talk about the data behind how capitalism helps the poor, let’s talk about the principles behind why free markets work and government regulation does not. Within Austrian Economics we have what is called “The Action Axiom”. What is meant with the word “axiom” is “a statement or proposition that is regarded as being established, accepted, or self-evidently true.” Essentially a synthetic a priori proposition. This axiom is self-evidently true because in order to attempt to refute it, one must assume its truth. This is contradictory therefore the axiom is true. The Action Axiom states that all individuals engage in purposeful behavior by using the scarce resources in their control towards the fulfillment of a perceived uneasiness they have identified thanks to their subjective value scales. What is meant by this is that all individuals will vary in their preferences and will attempt to attain their ends by a number of different ways. This is self-evidently true because, like I said, in order to refute it, the arguer against the action axiom must engage in purposeful behavior by applying a scarce resource (say their mind and body) towards the fulfillment of a desired end (the refutation of the action axiom). The desire to refute the axiom is a preference different from someone like myself therefore we prove both aspects of the axiom true by attempting to refute it. This is the basic starting point from which we can make logical deductions regarding any economic policy put forth by government as well as how individuals may react to them.

The “Unhampered Market”

Since we now understand this basic starting point for truly understanding economics, we can try to understand how individuals would act in an unhampered market where there is no government regulation. Understanding this helps us to understand how capitalism helps the poor.

  1. Within an unhampered market, individuals are free to make exchanges and associate with whomever they wish. Legitimate trades are voluntary meaning there is an absence of coercion. As an example, let us pretend that person A is in the market for a new horse and person B is selling a horse. Once they agree on a price, a trade occurs. Person A values the horse more than the money they paid for it while person B values the money more than the horse they sold for it. This unequal valuation on goods between the two economic actors is what allowed the trade to occur (remember, all individuals vary in preferences). Because these two individuals value these goods differently, a trade can occur and both people involved with the trade can walk away from it better off than they were before.
  2. On an unhampered market, there is no place of what is known as “fiat” money. “Fiat” meaning arbitrary. Money comes about through the Misesian “Regression Theorem”. This theorem posits that money comes about not through government edict, but spontaneously on the market. How is this so? Mises argued that money comes about because a particular commodity on the market was more “saleable” than others meaning it was accepted in trade for a wider range of goods than anything else. This is how things like salt, gold, silver and other precious metals became “money”. These commodities must first have a use outside of the concept of being a medium of exchange and all of the previous goods listed as money meet this requirement. Once these goods become more widely traded, they take on a second value beyond their original us and gain value as a medium of exchange, or, money. This kind of money is not controlled by the arbitrary whims of government, so only the money with the best purchasing power will be accepted as a medium of exchange.
  3. Entrepreneurs must make the best judgments regarding consumer demand. Because money in an unhampered market has arisen out of the market, it will reflect true market prices and the command of goods it possesses. Through this pricing mechanism, entrepreneurs make judgments and apply resources that they control towards fulfilling what they think consumers will demand. Those that make the right choices in this regard are rewarded with success while those that fail close up shop. This is good because clearly the entrepreneurs that failed could not apply their scarce resources in an efficient way that satisfied the demands of others. To allow them to continue to squander scarce resources would be an error and a waste of resources. Thankfully, the market naturally rewards those that make correct choices and stops those that do not. This means there will always be a trend towards efficiency in applying resources. This is because along with engaging in action by applying scarce means, all actors seek that maximum value out of their scarce means. They want to achieve the maximum reward by using the least amount of resources they can. This is true for all economic actors.
  4. This attempt at trying to please the consumer means that entrepreneurs will compete for the consumers money. This is healthy competition though. Entrepreneurs are competing with each other for the cooperation of the consumer while consumers are competing with each other for the cooperation of the entrepreneur. Entrepreneurs that do not satisfy consumer demands go out of business therefore there is a natural tendency to weed out those that harm the consumer with unsafe products or inefficient and poor products/services. Since they are competing for the cooperation of the consumer, and the consumer wants to maximize their scarce resource (money) for maximum value, entrepreneurs are under bidding each other while consumers are trying to out bid each other. This means that resources only flow to the most efficient and necessary ends. This competition also leads to a lowering of prices, more often than not, for the consumer as the purchasing power of their money increases and entrepreneurs compete for them as clients. Lower prices mean more goods become available to the poor and the purchasing power of what little they have increases.
  5. Labor is a good or service like any other and wages are just the price of labor. Since laborers are selling labor and entrepreneurs are buying it, there is the same kind of competition going on in the consumer-entrerpeneur relationship. Laborers are competing with other laborers for the cooperation of the entrepreneur and entrepreneurs are competing with other entrepreneurs for the cooperation of labor. This means that business owners cannot just pay dirt poor wages in the free market. How could they abuse their laborers if their laborers have the option to freely sell their labor to another employer that will treat and pay them better? Not only that, but a constant turn over rate with employment for a business is highly ineffecient and detrimential to the business owner in the long run. Therefore, this, couples with solid purchasing power of money and the freedom to assiociate means that the standard of living for all people, including the laborer, will continually rise.

The “Hampered” Market

The hampered market is known by another name that is praised by many mainstream economists. It is sometimes called the “mixed economy”. Let us observe the same four areas within this kind of economy to see how this creates poverty.

  1. Within this kind of market, trades are not voluntary and individuals are not free to trade and associate with whomever they please. Licensing laws create a barrier for entrepreneurs by paying politicians for the “right” to do business and associate with clients without having violence done against them. Those that try to do business without a licence have violence done against them to stop them. Any time a voluntary trade that would occur in the free market does not occur in the hampered market, a potential for wealth generation is lost. This means that what could have been is no more and we are all the poorer for it. Government also taxes individual incomes and transactions. They demand a portion of the rewards of the trade even though they have done nothing to earn it. Taxation and especially progressive tax schemes cause individuals to change their economic activity and actually stifles and limits action meaning we are again poorer for the lack of exchanges that could have happened. Trades can also occur in this system under threats of force by the government and whenever coercion is used to force a “trade”, the victim of force is always the loser while the initiator of violence benefits. So the anti-capitalist that says capitalism is a zero sum game is only projecting their systems failures onto that which they think they hate.
  2. In the hampered market, money is fiat or “arbitrary”. Today we have US dollars created out of thin air by a central bank that is protected by the monopoly on force that government has. Sound money is non-existent and the Central Bank will print money as it sees fit (usually to the benefit of themselves, their friends and the political class). An increase in the money supply means that the purchasing power of the money is decreased. A decrease in purchasing power means that what little money the poor have continually commands less and less goods. This creates a cycle of poverty and, probably by design, forces the poor to remain on government welfare programs. A rise in prices due to the purchasing power decreasing also means that goods become continually unavailable to the poor. As an example, the federal minimum wage in 1963 was $1.25. Back then, money was backed by precious metal and quarters were made out of silver. Now the Federal Reserve was still making a mess of things but this example still proves a point. As of writing this post, fice silver quarters ($1.25 in 1963) is worth about $17.98 today. If this does not show how government creates poverty to you, you have been hit on the head too many times.
  3. Because money is created out of thin air, interest rates are manipulated and entrepreneurs cannot make as accurate of economic choices as they could on the free market. Prices do not reflect reality. Think of it this way: The economy that has its money supply artificially increased and interest rates kept artificially low is like a man building a house that over estimates the resources available to him by 30%. Because of this grave miscalculation, the man maybe start to build a bigger house than he has resources for. He will then get to a point where the house is incomplete and their are no more resources available to him. He must tear down the house and start again with a proper understanding of the resources available. This is what is called “The Austrian Business Cycle Theory”. The Central Bank expands credit and the money supply which makes entrepreneurs think that there is more people saving than there actually is. This naturally causes a tendency towards malinvestment. Thus Austrians, unlike Keynesian economists, say that it is the boom or the bubble that is the problem. The bust is just the market trying to correct itself just like the man building the house who has to tear down the first one and recalculate his resources so that he can build a proper one. This economic instability means that business becomes unnecessarily difficult and risky. When fewer people wish to be entrepreneurs, we have less competition and less choice on the market. This makes us more poor than we otherwise could be. The constant booms and busts also financially ruin many people thus continually creating poverty.
  4. Some business owners will lobby the regulatory alphabet government branches for favor. They may offer positions in their company or kick backs for favorable legislation that protects them and ruins any competition. This is how all monopolies are granted, by the biggest monopoly of them all; government. This protection afforded business means that these entrepreneurs do not have to compete in the same way they would on the unhampered market. Real competition is stifled meaning the balance of power between the consumer and the producer is shifted. The business owner under the protection of government can perhaps offer a horrible service or product at high price and rest assured that the regulators in their pocket are keeping any kind of competition out and away from underbidding them. This only hurts the poor.
  5. Labor is also manipulated in the hampered market. Since the purchasing power of money is decreasing, laborers demand higher wages which only contributes to the rise in prices for goods produced (remember wages are just another price). Minimum wage laws keep voluntary employment agreements that may occur on the unhampered market form occurring. A minimum wage law does not guarantee jobs, it only makes receiving a particular wage illegal and this makes these laws compulsory unemployment laws. This only forces would be laborers onto government welfare schemes and perpetuates the cycle of poverty. The competing relationship that benefited both the laborer and the employer is distorted to the detriment of all.

The “Poor” Today Live Like Kings

What is the difference on the road between a poor person 1000 years ago in Feudal Europe and a poor person today? 1000 years ago, the poor person travelling on the road had to probably walk and maybe they didn’t have any shoes either. The rich person 1000 years ago road a horse or road in a carriage of some kind. Today, a poor person maybe drives a Honda from the 80s while the rich person has a new BMW. The point is that even corrupted capitalism today has created a standard of living unimaginable to a king 1000 years ago. The “poor” in modern “capitalist” nations lives a life the riches person long ago could never dream of. Kel Kelly points out the following:

  • 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.

Instead of looking at this amazing leap forward in the standard of living for the poor, the socialist cries about it and says this is not enough. Clearly, those that proclaim the horrors of income inequality are glass half empty kind of people and cannot fathom the lives their ancestors lived just 100 years ago. Bernie Sanders and other leftist demagogues like him want people to believe that poverty is rising. In reality, the data says otherwise.


And even in Latin American countries there is a downward trend on the existence of extreme poverty.


If this has occurred in the crony capitalist society we live in today while government continually makes things worse, imagine what would happen to poverty if government just completely was out of the way? I know that such a prospect is the stuff of nightmares of leftist statist, but the logic and data here does not lie. Capitalism is not the source of poverty, it’s the remedy for it.

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