The Miracle of Capitalism
Part V: Capitalism and Disastrous Good Intentions
by Loyal to the Word


         Eminent economist Ludwig von Mises observed:

 

“...economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.”

(Ludwig von Mises, Human Action, p. 67)

 

         Distinguished economist Thomas Sowell likewise observed:

 

“Nothing is easier than to have good intentions but, without an understanding of how an economy works, good intentions can lead to disastrous consequences for a whole nation. Many, if not most, economic disasters have been a result of policies intended to be beneficial – and these disasters could often have been prevented if those who originated and supported such policies had understood economics.”

(Thomas Sowell, Basic Economics, 4th ed., p. 2).

 

The Miracle of Capitalism Part V: Capitalism vs. Disastrous Good Intentions

         This section will discuss capitalism vs. well-intended intervention in the economy. It will take sacred cows of mainstream thought and the political left that are seemingly well-intended, and discuss their real effects, which are in fact disastrous.

 

The Conventional Wisdom is Folly

         A large portion of political policies and programs, and much of which comes from the political left, are very well-thought-of because they were conceived with good intentions. Liberals and socialists think well of themselves, because they want to enact ideas that are meant to help certain segments of society that they deem underprivileged. However, as we shall soon see, the conventional wisdom of the mainstream, which has long been heavily influenced by collectivist ideologies, does not actually attain to the ends sought. It doesn’t matter what the good intentions were, the only thing that matters is what the actual effects of the policies are. This is all that matters. And the effects of many of the mainstream policies, and policies from the political left, have pernicious results despite the well-wishing of their proponents.

         We have already seen this with government welfare in Part IV of the Miracle of Capitalism. It is the same for many other policies as well.

 

What is Seen and What is Unseen

         Journalist and economic genius Henry Hazlitt wrote that one of the main reasons for economic fallacies that caused so much harm in society was “the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups” (Henry Hazlitt, Economics in One Lesson, 2007, p. 3-4).

         Hazlitt continued:

 

“In this lies almost the whole difference between good economics and bad. The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”

(Henry Hazlitt, Economics in One Lesson, 2007, p. 4).

 

         Political thinker and superb economist Frédéric Bastiat wrote:

 

“In the economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference – the one takes account only of the visible effect; the other takes account of both the effects which are seen and those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.”

(Frédéric Bastiat, That Which is Seen, and That Which is Not Seen (Ce qu'on voit et ce qu'on ne voit pas), 1850, opening paragraph).

 

         In other words, we need to consider more than just what the intentions behind a policy may be. And we need to consider more than the effect they will have on a certain group of people for the short term. We need to instead consider the actual effects of such policies as they will inevitably unfold in the long run. We will now do so, for several of the beloved policies of the collectivist mainstream.

 

The Effects of High Taxes on Businesses and the Rich

         Liberals and socialists are always crying for the government to tax the rich. Look at all they have, they would say, and look at the disparity between their wealth and the conditions of the poor. The government should step in to spread this wealth and equalize incomes to help the poorer classes. This would be moral and just, they would say.

         The reality, of course, is that such a method of forceful confiscation would be the exact opposite of morality and justice. However, let us set all of that aside and consider simply the issue of whether it is actually profitable to soak the rich.

         It is very apparent that what this course of action will do is to take away the source of capital investment, that is, investment in the factors of production that make abundance possible. This will have the direct effect of reducing employment and production, and therefore reducing standard of living for society in general.

         This also affects the incentives to produce. The burden of all society cannot be borne by a smaller majority for long. Put yourself in the situation of the rich person. Why should you go to the trouble of trying to accumulate money for capital investment if it will only be taken from you and given to others instead? You would not do it. Instead, you would have incentive only to work for that amount that the government would allow you to keep. Of course, the government cannot tax wealth that is never created. Therefore, all of society suffers as capital investment decreases, production decreases as a result, and therefore so does standard of living.

         Henry Hazlitt wrote that,

 

“the funds that the present income-tax structure takes are precisely those that would have gone principally into investment — that is, into improved machines and new factories to provide that increased labor productivity which is the only permanent and continuous means of increasing wages. An even more important effect of taking so much of the taxpayer's earnings, in fact, has been to diminish or remove the incentives to bring such earnings into existence.”

(Henry Hazlitt, Newsweek, March 22, 1948).

 

         Henry Hazlitt demonstrated clearly that when governments raise taxes on higher income earners, the amounts of tax revenues decrease relative to what they would have been under smaller tax rates. That means the more the government tries to tax the rich, the less they actually end up getting! When government taxes only to a small degree, particularly on the higher incomes, a far greater amount of money can be collected in taxes. Graduated tax schemes to tax the rich are inherently self-defeating. What then, could possibly be the purpose of a graduated tax scheme aside from whimsical ideas about social justice? It has no merits in actual practice.

         Henry Hazlitt also wrote that were it not for a graduated income tax meant to soak the rich,

 

“The national income would be higher not because the high incomes themselves would be larger; but mainly because the lower rates would both permit and encourage high investment. It is this investment that would raise national production and real wages. In our efforts to soak the present rich we have been soaking the future poor.”

(Henry Hazlitt, Newsweek, March 22, 1948).

 

         It makes no difference what you think rich people ought to do with their money. If you take their money forcefully to redistribute it, it only ultimately makes everybody poorer in the end.

         With respect to taxing the rich at a greater rate than the poor, so that they can “pay their fair share,” who is to decide what a “fair share” is? Can any agreement be reached on this? What possible way could there be to decide what “fair” would be in this context? It is obvious that the only way to apportion people their “fair share” in a non-arbitrary and just way is to allow the free market to reward those who have been keen at providing the masses of consumers with their wants and desires, and then to tax people only mildly, and equally in proportion.

 

The Effects of Price Controls

         Often people complain about the prices of certain commodities. This is pretty natural. But sometimes the government will undertake to make things easier on a certain segment of society by fixing prices at a maximum or minimum level. This is called a price control.

         Let’s say the government has determined the market price of milk at $4 a gallon to be too high for the poor. It therefore undertakes to set the price at $2 by government decree. It is now illegal to sell milk for higher than $2. Sounds like nice idea, but what are the results of this?

         Immediately as a result of the price control there will now be shortages of the commodity. People who did not have money to buy the commodity before now will buy it, dramatically increasing the demand for the product. At the same time, dairy farmers find themselves having a difficult time turning a profit with the new restrictions. What do they do? They stop producing milk, and switch to a more profitable venture. They begin slaughtering their cows for meat instead. Therefore, at the same time demand has increased, supply decreases. These two factors combine to make for a dire shortage of milk on the store shelves.

         Therefore, the entire point of the price control – to increase availability – is entirely frustrated by the price control itself. It is completely self-defeating. Of course, the government can try to impose further controls to offset the unwanted effects of the original price control, but these in turn produce their own negative effects. The whole price control scheme must either end by abandonment of the policy in frustration, or in a descent into the total control of socialism.

         Consider again rent control, which is merely a variety of price controls. The government decides to make affordable housing available by imposing rent controls on apartments in a city so that those of lower income will be benefited. Where the market set rent at $1,200 a month, the government decreed that rent cannot exceed $750 a month.

         Again, the result is the same: a housing shortage is created. People who couldn’t afford to rent an apartment are now in the market for one, along with all the others who already were. The demand for apartments increases drastically. At the same time, landlords with rental units are having a harder time making money doing what they do. Therefore, landlords exit the rental market, and decide to convert their units to condos, or if they are houses, they simply sell them. Due to landlords leaving the rental market, supply for rental units drops. Those landlords who do stay in the market have no incentive to maintain the conditions of the dwellings they own, because due to the grave shortage, there will always be renters to fill in the space. Such landlords become known as slumlords.

         Again, the entire point of the price control – to increase availability – is entirely frustrated by the price control itself. It is completely self-defeating. Quality and availability are greatly diminished. This is another perfect example of a good intention with disastrous consequences.

 

The Effects of Minimum Wage Laws

         It is common for politicians and the general public to talk about raising the minimum wage. “Take a look at those poor workers, in such a disadvantaged situation,” they would say. “The government should step in and help them by raising the minimum wage!” And so for political prestige the government mandates a minimum amount that employees can legally be paid for their labor.

         A minimum wage is actually a variety of a price control; that is, it is a control on the price paid for labor services.

         The actual effect of enacting a minimum wage that is set above what the market would have freely determined through supply and demand is to create persistent unemployment. What a minimum wage is really doing is saying that it is illegal to hire people who are not worth the minimum wage set arbitrarily by the government. This means that teenagers, unskilled immigrants who do not speak English well, and handicapped people, have a much more difficult time finding jobs. If the services they are able to provide are not quite worth the set minimum wage, they will be without jobs, and therefore deprived of the ability to learn skills and earn their way up.

         Employers will hire fewer workers than they could have, because they are forced to pay the employees more than what their work is worth on the unhampered market. Therefore, since they must pay their workers more, they will hire fewer workers. The minimum wage workers holding jobs at the time minimum wages are raised are benefited, but not those seeking such jobs. They have fewer prospects, necessarily.

         And so the good intentions of the minimum wage laws fall flat on their face when it comes to the actual effects of the policies. It is a perfect example of causing harm by trying to be helpful.

 

The Effects of Bailing Out Failed Businesses

         There are times when certain businesses or industries thought to fulfill an important function in society falter and fail. “What shall be done?” worried citizens ask. “What will become of all those employees that lose their jobs?” “The government needs to step in and support this business [or industry].” And so the pernicious phenomenon of bailouts is often portrayed in a positive and sympathetic light. Other times, businesses that are faltering are supported by the government, to “help them compete.” Always these strategies are executed under the guise of total expediency – if it were not to be done, the sky itself would fall. But what are the real consequences of bailing out a failed industry, or routinely subsidizing an industry with public money?

         The true effect of supporting failing industries is very simply to take resources away from businesses in the market that better fulfill consumers’ wants, and to put them into industries that do a poor job of fulfilling consumers’ wants. As a result, production of goods and services that are actually desired by consumers decreases, and therefore consumer satisfaction and standard of living decrease. It should be obvious that if a business is failing, it is because people are not buying its goods and services. And if people of their own free will choose not to buy such goods and services, it is precisely because they do not want them. It is entirely nonsensical for shortsighted reasons to take resources from those portions of the economy that people are willing to pay money for, and put them where people have already chosen to not spend their money.

         We must remember that the profit and loss calculation is a signal, a sign that indicates which firms are fulfilling the desires of the consumers, and which are not. Those that are not are wasting resources that could be put to more expedient use. The natural mechanism to free up these wasted resources, therefore, is to allow such unwanted businesses to fail. Then the resources can be freed up and put to use in ways that better satisfy the needs and wants of the consumers, and will therefore raise the standard of living.

         It is not true that the resources and employees of failing industries, once liquidated, would float around without any function or use. It is a fiction that if the government had not bailed out the auto industry, there would have been a national disaster. Surely there would have been short term unemployment, but we need to remember that the demand for cars would not have decreased as a result of the failure of inefficient auto makers. The unemployment of American auto workers would have ended quickly as more efficient car companies, which know how to please consumers better, would have bought up the liquidated assets, hired the idle skilled workers, and created better cars that better satisfied the demands of the consumers.

         The bailing out of businesses or subsidies to industries are more bitter examples of good intentions directed toward the few with disastrous consequences for society as a whole.

 

The Effects of Stimulus Projects and Public Works

         There are times when the economy is in bad shape. Unemployment is widespread and many are out of work. It is an economic depression (or recession, as is it commonly called). The popular remedy has been for the government to pick up the slack and provide work for the droves of unemployed. “The government ought to do something about this unemployment,” some would say, and, “The government needs to create jobs to fix the economy.” What happens when the government attempts to stimulate the economy through public works projects, by developing make-work jobs for the basic reason to employ the unemployed?

         The real effect of this shortsighted strategy is simply to divert resources from those parts of the economy that are capable of fulfilling the true wants of the consumers, and put them towards make-work projects which have little value beyond providing jobs for some workers. As a result there are not enough resources available to carry out projects that people would actually need done. Only the workers hired for such make-work projects are benefited. Those who were taxed to pay for such things are actually worse off. Recovery is hampered, consumer satisfaction is decreased, and standard of living decreases. What could have happened instead, were the resources allowed to remain in the hands of the private sector, was that plans for projects actually desired by consumers who would pay for them would be made. The workers would still be hired. But they would be engaged in work that holds real value for society, and everyone benefits from.

         But when government has its way and attempts to stimulate the economy, this necessarily takes the resources from where they would have been put to more urgent use. And for each job created by the government there is a job with real, actual wealth-creating potential from the private sector that cannot be created.

         Government spending is not a good thing for the economy. Attempts to stimulate the economy through such means have and always will fail, and will instead make people poorer, precisely because it takes money from where it should go, and puts it where it should not go. It is yet another example of good intentions gone completely awry.

 

The Effects of Labor Unions

         As an effect of the progressive movement in the early 20th century, labor unions proliferated across America in an effort to give the workers power over their employers. Their underlying philosophies were and are based on the Marxist ideas of the proletariat workers, thought to be the real force behind the success of the industry, gaining ascendancy over the greedy, exploiting capitalists. “Workers unite!” the unions cry. The unions seek to raise the wages of the workers to nice, comfortable levels. “This is fair,” the unions and unionized workers say. And in order to get their way, they will bully, intimidate, and often use violence with impunity.

         Let us first realize that the workers are not the essential key that the unions say they are. Surely, their labor is indispensible, necessary, and fundamental to the undertaking. But they are, in effect, interchangeable. It is the astuteness of the capitalist, the owner of the factors of production, that has guided the business to its success. It is his resources at play, not those of the workers. They are guests in his house, being paid to perform a service for his enterprise.

         Now let us discuss the actual effects that unions have upon the welfare of society. Labor union activities may be beneficial for the workers who are members of the union, and to the union fat cats, but everyone else are losers in this scenario. When the unions succeed in raising wages above the market rates which the employers would have paid under the competitive forces of the market, the result is actually unemployment and a general decrease in wealth.

         Unions have the effect and the specific goal of raising the wages of those workers whom they have a special interest in. The resources expended to pay these unionized workers above their market value are necessarily taken from those that would have increased production, and therefore standard of living. When unionized workers enjoy their institutionally-enforced comfortable wages, they do it at the expense of everyone else in society, not simply at the cost of their employer.

         The anti-productive tendencies of labor unions also decrease production, leave consumers less satisfied, and leave the general population in a lower standard of living as a result. Often unions will make requirements that workers may only work a certain maximum of hours, or certain types of roles, or be paid a certain minimum amount for hours worked, or impose requirements about the number of workers that must perform certain tasks, and on and on. Inasmuch as these policies reduce production below the level of the unhampered market, standard of living of people in general is affected.

         Then there is the unemployment effect of labor unions. When labor unions raise the wages of the workers employed at a business, it makes it far more difficult for those seeking employment at that place of business. This is because the employer is forced to pay more for his workers, and therefore necessarily can afford fewer of them. Smaller businesses that cannot afford the costs inherent in unionization are forced to retreat from the industry. Those who are seeking employment are hurt by labor unions.

         There is no such thing as a worker being underpaid if their pay is in accordance with the amount set by the free market. In such circumstances, their wage is set at the appropriate level to the amount that society values what they produce. When labor unions increase wages beyond this point, it necessarily makes the products the consumers want to buy more expensive and less abundant. And so labor unions have a detrimental effect upon society, by ultimately making it poorer through unemployment and reduced production, than it otherwise would have been.

         The desire of labor unions to improve the situation of their favored groups of workers, inasmuch as it increases their wages above the market level, is another example of good intentions for the few meeting with a bad end for the many.

 

The Myth of Machinery

         Another stance of the labor unions is to resist the implementation of machinery in factories and other work places that might replace the roles of the factory workers. The threat of new machinery that can do what they do better and faster looms large over them like a specter. “We need to save jobs,” they would say, implying that resisting the implementation of machinery that would replace human beings would prevent unemployment and keep standard of living high. But is this true? Is it really a good idea to resist new machinery in the interest of saving jobs?

         Machinery is vital to the increase of production. And increased production is what raises the standard of living for all classes. We must realize that it is not simply employment that creates wealth, it is having an abundance of goods and services, and this is achieved through enhanced production. If machinery is bad news for our livelihood, then why not do away with all machinery? Why not do away with high-tech sewing equipment, and go back to sewing each article of clothing for sale by hand with a needle and thread? Think of all the jobs that would be created! Why not do away with automobiles for transport of goods, and hire people to carry the goods in their hands to their destinations instead? This would certainly create a need for workers, but how would this increase value and create wealth? Of course, abundance would be drastically reduced, and standard of living would sink to abysmal levels.

         What happens when new machinery makes factory workers obsolete? The implementation of machines does not cause long term unemployment as is popularly thought. Instead, it frees up the scarce labor resources, and allows them to be reallocated to those industries that need them more. Other industries, like, for instance, the one producing the new machinery.

         Then the money saved by the manufacturer by means of his labor-saving machine can be invested in expanding his business, investing in other industries, or increasing his own consumption of goods, all of which create jobs of real value elsewhere in the economy.

         Surely, new machinery is bad news for the workers that will be temporarily displaced. But it is phenomenal news for everyone else in society. It makes abundance much greater, and raises the standard of living dramatically. When well-intentioned people resist the onset of new machinery, they end up petitioning for the masses to be poorer, instead of richer. It is another example of good intentions of intervention for a narrow group of people creating disastrous consequences for the people at large.

 

The Effects of Shutting Down Sweatshops

         Nothing is thought of better by proud liberals in our modern society, than when they succeed in shutting down sweatshops in poorer nations. “Sweatshops are an evil,” they would say, “they employ children, and work poor people to the bone for a meager living. All for the greed of capitalism. They must be stopped!” And so liberals will unite to boycott businesses that use sweatshop labor to create their products.

         But what are the real effects of shutting down sweatshops? The real effect of shutting down sweatshops is simply to send the factory workers back to their farms, where they had an even lower standard of living, or to turn them out into the street, where the children will either starve or enter into prostitution. If left alone, through successive generations these poorer nations would pass through the sweatshop era and the children will be richer than the parents who worked at such facilities, and the grandchildren will be richer still.

         We must realize that every industrialized nation has had sweatshops at sometime in its history. The phenomenon of sweatshops is simply part of the growing pains from a backward agrarian society, into a modernized, industrial nation. This is not a process that can be skipped. It must be endured if progress to an industrialized nation is to be achieved. The great economist Ludwig von Mises wrote,

 

“Vast areas—Eastern Asia, the East Indies, Southern and Southeastern Europe, Latin America—are only superficially affected by modern capitalism. Conditions in these countries by and large do not differ from those of England on the eve of the ‘Industrial Revolution.’ There are millions of people for whom there is no secure place left in the traditional economic setting. The fate of these wretched masses can be improved only by industrialization. What they need most is entrepreneurs and capitalists. As their own foolish policies have deprived these nations of the further enjoyment of the assistance imported foreign capital hitherto gave them, they must embark upon domestic capital accumulation. They must go through all the stages through which the evolution of Western industrialism had to pass. They must start with comparatively low wage rates and long hours of work…. interventionist radicalism nips in the bud all attempts to create domestic industries. Their stubborn dogmatism spells the doom of the Indian and Chinese coolies, the Mexican peons, and millions of other peoples, desperately struggling on the verge of starvation.”

(Ludwig von Mises, Human Action, Pocket Edition, p. 618-619)

 

         When liberals deny these poorer countries the ability to have sweatshops, what they are in fact doing is condemning that nation’s poor to a life of continued poverty, and destroying the hopes of their children for a better life than their parents. In short, it condemns a whole nation to remain in third world poverty.

         Shutting down sweatshops is another powerful example of good intentions, based on emotional arguments rather than sound thinking, causing disastrous consequences for many.

 

The Effects of Protectionism

         When foreign competition gets tough, those producers who are hurt by it, rather than innovating, would prefer to come to the government for protection. “We need to save domestic jobs,” they would say in their call to action, “and protect domestic industry.” And so the government responds by imposing tariffs on imports, making it more difficult for foreign businesses to compete.

         But what is the real effect of protectionism, which is the stifling of free trade, a doctrine that hearkens back to the pre-Industrial Revolution ideas of mercantilism? The actual effects of protectionism are to raise the prices which consumers must pay for goods and services. While it is true the industry being protected is benefited, all others in society are losers, because they must pay higher prices for goods they could have gotten cheaper from foreign producers, and this impedes their ability to consume and therefore lowers their standard of living. This is also tantamount to the people of the nation subsidizing the protected industry with their own money.

         If the comparatively inefficient domestic businesses were actually obliged to compete on an equal playing field and thereby failed as a result, the workers laid off from these businesses or industries would then be assimilated into other parts of the economy that have a more urgent need for them. They would now enter into an industry that develops goods and services at which the domestic nation has a comparative advantage at producing. This has the effect of maximizing production for all, increasing abundance, and raising standard of living, making society better off as a whole.

         Therefore, this is yet another example of how thinking in the short term for the interests of a specific group has negative effects for society as a whole.

 

Conclusion

         After many insights we have now reached the conclusion of Part V of the Miracle of Capitalism: Capitalism vs. Disastrous Good Intentions. We have seen very clearly how shortsighted, narrowly aimed good intentions advocated by those who would intervene in the free market actually make life worse for society as a whole. There is simply no substitute for the God-ordained natural laws and principles of the free market. They are laws that are as eternal and immutable as God himself. Man might as well try to stop the tides from flowing. Meddling always ends in disappointing results. Paradoxically, interventionists who advocate such meddling will often blame the failures of their policies upon the free market itself. But any reasonable person can see that this is entirely fallacious. The free market is of course the best plan for mankind, the plan that God has ordained through his eternal laws. Rather than always vainly trying to fix it, it is time to trust the free market.


Proceed to PART VI: CAPITALISM AND MONEY

Back to PART IV: CAPITALISM AND POVERTY

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