For The Poor, End Capital Consumption

The debate over the best possible way to get our The State to "help the poor" is getting curiouser and curiouser, with many an argument being made in favour of "direct cash transfers." Give them cash, they say. Print more funny money and give it to the poor. The very idea is ridiculous, but it is being propagated by many eminent persons - like Professor Raghuram Rajan, formerly of the IMF and now with Chicago University. In an interview with Shekhar Gupta, editor of the Express, which took place in Davos, Switzerland, where the socialist World Economic Forum meets regularly, Professor Rajan says:

I think the whole lesson from other countries is that, eventually, you want to empower the poor. You don’t want to use the food distribution system as a job creation mechanism for the distributors. If you want to empower the poor, give them cash. And if you want to give them cash, give it to them directly, in an identifiable way. 

In my view, the only way to "empower the poor" is to disempower The State. 

Liberty!

Particularly, no more funny money.

Professor Rajan of Chicago U gives the examples of Mexico and Brazil as places where the poor have been empowered via direct cash transfers from their states. Methinks poor Mexicans would be happier and much better off with the Liberty to grow and sell marijuana (the Mexican word for ganja). Brazilians, of course, would be much better off with sound money.

There is a lead editorial in the Express today that joins Professor Rajan's cause - without naming him. Instead, two chief ministers are named as in support of the idea, one of them being the chief minister of Delhi!

In complete and total opposition to these views, let me state an economic truth:

The ONLY way to raise standards of living in poor countries where population is growing is to keep on accumulating and investing Capital such that the per-head amount of Capital invested keeps on rising.

That is, capital accumulation leads to civilisation while capital consumption causes de-civilisation.

All "welfare" is about consumption - not investment. All welfare causes capital consumption. Welfare funded out of inflation is even worse. 

On the other hand, roads are Capital investments. Whereas highways, expressways and "truckways" must be private, rural and urban roads must come from taxpayer funds.With good roads into the rural surrounds, and the spread of automobilisation, urban India will spread out and "develop" the countryside. The lives of all Indians will improve - both rural folk and well as urbanites will benefit. Living conditions will improve for all. Urban overcrowding will end. This is particularly true of DELHI - and it is shocking to read that the chief minister of this city is supporting the idea of cash transfers.

None utter the word Liberty either. They say "empower the poor." They have legislated away all our liberties. Will continued inflationism and welfare "empower" anyone other than The State?

No, siree. End funny money. End State borrowing. End PSUs and their losses, which "consume capital." Shrink The State itself. Cut taxes. Laissez faire. Liberty. These are the prescriptions of the real Science of Economics.

In defence of my dissenting views, here are some words of Ludwig von Mises, from his brief essay The Historical Setting of the Austrian School of Economics (PDF here):

The unpopularity of economics is the result of its analysis of the effects of privileges. It is impossible to invalidate the economists' demonstration that all privileges hurt the interests of the rest of the nation or at least of a great part of it, that those victimized will tolerate the existence of such privileges only if privileges are granted to them too, and that then, when everybody is privileged, nobody wins but everybody loses on account of the resulting general drop in the productivity of labor. However, the warnings of the economists are disregarded by the covetousness of people who are fully aware of their inability to succeed in a competitive market without the aid of special privileges. They are confident that they will get more valuable privileges than other groups or that they will be in a position to prevent, at least for some time, any granting of compensatory privileges to other groups. In their eyes the economist is simply a mischief-maker who wants to upset their plans.

When Mises warns of the "general drop in the productivity of labour" that will result from privileges, he is re-stating what I wrote above: that capital consumption is no way to raise living standards. In the final analysis, capital must be saved and invested (by private people), capital must also be freely imported, and productivity of labour must rise. Only this can raise wages. 

Goods and services must be produced - by private entrepreneurs. When these goods and services are produced (and finally sold), this will create demand for all non-competing goods and services. That is, when a chap sells ganja, he is possessed of the means to demand other goods on the market - except for ganja, which he will obviously not demand. 

This is Jean-Baptiste Say's Law of Markets - which Keynesians misteach as "supply creates its own demand," thereby making their students believe that the supply of funny money raises "aggregate demand." This is the greatest nonsense ever. Spreading the funny money around will spread poverty. It will reduce demand. It will stifle economic growth and development. It will cause more and more ruinous capital consumption. Oppose this nonsense - in the name of the poor. For the sake of the poor. Put an end to this "false philanthropy" - which is the hallmark of socialism.