Capitalism and Government Intervention

by | Aug 22, 2003 | POLITICS

Many countries often thought to be socialist, either now or in the past, such as Sweden, Israel, and Britain under the old Labor Party, should be thought of as hampered market economies instead.

Interventionism is any act of government that both represents the initiation of physical force and, at the same time, stops short of imposing an all-round socialist economic system, in which production takes place entirely, or at least characteristically, at the initiative of the government. In contrast to socialism, interventionism is a system in which production continues to take place characteristically, at the initiative of private individuals, including private corporations, and is motivated by the desire to earn private profit. Interventionism exists in the framework of a market economy, though, as von Mises puts it, such a market economy is a hampered market economy.

Many countries often thought to be socialist, either now or in the past, such as Sweden, Israel, and Britain under the old Labor Party, should be thought of as hampered market economies instead. For production in those countries characteristically takes place, or did take place, at private initiative, motivated by private profit. The effect of the very extensive interventionism in those countries was or is to prevent people from doing many, many things they would have done had they been free to do them and to compel them to do many, many things they would not have done had they not been compelled to do them. But within those confines, matters pertaining to production were and are characteristically still decided by private individuals, motivated by the prospect of making profits and avoiding losses. Thus, it is still private initiative, motivated by private profit, that animates and drives the economy of those countries. The fact that the ruling political party in such countries may call itself socialist and support the philosophy of socialism is not sufficient to make them socialist countries in fact.

The only genuinely socialist countries that have existed have been the Soviet Union and its East European satellites, Communist China and its satellites, Cuba, and also, very importantly, Nazi Germany. Mises explains that Nazi Germany was a socialist state by virtue of the existence of all-round price controls and the consequent shortages they create. In response to the existence of shortages and the economic chaos that accompanies them, the government takes control of all fundamental decisions concerning production, such as what is produced, in what quantities, by what methods, and who is to get the resulting product. Mises call such socialism, socialism on the German or Nazi pattern, to distinguish it from the obvious socialism of the Soviets, in which all means of production are openly nationalized, and which he calls socialism on the Russian or Bolshevik pattern.

Socialism on the German pattern is deceptive and often mistakenly characterized as capitalism because it maintains the outward form and appearance of private ownership of the means of production and thus of capitalism. However, under German-style socialism, private ownership exists in name only. The power to make all the substantive decisions that constitutes the essence of ownership is in the hands of the government and is exercised by the government. Socialism on the German or Nazi pattern is de facto socialism.

Hopefully, the distinction between interventionism and socialism is now clear.

However, it is also necessary to distinguish interventionism from proper, legitimate government action, which does not represent interventionism.

All government action, good and bad, represents the use of physical force. There is an expression in Latin, “nulla lege sine poena”—which means, in translation, “there is no law without punishment.” Every law, edict, ruling, decree, or regulation that a government issues is backed by the threat of physical force—even to the point of killing whoever does not obey it. And this applies even to the most minor offenses, such as refusal to wear a seat belt or to pay a parking ticket. First may come reminder letters, increasingly less polite, asking for payment of the initial fine. If they are ignored, then may come greater fines. Beyond the fines comes the threat of arrest and imprisonment. And if, when the officers come to make the arrest, one resists, then whatever force is required to overcome one’s resistance will be applied, including the use of firearms and sharpshooters.

Now by no means is it the case that all such instances are wrong, unreasonable, or in any way objectionable. There are murderers, muggers, rapists, robbers, and con men of various types (the activity of  these last is tantamount to robbery). The deeds of  all these categories of people represent the use of physical force, in that they constitute physically doing something to or with the person or property of another against his will. More than that, such actions represent the initiation of physical force. When the government uses force against such perpetrators, its actions represent the use of physical force in defense or retaliation, on behalf of innocent victims.

The government’s use of force in such cases, provided it is not excessive, is entirely appropriate. In essence, it is the same as the physical force used by the Sheriffs and United States Marshals, depicted in old Western movies, against bank robbers, cattle rustlers, and so on. The difference between the use of physical force in defense or retaliation and the initiation of physical force is the essential difference between the guys in the white hats and the guys in the black hats in those Western movies. It’s the difference between the physical force used by a bank robber and the bank guard, the physical force used by a kidnapper and the physical force used by the rescuers of the kidnapper’s victim.

Exactly the same point applies to a country’s armed forces. They are a legitimate use of force insofar as they are used in defense and retaliation against foreign aggression.

The government’s use of defensive and retaliatory force does not represent    interventionism. In such cases, the government is simply doing its entirely proper, strictly limited job of protecting individual rights from the initiation of physical force. The concept of interventionism applies only to instances in which the government uses physical force not in a defensive or retaliatory capacity, but as an aggressor, that is, uses physical force against people who have not initiated its use.

This is what the government does every time it forbids any voluntary, contractual relationship, such as the offer and acceptance of a price or wage, or products or working conditions, that the parties judge to be in their respective self-interest to offer and accept. Likewise, the government initiates the use of physical force whenever it compels one man to pay any part of  his wealth or income, against his will, for the benefit or support of another, as is the case in the financing of public welfare, public housing, and public education, or for some alleged benefit to himself that he prefers not to pay for, such as a future Social Security or Medicare benefit.

So much for the nature of interventionism. The policy of the strict avoidance of interventionism is the policy of laissez-faire, which, very simply, is to be understood as: if it—that is, the action or situation or whatever—does not represent the initiation of physical force, the government must leave it alone, i.e., not intervene.

Now we must turn to the question of what precisely is the scope of interventionism. This is a question that is very closely related to the further question of what is the cost of interventionism.

One method of judging the scope of interventionism, at least as a first approximation, is to consider the number of Federal Cabinet Departments and the various alphabet agencies that now exist and judge how many of them would remain, and to what extent, if the guiding principle were enacted that the government is not to initiate the use of physical force, and thus end all of its intervention, i.e., if the guiding principle were laissez-faire.

At present, three are fifteen Cabinet Departments: Agriculture, Commerce, Defense, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, Interior, Justice, Labor, State, Transportation, Treasury, and Veterans’ Affairs. The best known of the alphabet agencies are probably the IRS, the FRB and FDIC, the EPA, FDA, SEC, CFTC, NLRB, FTC, FCC, FERC, NRC, FAA, CAA, INS, OHSA, CPSC, NHTSA, EEOC, BATF, DEA, NIH, NASA, CIA, and FBI.

If the government were to be restricted to the use of force only in defense or retaliation, the only Cabinet Departments that would remain would be Justice—to prosecute acts of initiation of force across state lines and possible acts of aggression by State governments—Defense, State, and Treasury. All others would be eliminated. (This would essentially reduce the number of Cabinet Departments to the original five that existed under Washington. The Department of Defense incorporates what were then, and until as recently as 1948, the separate Departments of War and Navy.)

Of course, not even these Departments would continue as they are presently constituted. For example, the Justice Department would lose its Antitrust Division, which would be closed, and the Treasury Department would lose the IRS, which would also be closed. The Department of Defense would be scaled back to defending only the territory of the United States and abandon the mission of acting as global  policeman. The State Department would cease to grant foreign aid.

As for the alphabet agencies, probably only the FBI would survive, and its area of investigation would be limited exclusively to acts entailing the initiation of physical force across state lines or against the United States.

The scope and also the cost of interventionism can be judged by considering the current budget of the Federal Government and the magnitude and makeup of the expenditures of the state and local governments. The Federal Budget for the current fiscal year of 2003 projected total Federal outlays of $2140 billion. Of  that sum only $364.6 billion appeared under the heading “National defense,” $25.4 billion under the heading “Homeland Security,” and $18.3 billion under the heading “Justice.” For the reasons explained, of course, these sums would be substantially less under a policy of strict laissez-faire. But even taking them at their stated levels, it is clear that the overwhelming bulk of government spending, i.e., all but the $408.3 billion that comes under these three headings combined, out of the $2140 billion overall total, is spending that represents government intervention, spending that would  not exist under laissez faire. Such spending at the Federal level is clearly in excess of 80%, and may well be close to 90%, of total Federal spending. The elimination of this spending would make possible the abolition of  the personal and corporate income taxes and the inheritance and capital gains taxes, along with the special taxes to pay for Social Security, Medicare, and Medicaid.

The situation is essentially the same with respect to the spending of state and local governments. In the first quarter of this year state and local government spending, according to the statistics published by the government’s own Bureau of Economic Analysis, was running at an annual rate in excess of $1410 billion. Of this sum, no more than 15-20% is classified under the heading of “Public Order or Public Safety.”

Since the states and localities currently receive almost $313 billion of the funds they expend from the Federal Government, and that sum is already included under Federal spending, the total of government spending going to individuals and businesses comes to $3237 billion rather than $3550 billion.

To place this sum in perspective, it should be compared with the total of incomes earned, i.e., so-called national income, which is reported as currently running at an annual rate of $8445 billion. This figure, it  should be noted is substantially inflated by so-called imputations, i.e., monetary allowances for economic activity that does not earn money. An example is the imputation for the net rental income allegedly received by homeowners in renting their homes to themselves. Removing these imputations would reduce national income substantially—probably by at least 10%,  which would put it at approximately $7600 billion.

Indeed, this figure must be further substantially reduced. National income currently includes approximately $1028 billion of wages and salaries paid to government employees. To appraise the impact of government spending on the taxpayers who must pay for it, most of those wages and salaries must be deducted from the reported national income figure—all of them except the portion which itself is paid in as taxes, which is probably no more than a third, at the utmost. Thus, we now have an adjusted national income figure of roughly $6911 billion, which reflects the subtraction of $689 billion of after-tax wages of government employees. From this, one should also subtract approximately $218 billion of net interest paid by the Federal Government, which is counted in National Income. When this is done, the National Income in the hands of the taxpayers and on which the burden of government falls, comes out as $6693 billion. It is this figure against which the impact  of  $3237 billion of government spending must be judged. As a percentage of this figure, government spending amounts to approximately 48%! This is an enormous burden, one that is far higher than usually reported.

But this is by no means the full story. This is merely a measure of the direct cost of government spending. What the government does with the money it spends can impose enormous additional costs. For example, this year’s Federal budget lists an expenditure of $7.6 billion as the budget of the Environmental Protection Agency, which is charged with enforcing and applying existing environmental legislation and enacting all manner of new and additional regulations authorized by the legislation under which it operates. This agency is the one that decides what air and water quality standards must be met, and which species are endangered. Its use of whatever billions have been budgeted for it over the years has undoubtedly served to impose many hundreds of billions, possibly several  trillions, of dollars of additional costs on businesses and consumers across the country.

Indeed, such indirect costs should  be assumed to be the result of all of the regulatory agencies. As the result of OSHA, the Occupational Health and Safety Administration, CPSC, the Consumer Product Safety Commission, and NTSB, the National Transportation Safety Board, the prices of many consumers’ goods have been substantially increased in order to comply with government-mandated safety requirements. In at least one case, that of stepladders, the price has been more than doubled. The FDA—the Food and Drug Administration—substantially adds to the costs of new drugs to whatever extent it unnecessarily delays their introduction. Indeed, it causes people to suffer and die unnecessarily by preventing the introduction of drugs that have already proved their value for many years in other countries. The FTC—i.e., the Federal Trade Commission—along with the Antitrust Division of the Department of Justice, routinely prevents business firms from achieving greater economies by preventing them from carrying out mergers that would reduce costs and thus prices. The NLRB—the National Labor Relations Board—routinely drives up business costs and prices by compelling collective bargaining with labor unions and thus the payment of union scales and acceptance of union work rules. At the same time, of course, it adds to unemployment, because at the higher wage rates it causes, the quantity of labor demanded is necessarily reduced in comparison to what it would be in a free labor market. And, perhaps worst of all, the Federal Reserve Board systematically inflates the money supply of the country, thereby causing all of the serious problems that result from inflation, including periodic recessions and the potential for major deflation and depression.

Such extra costs are in the very nature of interventionism. As we have seen, to the extent that there is interventionism, individuals are prohibited from taking peaceful actions they judge to be in their interest and/or are compelled to take actions they judge to be against their interest. A leading category of actions that individuals judge to be in their interest are those that make it possible for them to achieve better results and lower costs. The actions they seek to avoid are those that will cause them to achieve poorer results and incur higher costs. By preventing individuals from doing what is in their interest to do and compelling them to do what is against their interest to do, it is not surprising that interventionism succeeds in holding back improvement and driving up costs.

I believe that the growing cost of interventionism is what is responsible for the fact that apart from the contribution made by women working more, real income for large numbers of working families in the United States has been stationary or even declining over the last thirty years or more.

A major vice of interventionism is that it tends to grow. In the words of Mises, “Prior Intervention Breeds Later Intervention.” For example, the government imposes rent controls. The result is that private investors don’t want to build rental housing, because it isn’t profitable. Instead of repealing the rent controls, the government goes on to build public housing, claiming that the free market has failed.

Or it imposes rate regulation on the railroads and at the same time inflates the money supply, compels the railroads to deal with the railway unions, and subsidizes massive highway construction. The result: lack of profitability in railroading and declining investment and quality and service in that industry, all adding up to another alleged failure of the free market and consequent alleged need to nationalize an industry.

The same pattern is now being repeated with respect to privately owned electric utilities, whose rates are controlled, while inflation drives up their costs, and who are prevented by the environmental movement from building even such additional facilities as they are able to build to keep pace with growth in demand, and who are then blamed for the resulting power shortages.

Or, the government imposes minimum-wage and prounion legislation, thereby compulsorily pricing workers out of the market and into unemployment. Then the complaint is made that capitalism suffers from an inherent problem of unemployment, necessitating a system of public welfare and government job-creation programs.

Or, the government imposes medical licensing, which keeps down the supply of physicians and artificially increases their rates, making their services unaffordable by people who otherwise could have afforded them. Then, in an effort to alleviate this problem, it encourages employer-financed medical “insurance” so-called, which has the effect of making the cost of medical care seem virtually free to growing numbers of workers. This is a system which should be understood not as any actual kind of insurance, but as the collectivization of medical costs. Because of the lack of cost of medical care to the individual under this arrangement, the demand for medical services begins to grow without limit.

Physicians cash in on the system by ordering more and more tests and procedures that may be of some benefit to their patients, but which they would not have ordered if they knew the patients themselves would have to pay for them and could not afford to do so. Soon physicians become exposed to malpractice suits for failing to order such tests and procedures and even for taking a patient’s financial circumstances into account at all. They then begin practicing “defensive medicine,” ordering still more tests and procedures in order to protect themselves from such suits. And malpractice insurance premiums grow ever higher.

In this process, the cost of medical care is driven beyond the reach of more and more people who lack so-called medical “insurance.” To deal with this problem, the government goes on to establish the programs of “Medicare” and “Medicaid.” The effect of these programs is to drive up the costs of medical care still further and to expose anyone who remains outside the system of so-called medical “insurance” to financial ruin should he need any significant medical care.

Finally, in order to limit the rise in costs, the government more and more seizes control of what doctors and hospitals are allowed to do and how they are to do it. This is the point we are at today in medical care.

In addition to their economic cost, it should be realized that many if not all of the administrative agencies that carry out the various interventionist programs routinely violate basic protections of Anglo-Saxon law. This is because they combine within themselves the role of legislator, executive, prosecutor, judge, and jury. The regulations they enact take effect upon publication in The Federal Register, whereupon they are added to the Code of Federal Regulations, which now contains several tens of thousands of pages. The regulations have the force of law and are often unintelligible, vague, arbitrary, or contradictory.

It would be very valuable for a volume, or, better, a series of volumes, to be written someday, perhaps titled “Alphabet Soup or the Cost and Consequences of  Federal Regulations,” which would detail the harm done by each and every government regulatory agency and each and every improper Cabinet department. Naturally, the same thing would have to be done at the level of state and local governments.

Such a project, should, of course, also deal with the intellectual foundations of interventionism, that is, the ideas and arguments, the doctrines and theories, that underlie it in each case, and with its intellectual sources in the writings of such figures as Marx and Keynes and Robinson and Chamberlin.

The role of Marx is especially noteworthy. His exploitation theory underlies the assumption that interventionism has no cost to anyone but the capitalist “exploiters”—that it somehow just comes out of “surplus value” or profits. This notion, that government intervention is costless to its alleged beneficiaries is powerfully reinforced by the government’s ability to create money, which makes its expenditures appear costless to the citizens, whose taxes do not have to be immediately increased to pay for additional government spending when that spending can be paid for by the government out of newly created money.

The ultimate goal of this project, of course, would be nothing less than the elimination of all government intervention and thereby the achievement of a fully free and far more rapidly progressing and prosperous society than we have today. Its main inspiration would be the works of Ludwig von Mises, the careful reading and studying of which by large numbers of scholars would be the most important prerequisite for its undertaking.

Along these lines, perhaps as a section in the Introduction to such an undertaking, I’d like to offer what I believe would be a pro-free-market, anti-poverty program. That is, a program for alleviating poverty not by means of additional government intervention, which has been the standard formula for so long that people seem to have lost the ability even to imagine any alternative, but by means of the repeal of existing government intervention and corresponding enlargement of the sphere of economic freedom.

I want to explain what sorts of things might be done, based on the principle of abolishing government intervention and enlarging economic freedom, to make it possible for low-paid workers to earn more money than they now do and to keep more of what they earn, and also what kinds of things might be done, again based on the principle of abolishing government intervention and enlarging economic freedom, that would serve to make housing, medical care, and goods in general more affordable by poor people. Based on a combination of higher incomes and lower prices, poverty can certainly be greatly reduced, if not eliminated altogether.

To increase the incomes of poor people, the first thing that must be done is to abolish laws that prevent them from working and thus from earning income. The leading example of this type of law is the minimum-wage law, which forces people into unemployment and thereby deprives them both of the income they might earn by working and of the opportunity of  gaining work experience and quite possibly of developing work skills that would later on enable them to perform more valuable work and thus earn more than they could presently earn.

Abolition of the minimum-wage law and the resulting employment of more workers at lower wage rates would serve both to reduce costs of production and to increase the supply of goods and services produced in the economic system, both of which in turn would serve to reduce prices. Previously unemployed poor people would thus both earn more money and be able to buy goods and services at lower prices than were possible before.

Of course, those poor people who were lucky enough to have jobs at the minimum wage would now be earning lower wages. To some extent, those lower wages would be offset by lower prices, which would come about on the foundation of  the repeal of the minimum-wage law, as we have just seen. To the extent that the lower wages would not be offset by lower prices, there is a free-market remedy—in the form of the repeal of prounion and licensing legislation.

Such legislation is essentially similar to minimum-wage legislation. It is minimum-wage legislation for semi-skilled and skilled labor. Like minimum-wage legislation, its purpose is to forcibly impose wage rates above the level that a free labor market would establish. And just like minimum-wage legislation, it reduces the quantity of labor demanded below the supply available and thus causes unemployment.

The only difference is that the unemployed workers in these cases are not totally deprived of employment. They have alternative employment opportunities. Displaced from the occupations in which they would have worked in a free labor market, they can still turn to other, less desirable jobs. Thus, for example, unemployed carpenters, electricians, and plumbers can seek work in factories, restaurants, or other establishments. Their influx into such other lines of work, however, serves to enlarge the supply of labor in those other lines. This larger supply of labor is employable only at lower wage rates than would have prevailed in the absence of the influx of labor.

To this extent, the effect of prounion and licensing legislation, it should be observed, is to raise the wage rates of some workers only by correspondingly reducing the wages rates of other workers, and, at the same time, of course, reducing the supply of more valued goods and services and increasing the supply of less valued goods and services in the economic system. The effect is tantamount to the wiping out of a portion of human skills and abilities.

If wage rates in the lines of work to which the displaced workers turn are prohibited from falling, because they too are unionized, the displaced workers may still find work, insofar as their relatively superior abilities enable them to outcompete other, less qualified workers in those lines. In such cases, there is a further displacement of labor into less desirable jobs. The process of displacement may go through several stages. A minimum-wage law serves to make it end in unemployment plain and simple, with the least-skilled, least educated bearing the brunt of it.

Repealing prounion and licensing legislation at the same time as minimum-wage legislation were repealed would reverse this process. At the same time that previously unemployed workers entered the labor market at the bottom of the economic ladder, other workers previously employed at the bottom would be leaving, to move up to the higher-level jobs which their skills and abilities qualified them for and from which prounion and licensing legislation had previously barred them. The result would be that wage rates at the lower levels would not have to fall as much as they would if only minimum-wage legislation had been repealed.

In such circumstances, there would be an increase in the supply of labor at all levels of skill and ability in the economic system, a resulting general fall in money wage rates, and in costs of production, and a general increase in the supply of goods and services, accompanied by a general fall in prices.

The greatest gainers from this process would be the poor, especially those of them  who previously had been unemployed. They would now be employed at the least possible fall in wage rates, and the fall in wage rates would be accompanied by a fall in prices almost certainly greater than the fall in the wage rates of those members of the poor lucky enough to already have had jobs.

The fall in prices would be greater than the fall not only in their wage rates but also in the overall average of wage rates. This is implied in the fact that the supply of labor employed is not only larger but is also now employed in ways that better take advantage of the skills and abilities of the workers, that is, in ways in which their overall productivity is higher.

The rise in the productivity of labor is manifested in part in the expansion of the production of more valued goods and services at the expense of the production of less valued goods and services. This in itself implies an increase in the supply of products greater than the increase in the supply of labor employed and thus, in the face of unchanged monetary demands for labor and products, a fall in prices greater than the fall in wages.

The rise in the productivity of labor and consequent increase in the supply of products in greater proportion than the increase in the supply of labor, and thus a fall in product prices in greater proportion than the fall in wage rates, results especially from the abolition of prounion legislation. Such legislation enables the unions to prevent or delay the introduction of labor-saving machinery, to prevent or minimize competition among workers, and to impose arbitrary and costly work rules and outrageous featherbedding practices, all of which signify a lower productivity of labor and thus a lower supply of products relative to the supply of labor, and thus higher product prices relative to wage rates. Take away this interference, and prices fall relative to wage rates, i.e., real wages rise.

In addition, and very important, the end of large-scale unemployment that would be achieved by a free labor market would further serve to raise real wage rates by eliminating the burden that wage earners must bear in supporting the unemployed, either through voluntary contributions to help unemployed friends or relatives or through the payment of taxes to support unemployment compensation and public welfare.

A further source of a rise in real wage rates would be the abolition of the government’s Social Security and Medicare programs. This would have the potential of directly increasing workers’ take-home wages in excess of 15 percent, inasmuch as so-called employer contributions for these programs are already part of the employers’ labor costs and could be passed on to the workers in the form of higher take-home wages.

Yet a further rise in real take-home wages would be achieved if workers were given the option of withdrawing from employer-financed health insurance programs and having the employer contributions paid to them directly, as tax-free wages instead of, as at present, being a tax-free fringe benefit. This change, as I will later show, would also be an important step in bringing about a radical reduction in the cost of medical care.

If interventionism is not eliminated in the ways I have described, and in other ways that I have not yet described, or at least very substantially reduced, then it will be necessary to place special focus on its elimination in other aspects of the restraints it places on people working. While a free economy makes it possible for real wages to rise to ever higher levels and thus to progressively reduce the amount of work required to achieve any given level of living standard, i.e., to both reduce the hours of work and increase the age at which work begins, an economic system characterized by growing government intervention requires the opposite outcome, if people are not to be utterly impoverished. That is, it requires that people work longer hours and start work at a younger age, in order to produce enough to meet both the voracious demands of the government and their own vital needs. In other words, to prevent interventionism from driving growing numbers of people into abject poverty, it becomes necessary at some point that maximum-hours and child-labor legislation become a major target of efforts at repeal.

Maximum-hours and child-labor legislation are especially sacred cows of interventionism, because of the widely held belief that the amount of work that workers perform affects employers’ profits rather than workers’ wages. The basis of this idea is the Marxian exploitation theory, which holds that wages in a free market are determined by the number of hours of labor required to produce the average worker’s minimum subsistence, and that hours of labor performed in excess of that number serve merely to enlarge employers’ profits. Based on this utterly fallacious idea, people believe that the compulsory shortening of the working day serves merely to reduce profits, not wages, and that the prohibition of child labor has the same effect.

The truth, of course, is that wages are not determined by minimum subsistence but by the demand for and supply of labor. And while a larger supply of labor serves to reduce hourly wage rates, its performance also correspondingly increases the supply of consumers’ goods and thus serves to reduce the prices of consumers’ goods. Assuming unchanged demands for labor and consumers’ goods and an unchanged output per unit of labor, the fall in average hourly wage rates resulting from any given percentage increase in the supply of labor hours must be accompanied by a corresponding fall in the prices of consumers’ goods. And because the workers who work the extra hours are able to offset the fall in hourly wage rates by means of their extra hours, they benefit from their extra work in the form of lower prices of the things they buy.

In other words, a longer working day and starting work at a younger age do serve to raise real wages, and, by the same token, a shorter working day and starting work at a later age do serve to reduce real wages. In a free market, the progressive rise in the output per unit of labor—the productivity of labor—which occurs because of  the work of scientists and inventors and the work and saving of businessmen and capitalists, brings about a progressive fall in prices relative to wage rates and thus a progressive rise in real wage rates. It is this which permits the progressive shortening of hours and elimination of child labor that characterizes a free market. Growing government intervention in contrast, throws this process into reverse. And then, because of the prevailing ignorance of economics, just as the interventionists claimed undeserved credit for the shortening of hours and elimination of child labor achieved by the free market, the advocates of economic freedom will be subjected to undeserved criticism for urging the repeal of such legislation in order to mitigate the consequences of growing interventionism.

My discussion of ways to increase the money incomes of poor people has been inextricably intertwined with discussions of the prices they must pay and what would serve to reduce those prices. This has been unavoidable, because real wages are determined by prices as much as they are by money wages, and thus there is simply no way intelligently to discuss wages without discussing prices.

I now want to indicate some major specific ways in which the prices or costs that poor people pay could be reduced by means of reducing or abolishing government intervention. Of course, these same price and cost reductions will be of benefit to everyone who buys the goods or services concerned.

Let’s start with medical care. I’ve already said that a major step in bringing about a radical reduction in the cost of medical care would be to have employer contributions to employee medical insurance paid to workers directly, as tax-free income. Making individuals financially responsible for their own medical care would reintroduce powerful buyer resistance to further increases in the cost of medical care and equally powerful pressure for actual decreases in the cost of medical care.

To bring down the absurdly bloated costs of the present system, it would be necessary to enlarge the sphere of economic freedom in some important additional ways as well. One essential way would be to establish freedom of competition among hospitals. Even without totally doing away with the present restrictive system of licensing, if it were made possible for, say, any three already licensed physicians to establish their own hospital, specializing in whatever procedures they cared to specialize in, from relatively simple appendectomies and tonsillectomies to quadruple bypass operations and the removal of brain tumors, hospital rates would soon be dramatically reduced.

This is because the present rates of $2000 per day or more far exceed the necessary costs of providing their services. Free competition in hospitals would drive their rates down toward their necessary costs plus only as much profit as required to yield a competitive rate of profit. And it would also operate progressively to reduce those costs, while improving the quality of the services provided, just as it does throughout the rest of the economic system. All the costs of unnecessary paperwork and of compliance with endless arbitrary government regulations could be eliminated, as well as requirements to subsidize nonpaying patients.

An essential requirement of bringing down costs would be respecting the freedom of contract of hospitals and patients to opt out of the standards of malpractice that have developed in recent decades and to choose to be guided by earlier and more reasonable standards. The same freedom of contract concerning malpractice standards should, of course, be applied to the relationship between patient and physician, and any and all laws or government regulations preventing physicians from offering discounted rates to uninsured patients should be abolished. Allowing physicians not to report fees from uninsured patients on their income tax returns would likely be extremely helpful.

These measures would go a long way toward making medical care affordable by individuals choosing to receive as take home wages the premiums presently paid by employers to medical insurers.

Let us turn now to how the cost of housing could be reduced for poor people. Laws and regulations imposing minimum housing standards, such as those concerning minimum size of apartments and minimum window areas have the effect of imposing standards that are often too high for poor people to afford. They are comparable to a law that in the name of safety or reducing air pollution would prohibit automobiles over a certain age from using the public streets or highways. Since the older cars are less expensive, they are precisely the kind of cars that poor people tend to own. And the effect of such a law would therefore be largely to prohibit poor people from driving. In exactly the same way, laws prohibiting poorer quality housing, which is precisely the kind of housing that poor people can afford, serves to deprive poor people of housing. Laws and regulations prohibiting unrelated adults from sharing living quarters have the same effect. I’m convinced that all such laws and regulations bear responsibility for the phenomenon of homelessness.

The withdrawal of land from development by environmental regulations makes land scarcer and more expensive and thus serves to raise the cost of providing housing. Zoning laws, which arbitrarily increase minimum lot sizes and limit the height of buildings have the same effect. Government-imposed building-safety codes, delays in granting permits, and laws and regulations supporting the higher wage rates and restrictive work practices of the construction unions, also serve to raise the cost of housing, as do property taxes and anything that holds back saving. (Saving is the foundation of housing construction and mortgage credit. The greater is the supply of savings relative to the demand for consumers’ goods, the lower are interest rates, including mortgage rates, and thus the lower is the cost of housing, including rental housing. I will say more in a little while about how government interference undermines saving and capital accumulation throughout the economic system.)

Protective tariffs and farm subsidies must be mentioned as important causes of prices being higher and thus real wages being lower than they need to be. And since poor people can least afford such reductions in real wages, they are their worst victims. Poor people are the worst victims of government intervention in general, because they can least afford the resulting inefficiencies and rise in costs and prices.

And this brings me to a wider point. Namely, it needs to be understood that the main way, the only significant way, in which poverty is eliminated is by means of the rise in the productivity of labor. This is what raises real wages, by increasing the supply of consumers goods relative to the supply of labor and correspondingly reducing prices relative to wage rates.

The rise in the productivity of labor in turn is  based on capital accumulation. Capital accumulation is what places in the hands of the average worker the tools, machines, materials, and previously produced products of all kinds that make possible the rise in his productivity. Capital accumulation is itself based on the combination of a sufficiently high degree of saving and provision for the future relative to current consumption, and scientific and technological progress. It both makes possible the progressive adoption of more advanced technologies and is itself sustained by their adoption, which makes possible a growing production of more and better goods, including further capital goods.

A major aspect of saving and provision for the future relative to current consumption is that it determines the demand for labor relative to the demand for consumers’ goods and thus the height of wages relative to profits. The greater is  saving and provision for the future relative to current consumption, the higher are wages relative to profits.

Deeper even than saving and capital accumulation and scientific and technological progress is economic freedom and respect for private property rights. The security of property is essential for people to be motivated to save and invest. To save and invest, they must know that what they save and invest will be theirs and not be seized by the government or by other private individuals. Economic freedom is further essential to capital accumulation and economic progress because it is the precondition of businessmen and capitalists not only saving and investing but also making the most efficient use of all existing means of production. The larger is the output obtained from existing means of production, the larger is not only the production of consumers’ goods but also of further capital goods. The results of any given degree of saving and provision for the future are correspondingly greater and the accumulation of capital is made correspondingly easier and greater.

Such taxes as the progressive income  tax, the corporate income tax, and the inheritance and capital gains taxes greatly impair the ability to save and accumulate capital. They are paid largely with funds that otherwise would have been saved and productively expended, i.e., expended for capital goods or labor by business firms. Instead, those funds are expended by the government, or by those to whom the government gives the money, for consumers’ goods. The effect is to reduce the demand for capital goods relative to the demand for consumers’ goods and thus the production of capital goods relative to the production of consumers’ goods. This is a sure formula for reducing or preventing capital accumulation or causing capital decumulation.

Government budget deficits, the Social Security system, and inflation of the money supply produce similar negative effects on capital accumulation. Budget deficits draw savings away from business investment and into financing the consumption expenditure of the government. The Social Security system leads private individuals to save less, both by depriving them of the income needed for saving and by leading them to believe that their and their employers’ taxes paid into the system are savings for the future. Meanwhile, the government consumes those taxes.

Inflation of the money supply undermines capital accumulation by leading to a systematic overstatement of profit and interest incomes and corresponding increases in the taxation of such incomes, while simultaneously raising the replacement prices of capital goods. The result is that business firms lack adequate funds for replacement. At the same time, the overstatement of profit and interest incomes and the paper capital gains caused by inflation promotes consumption by private individuals, who are led to believe that they are richer merely because inflation has raised their money incomes and the prices of their assets. Inflation of the money supply undermines capital accumulation in further ways as well, which I will discuss in my session on “The Economics of Inflation.”

Interventionism in all of its forms serves to undermine capital accumulation and thus the productivity of labor and real wages. It does so insofar as it serves to reduce the output of the economic system, because a major portion of that output is capital goods, and thus what reduces output reduces the production of capital goods no less than the production of consumers’ goods, and thereby makes capital accumulation correspondingly more difficult or impossible.

In conclusion, interventionism reduces the standard of living of everyone, but its impact on the poor, who can least afford any reduction in their standard of living, is necessarily greatest. If one wants to overcome poverty, there is only one essential means of doing so. And that is the establishment of economic freedom to the fullest possible extent, i.e., the establishment of laissez-faire capitalism.

The wider and more fundamental principle is that the foundation of economic prosperity is economic freedom.

To learn about every aspect of the case for capitalism, read my Capitalism: A Treatise on Economics. Originally published at the blog of George Reisman. Copyright 2019 George Reisman. All rights reserved.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics. See his author's page for additional titles by him. Visit his website and his blog Watch his YouTube videos and follow @GGReisman on Twitter.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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