Hornberger's Blog

Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
Here's the RSS feed or subscribe to our FFF Email Update to receive Hornberger’s Blog daily.

A Totally Free Market System Is the Way to Defeat Poverty

by

In response to my blog post of yesterday, “Failure, Failure Everywhere,” which discussed the manifest failure of the war on poverty, the war on drugs, and military empire and foreign interventionism, a progressive reader wrote me the following:

Is freedom the right of corporate entrepreneurs to drive wages to frightfully low, existence-levels so that people who work for a living must scrounge garbage cans for their food?  Is that the kind of freedom that you are talking about?

The answer: In a radically freed market economy — that is, a market totally free of government regulation, control, and taxation — that cannot happen. The reason? While it might appear that employers are unilaterally and arbitrarily setting wage rates in a free market, such is simply not the case. Wages, like the prices of everything else, are set in response to market conditions of supply and demand.

Let’s first keep in mind one important thing that people on both the left and the right fail to recognize: The United States does not have a free-market economy as libertarians understand that term. This is especially true of the left, which holds that the adoption of a massive welfare state and regulated economy by the Franklin Roosevelt administration (and expanded ever since by both Republicans and Democrats) actually saved “free enterprise.”

For libertarians, free enterprise means what the term connotes: a system in which all economic enterprise is totally free of all government control, regulation, and taxation. To grasp what we are aiming for, consider the system that we have here in the United States with respect to religion. The federal government and the state governments are constitutionally prohibited from controlling, regulating, and taxing religious activity. That’s what we are striving for with respect to economic activity — a way of life in which the federal government and state governments are constitutionally prohibited from controlling, regulating, and taxing economic activity.

Obviously, that’s not even close to the system under which Americans have lived for decades. Economic activity is tightly controlled, regulated, and taxed by the federal government and state and local governments.

Nonetheless, we can still grasp important principles within America’s highly controlled and regulated economic system. Consider, for example, the fact that some employers pay their workers more than the minimum wage. Why would they do that? After all, progressives tell us that in the absence of a government-mandated minimum wage, employers would drive down wages to subsistence levels. If that’s true, then wouldn’t you expect employers to drive down wages to at least the level of the minimum wage? Yet, we know that many employers are paying wage rates that are higher than the government-mandated minimum.

How do progressives explain this phenomenon? Do they say those employers are more charitable, compassionate, or responsible? Actually, progressives never mention this phenomenon because it doesn’t fit within their preconceived conceptions about rapacious businessmen and cut-throat “free enterprise” activity.

The reason that some businesses pay higher than the mandated minimum wage is that market conditions force them to do so. If there is a scarcity of labor, existing firms will compete against each other for the available labor. The best way to compete is by offering more money to workers. But there are also other factors that could be offered, such as a nice work environment and other benefits.

Consider, for example, if minimum-wage laws were abolished, along with all other economic regulations. Immediately, all sorts of new businesses would be started by poor people, who would now be free to hire friends, neighbors, relatives, and others at minimal wages and would not have to comply with expensive and burdensome regulations. As those new businesses began prospering, they would need to expand their operations. That means more businesses competing for labor services, which means an upward tendency in wage rates.

Another important factor in increases in wage rates involves savings and capital. The only way that employers can pay higher wages is by increasing revenues. How do they do that? By making workers more productive. How do they do that? By providing them with better tools, equipment, technology, computers, and the like. How does such capital come into existence? Through savings, something we don’t see much of anymore given the vast amount of welfare-warfare taxes that take so much of people’s money.

Workers on a farm who are using tractors are going to produce more than their counterparts who are still using hoes. The increase in productivity increases the farmer’s revenue. He is able to use that revenue increase to pay higher wages to his workers. Does that depend on his benevolence? No! It depends on surrounding farms and businesses, which are doing the same thing, competing for labor services, which will tend to drive real wages upward.

Thus, it is obviously in the interests of the poor to have as many businesses as a possible in society because that will mean not only a multitude of high-quality, low-priced goods and services for the workers in their role as consumers but also a larger number of firms competing for the labor services of the poor, which tends to increase wages.

The controlled, regulated, and taxed economic system is the worst enemy of the poor because it taxes income that could have gone into savings and capital and restricts the number of new businesses that can come into existence. A genuine free market is the best thing that could ever happen to the poor because it brings into existence ever-increasing amounts of productive capital and new businesses, which raise standards of living, especially for the poor.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.