In a recent column Andrew Coyne reported on a newly released statistic: Canada’s poverty rate had almost halved in 15 years since 1996, suggesting that such news would be a cause for celebration. However, this drop in poverty is not good enough for the anti-poverty NGOs. In published commentary and letters to the editor, their members demanded commitment and concrete action by the federal government to end poverty, now, for the four million Canadians who according to these writers are afflicted by it.
Without getting into the definition of the poverty line (there seems to be a whole industry focused on it), let’s ask: how can we end poverty, not just in Canada, a relatively wealthy industrialized country, but anywhere in the world? While recognizing that there is no magic wand to wipe out poverty overnight, I will argue that it is possible to end poverty and increase prosperity for everyone. It will indeed require commitment by the government—albeit undoubtedly a very different kind from what the anti-poverty activists envision.
To end poverty, we must first ask what it takes to create wealth. Wealth does not grow on trees, nor can governments create it by printing money. Wealth is created through production and trade of goods and services by business firms: the Apples, the Samsungs, the Mercks, the Wal-Marts, the Ryanairs, the Hyundais of the world as well as by millions of other, less known companies.
The single most important requirement of wealth creation is freedom. For efficient wealth creation, companies need free markets without government interference. If the government imposes a multitude of regulations even before a business can be started (try starting a restaurant anywhere in Canada today), restricts who it can hire, how it can finance itself, and what, where and when to sell its products and services, and engages in cronyism, wealth creation is hampered and poverty perpetuated.
If, on the other hand, businesses are free to produce, trade and compete, they come up with innovative new products, services and processes (think smart phones, tablets, 3-D printers, life-saving medicines, time-saving software apps, streamlined supply chains, value co-creation with suppliers and customers)—and create wealth for their owners. This wealth gets invested, either in growing the business or other businesses, thus creating opportunities for others, in the form of jobs, better and cheaper products, start-up capital, etc. Everybody is better off, as these opportunities multiply and the standard of living increases—and poverty decreases.
Making wealth creation and poverty reduction possible requires a specific commitment from governments: they must grant individuals and markets freedom. In Canada, like in most welfare states today, this requires concrete action: the dismantling of the elaborate system of business regulations, subsidies, and cronyism. This is a significant task and has not been pursued by the current conservative government, despite of original election promises. However, it is possible (many of the Nordic countries and New Zealand are positive examples of the right direction), and necessary—if ending poverty is the goal. (Under a capitalist system of freedom, governments would retain one crucial role: the protection of individual rights against the initiation of physical force and fraud. This is necessary for peaceful, just functioning of free markets.)
The anti-poverty crusaders would not be satisfied with such a free-market solution to ending poverty. They do not just want to end poverty; they demand income equality. (Click here for a post on income inequality.) Their preferred solution is to “redistribute” income (by force, through progressive income taxes) from those who create wealth to those who don’t. However, such a method will not end poverty. Why? People have different levels of ability, intelligence, and most importantly, motivation. They will make different choices. Even if all the currently existing wealth was divided evenly among the people of the world today, it would not remain even for long; some people would soon be wealthier and some poorer. If we want to end poverty, we must not punish the producers—the wealth creators—through various “redistribution” schemes. Instead, we must encourage them by making them free to produce and trade. A system of freedom, capitalism, will end poverty and benefit everyone, even the least productive.