By Edmund Opitz, originally published in the February 1986 edition of The Freeman.

Capitalism, by conquering poverty, creates the “problem” of poverty.

If we look back over the history of the past two or three thousand years we realize that most people who have ever lived on this planet were desperately poor, not merely poor by our standards – poor by any standards; miserably housed, shabbily clothed, and continually on the verge of starvation, only to go over the edge by the hundreds of thousands during the regularly recurring famines.

Medieval Europe is regarded by many scholars as one of the high points in world civilization. It gave us the great cathedrals, scholastic philosophy, magnificent works of art, literature like Dante’s Divine Comedy, specimens of craftsmanship that grace our museums, and chivalry. But the Middle Ages in Europe suffered from a number of famines. Between 1201 and 1600 there were seven famines, averaging ten years of famine per century. Coming down to 1709, there was a famine in France that wiped out one million people, five percent of the population. The last great natural famine in Europe was the Potato Famine in Ireland in the late 1840s, which claimed about one and a half million lives.

But Europe has always been a favored region, more prosperous than the rest of the world, less subject to natural disasters than Asia. There have been starving times in Western civilization, but never were they of the same order of magnitude as the disasters in the Orient. India and China have been especially vulnerable to famines. A famine in China between the years 1876 and 1879 resulted in an estimated 15 million deaths. And within living memory, a famine in China’s Hunan Province in 1929 resulted in two million dead. Ten major famines in India between 1860 and 1900 caused the death of close to 15 million people. During the Bengal famine of 1943-44—in and around Calcutta-one and a half million people died of starvation and the epidemics that followed.

I have recited these rather unpleasant facts, not for their own sake, but to emphasize a neglected or overlooked truism: Poverty is the natural state of mankind. Poverty is the rule; prosperity is the exception. In most parts of the globe, in most periods of history—including the present—most people most of the time have been or are desperately poor. Prosperity is what the ruling class enjoys. The rich are the superior warriors, the superior hunters, the favorites of the gods, and these wealthy few—it was believed—deserve what they have.

Water runs downhill, fire burns, grass is green, the masses of people are poor. This was the perceived natural order of things, accepted and rarely questioned. Such was the mentality that prevailed throughout most of the world most of the time—until a few centuries ago. Poverty for the multitudes was simply a fact of life. It was a hardship, but being poor was not perceived as deprivation.

The rich were envied, but the envy rarely translated into thoughts of redistributing their wealth. Occasionally something triggered a peasants’ revolt or a slave rebellion, but when each of these fizzled out, all ranks went back to “The good old rule/ The simple plan/ That they should take who have the power/ And they should keep who can.” Universal poverty was a fact. But poverty was not a problem! The distinction is simple: a fact or situation just is; a fact or situation for which there is perceived to be a solution becomes thereby a problem, and a new mentality is generated.

The Capitalist Alternative

Masses of people, the world over, have now been persuaded that someone or something keeps them poor, and their resentment follows. This fact helps to explain the modern world’s hostility toward capitalism. Capitalism is not at all the cause of the poverty of the noncapitalistic nations, but it is the source of their dissatisfaction with their poverty. Capitalism in fact overcomes poverty; but in overcoming poverty capitalism creates the problem of poverty.

There was a breakthrough a few centuries ago, one of those great tidal movements in human affairs resulting in a new mentality and a different way of viewing the human condition. It was the discovery by the people of a few western nations of the complex set of institutions which later came be to be called capitalism. The breakthrough might be symbolized by two documents, one penned by Thomas Jefferson setting forth the vision of a nation founded upon a new philosophy, that “all men are created equal,” that they are “endowed by their Creator with certain unalienable rights,” and that everyone is entitled to equal justice under the law. These axioms form the cornerstone of the free society.

At the same time, on another continent, a man named Smith wrote a great book which explained why the economy need not be centrally planned, directed, and controlled by the government—as it was under the mercantilism of his day. Let the law be vigilant to protect the life, liberty, and property of all — as the Whigs advocated — and the buying habits of freely choosing men and women in the marketplace will provide all the directives needed for the producers to grow and manufacture the things consumers want most. This is the market economy, the backbone of a free society. Under these conditions a free people will multiply their productivity and thus generate their own prosperity.

Capitalism is the name given to the set of institutions which enable free people to produce wealth up to the limit of their time, talents, capacity, and desire; and then to voluntarily exchange the fruits of their labors with others. Capitalism becomes fully operative only when there are institutional guarantees of individual liberty, with laws designed to secure the G0d-given rights of every person to life, liberty, and property.

The intelligent and ethical way of arranging human action in society, the free society-market economy way of life which we are labeling capitalism, was like a bootstrap by which whole nations of people could and did elevate themselves out of misery, grinding poverty, and periodic starvation. Capitalism tackled poverty using the only means by which poverty can be alleviated, namely, by increased productivity.

Remove every obstacle that hinders the productive and creative energies of men and women and you create an abundance of goods and services, shared by everyone involved according to his contribution to the productive process, as that contribution is judged by the man’s peers. This ever-increasing supply of goods and services will move the entire society up the rungs of the ladder of wealth. Some will climb to the top rungs, but even the least well-off on the bottom rungs will experience a level of well-being that would be regarded as affluence in noncapitalistic societies past or present.

Liberty and the Economic Miracle

The results of this new social order were almost miraculous, but there was nothing magical about the way the results were achieved. The results were achieved by people who had the intelligence to understand the requirements of a free and prosperous commonwealth, and who possessed the integrity and character to live by those requirements. We had a significant number of people a couple of centuries ago, who “pledged their lives, their fortunes, and their sacred honor” to establish not simply a new nation, but a nation founded upon new principles.

Capitalism generated a new mentality, a new perception of the human condition. After the experience of capitalism anywhere, people everywhere came to regard prosperity as the rule; poverty as the exception. The fact that we launched a “war on poverty” demonstrates this. No one would contemplate a war on poverty in India or Africa, where need is much more desperate than here. Only in a prosperous nation like our own, where the great war against poverty had already been won — by means of the market economy — would the elimination of the last, lingering remnants of poverty emerge as a political issue. The trouble is that if we employ the wrong remedy to eradicate the remaining pockets of poverty — as we are doing — we may find that we have destroyed prosperity instead, as in the familiar story about killing the goose that laid the golden eggs. Charles Murray’s recent book, Losing Ground, demonstrates that we have been losing the political war against poverty despite spending hundreds of billions of dollars yearly.

The 18th-century breakthrough I’ve referred to brought with it a new understanding of how economic goods come into being, the nature of material wealth, and how this new wealth is allocated in differing amounts among all the participants in the productive process. The economic breakthrough was not miraculous; it was preceded by a new vision of how the ancient ideas of liberty, justice, and law should be applied. No longer Were these venerable ideas to be the prerogative of the few; equal justice under the law was for everyone; liberty was to be enjoyed by all, and every person had a natural right to the property created by his labor.

For thousands of years the planet was regarded as a static warehouse, containing a fixed amount of wealth, impossible to increase, never enough for everyone. The serf tilling his field grumbled that he had to pay various feudal dues to the lord of the manor, but he was realistic enough to know that even if he kept everything he produced, he’d still go hungry much of the time. He was cursed by low productivity, caused by a faulty understanding of the nature of wealth.

When it is believed that the earth contains only a fixed amount of wealth, the preoccupation is with the allocation of what’s already here, which means, invariably, that one man’s gain is another’s loss.

The new perception that dawned during the 18th century was that new wealth is in a process of continuous creation, in ever-increasing amounts, with more for everyone resulting from each new cycle of production. This new abundance would be distributed—not equally, but equitably—by voluntary exchanges in the marketplace, with each person receiving from his fellows what they think his contribution is worth to them. Each of us benefits in such a voluntary exchange.

This is a paradigm of capitalistic society; peaceful exchanges within the rules, with the rules designed to protect person and property. Each participant in a voluntary exchange is a net gainer, having given up what he wants less to get what he wants more. And as these exchanges multiply every person has a strong inducement to work harder, producing more of the things other people will want from him in exchange. And as each person betters his own circumstances he improves the lives of other people. Production, in a free society, begets production, with more for everyone.

In the pre-capitalistic ages the kings and nobles used their political power to enrich themselves at the expense of the peasants. The serfs who did most of the work were entitled to enjoy only a portion of the goods they produced. Post-capitalistic societies operate in similar fashion. Those who possess political power in welfarist America or socialist Britain or Soviet Russia, exercise the taxing power to deprive productive people of a huge chunk of their earnings. These tax dollars — minus the political costs of effecting these transfers — are then doled out to various “deserving” pressure groups in the private sector.

We witness what Frederic Bastiat might have called a Plunder-bund — the law designed to protect life, liberty, and property perverted into an instrument to enrich some by impoverishing others. Albert Jay Nock referred to the law thus perverted as The State — holders of public office in cahoots with factions in the private sector to operate a scare against productive people.

Our basic political structures were largely built around the conviction that, “to the producer belongs the fruits of his toil.” We were to have a private property order. The Declaration does not mention a right to property, substituting a right to “the pursuit of happiness.” We cannot read Jefferson’s mind as he wrote the document, but we do know what was in almost everyone else’s mind at the time; it was Life, Liberty, and Property.

The colonists had migrated out of situations in Europe where they lived on the estate of a master, working mostly for his benefit and only partly for their own. Here in the colonies the idea of freehold property was established. You owned your farm in fee simple, which means that your estate was your very own. You could will it to your descendants, sell it, dispose of it as you wished.

What you produced on your property was yours to keep, or sell, or give away. Now, you owned what your labor created, and you had an enormous incentive to devise labor-saving devices and work harder, longer, and more skillfully because everything you produced was yours. You got the added benefit; not some absentee landlord. Wealth creation increased by geometrical progression under these circumstances, with free men and women living under a just system of laws, holding a strict property right in the fruits of their labor.

The American colonists of the 17th and 18th centuries lived in a society whose primary institution was not government, or the press, or business, or the academy; it was the Church. As Alexis de Tocqueville observed of us in the 1830s: “Religion… is the first of their political institutions.” And it was the colonial churches which labored for the creation of the kind of personal character in men and women which a free society, with its market economy, demands as its basic ingredient.

We are reminded of this need for exemplary character by the late, great economist Wilhelm Roepke who said that the market economy cannot “… go on in a moral vacuum… Self-discipline, a sense of justice, honesty, fairness, chivalry, moderation, public spirit, respect for human dignity, firm ethical norms—all of these are things which people must possess before they go to market and compete with each other.” And as these early Americans entered the marketplace they practiced the Puritan ethic of work and thrift, believing that thus they served God as co-creators of a new nation, and proved that poverty is not mankind’s fate.

The Wealth of the West

The Western World is relatively wealthy because it is relatively capitalistic. The Third World is poor because it shuns capitalism. This is the truth of the matter, obvious to any person who examines the issues impartially. But this truth is overcome by a worldwide ideology which declares that the wealth of the West is the cause of Third World poverty!

President Julius Nyerere of Tanzania voiced this Third World ideology when he wrote: “In one world, as in one state, when I am rich because you are poor, or I am poor because you are rich, the transfer of wealth from the rich to the poor is a matter of right; it is not an appropriate matter for charity.” Along the same line, Third World voices tell us that the United States is to blame for the famine in Ethiopia — a country which exported its surplus grain and other foodstuffs until the Communists took over.

Third World politicians have a method in their madness: they want things from the West — American dollars, foodstuffs, machinery, and other goods — so they try to convince us that we owe it to them because we are to blame for their plight. This is the Marxist notion that the rich, under capitalism, get richer by making the poor poorer. This ploy would not work except that millions of Americans have also swallowed the Marxist exploitation theory; that those who are better off got that way by making others worse off; that the wealth created by capitalism is the cause of poverty.

Here, for example, are the words from a keynote address given at the World Council of Churches Assembly held in Vancouver two years ago: “We inhabitants of the industrial nations… exploit the majority of the world’s population… The demon of profit for the few at the expense of the many, i.e., their impoverishment, has the whole world economic system firmly in its grip.” These false and defamatory sentiments are echoed by many academic and ecclesiastical voices, here and abroad.

Americans do consume more than most people elsewhere and it might be interesting to find out why. The answer is simple, to the point of being self-evident: Americans consume more because Americans produce more. Americans produce more, not because we are superior beings, but because our relatively free institutions impose fewer restraints on our productive energies than is the case in other nations, and our private property system guarantees to the producer that he will own the fruits of his toil. Any nation that adopts the free market will be more productive, and thus more prosperous, and in the long run this is the only way to feed the world’s hungry.

A False Axiom

The redistributionist policies of our own welfare state, as well as similar international policies which tax Americans in order to subsidize other nations, is based on the false axiom that the wealth of some is the cause of the poverty of others. Something like this was true during the pre-capitalistic ages, but capitalism introduced an entirely new ball game in which each one of us prospers to the degree that he contributes to the well-being of other people, as they see it. Walter Lippmann puts it this way: “For the first time in human history men had come upon a way of producing wealth in which the good fortune of others multiplied their own.” Freedom in production and exchange does not promise perfection. When people are free, many of their choices may offend us, which means that the free society demands infinite tolerance for each other’s foibles. But that’s a small price to pay for all the benefits received.

To believe that wealth is the cause of poverty makes as much sense as to assume that health is the cause of disease. And to contend that the remedy for poverty is to soak the rich and give to the poor is as idiotic as believing that the only way to heal the sick is to make the healthy ill. The sick can be made well only as they adopt the sensible regimen of the healthy, and the poor can move out of poverty only as they become more productive. The world’s economic problems and other ills will only worsen unless there is a revival of that sound philosophy, which, two centuries ago, gave us the free society and the market economy which I’ve been labeling capitalism. Education along these lines — replacing bad ideas with better ones — is slow, frustrating, uphill work. But there is no other way.

Meanwhile, we try to live with — while working to correct — the false assumption of people everywhere, that wealth is the cause of poverty. The truth of the matter is that poverty in a nation is caused by the low productivity in that nation. And it is our good fortune that there is a simple recipe for overcoming low productivity while moving in the direction of prosperity. The recipe is: follow the prescriptions of people like Jefferson and Madison; Adam Smith, and Bastiat; Mises, Hayek, Roepke, Friedman, and others. The remedy is simple, but simple is not necessarily easy!

Read more from the Edmund Opitz Archive.

Dr. Norman Horn

Norman founded and the Libertarian Christian Institute, and currently serves as its President and Editor-in-Chief. He holds a PhD in Chemical Engineering from the University of Texas at Austin and a Master of Arts in Theological Studies from the Austin Graduate School of Theology. He currently is a Postdoctoral researcher in Chemical Engineering at the Massachusetts Institute of Technology.
  • Another thing that muddles the issue is that those who argue for and against welfare rarely use the word “poverty” in the same sense. Liberals/leftists tend to use the word “poverty” in relative terms, whereas conservatives and libertarians use the word “poverty” in absolute terms. This creates a discourse where both sides disagree about the existence of poverty and whether it needs stamped out by the government, while the real issue is that they don’t actually mean the same thing.

    It is important to remember that, when using “poverty” in a relative sense, there will, by definition, always be a bottom 10% (or any other arbitrarily decided number). It’s no so clear that there will always be a certain number of people who lack life’s necessities, at least in America.

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  • This is definitely an astute point to make. Statistics cited by progressives about the poverty level and the “gap” between the poorest and the richest can be very misleading. On the other hand, those of us who promote liberty cannot be too careful to ignore the need of some in true poverty. Typically this is the first accusation levied against those who decry a welfare state.