How to End Poverty
AUGUST 01, 1964 by DEAN RUSSELL
Dr. Russell is a member of the staff of the Foundation for Economic Education and Director of the FEE School of Political Economy.
Our political leaders have recently declared war against poverty in the United States. And they are now in the process of mobilizing the nation’s manpower and resources for the coming battle.
The general philosophy behind these recurring governmental campaigns to stop poverty is familiar indeed to students of economic history. As merely one of countless possible examples on the same general theme, let us first look briefly at the so-called Industrial Revolution in the England of 150 years or so ago.
Perhaps the two most famous of the reformers of that era were the classical economist, Karl Marx, and the successful businessman who became his collaborator, Friedrich Engels. Those two men were the intellectual leaders of the war against poverty in their time. And as is still the case with most of our own intellectual and political leaders today, the only solution that Marx and Engels ever offered to end poverty was to have the government increase its compulsions and prohibitions over the people in their economic activities.
It is not necessary here to question the accuracy of those reports by Karl Marx in which he described the degrading living conditions of the people who worked in those early factory towns of industrial Britain. While his research was confined to extensive reading in the British Museum, I will here assume that his statements on the harsh working conditions of that time were essentially true in a reportorial sense. But most unfortunately for poor people everywhere, Marx completely missed both the reality and the portent behind what he was reporting. And thus he offered a totally erroneous solution to the problems of poverty and how to raise the level of living of the general population.
The Socialist Theory
The famous theory endorsed by Karl Marx to improve the wellbeing of mankind was based firmly on governmental ownership and operation of the means of producing and distributing all goods and services; later on, he appears to have agreed that heavy governmental controls, without total state ownership, might also effectively accomplish the task. That ancient but ever-new theory has been increasing in popularity all over the world, ever since Marx refurbished it again in his program to end poverty by positive governmental action. Under a different name (and with a few changes in nonessentials), that same socialist theory of economics is the inspiration behind the current governmental plans to end poverty in the United States.
Perhaps the best source for a summary of the philosophy and program of Karl Marx is his major book, Das Kapital. As I here list the main points of his theory, I am confident that you will find most of them as familiar as today’s newspaper or political speech or sermon or textbook on economics.
Departure from Classical School
Since Karl Marx was trained in the "classical school" of economics of Adam Smith and David Ricardo, he was well aware that increasing capital accumulation is necessary for increasing industrial growth. And he readily agreed with the classical economists that as capital (machinery) increases, the result will be more and more production of more and more products. So far, so good.
But at this point, Marx deviated from the prevailing economic thought of his time and claimed that the unplanned and uncontrolled production of a free market will result in general surpluses that can’t be sold; that is, the workers won’t have enough purchasing power to buy the products they produce. This development will cause factories to shut down until the surpluses can be disposed of in some manner. Thus, booms will be followed at regular intervals by busts. Throughout the economic ups and downs of these business cycles, however, the rich will get richer and the poor will get poorer, according to Marx. This will continue as long as there is uncontrolled private ownership and production in a market economy that (according to Marx) is necessarily based on increasing monopolies, jungle competition, and anarchic production. The unorganized, oppressed, and politically helpless workers will be exploited mercilessly. Many (perhaps most) of them will lose their jobs to the ever-increasing and more efficient machines. And while the workers who are fortunate enough to have jobs will increase their production, they will be paid lower wages than before.
Marx predicted categorically that widespread poverty, mass starvation, and death among the working classes are the inevitable results of capital formation and industrialization in a market (nonsocialist) economy of private ownership. His financial backer and literary collaborator, Friedrich Engels, said much the same thing in his book, The Condition of the Working Classes in England in 1844. For example, he claimed that the peasants and their children in agrarian England were far healthier, happier, and more prosperous than the workers of industrial England after 1700 and the advent of machinery for mass production.
Trimming the Facts To Fit the Theory
One of the most astounding facts of economic history is this: At the time that Marx and Engels formulated and published their theory, the statistical proof of its falseness was publicly available. Further, both Marx and Engels were aware of this evidence; one can only assume that they simply ignored it because it did not fit into their theory.
Here are the statistics referred to—the population figures for England and Wales from 1600 through 1831, figures that Karl Marx could not possibly have missed during his years of extensive research in this general area.
1600 around 5 million*
1700 more than 5 million*
1750 more than 6 million*
1801 9 million (census)
1820 12 million (census)
1831 16 million (census)
Among the voluminous statistics of this same type that were available to Marx and Engels, one also finds this: In London in 1750, about 70 per cent of all children died before age five; by 1830, the figure had fallen below 30 per cent.
If the theories of economics and history advanced by Karl Marx were valid, these population figures would have to be the reverse of what they are. If there were any merit at all to the theory of socialism, children would have died earlier (and the population would have diminished) as the number of machines increased in Great Britain from 1700 to 1900 in an increasingly free market.
They Lived Longer
But the truth of the matter is, of course, the reverse. As industrialization in the competitive market economy grew, the life expectancy of children (and also of adults) grew right along with it. The population had been barely moving forward for two or three hundred years in an agrarian economy with few machines. But with increasing machinery—and especially the invention of the steam engine and the rapid industrialization that followed it—the population soon doubled, and then trebled.
One should also remember that it was during this period that hundreds-of-thousands of British subjects were migrating to all parts of the world. Thus, the statistics on population growth given above are really understated.
The reason that the evidence is contrary to socialist theory is simply because (basically) socialist theories of economics and history were (and still are) totally false. But before we examine the validity of that sweeping condemnation, let us mention two possibilities other than machines in a market economy that might explain this increase in life expectancy.
Was it due to new medical knowledge and practices? No, for the most part, those improvements came after the machines, not before.
Was it due to more governmental controls and welfare schemes? No, governmental interferences in the economy were decreasing during this period. Percentage wise, there was less government welfare instead of more. The economy was becoming increasingly free.
A False Theory
At this point, however, I would like to agree with Marx on one of his ideas—that is, before one can understand history, he must first have some understanding of economic theory. Economics is certainly not the sole determinant of history, as Marx claimed it to be. But at least it is important enough to explain the nonsense that is so often encountered in the deductions of historians who have no real understanding of economic theory. The misinterpretation of history by the socialist philosophers, however, was, of course, not due to the absence of economic theory but rather to the endorsement of false theory.
A Better Theory Proposed
Since it is obvious that the socialist theories of history and economics do not fit the facts of the Industrial Revolution, and are thus false, then what theory does explain this period of fantastic economic growth? Well, here is my own theory, in four simple parts. Let us see if it helps in any way to explain the facts:
1. Persons who have enough to eat will live longer than persons who don’t have enough to eat. That statement is not intended to be humorous; actually, it is an oft-ignored fact that is fundamental to any economic theory that explains why human beings act as they do. And I am reasonably confident that Karl Marx would have agreed with it.
2. Other things being equal, a man with a wheelbarrow and shovel can move more dirt from "hither to yon" than can a man using only his hands. That is, a man with a machine can produce more than a man without a machine; or, capital formation increases production. Again, Marx would surely have agreed with me. But on the heart of my theory—the next two points—he would have been in total disagreement.
3. The employee who is working in a factory for wages in a free economy will be paid more if he produces more. I could here use marginal analysis to support the theory. But for my present purpose of simplified explanation, I need only point out this fact: Competition among employers in a free economy will guarantee that result; for since each employer is in business to earn profits, each will try to secure the services of the workers who produce the most in the shortest period of time. The only way this can be done in a free market is to offer higher real wages. If that is not so, then we are faced with the absurd theory that the policy of employers in an economy of choice is to voluntarily pay most to the employees who produce the least.
4. Persons who are producing, selling, and buying what they choose to produce, sell, and buy will have more of what they want than will persons who are compelled to produce, sell, and buy what they don’t want. If that sounds like a mere play on words, it isn’t. For what I have said is that the market economy of free choice (with the government restricted to preserving the peace and suppressing fraud) provides more people with the things they want than does any other economic arrangement. Or expressed in other words: If the objective of an economic system is to provide the maximum amount of goods and services that peaceful persons want, obviously there must be freedom of choice and exchange. This essential requirement for maximum material wellbeing exists in a free market economy, and only in a free market economy. The socialist theory of a controlled economy (that is, a controlled people) is necessarily based on the idea that when peaceful persons are compelled to produce, sell, and buy what they would not voluntarily produce, sell, and buy, they really have more of what they want than is the case when they are free to choose.
A Priori Reasoning
Well, there you have the non-socialist theory of economics as best I can state it in brief form. It is, essentially, the exact opposite of the socialist theory. And thus you can now better understand my sweeping statement that the socialist theory of government ownership or control of production and distribution is totally false and must always finally produce the reverse of what its advocates say they wish to accomplish. That is as true in the United States as elsewhere, currently or at any other time.
Now I wish to say two things about this theory. First, of course, I didn’t invent it; I suspect, however, that I have simplified it considerably. Second, the inventors did not first look at the facts and then work out a theory to fit them. That isn’t how theory is developed. For example, the first "sputnik" that circled the earth did not generate a theory; instead, the prior theory generated the first man-made orbit around the earth.
You and I know a priori that a man with a wheelbarrow and shovel can move more earth in a given period of time than can a man without a wheelbarrow and shovel. We don’t need any facts to prove it. The theory is self-evident. The man who invented the wheelbarrow did it because he knew in advance that he could thereby "produce more" with that tool than he could without it. And so it is with the three other a priori theories I have cited above. Since they are unquestionably true, I know that certain results must necessarily follow their application.
I know that as more machines appeared in an increasingly free market in Great Britain after 1700, there would be more food and other goods and services. The people would live longer. And under the conditions of that particular time, the population could be expected to increase rapidly. That economic theory doesn’t really need "statistical proof" since it is self-evident and is based on the fact that every person is well aware that he will live longer with food than without food. The opposing socialist theory is not false merely because the statistics disprove it; the theory is false on a self-evident basis. Since socialist economic theory is false a priori, naturally the results in practice must finally be disastrous. That is why millions of Russians starved to death under the communist economic system after 1918; persons were literally prevented from producing food. It was not due so much to lack of political freedom as it was to the utter nonsense of socialist economic theory; the results could not be otherwise.
The Communists Cheat!
And even today, the only reason that the Russian people manage to stay alive at all is because they cheat against their socialist theory. This cheating is on a mammoth scale and, fortunately for the Russian people, it appears to be increasing. The officials permit a tremendous amount of "free enterprise" food growing; they use unrestricted market prices to distribute vast quantities of food and considerable amounts of consumer goods; the managers of factories can now fire inefficient workers and hire ones who produce more; the government planners have rejected the Marxian idea of government unemployment compensation that pays a person not to work; further, make-work schemes that are now protected by law in the United States would result in long prison sentences for persons who openly practiced them in the Soviet Union; the free market prices of the world are used by the socialist planners in Russia to guide their production procedures and goals; the "profit motive" rather than the "firing squad" is now increasingly used as the incentive to get better management and more production; and so on through thousands of free market violations of socialism.
The truth is simple and harsh: If the Russians didn’t cheat against the economic theory on which their system is based, they would all literally starve to death. And even at best, they must still depend on other nations to send them food. It is to be hoped that future leaders in Russia will finally accept fully the fact that persons who have enough to eat will live longer than persons who don’t have enough to eat, and that they will then adopt the policy of leaving persons free to produce the food they want instead of compelling them to produce "moon shots" that they would never produce voluntarily.
The adoption and practice of false economic theory explains why millions of men, women, and children are literally starving and dying in China today. The total economic collapse in Cuba today is not due primarily to the fact that Cuba has a dictator; it is because that dictator operates on socialist economic theory. The present socialist economic system in Cuba can’t possibly work in practice because it is false in theory. It is totally contrary to how all human beings choose to act when they are free to do so.
Some Things Explained
With my own theory cited above, I know in advance that (other things being somewhat equal) the people in a comparatively free economy will have a higher level of living than will the people in a less free economy.
I know that West Germany has to be more prosperous than East Germany. My a priori theory says that it cannot be otherwise. And since the economy in Poland is a little bit more free than the economy in Russia, my theory says that the Poles should be expected to have a slightly higher level of living than the Russians. They do, even though the still-heavy controls over the economy in Poland still mean a distressingly low level of living for the unfortunate Polish people.
My economic theory says that the Japanese in their comparatively free market should have a higher level of living than had the Japanese under the former controlled economy. They do. Further, my theory implies that the economic "growth rate" in Japan should be high. It is; in fact, the rate there appears to be the highest in the world.
With my theory, I can now make some sense out of history, a thing that Karl Marx was never able to do. I now better understand why ancient Athens enjoyed its phenomenal growth rate for 150 years or so. I can now better understand why it declined and collapsed. In each case, the key I search for is the comparative freedom enjoyed by the citizens in the economic areas—that is, the extent of private ownership and of the freedom of persons to exchange goods and services voluntarily.
I now know why a much higher level of living developed in Venezuela than in Brazil in our own era. And I also now understand why the level of living in Venezuela has (percentagewise) not increased as fast during the past few years as it did formerly. I can now also understand the situations in Argentina and India. Finally, I can now understand why the real level of living per capita in my own country is not increasing (percentagewise and on the average) as fast as it used to before 1930 and the general acceptance of the philosophy of the welfare state and the controlled economy. Further, my theory says that the battle plans of the current war against poverty in the United States (more socialism) must eventually bring the reverse of the announced aims.
Well, you pick your own time and place, and examine it from the viewpoints of the two theories here advanced—Marx’s socialist theory of economics and my own free market theory. If other things are reasonably equal, you will always find that (over a significant period of time) the people in the "more free" economy will be more prosperous than the people in the "less free" economy. This is self-evident because free people will always produce more of what they want than will people in a controlled economy who are prevented from choosing what they will produce. It cannot be otherwise.
The size of the country and the extent of its natural resources are not as vital for a high level of living in today’s world as is the economic philosophy endorsed by the nation’s leaders; for example, small and resource-poor Switzerland has a comparatively high level of living. When one considers the amount of foreign capital that goes there—and why it goes there—no one should be surprised at this result. And no one who understands economic theory is in the least surprised at the fantastic "growth rate" of tiny Hong Kong with essentially no natural resources.
The More They Produced, the More They Could Have
Now I would like to end where I started—with the Industrial Revolution. Please note that I have not denied the horrors of that period. I am aware that there were cases of six-year-old children who worked ten hours a day—and that they lived in filth and often suffered injury from those primitive machines. All I have said is that life expectancy for children working in those factories was higher than was the life expectancy of children in the preindustrial society. The children of the Industrial Revolution era had more to eat, even though they still didn’t have enough. They had more to eat because they could produce more with machines than without machines, and could trade their industrial products for more and better food. They still didn’t have all they wanted to eat because they still couldn’t produce enough with the still-primitive machines they had. But as capital accumulated and more and better machines came into existence, they produced more. And thus they had more to eat. And thus they lived longer.
I maintain that living to age nine is better than dying at age five. As more capital was accumulated in an increasingly free market economy, the children lived even longer. Finally there was enough capital available to permit a man to produce enough to put his children into schools, and for his wife to change her factory job for the job of homekeeping. It was machines under private ownership, not child labor laws, that finally took the children permanently out of the factories and put them into schools. If you doubt this, think of what would necessarily happen to children today if there were no machines.
The private accumulation of capital in a free market economy has always meant an increasingly higher level of living. This is what it always will mean. Thus the most practical thing that you and I can do to end poverty in the United States or elsewhere is to insist that the market shall be free. Nothing else is required; anything else will fail.
If We Will Let It Work
I have deep faith in the stimulating power of competition and in the capacity of the free market to allocate resources and to bring us optimum growth and progress, if we will only let it work. And we will let it work if we can bring ourselves to accept a few very simple ideas about business: that business is a tool, and that the sharper its cutting edges are and the stronger its motivating power, the better job it will be able to do for all of us.
HENRY FORD I, What America Expects of Industry