Misguided Charity and Standard Free-Market Arguments
When I was at an Austrian economics conference in Rosario (Argentina) last week, they showed us a long segment from the Acton Institute’s film, “Poverty, Inc.” Here’s the trailer:
You can see some quick allusions to it in the trailer, but one of the themes is that sending free stuff actually makes the recipient countries poorer, because local entrepreneurs can’t develop. For example, they interviewed a guy trying to sell medical supplies, and he complained that every once in a while, in a completely unpredictable pattern, some international organization would dump months’ worth of free medical supplies onto the community, making him have to shut down for that period.
To be sure, there were plenty of other points the video brought up, but I’m guessing most of you can see why I want to focus on this particular point. It’s because it sounds eerily similar to standard arguments for protectionism.
(These points came up explicitly in my debate on free trade with Vox Day, hosted by Tom Woods.)
In other words, if a free market economist is going to say, “Of course we don’t need tariffs to keep out cheap goods, would we also keep out the sunlight to help our candle makers?” then don’t we similarly need to say, “Of course it helps an African country if an aid group gives them a bunch of medical supplies for free. If you doubt that, would we be helping the Africans by sending in Seal Team 6 to steal their syringes?”
And yet… It is also typical for a free market economist to say that the welfare state has hurt poor people, by trapping them in a cycle of poverty. But how do you reconcile that with a typical utility-maximizing agent? It can’t hurt to give someone options, right? So if the government says to women, “We will send you food stamps if you have kids and no husband,” how does that hurt them? Don’t the women rationally choose the option that is best?
Note, I’m being facetious here. I don’t think the welfare state helps poor people. But this Acton movie really got me thinking and I realized that several standard free market arguments on various issues are at best in tension, and at worst are contradictory.
Leaving the realm of secular economics models, it is certainly true that a Christian charity would not want an able-bodied person to be a recipient of assistance for years at a time. That would be considered harmful not just to the people paying for it, but to the recipient too. This is actually one of the reasons I personally think private, religious charities are better than secular State ones. I think the people running the private versions (in general) actually care more about the genuine welfare of the people they’re dealing with, and thus try to restore them to self-sufficiency rather than viewing them as clients.
Whoa; Bob, you’re right. This is clearly related to Scott Sumner’s recent posts on Saudi Arabia:
themoneyillusion.com/?p=31908
themoneyillusion.com/?p=31909
Wow, I just listened to that part of the podcast. You’re right. So your point is that like welfare, when things are given for “free,” there are no prices by which to gauge the other competitors in the market. Therefore it is essentially tantamount to Mises’ Socialist Calculation Problem, as well as Rothbard’s avid arguments against government intervention that destroy the appropriate allocation of resources in a free trade system. For example, here in Ithaca, we have both Wal Mart and Wegman’s. Walmart has falling prices, whereas Wegman’s has higher prices. Given that there are more choices, and indeed given that there are free-market prices, the consumer would decide between the various competitors based upon their subjective value scales. It could be higher prices and better quality or lower prices and lower quality, perhaps some combination between the sorts of values we gather subjectively. What is essential is that the choices are there.
Your point in the blogpost does allude to dumping of cheap products by governments, but one quick understanding of the Austrian Business Cycle Theory would reveal the true culprit of the predicament at hand. This can also relate to the problem of immigration promoted by Rothbard. Of course us Rothbardians know that he was completely pro-immigration with respects to a free society that upholds property rights, yet some people, such as Vox Day, completely misunderstood his later arguments against Russians. Rothbard was suggesting that government “promotion” of immigration was not free market oriented and thus would create problems. He said this in perhaps a more overt way, but this was his point. Rothbard never suggested getting the government involved to bureaucratically control immigration. He did suggest, like most of his arguments, that when a government gets involved, it creates waste and inefficiencies.
Case and point to Robert Murphy and Free Markets.
I linked to the Cato article “More Welfare, More Poverty” when you first had the Vox Day debate.
http://consultingbyrpm.com/blog/2016/06/murphy-vs.-vox-day-on-free-trade.html#comment-1707352
Also someone called “SB” brought up the topic of “Poverty Inc” on the same comments page.
I could also mention the book about Scandinavian Socialism called “Debunking Utopia” by Nima Sanandaji which talks about the welfare state and how it goes wrong (especially in terms of immigration, integration of new people into a society, and cultural differences, which is pretty pertinent given the current political situation).
Also Emily Skarbek has talked about what she calls the “Samaritan’s Dilemma” which is pretty much describing the same thing as all the other links.
Lastly I should point out that the “Samaritan’s Dilemma” has a nasty flipside that I’m calling the “Victim’s Paradox” and it works like this: a person who gains political power, financial benefit and/or emotional satisfaction by helping victims has a hidden incentive to prevent the victim ever escaping their predicament. We are in the territory of Munchausen syndrome by proxy, and Steven King’s famous movie “Misery”. Chilling stuff. Before you think I’m going too far out on a limb here, in the context of the African American struggle with poverty this has been named the “Democrat Plantation” (check out Diamond and Silk, two well built and well tanned ladies); if you want a second opinion try Sonnie Johnson, “Democrats want to be the party of the poor. In order for that to happen they have to keep you poor.”
I guess if foreign aid were dumping medical supplies predictably and forever, there would be nothing wrong with it. Just like the sun shines every day and will do so forever. The guy selling medical supplies would find a different line of work.
Interesting. I thought it was silly, when I read it in Atlas Shrugged, that sharing and charity were not allowed in Galt’s Gulch. That Galt had to rent the car even though it would have been easier for everyone involved if he had just borrowed it. It seemed completely unnecessary to me. But lately I’m starting to see what Ayn was getting at.
Well, think about this:
The act of charity itself, undertaken voluntarily by those giving charitably, is a rational act because based on the information available to the giver he believes himself to be helping the recipients and their country, and he derived a psychic profit from that.
Now if you simply inform him-don’t use any kind of force against him, merely inform him-that he is engaged in an unintentional act of “predatory pricing.”-that is, tell him about this entrepreneur whose activities he unintentionally disrupts.
All you will have done is give him more information with which to make his decisions about charitable giving. But you may well have destroyed-or significantly reduced-his psychic profit. He may think harder about how best to give in the future.
Guys, let me make sure you understand my position: I still think it’s wrong to say that “dumping” free medical supplies on a poor country, makes the country poorer. Yes, it makes the local guy selling medical supplies worse off, but in general we don’t take that as decisive.
Look, sometimes the apple crop is big and sometimes it is small. It is like Nature unpredictably showers cheap apples on us. When that happens, the poor schmoe trying to make a living selling chickens gets clobbered. So would humanity be richer if there were never bumper crops of apples?
Or if someone stumbles on a new oil deposit, did humanity just get poorer? (Forget climate change stuff.)
Here’s a question: is humanity as a whole poorer if instead of giving the free medical supplies directly to the people, he gives them to the entrepreneur he unwittingly competes against?
So what then do you think is wrong with foreign aid? Is it that the money is taxed in the country giving the aid?
I think you’re right btw, it makes them richer although a fishing rod is better than fish.
Jan,
Well for sure, giving aid to the State in a poor country is bad, because it props up an oppressive regime. But if the issue is literally giving non-military consumption goods to the average people, the standard economist point would say it makes those people on average wealthier, just as surely as if we get crops out of the ground.
However, in everyday life I wouldn’t think a charity that gave $1,000 per year to an able-bodied man was doing him a favor, even though he could rationally pursue his career and that charity shouldn’t stunt him. I would use a more nuanced model of what that charity did to the guy, than free market economists typically use when evaluating international transfers.
So, I’m just acknowledging that there is a tension, and I’m not sure what the solution is. Maybe there’s something about knowing you are receiving charity that is debilitating?
Even if there is a bumper apple crop, you still have to pick the apples or buy them from someone who did; and someone needs to protect and nourish the trees. Even if you stumble upon an oil deposit, you still have to bring it up out of the ground or sell it to someone who can. Nature is a different sort of benefactor than men.
Free giveaways are a short term increase in wealth that can negatively impact long term incentive structures. Think about the Federal Reserve giving out credit at below market rate prices. This comparison (though imperfect) should be striking for anyone with an Austrian tilt.
In both cases, no one is physically injured by the giveaway. We are simply getting something we already wanted for cheaper. In both cases, the value of the thing being given is reduced and long term incentive structures are altered. In both cases (medical goods & reserve notes), we have little choice but to use the goods being given away.
Wow — very interesting topic, Bob. Several different issues are overlapping here. I just want to focus on one:
I think the vid (and related arguments) fail to demonstrate that the free aid *hurts*, even under the hyper-rational, hyper-self-interested model.
But it does demonstrate that the *way* they do it severely undermines the (net total) value of the aid, eliminating all or most of it.
Toy model: Village consumes (up to) 6 medicines/month. Any more and they’re worthless (can’t be stored,etc).
Let’s say the aid-givers are completely capricious — like, Knightian level uncertainty; you don’t even know if there *are* aid-givers. In that case, the village will/should unconditionally spend the resources for producing 6 medicines. The aid produces no net value; all it does is redirect some resources from the medicine makers to the non-makers. (When aid comes, they don’t buy from the maker.)
Of course, it’s not that bad: the aid will be *somewhat* predictable. In that case, the village can still make use of the random free aid. However, the value of the aid will *still* be less than the value of the meds (perhaps far less). This is because producers (like the guy in the story!) have to retool to a *less specialized* production structure. Instead of using a dedicated med-factory or a dedicated rope-factory, he has to make a hybrid rope-or-medicine factory that can produce rope or medicine (but not as well of either as a specialized factory), so he can switch whenever the aid comes.
But that’s not an argument against aid; it’s an argument for predictability. It shows that aid groups should credibly pre-commit to certain levels so the villages can build a more reliable structure of production around it, even if it means “overgiving” at times. Ideally, the (precommited) total aid would also (knowably) dissipate over time to ensure the village becomes self-sustaining, but that gets back to the whole “idle hands” problem with aid.
I had the same thought when I first heard about this movie.
Similarly, one argument that I hear often is that yes, the U.S. economy grew rapidly in the 1950s and 1960s despite high taxes, unions, etc. but that was because the economies of Europe and Japan had been destroyed in WWII so we didn’t have any competition. If that’s right, then we should be able to reproduce rapid growth by banning imports from Europe and Japan.
The other part of that argument you don’t mention was that in that period Europe, Japan etc. didn’t have a lot of suppliers other than the US and the unbombed parts of the Commonwealth. I have a feeling the import bans wouldn’t do much to recreate that part.
John,
How do you suppose Europe and Japan paid for the stuff they imported from the U.S. back in the 1950s and 1960s?
They paid for it by borrowing from the US or cutting real prices to the US, either of which would make the average American richer and the taxes and regulations less seemingly burdensome.
(Sorry, should have started here since John_Dougan said the same thing basically.)
I think you misunderstand the argument — it’s referring to international competition for sales of the output, not just the domestic market. That is, US producers could add a big markup on all the sales to the rest of the world, because Germany couldn’t keep up. Banning imports to you own country wouldn’t affect that; you’d have to e.g. sabotage or ruin the reputation of non-American suppliers.
On the welfare point, I agree that most arguments about welfare dependency aren’t really consistent with the utility maximized model, but then a lot of human behavior doesn’t seem consistent with it either.
If you don’t accept a person’s own preferences as a suitable measure of that person’s utility… then how are you going to measure utility?
I most certainly don’t want to be forced to live my life by your preferences.
Measuring utility at all a pretty tricky matter. What you can do is show that a person’s preferences are internally inconsistent.