How Markets and Governments Can Deal with Poverty
December 20, 2010
This paper presents the current thoughts on the fight against poverty, specifically the views of different economists on the role of markets and government on this issue. The discussion begins with Hazlitt’s ideas, based on the U.S. experience. It is then followed by the works of other key economists focusing mainly on the underdeveloped world. Lastly, some concluding opinions are offered.
Reducing Poverty in the Developed World
Hazlitt (1973), in his book The Conquest of Poverty makes the case for free enterprise system (Capitalism) as the solution to poverty. Through a thorough analysis, Hazlitt outlines various remedies that have already been tried and those that have been suggested for the future poverty relief in the United States. All these fixes translate into government interventions. The most common interventions discussed by the author are establishing minimum wage rates, creating labor unions, developing welfare programs and job programs, and redistributing income. In the book, and as discussed below, the author analyzes why each of these actions not only fails to reduce poverty, but actually worsen it. ← Minimum Wage
Minimum wage actually increases unemployment, and specially the unemployment of those that need the most, the unskilled workers. Why is that? Simply because by forcing the employer to pay a worker more than he/she is worth, it makes it unprofitable for employers to hire those workers, and therefore forces them into unemployment. ← Labor Union
The minimum wage logic also applies to labor unions. Labor unions, without realizing it, are an anti-labor force. Wages, like any other price, are determined in the free market by supply and demand, and the demand for labor is determined by the labor productivity. Thus, if union wages exceed what employers consider to be the employees’ worth in productivity, the employers are forced to reduce the work force; otherwise, they would be employing them at a loss. So, as union wages are increased, there is a point where employers cannot afford them, and get rid of them. In situations where employers cannot reduce the work force because of labor agreements, eventually they will shut down the operation. In addition, it is only expected that the next marginal capital will either not be invested or will be invested where labor is cheaper. Thus, the bottom-line is that arbitrary labor wages, which typically are excessive, can only result in work reductions. Now, if instead the wages would be set by the market, the employers have an incentive to hire them, increasing employment. ← Welfare Programs :
Welfare programs have continued to balloon exponentially since their inception, not only in number but also in cost. To appease the voters, government consistently enlarges these programs without regard to the consequences. Thus, they have led to higher taxes and chronic deficits because taxes have not been able to keep up with the cost of these programs, thus the government has had to resort to printing paper money, creating chronic inflation. These programs are like a chronic disease. Once on welfare, people typically stay on it. Moreover, those on unemployment compensation have little incentive to go back to work. Lastly, there is uncontrollable fraud and cheating among those on relief. ← Government Job Programs
Many feel that it is the government’s obligation to assure full employment. However, some degree of unemployment is always present in a dynamic economy, mainly as a result of shifts in product demands. Some industries are contracting while others are expanding, thus, some workers are laid off while others are hired. There are times, however, when significant unemployment happens, and typically, it is due to some type of the government action...