Increasing the Earning Power of Workers in Developing Countries

Henry Hazlitt wrote "Why some people are poorer" on January 1972 at The Freeman, and it was republished at Mises.org last Decemeber 2009. After providing a brief historical overview of the economic condition of the world from poverty to prosperity, Hazlitt then shared some quantitative studies about causes of poverty. He considered these studies nonsense and misleading for the causes are too numerous and too diverse to classify. In concluding the article, Hazlitt stated:

"The real problem of poverty is not a problem of 'distribution' but of production. The poor are poor not because something is being withheld from them, but because, for whatever reason, they are not producing enough. The only permanent way to cure their poverty is to increase their earning power."

Reading the last statement, a question comes to my mind: How can you increase the earning power of people in developing countries if the investment capital per head is very small due to low foreign investment and stagnation of domestic capital caused by government interventionist policies?

I answered my own question: The economic policies must change in order for foreign investment to freely enter the country and for domestic capital to grow. Only then can the investment capital per head will increase and the salary of laborers in developing country will also increase. 

But the problem is statist ideas are so pervasive in our society. Socialist and neo-Marxist ideas have captured our educational institution and the media. These ideas dictate the policies that politicians and bureaucrats make. Everybody think they help the poor. Due to ignorance to sound economic principles, our leaders are clueless that they are actually reducing the economic pie, and making the poor even poorer. 

Salvation through Government Spending

"In the early nineteen thirties, in the depth of the Great Depression, the theory became fashionable that the cause of all depressions was lack of purchasing power. The people just did not have enough money, and because of unwarranted pessimism they were refusing to spend enough even of what they had. The solution was therefore simple: at such a time the government should boldly increase its own spending, 'prime the pump,' and 'get things moving again.' Naive advocates of this theory assumed that more government spending was the whole answer. The more sophisticated advocates saw that the increased spending would not give people more purchasing power if the government kept the budget balanced and took it all away again in higher taxes. . .The trick, in other words, was deliberately to unbalance the budget—to run a deficit." - Henry Hazlitt, Man vs. The Welfare State, 1969, pp. 4-5

-----o-----o-----o-----

Jean-Baptiste Alphonse Karr (1808-1890) is right when he said, "the more things change, the more they stay the same" (Les Guêpes, 1849).

Instant Utopia

"In the last generation politicians and governments have been promising the voters that they could not only bring perpetual full employment, prosperity, and 'economic growth,' but solve the age-old problem of poverty overnight. And the end result is not merely that accomplishment has fallen far short of promises, but that the attempt to fulfill the promises has brought an enormous increase in government spending, an enormous increase in the burden of taxes, chronic deficits, chronic inflation, and a constant loss in the buying power of the people's earnings and savings. . . Another result of the promise of instant utopia has been a gigantic growth of governmental power—of interference in the details of everybody's business and everybody's life. As this power has increased, it has also become concentrated in fewer and fewer hands. . . One mark of the welfare state everywhere has been the gathering of power into the hands of one man. This is no mere unfortunate coincidence; it has been inevitable." - Henry Hazlitt, Man vs. The Welfare State, 1969, pp.1-2

-----o-----o-----o-----

Is there truth in the above quotation from Henry Hazlitt? Try to assess the governments of the world today on the basis of the idea in this quotation and then judge for yourself whether Hazlitt's analysis is accurate or not.

In the Philippines, if my memory still serves me right, I think all the presidents in my lifetime so far had given their promise to fight poverty. However, from Marcos, Cory, Ramos, Erap, Arroyo, and now Pnoy, none of them have succeeded in alleviating the condition of the poor, but instead, again, if my common sense is right, I think Filipinos now are poorer than ever. I accept that there are people who do not share this common sense, and could easily come up with the latest data to contradict this personal observation. But as far as myself is concerned, I think Hazlitt's analysis describes if not most, I think all of the governments today including our own.

So the government's fight against poverty is not bringing the results that we all desired. Instead, what we see are failed promises and greater poverty. One question that bothers me is about the sincerity of those in office. Are they really sincere in their goal or is it just a political slogan? Let us grant that they are sincere, and then another question must be asked: Why are they failing to produce the desired results despite their sincerity? Is it not because they are mistaken in their basic understanding of the nature and function of the government?

Instead of alleviating the condition of the poor, Hazlitt identifies seven inevitable outcomes of government's fight against poverty. And these outcomes are actually addictive for those in power and leading to economic trap and disaster. What are these outcomes? They are as follows:

• Increase in government spending

• Increase in taxes

• Chronic deficits

• Chronic inflation

• Constant loss in the buying power of the people's earnings and savings

• Gigantic growth of governmental power or interference in the details of everybody's business and everybody's life

• Concentration of power in fewer hands that will finally end in dictatorship. 

All these outcomes or results are obvious now in the US. Here in the Philippines? I think it is still not so obvious, but our instincts feel it.

The Role of Hyperinflation in the Rise of Hitler into Power - Notes from Hazlitt's "Lessons of the German's Inflation"

I started a thread in a theological forum in Facebook about inflation. Initially, I shared two articles from "The Freeman" both written by Henry Hazlitt in 1976. 

One commenter gave his comment and shared the NSO link:

"Inflation in the Philippines goes down to 2.1 percent last August from 2.5 percent in July. The National Statistics Office (NSO) said that this was the lowest level since 2009."

I replied, 

" In the US, Austrian economists think that winning the inflation debate is vital in their fight for economic freedom. Here in the PH, the NSO data is already considered good news compared to other nations' economies. Matagal pa naman daw tayo bago makaranas ng "bagyo". I initiated this thread thinking that as Christian leaders, it is also part of our duty to know both sides of the story. The way mainstream economists use the term "inflation" is different from the way classical liberals use it."

And then I returned to the first article I shared and made some notes. Below are the notes I made:

Note # 1 - Examples of Hyperinflation in History

"When the inflation is sufficiently severe and prolonged, however, when it becomes what is called a hyperinflation, people begin at last to recognize it as the catastrophe it really is. There have been scores of hyperinflations in history—in ancient Rome under Diocletian, in the American colonies under the Continental Congress in 1781, in the French Revolution from 1790 to 1796, and after World War I in Austria, Hungary, Poland, and Russia, not to mention in three or four Latin American countries today."

Note # 2 - German hyperinflation as the most spectacular of all

"But the most spectacular hyperinflation in history, and also the one for which we have the most adequate statistics, occurred in Ger­many in the years from 1919 to the end of 1923."

"By November 15, 1923, the day the inflation was officially ended, it had issued the incredible sum of 92.8 quintillion (92,800,000,000,000,­000,000) paper marks. A few days later (on November 20) a new cur­rency, the rentenmark, was issued. The old marks were made converti­ble into it at a rate of a trillion to one."

Note # 3 - Three Stages of Inflation

Stage 1 - "...prices do not increase nearly as much as the increase in the paper money circulation. This is because the man in the street is hardly aware that the money supply is being increased. He still has confidence in the money and in the pre-existing price level. He may even postpone some intended pur­chases because prices seem to him abnormally high, and he still hopes that they will soon fall back to their old levels."

Stage 2 - "...when people become aware that the money stock has increased, and is still increasing. Prices then go up approximately as much as the quan­tity of money is increased. ...But Stage Two, in fact, may last only for a short time. People begin to assume that the government is going to keep increasing the issuance of paper money indefinite­ly, and even at an accelerating rate. They lose all trust in it."

Stage 3 - "...when prices begin to increase far faster than the govern­ment increases, or even than it can increase, the stock of money."

Note # 4 - Summary of German Hyperinflation

"At first inflation stimulated pro­duction because of the divergence between the internal and external values of the mark, but later it exercised an increasingly disadvan­tageous influence, disorganizing and limiting production. It annihi­lated thrift, it made reform of the national budget impossible for years, ... it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into pover­ty. It was a distressing preoccupa­tion and constant torment of innumerable families, it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, and it was the cause of incessant politi­cal and moral disturbance. It is indeed easy enough to understand why the record of the sad years 1919-23 always weighs like a nightmare on the German people? "

"The demoralization that the debase­ment of the currency left in its wake played a major role in bring­ing Adolf Hitler into power in 1933."

Source: 

Lessons of the Geman Inflation by Henry Hazlitt

Libertarian Duties

In keeping with my goal to return to square one to understand Austrian economics, I decided to adopt a reading plan suggested by Economic Policy Journal. The aim of the 30 day reading plan is to provide an introduction and overview of libertarian principles. And I want to start with the first three articles.

Henry Hazlitt’s The Task Confronting Libertarians identifies four primary responsibilities a freedom-lover has to fulfill to contribute towards the reversal of fascist-socialistic trend. Llewellyn Rockwell’s The Fascist Threat contains undeniable evidences characterizing the current existence of fascist policy. And finally, Wilhelm Ropke’s Free Economy and Social Order shows that free market capitalism will never survive in a society that violates freedom in economic activity.

I invite my readers to either make your own reading plan or simply follow the suggested plan to familiarize yourself with basic libertarian principles. For those like me, who are interested to know what is really going on in world economy, I invite you to dig deeper and verify yourself if the ideas presented in these articles provide a better explanation of reality.

Reading the mentioned articles convinced me that the US government is actually a socialist state making use of fascism as a necessary transition towards its globalistic aim. This is difficult to see for it is hiding behind the mask of free market capitalism. What we now see as the present situation of global economy is not a result of the destructive forces caused by capitalism; but actually a destruction of it, by a fascist socialist state, which maintains its present existence through welfare and warfare.

Responsibilities of Libertarians

Allow me now to share my own thoughts resulting from my reading of the first three Austrian articles. Henry Hazlitt’s article enumerates several responsibilities that confront a freedom-lover given the existing political and economic trend. Most people find themselves helpless to respond against the inflationist and socialist trend. Hazlitt identifies during the time of the writing of this article that more than 100 member countries of IMF are leading into socialist direction. In this battle for ideas, libertarians are literally outnumbered and the dominance of welfarists, statists, socialists, and interventionists are evident in almost all fields.

Reading Hazlitt’s piece, I understand that freedom-lovers have at least four responsibilities:

• Libertarians need to focus on few critical issues to provide informed answers to show the public that an alternative exists as a replacement to existing socialist trend.

Libertarians should go beyond generalities to be effective in winning the public to their side. We must provide convincing arguments on issues like:

…public housing, farm subsidies, increased relief, bigger Social Security benefits, bigger Medicare, guaranteed incomes, bigger government spending, bigger taxation, especially more progressive income taxation, higher tariffs or import quotas, restrictions or penalties on foreign investment and foreign travel, price controls, wage controls, rent controls, interest rate controls, more laws for so-called consumer protection, and still tighter regulations and restrictions on business everywhere.

• Austrian thinkers must learn to accept the fact that they cannot rely on big corporations to support them in the conflict against government expansionism.

Hazlitt identifies four reasons for the timidity of big businessmen to protest against the increasing intervention of the state. These reasons are related to contracts and legal threats like breaking the antitrust law, being prosecuted for unfair labor practices, and hostile examination of their income tax returns. In the light of present-day occurrences, these reasons appear as excuses and we suspect that big companies have already joined the camp of the fascist-socialist state.

• Austrian thinkers must concentrate on several basic libertarian principles.

Three of these are as follows:

First, that the government is taking something from somebody else in order to perpetuate a welfare state.

Second, that the statist proponents are either blind or simply ignoring the long-term consequences of their actions

And third, that the Austrian followers themselves should remain confident about the great advantages of liberty over policies of coercion

• Finally, freedom-lovers must demand the government to provide honest currency and stop inflating the money supply.

Since the government is taking credit during economic “booms,” it must also take responsibility for economic “busts” for the primary cause of such “business cycle” is the government’s decision to inflate the money supply. This is why we need to seriously listen to Hazlitt’s call to vigilance:

If libertarians lose on the inflation issue, they are threatened with the loss of every other issue. If libertarians could win the inflation issue, they could come close to winning everything else. If they could succeed in halting the increase in the quantity of money, it would be because they could halt the chronic deficits that force this increase. If they could halt these chronic deficits, it would be because they had halted the rapid increase in welfare spending and all the socialistic schemes that are dependent on welfare spending. If they could halt the constant increase in spending, they could halt the constant increase in government power.

The solemn responsibilities of libertarians is best summarized in the words of Ludwig von Mises:

Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping toward destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle, the decisive battle into which our epoch has plunged us.

 Notes: 

1. The blogger is aware about the limitation of the term “Austrian school” originally referring to thinkers whose primary concern was to develop a sound economic theory. In this post, the phrases “Austrian thinkers” and “freedom-lovers” are synonymously used with “libertarians.”

2. This was posted last July 28, 2012