This post is one in a series entitled Posthumous Refutations. Previously in this series: Absolving with Faint Criticism: A Media and Real Estate Mogul Defends the Fed.
The Independent is propagating the “findings” of a two-year study conducted by two British socialist outfits, the Fabian Society, and the Webb Memorial Trust. Its article’s headline reads “Britain faces return to Victorian levels of poverty“, but the lead paragraph refers not to poverty but “Victorian levels of inequality“.
This conflation of absolute with relative poverty reminds me of an encounter I had with Robert Reich in 2005. This was my reflection written back then:
I just attended a speech by Robert Reich, a very prominent pundit and Secretary of Labor under President Clinton. He opened by asking the audience to suppose he was a genie. As a genie, he could snap his fingers and automatically create a new world order in which there is more inequality of wealth, but everyone, even at the lowest level, is more wealthy than they otherwise would have been. He asked the audience if they would want the genie to bring that about. Being an audience in Berkeley, a very small minority (including myself) raised hands. This scenario, he argued, would be dangerous because people generally care more about their wealth in comparison with others than about their absolute level of wealth. So resentment over inequality would fester, and eventually would burst.
After his speech I went up to the stage to talk to him. I asked him to consider his genie scenario on a global scale. In the third world there are millions of people on the brink of starvation. For them, a change in their absolute level of wealth could be a matter of life and death. I asked him, “Isn’t actual starvation in the third world more important than resentment over inequality in the first?” He responded that there are real ways that inequality can harm a person. Before he could continue, I asked, “Are they worse than starving?” Mr. Reich was uncharacteristically speechless, momentarily. Then, my friend who, unbeknownst to me had come up to the stage too, blurted out, “Well, yes, in some cases.” Then some others in the crowd said some things, and instead of answering my question, Robert Reich said, “I’ll let you guys argue it out,” and moved on to other audience members.
I was extremely frustrated. Robert Reich is one of the most influential economic thinkers on the left. He’s on National Public Radio every week, and he’s regularly featured in the New York Times, the Wall Street Journal, and innumerable other publications. If economic policy drastically lurches to the left, it will largely be because of him and other thought-leaders, like NY Times columnist Paul Krugman. So, for him it’s not necessarily an academic question. If he convinces enough people from his media pulpit, he could actually bring about a huge change. And the change he wants is to reduce absolute wealth for the sake of greater equality. Since absolute, not relative, poverty is a matter of life and death to millions of people, such a change would push a great many people off the starvation brink. Given the stakes involved, and given his position, Robert Reich should have had a ready answer to my question.
Of course, it is par for the course for British socialists to associate the Victorian era, one of the greatest floruits of man, and the Industrial Revolution that spawned it, with grinding poverty. Mises wrote of this tendency in Human Action, chapter 21, section 7.
It is generally asserted that the history of modern industrialism and especially the history of the British “Industrial Revolution” provide an empirical verification of the “realistic” or “institutional” doctrine and utterly explode the “abstract” dogmatism of the economists.
The economists flatly deny that labor unions and government prolabor legislation can and did lastingly benefit the whole class of wage earners and raise their standard of living. But the facts, say the anti-economists, have refuted these fallacies. The statesmen and legislators who enacted the factory acts displayed a better insight into reality than the economists. While laissez-faire philosophy, without pity and compassion, taught that the sufferings of the toiling masses are unavoidable, the common sense of laymen succeeded in quelling the worst excesses of profit-seeking business. The improvement in the conditions of the workers is entirely an achievement of governments and labor unions.
Such are the ideas permeating most of the historical studies dealing with the evolution of modern industrialism. The authors begin by sketching an idyllic image of conditions as they prevailed on the eve of the “Industrial Revolution.” At that time, they tell us, things were, by and large, satisfactory. The peasants were happy. So also were the industrial workers under the domestic system. They worked in their own cottages and enjoyed a certain economic independence since they owned a garden plot and their tools. But then “the Industrial Revolution fell like a war or a plague” on these people. The factory system reduced the free worker to virtual slavery; it lowered his standard of living to the level of bare subsistence; in cramming women and children into the mills it destroyed family life and sapped the very foundations of society, morality, and public health. A small minority of ruthless exploiters had cleverly succeeded in imposing their yoke upon the immense majority.
Of course Mises goes on to obliterate this myth:
The truth is that economic conditions were highly unsatisfactory on the eve of the Industrial Revolution. The traditional social system was not elastic enough to provide for the needs of a rapidly increasing population. Neither farming nor the guilds had any use for the additional hands. Business was imbued with the inherited spirit of privilege and exclusive monopoly; its institutional foundations were licenses and the grant of a patent of monopoly; its philosophy was restriction and the prohibition of competition both domestic and foreign. The number of people for whom there was no room left in the rigid system of paternalism and government tutelage of business grew rapidly. They were virtually outcasts. The apathetic majority of these wretched people lived from the crumbs that fell from the tables of the established castes. In the harvest season they earned a trifle by occasional help on farms; for the rest they depended upon private charity and communal poor relief. (…)
The factory owners did not have the power to compel anybody to take a factory job. They could only hire people who were ready to work for the wages offered to them. Low as these wage rates were, they were nonetheless much more than these paupers could earn in any other field open to them. It is a distortion of facts to say that the factories carried off the housewives from the nurseries and the kitchens and the children from their play. These women had nothing to cook with and to feed their children. These children were destitute and starving. Their only refuge was the factory. It saved them, in the strict sense of the term, from death by starvation. (…)
The outstanding fact about the Industrial Revolution is that it opened an age of mass production for the needs of the masses. The wage earners are no longer people toiling merely for other people’s well-being. They themselves are the main consumers of the products the factories turn out. Big business depends upon mass consumption. There is, in present-day America, not a single branch of big business that would not cater to the needs of the masses. The very principle of capitalist entrepreneurship is to provide for the common man. In his capacity as consumer the common man is the sovereign whose buying or abstention from buying decides the fate of entrepreneurial activities. There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for.
Blinded by their prejudices, many historians and writers have entirely failed to recognize this fundamental fact. As they see it, wage earners toil for the benefit of other people. They never raise the question who these “other” people are.
Historian Ralph Raico, in lecture 5 of his wonderful lecture series History: The Struggle for Liberty reveals just how the prevailing myths about the Industrial Revolution and the Victorian Era came about. I have transcribed the most relevant part:
“The earlier view had largely been based on the blue books collected by the House of Commons’ commissions into the conditions of working people in the mid-19th century, and after that. These are called “blue books”, and what was behind these commissions is of interest and importance. If you take England following the Napoleonic War of 1815: parliament is unreformed, there are heavy tariffs to the advantage of the land-owning nobility (they control all public offices), the Church of England bases its income largely on tithes extorted from non-believers (from Presbyterians and Baptists and Quakers and other; in other words you have a parasitic established church. Many other elements of the conservative control and domination of English society. (…)
There’s a powerful liberal movement in England that threatens this domination. They threaten also, for instance, the slaves, owned by the absentee plantation owners, mainly English noblemen–the slaves in Jamaica and other places. They want to do away with slavery. They want a general reform of British society, and they’re making a lot of noise. They’re agitating public opinion.
And now the Tories, and the defenders of the establishment and the status quo come back with a counter-attack. They say, “You liberals, you great lovers of the oppressed. Don’t you have your own oppressed? Aren’t you yourself slave owners in a sense? What about the workers in your factories? Why don’t we go in and investigate what’s happening there?”
Parliamentary commissions were set up with the political aim of exposing the factory system at the base of the economic power of these liberals and these reformers. (…) Well, these parliamentary commissions in England issued their findings, and they are compendiums of horror stories, one after another about people working 16, 17, 18 hours, women working, children working as well. And it was on the basis (…) of these collections of these supposed data that the first interpretation of supposed histories of the Industrial Revolution were composed. Friedrich Engels, who of course was Marx’s collaborator, wrote a book The Condition of the English Working Class in 1844. And the book is based on these parliamentary commissions. Other people who began lecturing and writing about the Industrial Revolution took the same tack. (…)
In the early 20th Century, better, more detailed, more comprehensive data begins to be collected, on wages, on availability of foodstuffs, on longevity (length of life) and so on, things begin to change. People don’t have to depend on contaminated data. They can go to the sort of data historians can debate: more objective facts. And, moreover, new probing questions were asked, the sort of things that didn’t occur to other writers, opening novel perspectives.
So you had a different and contrasting interpretation of the Industrial Revolution, beginning with J.H. Clapham, an older historian of the 20s and 30s, but especially in the 40s and 50s with T.S. Ashton, who’s represented in Hayek’s lecture Capitalism and the Historians, and more recently Max, as he’s known, or R.M. Hartwell, of, well he’s retired now, but of the University of Chicago and Oxford. Fundamentally what came out of this newer research is this: in fact, for most of the working people in Britain, the standard of living did not deteriorate, let alone collapse, but improved, slowly from around 1780 to 1850, and more rapidly thereafter.
But what is more pernicious than the study’s wretched grasp on history is its policy prescription:
the report calls for sweeping reform of the tax and welfare systems under which higher earners would finance more generous, universal benefits. The £43,888-a-year ceiling on national insurance contributions (NICs) would be abolished, so people earning more would pay NICs at 11 per cent on all their income above that level, instead of the current 1 per cent.
Obviously, these people are not taking to heart Daniel Hannan’s warning to Prime Minister Gordon Brown that “you cannot carry on for ever squeezing the productive bit of the economy in order to fund an unprecedented engorgement of the unproductive bit.”
In Human Action, chapter 36, section 2, Mises referred to this unsustainable and ultimately suicidal approach to the economy as “the Santa Claus Principle”.
The idea underlying all interventionist policies is that the higher income and wealth of the more affluent part of the population is a fund which can be freely used for the improvement of the conditions of the less prosperous. The essence of the interventionist policy is to take from one group to give to another. It is confiscation and distribution. Every measure is ultimately justified by declaring that it is fair to curb the rich for the benefit of the poor.
In the field of public finance progressive taxation of incomes and estates is the most characteristic manifestation of this doctrine. Tax the rich and spend the revenue for the improvement of the condition of the poor, is the principle of contemporary budgets. In the field of industrial relations shortening the hours of work, raising wages, and a thousand other measures are recommended under the assumption that they favor the employee and burden the employer. Every issue of government and community affairs is dealt with exclusively from the point of view of this principle.
An illustrative example is provided by the methods applied in the operation of nationalized and municipalized enterprises. These enterprises very often result in financial failure; their accounts regularly show losses burdening the state or the city treasury. It is of no use to investigate whether the deficits are due to the notorious inefficiency of the public conduct of business enterprises or, at least partly, to the inadequacy of the prices at which the commodities or services are sold to the customers. What matters is the fact that the taxpayers must cover these deficits. The interventionists fully approve of this arrangement. (…)
It is not necessary to argue with the advocates of this deficit policy. It is obvious that recourse to this ability-to-pay principle depends on the existence of such incomes and fortunes as can still be taxed away. It can no longer be resorted to once these extra funds have been exhausted by taxes and other interventionist measures. (…)
The interventionist in advocating additional public expenditure is not aware of the fact that the funds available are limited. He does not realize that increasing expenditure in one department enjoins restricting it in other departments. In his opinion there is plenty of money available. The income and wealth of the rich can be freely tapped. (…)
From day to day it becomes more obvious that large-scale additions to the amount of public expenditure cannot be financed by “soaking the rich,” but that the burden must be carried by the masses. The traditional tax policy of the age of interventionism, its glorified devices of progressive taxation and lavish spending have been carried to a point at which their absurdity can no longer be concealed. The notorious principle that, whereas private expenditures depend on the size of income available, public revenues must be regulated according to expenditures, refutes itself. Henceforth, governments will have to realize that one dollar cannot be spent twice, and that the various items of government expenditure are in conflict with one another. Every penny of additional government spending will have to be collected from precisely those people who hitherto have been intent upon shifting the main burden to other groups. Those anxious to get subsidies will themselves have to foot the bill. (…)
An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. The whole system of interventionism collapses when this fountain is drained off: The Santa Claus principle liquidates itself.
