The Government, the Market and the Poor


When one argues that the government has become too large and ought to be reduced inevitably the first question that comes to the minds of most people is: what would happen to the poor? This is certainly a legitimate question. What would be the condition of the poor if all government “poverty” programs were abolished?

An accurate assessment of the impact of such a change in policy can best be obtained by dividing this broad question into two parts: (1) what is the actual impact on the poor of existing government policies and (2) what would be the probable impact of a program of laissez-faire?

This paper will attempt to deal with both of these questions.

Part I: The Government and the Poor

1. The “Ideal” Model: The Way Government Is Supposed to Work

In the area of the market economy, or the “private arena,” we are constantly told, the proper concern of the individual is with satisfying his own personal needs. Thus, in the economic arena the individual is assumed to behave egotistically in order to maximize his individual utility. In contrast, since the proper concern of government and politics, or the “public arena,” is the well-being of the entire society, individuals in this arena are assumed (or perhaps “supposed” is a better word) to act altruistically. Politicians and government bureaucrats are not 643

concerned so much with maximizing their own personal utilities but with maximizing “social utility,” i.e., with pursuing something called the “public good.”[1] Thus, the individual is divided, as it were, into two parts: the egotistical, which is given free rein in the private, or market, arena, and the altruistic, which dominates the public or governmental arena.

The ramifications of this “ideal” model for analyzing the politico-economic world are significant. In the competitive struggle that prevails in the open market between egotistically-motivated individuals, the economically strong, i.e., the wealthy, the well- educated, the cunning, and the unscrupulous, emerge as the victors, while the weak, i.e., the physically and mentally handicapped, ethnic minorities, the un-and under-educated, and the poor in general, are piteously ground underfoot. But since individual behavior in the governmental sphere is assumed to be altruistic, an important function of the government becomes that of helping the casualties of the economic conflict by adopting policies, sometimes referred to as the “bucket” method of eliminating poverty, which transfer wealth from the economic winners to the economic victims. Thus, according to the “ideal” model, while the egotistical behavior of the individual in the private, economic sphere creates poverty among the weak, the altruistic behavior of individuals in the public sphere serves to eliminate, or at least ameliorate, it.

2. The Problem: Assumptions about Individual Behavior

The fatal flaw in the foregoing model lies in the assumption that while individual behavior in the private arena is egotistical, that in the public sphere is altruistic. Regard less of how one believes that individuals ought to act, there is no reason to suppose that individuals actually compartmentalize their lives after the fashion of the “ideal” model. True, individual behavior is always a combination of egoism and altruism, with the particular “mix” of each not only varying from individual to individual but within the same individual over time. But it is unwarranted to assume that individuals act altruistically in one realm and egotistically in the other.

Surely, individuals can, and do, behave “altruistically” in the private arena, as is demonstrated by any voluntary contribution to a charitable cause. And just as surely, and far more importantly, individuals can, and do, behave “egotistically” in the public sector. Aside from the daily revelations of the scandalous behavior of many of those in the public arena—Watergate, Korea-gate, Abscam, etc.—one has simply to note, after all, that to get elected a politician must try to convince a majority of the voters that more benefits will accrue to them from his election than from the election of his opponent. One may, as a Plato, or a Rousseau, adopt the moral posture of condemning such “egotistical” behavior as unsuitable for the “public arena,” but it is scarcely deniable that such behavior is no less prevalent in the public than the private arena.

The recognition that “egotistical” behavior exists in both arenas entails an entirely different way of viewing government which, as we shall see, has significant ramifications for the “ideal” perspective.

According to this alternative perspective, which Professor James Buchanan has termed the “logical” or “individualist” model,[2] there exists no such thing as “the public interest.” In fact, government, as such, has no “goals.” Individuals and only individuals possess goals, which may run the gamut from purely selfish to purely altruistic. And just as the market is an instrument which the participants use to attain their goals, so government is viewed as an instrument which the participants in the political process try to use to their own benefit.

The critical question then becomes not, as in the “idealist” model, which type of behavior, egotistical or altruistic, or which type of goals, individual or social utility, ought to take precedence, but which instrument, the market or government, can best, or most efficiently, satisfy the needs and wants of the members of society. Economic tools, in other words, are brought to bear on the political process.[3]

3. The “Logical” Model: The Way Government Actually Works

The first thing to be noted in developing an alternative view of government is the fundamental difference between government and the market. The market is nothing more than the nexus of exchanges. Force is absent. Not only can anyone offer to make an exchange, anyone can refuse any offer. This means that for any exchange to occur, each party must value what he obtains in the exchange more highly than what he gives up. Thus market or voluntary exchange must, ipso facto, entail benefit to both parties.

In contrast, government is precisely that agency in society which claims a monopoly on the use of force. This unique position of government means that while it does not, in fact cannot, create wealth its monopoly on the use of force can be used to transfer wealth from one group to another. It is this aspect of government which makes it a potentially valuable instrument for any group or groups that can obtain control of it. An important question is: who is likely to obtain control?

(a) The Process of Politics. Even though based on different assumptions regarding individual behavior it might seem that the results of the “logical” model would be identical to those expected by the “ideal” model. Democracy means rule by the majority. And if those who are relatively poor are in a majority they should be in a position to benefit themselves by seeing to it that the government adopts and follows a policy of transferring wealth from the relatively rich to the relatively poor.

Reality, however, is far more complex. To understand the flaw in the foregoing we must look a little more closely at the concept of “majority rule.” There is, in fact, no such thing as “the majority.” Rather, each individual has various interests which he desires to see protected and furthered. Since single individuals seldom have much influence in the political process, those individuals who possess the same or similar interests tend to join together to form interest groups, such as the National Association of Manufacturers (NAM), the AFL-CIO, the National Organization for Women (NOW), etc.

The purpose or goal of the interest group is, of course, to advance the interests of its members. This can be done in any number of ways but one of the chief means is by influencing government policy. Thus, labor groups like the AFL-CIO desire such things as increases in the minimum wage, closed or union shops, or a national health care program; business groups, like the NAM, the Fatty Acid Producers Council, or the Underwear Negligee Association, generally push for such things as subsidies or licensing restrictions to shield themselves from domestic competition and tariffs to protect themselves from foreign competition, although it must be borne in mind that “business” is not monolithic. Department stores like Sears benefit from the lower prices that foreign competition brings and therefore oppose tariffs while such industries as clothing and TV manufacturers are hurt by such competition and therefore favor tariffs.[4]

If a primary goal of an interest group is to influence government policy one would quite naturally expect that they would endorse only those politicians who promise to support their demands. It can be seen that there is no such thing as “the majority” to which a politician must appeal to be elected. Rather, the goal of the politician is to pledge his support for the demands of enough interest groups to create a coalition of groups totaling a majority of the voters in an election.[5]

(b) Who Influences Government? We are now in a position to answer the question: who is most likely to influence or even control government? Superficially, it still might seem that since the relatively poor would be a fairly large group which politicians could not afford to ignore, the result of interest group politics would be the governmental transfer of wealth from the wealthier segments of society to the poorer. The data, however, belie this assumption. While it is no doubt true that some government programs do benefit some groups of poor, nearly all studies indicate that the poor as a whole do not benefit.

Although the federal income tax appears on the surface to be progressive, much of this progressivity is eliminated by loopholes. And when this is combined with the regressive nature of most state and local taxes, the overall effect is that the tax burden is “essentially proportional for the vast majority of families.”[6] But government revenues are only half of the story; there are also government expenditures.

The venerable John Calhoun recognized long ago that what is crucial is not solely what one pays in taxes but what one pays in taxes relative to the government benefits one receives. And he also realized that if some groups are net tax beneficiaries, other groups must be net tax losers.[7] This means that while all income groups pay approximately the same percent of their income in taxes, the poor could still be considered gainers from the political process if the benefits they received from government exceeded the taxes they paid to it. While the evidence is somewhat mixed, this seems unlikely.

When one considers the direct effect of such programs as subsidies to businesses, and the indirect effect in terms of higher prices, of such policies as tariffs and licensing restrictions, it is likely that the overall impact of government policies is a slight transfer of wealth from the less well off to the better off. As a dramatic illustration, economist Walter Williams has determined that $250 billion is spent annually at all levels of government simply to “fight poverty.” Now, if all of this were divided equally among those families with incomes below the poverty line, each poor family would receive a yearly stipend of $34,000.[8] Of course very little of this ever reaches the poor. Most of it gets eaten up in bureaucratic overhead or siphoned off by private contractors.[9] The “bucket” is clearly very leaky.

In brief, far from showing that government helps the poor, the evidence indicates the opposite: the poor tend to be the net losers in the political process. The significant question is: why are the less well off, who would appear to be a potentially powerful interest group, unable to exercise any effective control over government policy? Two related principles of the “logical” model explain this seeming paradox rather well: the “Iron Triangle” and “Olson’s Law.”

(c) The “Iron Triangle.” Political scientist, Theodore Lowi, has pointed out[10] that if a particular interest group desires a particular policy it goes, not to Congress as a whole, but to the Congressional committee or subcommittee with jurisdiction over this policy area. Since it is normal for Congressmen to be placed on committees that deal with the concerns of their districts, those representing farming districts get on the Agricultural Committee, those representing districts or states that are primarily urban desire to be placed on, say, the Banking, Housing and Urban Affairs Committee, etc. This, of course, makes the committee quite sympathetic to the concerns of the interest groups that appear before them, and it is common for the Committee to deal with a particular concern simply by adopting the policy recommended by the interest group and then instructing the bureaucratic agency to carry it out.

Typically, the agency will then go to the interest group that initially proposed the policy for information and guidance in implementing the new policy. The Tobacco Institute and the Retail Tobacco Distributors of America, for example, desire continued or expanded government subsidies for tobacco. Since seven of the eight members of the House Sub committee on Tobacco come from tobacco growing states, it is hardly surprising that the Subcommittee is sympathetic to this. And since, in administering the program, agencies in the Department of Agriculture have nearly daily contacts with tobacco growers it is also quite natural for them to see themselves as protectors of the interests of the tobacco growers.[11]

But the best known “triangle” is probably the “military-industrial complex.” Between 1969 and 1973, 1,406 Pentagon officials left government to take positions in defense in dustries. Given this close connection between government and the defense industry it is not surprising that, a recent study disclosed, profits in the aerospace industry were 12.5 percent higher than for American industry as a whole. One defense corporation, in fact, averaged 245 percent profit on 22 government contracts.[12] These are only two examples where an “iron triangle” composed of an interest group, committee and bureaucratic agency, has emerged. The public is locked out and the interest group is left to, in effect, regulate itself.

The problem, in so far as the poor are concerned, is that to influence government in this fashion requires three things: time, money and expertise. Both time and money are required to put together an effective interest group; money is also required to hire the services of a lobbyist; and some expertise is needed to know how to manipulate the political system. Usually, the poor lack all three: by definition they do not have money; their working schedules tend to be inflexible; and since the poor tend also to be the less well-educated, they lack expertise. Consequently, as one commentator has put it, the interest group system is “skewed, loaded, and unbalanced in favor of a fraction of a (wealthy) minority.” And, he adds, probably “about 90 percent of the people cannot get into the pressure system.”[13]

(d) Olson’s Law. Reinforcing the effect of the “iron triangle” is “Olson’s Law of small groups.” Isn’t it possible for the poor to compensate in numbers for what they lack in wealth? After all, it’s ultimately votes that count and each vote counts equally. The flaw here stems from the failure to distinguish between the potential and the actual group. For instance, since everyone is a consumer, the potential membership of a consumer group is the entire population. But the actual membership is only a tiny fraction of this. Why? This can best be seen by way of an example. Assume that a tariff on the importation of foreign cars would cost consumers $10 million per year. If we assume that about 50 million Americans will buy a car in a year the cost of the tariff to each car-buyer would be about 20¢. But since there are only three American auto manufacturers, the benefits to each would be approximately $3.5 million. It is easy to see which side would devote the greater time and resources to influence Congress on the passage of the tariff.

Thus, as economist Mancur Olson has pointed out,[14] when the benefits of a law or policy are concentrated on a particular group, while its costs are dispersed to the larger population, the interest group will have an incentive to work for its passage while the larger population will have little or no incentive to oppose the policy. This is so because it would cost each member of the larger group more in time and money to oppose the tariff or policy than he would gain by the defeat. In brief, according to “Olson’s Law” there is an inverse relationship between size and political effectiveness: the larger the group the less effective it tends to be.

(e) Conclusions. Lowi’s “Iron Triangle” and “Olson’s Law of Groups” help to explain why the poor, as a group, have not and do not benefit from government policies. We live in an interest group system. Yet the poor lack the three elements—time, money, and expertise—needed to participate effectively. But we can go even further. Since small, well-financed interest groups are able to influence government, and since, according to the “iron triangle,” they are also able, literally, to regulate themselves, one would expect to see many interest groups actually wanting to be regulated by government. And this is exactly what we see.

Milton Friedman has noted that “the pressure on the legislature to license an occupation rarely comes from the members of the public . . . On the contrary, the pressure invariably comes from the occupation itself.”[15] Since regulatory boards typically set maximum rather than minimum prices, and since licensing boards serve to limit rather than encourage competition, their effect is to raise prices. It’s been estimated that the cost of such regulation is about $130 billion per year.[16] And since the poor can least afford high prices they are the ones most severely hurt by these agencies. Thus, not only do the poor not benefit from government policies, as a rule, they are actually hurt by them.

Part II: The Market and the Poor

Before one can appreciate the manner in which the plight of the poor is eased through the workings of the market process, a few preliminary observations are necessary.

1. The Culture of Poverty

Although it is a truism to say that the poor are those without much wealth the most important thing to realize is that poverty is not so much an economic as a sociological problem. Professor Edward Banfield, among others, has distinguished between lower, middle, and upper class individuals on the basis of their time-orientation. While middle and upper class individuals are future-oriented, the lower class individual lives in and for the present. A future-oriented culture is one which emphasizes hard work and delayed gratification, i.e., discipline in the present for the attainment of a larger “payoff” in the future. Such a culture, Banfield notes, “teaches the individual that he would be cheating himself if he allowed gratification of his impulses . . . to interfere with his provision for the future.”[17]

In contrast, he continues, the “lower-class individual lives from moment to moment. If he has any awareness of a future, it is of something fixed, fated, beyond his control: things happen to him, he does not make them happen. Impulse governs his behavior, either because he cannot discipline himself to sacrifice a present for a future satisfaction or because he has no sense of the future. He is therefore radically improvident: whatever he cannot use immediately he considers valueless. His bodily needs . . . and his taste for ‘action’ take precedence over everything else—and certainly over any work routine. He works only as he must to stay alive, and drifts from one unskilled job to another, taking no interest in his work.”[18]

In brief, the goal for those in the middle class is “to get ahead;” to succeed; the means are hard work and delayed gratification. The goal for those in the lower class is “to enjoy now,” i.e., immediate gratification; the means are to work as little as possible and to spend whatever you make as soon as you make it. These are, of course, pure types. But while all individuals are mixtures of the two life styles, a lower class individual lives far more in the present than a middle or upper class person.

Although there are many reasons for poverty, what is important is that it is found disproportionately among those exhibiting the values of the “lower class mentality.” Perception of this fact has significant ramifications both for determining the number of those who are actually poor and the ability of the government, even assuming the best of intentions, to deal with the problem. It is to these two issues that we now turn.

2. Government Poverty Statistics

Approximately 12 percent of the population of the United States have, according to official statistics, incomes below the poverty line.[19] “The poor,” however, must not be thought of as a permanent economic class. Given the affinity of a lower class individual for risk, action, and impulse behavior, it is not surprising to discover that, as Professor (now Senator) Daniel Moynihan has noted, many who are classified as poor have high risk and/or seasonal jobs and therefore that their “incomes rise and fall with changing employment conditions . . . .”[20] The result is that the turnover rate among those whose income is below the official poverty line is about one-third per year. This means that if poverty statistics were measured on, say, a two or three, instead of a one-year, period, the actual number of poor would be significantly less.

Also, since people must pay tax on their incomes there is a built-in incentive for people to underreport their incomes. While this is true for all income groups and not just the poor, what is significant is that basing poverty statistics on reported income inflates those statistics. In testimony, a few years ago, before the House Hearings on the Economic Opportunity Act of 1964, Margaret Reid disclosed that those reporting incomes of under $1,000 per year were actually spending an average of approximately $2,500 each per year. And reinforcing this is the fact that such high-risk, action-oriented occupations as gambling, loan sharking, prostitution and the like, naturally attract a disproportionate share of “lower class” individuals. But since these activities are illegal, this income cannot be reported. Although the amount of income from such activities is difficult to gauge there is no doubt that it is in the billions. Regardless of what one may think of these activities one thing is clear: If such income could be taken into consideration “a considerable percentage of the ‘poor’ in some of the large cities would turn out to be well off.”[21]

There is no doubt that there are people in this country who are poor. Yet, it is also clear that the official figure of approximately 12 percent is highly inflated. This is due to the basing of poverty statistics on (1) one-year periods and (2) reported income rather than actual spending.

3. The Poor and the “Ideal” Model of Government

The concept of the “culture of poverty” also indicates just how limited is the ability of the government to help the poor, even assuming the best of circumstances, i.e., that the government follows the altruistic policy prescribed by the ideal model.

Consider the government policy regarding education. One of the reasons for compulsory, “free” grade and high school education, and zero or minimal tuition, taxpayer supported, state universities, was to make education accessible to children of poor families. This, so it was reasoned, would break the “cycle of poverty” by providing such children with the skills needed to enter high paying occupations. What happened was instructive. The payoffs from education lay several years in the future. Consequently, while middle and upper class individuals began attending state-run universities in droves, the poor were not particularly attracted, even when it was free. Instead, they entered the workforce and began paying taxes, some of which went to provide low-cost education for middle and upper class children at state universities.[22]

Another government program was “jobs training,” which began with much fanfare in the “War on Poverty” programs of the 1960s. This too proved a failure and for the same reason: like education, the payoffs from training programs lay months, maybe years, in the future. In fact, the entire program was based on a contradiction. A program designed to train the poor for good jobs could not succeed for the same reason that the poor do not have good jobs in the first place: both good jobs and successful training are future- oriented; the poor live in the present.[23]

One final anti-poverty policy might be mentioned: the minimum wage. This is probably the most pernicious of all “anti-poverty” legislation. Wages are determined by the marginal productivity of labor. And since the poor as a rule do not have the skills that would enable them to become highly productive members of the labor force the only jobs for which they are suited are low-paying ones. This is most unfortunate but good intentions are not enough. Since minimum wage legislation does not, and can not, increase the marginal productivity of the poor, its only effect is to eliminate their jobs. If an individual worker’s marginal value to the firm is $3.00 per hour, an increase in the minimum wage from $2.90 to $3.10 per hour means that that worker will lose his job. Thus, the ones most hurt by minimum wage laws are the least productive members of society, i.e., the poor.

If the foregoing is correct, then the ability of government to eliminate poverty is most limited, indeed. It should therefore not be too surprising to discover that while the percentage of the population classified as “poor” had declined steadily for decades, its rate of decline actually slowed down during the vaunted government “War on Poverty” program of the mid-1960s. And, despite the continued increases in the “anti-poverty” budget throughout the 1970s, the percent of those classified as poor has remained at 12 percent for the past decade.[24]

Once the cultural basis of poverty is recognized, the government appears to have but two options: (1) to insure everyone a minimum income and/or (2) to somehow change the time-frame of the poor from a present to a future orientation. The problem with the former is that if the minimum is set high enough to eliminate poverty it would also be high enough to have a disincentive effect on those whose incomes are only slightly above the minimum. If some of this group quit not only would this increase the number of those receiving handouts from the government, it would also impose increased taxes on those who continued to work, thereby encouraging still others to quit. The result would be an ever-increasing number of “beneficiaries” living off an ever-dwindling number of producers until the whole pyramid collapsed. As Milton Friedman is fond of pointing out, if you pay people to be poor, you will have no shortage of poor people. But, if the minimum were set low enough to preserve the incentive to work, it would no doubt be too low to eliminate poverty.

But what of the second option? Since values are picked up very early in childhood, usually from the parents, the “weeding out” Of the “lower class mentality” would require nothing short of the seizing, probably at birth, of all children born to “lower class” parents. These children would then be placed in homes or schools and inculcated with middle class values. While this could work, the medicine is probably far worse than the disease. At the very least such a draconian measure raises significant moral and ethical questions.

In brief, there is next to nothing that the government, even assuming the best of circumstances, can do to help the poor: if one is poor but doesn’t have a lower class mentality, he will not need government help to succeed; but if he does have such a mentality, no amount of aid will work.

4. The Market Process and the “Culture of Poverty”

Even though government statistics exaggerate the amount of poverty in America there is no doubt that there are people who are needy. Given the “culture of poverty,” government efforts at dealing with this problem have been ineffective. The question therefore becomes: given this same condition, would pure market measures prove any more effective than government policies? There is reason to believe that this is so.

There prevails on the unhampered market a tendency to employ every factor of production, including labor, at its most value productive point. Since people only buy what is useful to them there can be no distinction between production for use and production for profit. Profits result from successfully supplying consumers with what they most intensely desire at the time of their evaluations; losses from the failure to do so. In the quest for profit, labor and capital perpetually flow to areas where they can reap the most lucrative returns on investment and away from areas manifesting loss. In the same way the market also determines prices for the factors of production.

Since what the entrepreneur can bid for factors is limited by his expected yield from the sale of his product, those making the most profits can make the highest bids. Thus the factors of production are channeled into the production of the most intensely desired goods. Since it is precisely the poor who can least afford the lower standard of living caused by the squandering of scarce resources, they are the economic class most benefited by the market process.[25]

But, it might be objected, this is all very well for the “able-bodied” poor, but most who are poor today have limited education and/or physical or mental handicaps. Such un skilled workers do not benefit from the market process since their productivity tends to be so low that they cannot even find jobs. This line of reasoning is based on a fallacy. The reason that such individuals cannot find jobs is not because of their low productivity but because minimum wage laws establish wage rates in excess of their productivity.

For example, in the 1950s and early 1960s, most elevators were operated manually and many restaurants had their dishes washed by hand. These jobs were filled by the unskilled: the young, uneducated and the handicapped. They did not pay much, of course, but that is just the point. As the minimum wage was raised to 75¢, then to $1.00 and then to $1.25 per hour, the building owners discovered that it now was economical to automate their elevators, thereby eliminating the jobs in that field. And the same was true with dishwashers: as the minimum wage was pushed upward, dishwashers were replaced with automated dishwashing machinery.[26]

The root of the problem, therefore, is not the low productivity of the unskilled worker, but the fact that the minimum wage prevents the worker from offering a “compensating difference” for his low productivity. As Walter Williams points out, “Less-preferred chuck steak can compete with more-preferred filet mignon only by offering a compensating difference—a lower price. If we had a minimum price law for steak of, say, $4 a pound, sales of chuck steak would fall relative to sales of filet.” Chuck steak, in other words, would be “unemployed” under those conditions. The same thing applies to minimum wages. Since an unskilled worker cannot offer a “compensating difference,” his labor, under those conditions, is overpriced and he is therefore unemployed.[27]

Thus, while a worker’s productivity has a bearing on his wage rate, it would not affect his ability to get a job provided the market were free. Unemployment rates are especially high among the handicapped and the unskilled because of such government restrictions on the market as the minimum wage.

But, it might be objected, in the absence of the minimum wage the unskilled might find jobs. Such jobs would pay so little, however, that the workers would still have to rely on the government for assistance. This, too, is a fallacy. First, most of the lowest-paying jobs are not had by the breadwinner but by other members of the family desiring to supplement the family income. And second, wage rates, Ludwig von Mises noted, do “not depend on the individual worker’s ‘productivity,’ but on the marginal productivity of labor.”

A barber, Mises comments, %haves a customer today in the same manner his predecessors used to shave people two hundred years ago. A butler waits at the table of the British prime minister in the same way which once butlers served Pitt and Palmerston . . . Yet the wage rates earned by all such workers are today much higher than they were in the past. They are higher because they are determined by the marginal productivity of labor. The employer of a butler withholds this man from employment in a factory and must therefore pay the equivalent of the increase in output which the additional employment of one man in a factory would bring about.”[28]

This means that, while the unskilled worker would seldom become wealthy his wage rate would tend to be higher than commonly thought, provided there were alternative means of employment open to him. What is needed are more jobs available for the unskilled. But the effect of such regulations as the minimum wage and licensing restrictions is to eliminate just those jobs. Repeal of such legislation would be expected to provide adequate, but not lucrative, wages for the unskilled.

The market process would also help the poor in their capacity as consumers. Consider, for example, the “ghetto merchant.” Since prices in the ghetto average about 10 percent more than prices for goods in other neighborhoods, the ghetto merchant is often excoriated for exploiting the poor. But the key question is why is the ghetto merchant able to charge, and receive, such prices; why don’t such prices attract additional competitors? The answer is that higher prices do not mean higher profits. Ghettos are high crime areas and this means higher insurance premiums, expensive padlocks, safes, etc. The higher prices, economist Walter Block points out, merely reflect the additional expenses of doing business in the ghetto.

If, in the name of “fairness,” the government imposed “equal” prices between neighborhoods, profit margins in the ghetto would be reduced, forcing the bankruptcy of many ghetto merchants. The resulting shortages would, of course, entail severe hardships on the poor. Conversely, if the market operated unimpeded, higher profit margins in the ghetto would lure additional merchants into that neighborhood, thereby lowering prices. This means that the ghetto merchant is actually a benefactor of the poor, for his presence serves to keep prices lower than they otherwise would be. And the more such merchants, the lower the prices.[29]

The same is true, Block has demonstrated, of many other commonly condemned occupations. The “slumlord” is another example. This person is usually depicted as charging exorbitant rents for dirty unsanitary apartments, located in old, dilapidated buildings. But the problem of slum housing “is not really a problem of slums or of housing at all. It is a problem of poverty.” This is unfortunate but not only is he not responsible for this condition, the slumlord, regardless of his motives, helps the poor make the best of their bad situation.

Consider what would happen, Block asks, if slums and slumlords suddenly disappeared. If the slumlord truly harmed his tenants, then his disappearance should increase their well-being. But exactly the reverse would occur. For the poor would then “be forced to rent more expensive dwelling space, with consequent decreases in the amount of money available for food, medicines and other necessities.”[30] But this is just what occurs when the government imposes rent controls, housing codes, and the like. Forced to charge lower rates, some landlords will go bankrupt; others will employ their property in alternative uses. The resulting housing shortage can only leave the poor worse off.

These two examples could be multiplied many times over. But they demonstrate how the unhampered market works to the benefit of the poor.

5. Care for the Truly Poor

There is one final question to be dealt with. What would happen to those few who were (almost) completely incapacitated and could not take care of themselves? Regardless of the socio-economic system, such people can be provided for only out of “surplus production.” The complete elimination of government intervention would have two effects: (1) it would eliminate the poverty unnecessarily created by such government policies as minimum wages and licensing restrictions; and (2) it would increase output and thus “surplus production.” There is, of course, no guarantee that this “surplus” would go to the truly needy. Yet, in 1977 Americans donated $32 billion to charity.[31] If one assumes that under a pure laissez-faire economy there would still be about 6 million poor, this would prorate out to over $5,000 for every poor individual in the country. And, given an even more productive economy coupled with the significantly lower taxes resulting from the dismantling of the welfare state, it is likely that this figure would be even greater under pure laissez-faire.


The “ideal” model depicts a government implementing policies designed to help the poor. But this model is based on the faulty behavioral assumption that people act altruistically in the “public sphere.” In fact, the poor are more commonly the victims rather than the beneficiaries of government programs. Further, what is important are results, not intentions. Even assuming that the government operates as envisioned by the ideal model, the cultural basis of most poverty not only renders the government incapable of benefiting the poor, it actually increases the incidence of poverty. The market, on the other hand, has the capability of both reducing poverty to those few who are completely incapacitated, or nearly so, and creating the economic surplus necessary for the care of those few.

In short, there is every reason to believe that the poor would fare considerably better under the market than under the government approach. []

1.   While this model is something of a hybrid, it runs throughout much popular as well as academic literature. Jacques Maritain, The Person and the Common Good (New York: Schriber, 1947), and Mortimer J. Adler, The Common Sense of Politics (New York: Holt, Rinehart and Winston, 1971), are two, of many, philosophers for whom the notions of the “common good” and “altruistic” behavior in the political sphere are central. Also see Roland J. Pennock, Democratic Political Theory (Princeton: Princeton University Press, 1970), pp. 183—91, for overview of this approach.

2.   James Buchanan, “An Individualistic Theory of Political Process,” Varieties of Political Theory (Englewood Cliffs: Prentice-Hall, 1968) ed. David Easton, pp. 25-37; and James Buchanan, “An Economist’s Approach to ‘Scientific Politics’,” Perspectives in the Study of Politics (Chicago: Rand McNally, 1968) ed. Malcolm Parsons, pp. 77-88.

3.   While the economic approach to government can be traced back to the writings of Thomas Hobbes and John Locke in the seventeenth and eighteenth centuries, it was not until the mid-twentieth century that economic tools began to be applied to the study of politics in a systematic way. The landmark book was Anthony Downs’ An Economic The ory of Democracy (New York: Harper and Row, 1957). The number of works employing this economic or “public choice” approach to the study of government has mushroomed since 1957. Two of the more important, and read-able, however, are James Buchanan and Gordon Tullock, The Calculus of Consent (Ann Arbor: University of Michigan Press, 1974); and Gordon Tullock, Private Wants, Public Means (New York: Basic Books, 1970).

4.   Robert Lineberry, Government in America (Boston: Little, Brown and Company, 1980), pp. 278-83.

5.   The interest group model is developed in far more depth in such works as Robert Dahl, A Preface to Democratic Theory (Chicago: University of Chicago Press, 1956); David Truman, The Governmental Process (New York: Alfred Knopf, 1971). For a provocative article using economic tools to analyze inter-est-group politics see William Landes and Richard Posner, “The Independent Judiciary in an Interest-Group Perspective,” The Journal of Law and Economics (December 1975), pp. 875-901.

6.   Joseph Pechman and Benjamin Okner, Who Bears the Tax Burden? (Washington D.C.: Brookings Institution, 1974), p. 10. Also see Robert Sherrill, Why They Call It Politics (New York: Harcourt Brace and Jovanovich, 1979), p. 300; and Michael Parenti, Democracy for the Few (New York: St. Martin’s Press, 1977), p. 97. A recent study by R. A. Herriott and H. P. Miller shows the following relationship between income classes and total tax takes:


Selected Income
Classes  Percent of Income
Paid in all Taxes
 Under $2,000
$ 4,000–$ 6,000
$ 8,000–$10,000
$50,000 and over  50

Cited in Murray Rothbard, For a New Liberty (New York: Macmillan, 1978), p. 161.

7.   John C. Calhoun, Disquisition on Government (Indianapolis: Bobbs-Merrill, 1953), pp. 16-19.

8.   Walter E. Williams, “Commentary,” Newsweek (September 24, 1979), pp. 57-59. See also Thomas Sowell, Race and Economics (New York: David McKay, 1975), pp. 195-200.

9.   See Tom Bethell, “The Wealth of Washington,” Harper’s (June 1, 1978), pp. 41-60; also see Tom Alexander, “Why Bureaucracy Keeps Growing” Fortune (May 7, 1979). For a study that concludes that the poor are net tax payers see Gabriel Kolko, Wealth and Power in America (New York: Praeger, 1962). But for a contrasting conclusion see Morgan Reynolds and Eugene Smolensky, “The Post Fisc Distribution, 1961 and 1970 Compared,” National Tax Journal (1974), pp. 515-30.

10.   Theodore Lowi, The End of Liberalism (New York: Norton, 1979).

11.   Lineberry, pp. 268-69.

12.   Philippa Strum, Presidential Power and American Democracy (Santa Monica, Cal.: Goodyear, 1979), pp. 51-54.

13.   E. E. Schattschneider, The Semisovereign People (Hinsdale, Ill.: Dryden Press, 1975), pp. 34-35.

14.   Mancur Olson, The Logic of Collective Action (Cambridge: Harvard University Press, 1965).

15.   Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), pp. 138-44.

16.   See “’The Regulators/They Cost You $130 Billion a Year,” U.S. News and World Report (June 30, 1975), pp. 24-28.

17.   Edward Banfield, The Unheavenly City Revisited (Boston: Little, Brown and Company, 1974), p. 57.

18.   Ibid., p. 61.

19.   See Robert Lineberry, pp. 490-92; also see Herman P. Miller, “Inequality, Poverty and Taxes,”Dissent (Winter, 1975), p. 45. The “poverty line” is calculated by determining how much it costs to feed a typical family of four and then multiplying that figure by three.

20.   Daniel Patrick Moynihan, “Poverty in Cities,” The Metropolitan Enigma (New York: Anchor, 1970) ed., James Q. Wilson, p. 369.

21.   Banfield, pp. 128-29.

22.   The same holds true for programs like social security. First, since the tax is regressive, the poor pay a higher percentage of their earnings in social security taxes. Second, since the poor usually do not go to college, they tend to enter the workforce earlier than middle or upper class individuals, and therefore begin paying social security taxes much sooner. And finally, statistics show that the poor have a shorter life expectancy than other economic classes. The result is that the poor tend to pay the most into social security and receive the fewest benefits.

23.   See, for example, Reo Christenson, Challenge and Decision (New York: Harper and Row, 1976), pp. 79-86. Especially see p. 80: “about one-fourth of the (Job Corps) recruits stayed less than a month. Less than half stayed for six months, though strongly encouraged to stay for nine months.”

24.   Miller, p. 45.

25.   See, for example, Ludwig von Mises, Human Action (Chicago: Regnery, 1966); and Murray Rothbard, Man, Economy and State (Los Angeles, 1971).

26.   See Yale Brozen, “Wage Rates, Minimum Wage Laws, and Unemployment,” The Libertarian Alternative (Chicago: Nelson-Hall, 1974) ed., Tibor Machan, pp. 380-99; and Walter Block, Defending the Undefendable (New York: Fleet Press, 1976), pp. 232-33.

27.   Williams, pp. 58-59; and Banfield, p. 10708.

28.   Ludwig von Mises, The Anti-Capitalistic Mentality (New York: Van Nostrand, 1956), pp. 88-89.

29.   Block, pp. 162-70.

30.   Ibid., pp. 154-61. See also Sowell, pp. 184-189.

31.   In Help: the Useful Almanac (Washington, D.C.: Consumer News, Inc., 1978) ed. Arthur Browse, p. 356.

Dr. Osterfeld is assistant professor of political science, St. Joseph’s College, Rensselaer, Indiana.

7.   John C. Calhoun, (Indianapolis: Bobbs-Merrill, 1953), pp. 16-19. 8.   Walter E. Williams, “Commentary,” (September 24, 1979), pp. 57-59. See also Thomas Sowell, (New York: David McKay, 1975), pp. 195-200. 9.   See Tom Bethell, “The Wealth of Washington,” (June 1, 1978), pp. 41-60; also see Tom Alexander, “Why Bureaucracy Keeps Growing” (May 7, 1979). For a study that concludes that the poor are net tax payers see Gabriel Kolko, (New York: Praeger, 1962). But for a contrasting conclusion see Morgan Reynolds and Eugene Smolensky, “The Post Fisc Distribution, 1961 and 1970 Compared,” (1974), pp. 515-30. 10.   Theodore Lowi, (New York: Norton, 1979). 11.   Lineberry, pp. 268-69. 12.   Philippa Strum, (Santa Monica, Cal.: Goodyear, 1979), pp. 51-54. 13.   E. E. Schattschneider, (Hinsdale, Ill.: Dryden Press, 1975), pp. 34-35. 14.   Mancur Olson, (Cambridge: Harvard University Press, 1965). 15.   Milton Friedman, (Chicago: University of Chicago Press, 1962), pp. 138-44. 16.   See “’The Regulators/They Cost You $130 Billion a Year,” (June 30, 1975), pp. 24-28. 17.   Edward Banfield, (Boston: Little, Brown and Company, 1974), p. 57. 18.   , p. 61. 19.   See Robert Lineberry, pp. 490-92; also see Herman P. Miller, “Inequality, Poverty and (Winter, 1975), p. 45. The “poverty line” is calculated by determining how much it costs to feed a typical family of four and then multiplying that figure by three. 20.   Daniel Patrick Moynihan, “Poverty in Cities,” (New York: Anchor, 1970) ed., James Q. Wilson, p. 369. 21.   Banfield, pp. 128-29. 22.   The same holds true for programs like social security. First, since the tax is regressive, the poor pay a higher percentage of their earnings in social security taxes. Second, since the poor usually do not go to college, they tend to enter the workforce earlier than middle or upper class individuals, and therefore begin paying social security taxes much sooner. And finally, statistics show that the poor have a shorter life expectancy than other economic classes. The result is that the poor tend to pay the most into social security and receive the fewest benefits. 23.   See, for example, Reo Christenson, (New York: Harper and Row, 1976), pp. 79-86. Especially see p. 80: “about one-fourth of the (Job Corps) recruits stayed less than a month. Less than half stayed for six months, though strongly encouraged to stay for nine months.” 24.   Miller, p. 45. 25.   See, for example, Ludwig von Mises, (Chicago: Regnery, 1966); and Murray Rothbard, (Los Angeles, 1971). 26.   See Yale Brozen, “Wage Rates, Minimum Wage Laws, and Unemployment,” (Chicago: Nelson-Hall, 1974) ed., Tibor Machan, pp. 380-99; and Walter Block, (New York: Fleet Press, 1976), pp. 232-33. 27.   Williams, pp. 58-59; and Banfield, p. 10708. 28.   Ludwig von Mises, (New York: Van Nostrand, 1956), pp. 88-89. 29.   Block, pp. 162-70. 30.   , pp. 154-61. See also Sowell, pp. 184-189. 31.   In (Washington, D.C.: Consumer News, Inc., 1978) ed. Arthur Browse, p. 356.


November 1980

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July/August 2014

The United States' corporate tax burden is the highest in the world, but innovators will always find a way to duck away from Uncle Sam's reach. Doug Bandow explains how those with the means are renouncing their citizenship in increasing numbers, while J. Dayne Girard describes the innovative use of freeports to shield wealth from the myriad taxes and duties imposed on it as it moves around the world. Of course the politicians brand all of these people unpatriotic, hoping you won't think too hard about the difference between the usual crony-capitalist suspects and the global creative elite that have done so much to improve our lives. In a special tech section, Joseph Diedrich, Thomas Bogle, and Matthew McCaffrey look at various ways these innovators add value to our lives--even in ways they probably never expected.
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