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Tom Woods: Free markets liberate people from poverty

By | December 26th, 2010

“…We have seen the greatest conquest of poverty ever in the history of mankind in the age in which we have seen the greatest movements toward the liberation of markets. Now it’s true that we have not seen as much movement in that direction as would be desirable, but nevertheless that has been the trend.”

That’s author Thomas E. Woods, Jr., Ph.D., a senior fellow at the Mises Institute, describing to an audience at Colorado State University on Dec. 9 the power of markets to improve lives throughout the sweep of history.

“So, for example, in 1820 some 85 percent of the world’s population lived in what economists call ‘absolute poverty.’ Now, by 1950 that figure had fallen to 50 percent, and by the early 1980s it was down to one third. Absolute poverty in the developing countries fell from 40 to 21 percent, and thus the global rate from one third down to 18 percent between 1981 to 2001. Now this has never happened in any two-decade period in the history of the world, that we’ve seen not only the percentage of people in poverty but also the absolute number of people in poverty fall. This has never happened before.”

Woods detailed a laundry list of age-expectancy advances, nutritional increases, diminishment of physiological disparities between rich and poor, and the overall drop in the overall poverty rate over time.

Woods is not alone in his assessment, as this recent video from the BBC clearly illustrates, tracing the same essential time period of the last two centuries:

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Woods argues that the advent of anti-poverty programs in the late 1960s, the rate of poverty reduction had stagnated. The absolute standard of living - toilets and transportation - have drastically increased and “seen the greatest advances.”

As Woods notes, the improvement from zero to one toilet (and not an outhouse or other arrangement) is more significant than the addition of 2 or three more fixtures in a house, much in the same way that transitioning from walking to driving a car is substantially more of an improvement than having an additional car in the family, or one that is more luxurious.

“It’s actually the bottom groupings in society, in terms of income, that have seen the greatest advances,” said Woods. “Of course all of us, rich or poor, are able to have recourse to and acquire good that people just couldn’t possibly have imagined, things that the Habsburgs didn’t even have on the eve of World War I are things that people now come to take for granted.”

He continues with an extended thought experiment, where modern assembly lines and machinery disappear, and production plummets. Each individual will have to learn how to make many more items, and some, like automobiles and televisions, will be entirely outside the realm of possibility. No amount of redistribution from rich to poor will produce a situation to match the previous level of production. It is savings and investment in the machinery and the recovery of technology (implying the recognition of the role technology plays in raising living standards) that will lead to more production, falling costs, and even more goods and services:

“And we see it today in electronics and computers. Prices consistently come down in those areas over time. We have just come to expect it. And so, this is how our living standards have increased. It’s that there is this investment in capital equipment that makes the production process more physically productive, good more abundant, their prices lowered in terms of how many minutes we have to work in order to earn the money to buy them, and our living standards are improved.”

Inflation, according to Woods, masks the lower prices that were previously seen in the 19th century. We do see the cost savings in electronics due to the rapid decrease in the cost to the producers, who are able to quickly pass on to the consumers. The consumers benefit not only from the reduced cost, but also see the intangible benefit of the drastic improvement in the technology itself (see “Moore’s Law” or, perhaps more illustratively, your newest smartphone for confirmation of the latter).

Woods laments, as he did in his parable of the ham sandwich, that much of this process is assumed and taken for granted, or ignored and/or dismissed by those who advocate more control over the market:

“But yet we take this entirely for granted like this is just automatic, that the institutional forms don’t matter, these things just occur. So, in other words, this is an area which, if we don’t understand how this works, we could shoot ourselves in the foot very easily. And one way to shoot ourselves in the foot, of course, would be to tax this process - would be to tax people who are engaged in this very process of taking profits and then investing them in capital equipment so as to make possible the rise in our living standards. A rise that occurs, not because we steal from one group and give to another, then there’s no overall rise, but spontaneous voluntary process. That is interrupted every time we tax or sledgehammer or whatever people who are engaged in it.”

“And yet we’re all taught from birth that that’s what we need to do. ‘These bloodsuckers need to be bashed and taxed and looted and expropriated.’ But, you understand, doing that is just shooting ourselves in the foot. We shouldn’t want to do that. This is an area in which we all have the same interest as a society. Everybody should want this process to continue unhampered, but yet nobody realizes that, unfortunately, and so we continue to hurt ourselves.”

While those who advocate for “progressive” taxes or redistribution of wealth in the name of “equality” or “fairness” demonize the producers as the “expropriators,” it is these individuals who truly “expropriate” from society as a whole, diminishing the ability of the natural progress to promote the general welfare of society by raising the living standards of all.

In the 20th century, economic demagoguery produced famine, war, and mass killings (including genocide) on the worst side. Economic stagnation, a flattened rate of poverty reduction, and a slowing rise in the standard of living occurred on the less unfavorable end.

In essence, Woods concludes, intervention by governments into the productive process of the free markets has slowed, stopped, or temporarily reversed the rise of living standards seen most vividly over the course of the 19th and early 20th centuries. While in a country like the United States this intervention will exacerbate or trigger downturns in the economy, it will literally cause harm to individuals - their feet or otherwise - where the economy enjoys little in the way of market freedom, and the level of government intervention isn’t merely annoying, but onerous and a threat to the lives of its citizens.

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