Economic Myths #9 - Social Safety Nets

[First published on Free Life]

It is often trumpeted as a virtue that “civilised”, social democratic countries offer their citizens one or more types of “social safety net” in an attempt to eliminate the most dire effects of, say, unemployment, illness or some other kind of incapacity that could inflict a condition of extreme poverty upon the individual members of the citizenry. The idea is that the most basic wants will always be guaranteed by the state should one be unable to provide them for oneself and no one need have any fear of hunger or lack of shelter – situations that are said to be “intolerable” in a modern, twenty-first century society.

The first problem with this theory is that poverty is not some selectively appearing disease that makes a magical appearance every now and then to infect an otherwise healthy and wealthy society. Rather, poverty is the natural state in which human beings first found themselves. When Adam and Eve were expelled from the Garden of Eden they saw that the world was a barren and harsh place that is capable of providing precious little – may be just air to breathe – without the conscious effort of its inhabitants. The only way to alleviate this terrible situation is for humans to work to produce the goods that they need and, eventually, to bring about capital investment in order to expand the amount of consumer goods that can be enjoyed – whether it’s cheap food, housing, education, holidays or whatever – a process that only really got underway in any significant form in the 1800s.

If, therefore, the individual beneficiaries of a social safety net are not able to produce these goods themselves then it follows that somebody else must do so. Legislating the welfare state into existence does not, unfortunately, create the goods and services it needs to dispense to the poor and needy in order to banish poverty and want. Rather, existing goods have to be forcibly confiscated from those who have produced them and dished out for free to those that haven’t. Social safety nets are compulsory redistribution programmes, not wealth creation programmes and any benefit one receives under them will be at the expense of another person.

The economic effects of this are familiar to economists not only in the “Austrian” tradition but of other free market persuasions also. The most naïve error made by any proponent of redistribution is to believe that people’s behaviour is somehow hermetically sealed from the government intervention that seeks to achieve a certain end – i.e. that increased taxes on a certain activity will not discourage people from carrying out that activity; or that increased funding to eliminate a “dire” situation will not, in fact, exacerbate that situation. Whenever a new tax is proposed the estimations of new revenue to be raked in are often based, incorrectly, on the assumption that people will still wish to carry on doing the taxed event just as they did before, as if the tax makes no difference. And if some new programme to be financed by this revenue is proposed, they will calculate the amount of money needed to cure only the existing problem without considering whether throwing money at it will make that problem worse. All else being equal, if you pay people to do something they will do more of it; if you charge someone to do something they will do less of it.

Applying this understanding to the case of social safety nets, if people are charged to produce wealth in order to fund them then the cost of creating wealth is forcibly raised. Relative to other activities such as engaging in more leisure time, the attractiveness of producing more goods, more capital and more resources is reduced. There will, therefore, be less production, less capital investment and fewer consumer goods at higher prices – hardly the situation that one would expect to be conducive to the abolition of poverty. Similarly, if you grant a guaranteed right to be paid upon the occurrence of a bad event – such as sickness and unemployment – then you lower the cost of that event while the relative cost of preventative measures is raised. All else being equal, you will have more sickness, more unemployment and so on. Indeed, most of the afflictions which may cause a person to fall into hardship are not sudden accidents but are, in fact, a consequence of the lifestyle and environmental choices that a person may make – choices that are influenced by relative costs/benefits.

For instance, children, in particular, appear to be little more than a metaphorical blank cheque that the state writes to “protect” them from poverty and hardship (indeed, the focus of many social safety nets today appears to be on so-called “hardworking families” – never mind the fact that single people or childless couples may also work hard and struggle to make ends meet). Children, however, do not appear out of nowhere and, but for the most exceptional of circumstances, a conscious decision must have been made at some point to have a child – or at least to carry out the act of procreation. The economic effects that we outlined will therefore result from any safety net that benefits parents with children. If you pay people when they have children then all of the existing children will not suddenly be transported to the land of milk and honey. Instead, there will be more children in more families struggling to pay the bills who are desperate for a handout. The resources to feed these hungry, young mouths must be confiscated from those who do not have children – either through inability, a lack of desire or as the result of a financial decision – and redistributed to those who do.

The running theme through all of this, therefore, is that throwing free money at a problem in which people have at least some kind of influence will only aggravate that problem. Indeed, in spite of more than half a century of the welfare state the Western world still seems to be afflicted by the scourge of poverty – although a rather bizarre form of it where those who are poor appear to suffer more from obesity rather than from starvation. Moreover, it is also the case that expenditure on healthcare and other entitlements is shoving most states down the road to bankruptcy. Should it not be the case that “progress” is characterised by a reducing, rather than an expanding social safety net?

A powerful weapon in the arsenal of proponents of the welfare state is the false dichotomy – that the choice is either between a government social safety net motivated by “care” and “compassion” on the one hand or some kind of selfish, greedy, sink-or-swim and dog-eat-dog society on the other. This is plainly ridiculous; the free market exists precisely because people have needs and others are willing to advance the means to fulfil them. The whole edifice of investment and capital accumulation is not to benefit only the well off – rather, its task is mass production of more and more goods and services at lower prices for the ordinary person. Moreover, the purpose of insurance – presently and regrettably distorted by government interference – is to protect you from genuinely catastrophic events that are not your fault in return for a premium paid in advance.

Opting for the alternative of the free market does mean the abolition of care and compassion and the sudden appearance of selfishness and “rugged individualism”. Rather, it gives people the freedom to be caring and compassionate. Indeed it is such private benevolence that is discouraged by the social safety nets as they obliterate the need to cultivate familial and personal relationships upon which you can rely. Real benevolence, selflessness and caring for one another springs from these relationships and from private choice; the forced redistribution demanded by the state, however, leads to the very opposite – bitterness, antagonism and cynicism when your hard earned money is taken to be given to others, all of whom – in spite of whether they are genuinely needy or not – are tarnished as work shy, endless breeders. It is no accident that many of the great charitable foundations and mutual organisations appeared in the nineteenth century, the most relatively free and capitalist period in history – and not in the era of the welfare state. As for the argument that social safety nets are necessary for civilisation, what could be less civilised than wrestling something you want from someone at the point of a gun?

The social safety net therefore needs to be realised for the destructive force that it is; not as a hallmark of economic and societal progress but as one of retrogression of civilisation and as a retarding influence on the very real cure for poverty and illness – more capital, more production and more goods for everyone to be able to buy at cheaper prices.