“Aid is just a stop-gap. Commerce—entrepreneurial capitalism—takes more people out of poverty than aid.”

You might be surprised that this statement was made by Bono, the front man of U2 and a former crusader for more foreign aid by governments of developed nations. (See Mark Hendrickson’s Forbes.com column about Bono’s conversion to embrace capitalism here).

Bill Gates, the founder and former CEO of Microsoft and chairman of Melissa and Bill Gates Foundation, on the other hand, beseeches us to embrace statism as a means to end poverty. He wants governments of wealthy nations to allocate their tax payers’ money for foreign aid to developing countries and urges donors of foreign aid, both governmental and private, to work with Third World governments to find technical solutions—such as mosquito nets and drought-resistant corn—to help the poor. (See Bill Gates’ annual 2014 letter to his foundation here).

Who is right about the best way of ending poverty, Bono or Bill Gates? Is statism or capitalism more effective in achieving such a goal?

I’m with Bono: capitalism wins. Statism—any system where the state has the right to initiate physical force against its citizens, from our nanny state to totalitarian dictatorships—is a lousy way to try to end poverty. Statism is not just lousy at ending poverty—it is lousy at facilitating human survival and flourishing. You may say: I buy that argument for dictatorships, but isn’t the welfare state the ideal system for ending poverty because everyone is guaranteed a certain minimum standard of living? The government will “redistribute” income and wealth from those who are better off to those in need. No-one will be left behind.

But how do some people become better off? How is income and wealth created in the first place so that there is something to “redistribute”? Somebody must produce and trade material values. The modern welfare states succeed (relatively speaking) only when they are mixed economies containing an element of capitalism: a degree of recognition and protection of individual rights and private property. The socialist experiments in history, from Soviet Union and its Eastern European satellites to Cuba have failed (and China manages to continue only because it has loosened economic, if not political, freedom of its citizens). What happens to the motivation of those who are capable of creating wealth when their right to keep the results of their productive efforts is violated by the government? It diminishes or disappears altogether. The socialist experiments have shown that people may toil as their brothers’ keepers, but they will not expend the extra effort to come up with innovations or to create wealth they will be forced to “share” with everybody, especially with those claiming extra needs.

The fundamental elements of capitalism—the recognition of individual rights to life, liberty, property, and pursuit of happiness and private ownership of property—are a crucial requirement of wealth creation. They provide the incentive and capital for innovation and entrepreneurship to create better mosquito nets, drought-resistant seeds, and other material values. In contrast, if the government does not protect the individual rights of its citizens and arbitrarily initiates physical force against them—by confiscating their property in the name of “public interest” through taxation or an appeal to eminent domain and by limiting free speech and trade—it stifles initiative and kills wealth creation. It is the degree of protection of individual rights and private ownership of property that determines the level of wealth creation in a country. Developed countries are wealthier because they are relatively free. Countries with most freedom create most innovations and most wealth. Developing countries are poor because their governments are more autocratic and violate the rights of their citizens more than governments in wealthier countries, taking away the incentive and opportunity for innovation and wealth creation.

Bono is right. If we want to eradicate poverty, sending foreign aid to developing countries and collaborating with governments that violate the rights of their citizens is not going to work. If we want to eradicate poverty and to enhance human survival and thriving, we need to embrace capitalism. That means defending individual rights against government initiation of force and letting innovators and wealth creators—ourselves—be free to produce and trade. The flood of wealth creation would raise everyone up, ending poverty.

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Jaana Woiceshyn teaches business ethics and competitive strategy at the Haskayne School of Business, University of Calgary, Canada. She has lectured and conducted seminars on business ethics to undergraduate, MBA and Executive MBA students, and to various corporate audiences for over 20 years both in Canada and abroad. Before earning her Ph.D. from the Wharton School of Business, University of Pennsylvania, she helped turn around a small business in Finland and worked for a consulting firm in Canada. Jaana’s research on technological change and innovation, value creation by business, executive decision-making, and business ethics has been published in various academic and professional journals and books. “How to Be Profitable and Moral” is her first solo-authored book. Visit her website at profitableandmoral.com.

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