William Easterly, author of The White Man’s Burden has an interesting piece in the Wall Street Journal today where he responds to Bill Gates’ call for “creative capitalism” Gates argues that the way capitalism is practiced it doesn’t help the poor and argues for increased philanthropy on the part of businesses.

Easterly points out that :

Profit-motivated capitalism, on the other hand, has done wonders for poor workers. Self-interested capitalist factory owners buy machines that increase production, and thus profits. Capitalists search for technological breakthroughs that make it possible to get more output for the same amount of input. Working with more machinery and better technology, workers produce more output per hour. In a competitive labor market, the demand for these more productive workers increases, driving up their wages. The steady increase in wages for unskilled labor lifts the workers out of poverty.

The number of poor people who can’t afford food for their children is a lot smaller than it used to be -- thanks to capitalism. Capitalism didn’t create malnutrition, it reduced it. The globalization of capitalism from 1950 to the present has increased annual average income in the world to $7,000 from $2,000. Contrary to popular legend, poor countries grew at about the same rate as the rich ones. This growth gave us the greatest mass exit from poverty in world history.

The parts of the world that are still poor are suffering from too little capitalism...

Easterly points out that governments and philanthropists just don’t have enough information and knowledge to make the right decisions. This is why they have failed and why markets have worked. It is the age-old problem that Friedrich Hayek called The Fatal Conceit.

Easterly notes:

Moreover, how do philanthropists choose just which product is going to be the growth engine of a country? Much research suggests that “picking winners” through government industrial policy hasn’t worked. Winners are too unpredictable to be discovered by government bureaucrats, much less by outside philanthropists.

There are many people with good intentions who want to help the poor live according to their dignity, but good intentions often don’t mean good policy.

We know what has helped the West create prosperity. It was not foreign aid or philanthropy--it was the key institutions of private property, rule of law and free exchange that created a framework for markets and for entrepreneurs to use their energy and insights to meet the needs and wants of millions. What the developing world needs is less aid and more of the institutions of freedom.

Here is a fantastic quote about America that deserves a hearing:

From the very beginning, the American dream meant proving to all mankind that freedom, justice, human rights and democracy were no utopia but were rather the most realistic policy there is and the most likely to improve the fate of each and every person.

America did not tell the millions of men and women who came from every country in the world and who--with their hands, their intelligence and their heart--built the greatest nation in the world: “Come, and everything will be given to you.” She said: “Come, and the only limits to what you’ll be able to achieve will be your own courage and your own talent.” America embodies this extraordinary ability to grant each and every person a second chance.

Here, both the humblest and most illustrious citizens alike know that nothing is owed to them and that everything has to be earned. That’s what constitutes the moral value of America. America did not teach men the idea of freedom; she taught them how to practice it. And she fought for this freedom whenever she felt it to be threatened somewhere in the world. It was by watching America grow that men and women understood that freedom was possible.

What made America great was her ability to transform her own dream into hope for all mankind.

America needs to remember the things that made us great. Liberty is the fruit of responsibility and virtue. Let us take heart.

The speaker was none other than French President Nicolas Sarkozy in his address to Congress earlier this week. You can find the entire text of his speech here

Chicago’s City Council passed a measure last week that mandates “big box” stores such as Wal-Mart, Best Buy and Lowe’s to pay workers -- regardless of experience -- a minimum wage of $13 an hour including benefits by 2010. See the opinion piece in today’s Wall Street Journal.

The justification is to help poor people have a better standard of living. Is this another example of good intentions mixed with bad economics? This time I doubt the intentions are to help the poor. They may be to reduce the number of aesthetically unpleasing “big box” stores to make the neighborhoods look nicer, but it surely won’t help the poor. What it will do is move jobs from the city to the suburbs, discourage Wal-Mart and others from staying and expanding in Chicago, and in addition to creating higher unemployment result in an increase in prices at these stores.

People forget that a higher standard of living isn’t just measured by one’s salary, but also by the cost of goods. A salary increase that is accompanied by an equal increase in the cost of goods doesn’t mean a higher standard of living. I agree that big box stores are aesthetically unpleasing, but I also recognize that they enable Americans to buy many household goods at low prices and enjoy a standard of living better than anywhere else in the world. When I lived in Nicaragua, a halogen lamp cost almost three times as much as it did in the States -- that’s was because there weren’t places like Wal-Mart to provide them more cheaply -- and that meant that only people of a higher income level could afford to buy them. My question is that when the prices inevitably increase will the Chicago City Council mandate “everyday low prices” too?

If you haven’t seen it yet, I recommend the film I Am David with Jim Caviezel and Ben Tibber. It is about a young boy, David, who escapes from a Bulgarian Prison Camp and undertakes a journey northward to Denmark. It is based on the children’s novel North to Freedom by Ann Holm.

The movie contrasts the horror of communist prison camp life with daily life of people in free societies. Normal everyday interactions of young David with a wealthy Italian family and a Swiss woman are powerful in the way they illustrate the differences between an easygoing and joyful life of a free society and the de-humanizing forces of camp life.

David’s soul, mind, and worldview were shaped by the violent, godless, and ugly life of the camp and the movie, among other things, shows how David becomes humanized as he meets normal individuals striving to live good lives in freedom. It is a moving and uplifting film and it also reminds us of the horrors of communism and the privilege of living in a free society—and the need to protect it.

While there is a general acceptance of the role of private property for social order and economic prosperity, the challenges to private property have not ended. The eminent domain issue is one threat; another comes from environmentalist groups such as the Foundation for Deep Ecology and others who see humans as a drain on the earth and nature. Some environmentalists advocate the consolidation of land to be put under federal control and promote stringent land usage restrictions that would prevent a landowner using his property fruitfully.

Their argument is nothing new: individuals left to themselves will not be as effective as central planners in decided the best way to allocate and protect resources, etc. etc—they are merely variants of the Marxian arguments used by economic central planners.

Despite the rhetoric, common ownership of land and resources has not been an effective means of addressing problems. It failed under applied socialism, and has not led to environmental protection and stewardship as environmentalists hope. Private property ownership creates incentives for people to use land wisely and in a sustainable manner. John Stossel gives an excellent illustrations of the importance of incentives and the private ownwership including privatizing elephant ownership in Africa.

St. Thomas Aquinas addressed the question of property and human incentives in the 13th century. He argued it is lawful to own property for three reasons:

First, because every man is more careful to procure what is for himself alone than that which is common to many or to all: since each one would shirk the labor and leave to another that which concerns the community, as happens where there is a great number of servants.

Secondly, because human affairs are conducted in more orderly fashion if each man is charged with taking care of some particular thing himself, whereas there would be confusion if everyone has to look after one thing indeterminately.

Thirdly, because a more peaceful state is ensured to man if each one is contented with his own. Hence it is to observed that quarrels arise more frequently where ther is no division of the things possessed.

Notice the humanist vision—the appreciation for the individual, an understanding of human nature, a respect for the capabilities of individuals to make decisions and control their own sphere. Also notice point number three. Compare this to the unspeakable violence perpetrated by socialist government leaders on their own citizens because they were not “content” with operating in their own sphere.

It is unfortunate Marx and the socialists were not steeped in the thought of St. Thomas early on. Who knows, it could have avoided some of the pain and suffering imposed by socialist governments on their own people. But the reality of Marxism has become clear. As Pope Benedict put it in his new encyclical Deus Caritas Est

Marxism had seen world revolution and its preliminaries as the panacea for the social problem: revolution and the subsequent collectivization of the means of production, so it was claimed, would immediately change things for the better. This illusion has vanished.

The leftwing environmentalists are part of a long line of central planners. They want to the control of property in the hand of government bureaucrats and planners, i.e., themselves. But planners are always less effective than those closer to the problem, because no matter how much they know, or think they know, they’ll never has as much knowledge as those individuals on the ground close to the situation. This is the principle of subsidiarity—rooted in Aquinas’ defense of private property. Wisdom of the past as applicable today as it was then.

William Easterly, professor of Economics at NYU, has written a new book challenging the prevailing development orthodoxy of increased aid and the “big push” to combat poverty in the Third World. The White Man’s Burden: Why The West’s efforts to Aid the Rest Have Done So Much Ill and So Little Good, published by Penguin is to be released on March 20th.

I have only read a short bit of it so far, but what I have seen is refreshing. He questions the effectiveness of aid, pointing out that aid has been largely ineffective and more of the same is not the answer. In so doing he goes up against politicians such as Tony Blair and Gordon Brown, economists such as Jeffery Sachs, and rock stars such as Bono and Bob Geldof.

Sachs calls for increased aid and Blair speaks of a “big push” to bring about The End of Poverty. (Sach’s book is also v. interesting by the way) Easterly agrees with Sachs that extreme poverty is a tragedy, but while there is a lot of talk about poverty itself, he says there has been very little said

about the other tragedy of the world’s poor. This is the tragedy in which the West spent 2.3 trillion dollars in foreign aid over the last 5 decades and still has not managed to get twelve cent medicines to children to prevent half of all malaria deaths. The West has spent 2.3 trillion and still has not managed to get four-dollar bed nets to poor families

He contrasts the central planning inefficiency of the aid industry to the market’s ability to distribute 9 million copies of the sixth volume of Harry Potter books to the British and American economies in a single day.

There was no Marshall Plan for Harry Potter, no International Financing Facility for books about underage wizards.

Easterly makes the distinction between what he calls planners and searchers. Planners like Jeffery Sachs and Tony Blair advocate large scale attacks on poverty through aid and global initiatives. Planners operate from top-down schemes that are often well intentioned but have not worked. Searchers on the other hand avoid large scale plans and look for entrepreneurial solutions to solve problems that take into account incentives and accountability.

Despite the evidence, why do big plans remain so popular? Well, one reason of course is that planning schemes are inspiring. End poverty by 2025. Grandiose plans often have the support of big name politicians and celebrities and they promise a solution right away. Piecemeal solutions rarely inspire even when they work. Second, no one is accountable when the fail. And when they do fail the answer is do more of the same thing. The One Campaign is a perfect example. But popularity and good intentions are not a substitute for effectiveness.

A third reason is the prevailing allure of utopian schemes. Easterly writes that the planning approach to foreign aid is part of the what Karl Popper calls the “utopian social engineering” approach to problem. This approach has been tried and failed in diverse times and places such as the five year plans of the Soviet Union, the structural adjustment programs of the World Bank in Africa in the 1980s and 90s, and the “shock therapy” used on the transition economies after years of failed planned economies.

Utopianism is nothing new. Eric Voegelin saw Gnosticism and utopianism as the driving force of modern politics, and it appears to be the driving force of aid as well.

Maybe Easterly’s challenge will wake people up to the failures of planning and get them to respect the entrepreneurial capabilities of the people in the developing world. As Hernando de Soto has pointed out in The Mystery of Capital, there is no lack of entrepreneurial spirit in the Third World.

Instead of increasing aid and more top-down plans decrease regulation and barriers to starting businesses, and let local entrepreneurs and the markets find solutions that far away planners have been unable to accomplish.

Bono and the One Campaign want us to sign a petition encouraging the government to spend 1 percent of the U.S. budget for aid to developing countries. The One Campaign states that this would “transform the futures and hopes of an entire generation of the poorest countries.”

Now I admire the intentions of Bono to fight against poverty and he puts his money where is mouth is. But how do we know that increased aid will make a difference? How will the money be spent? Billions of dollars of aid have poured into developing nations, often with minimal if any positive results. Why does increasing something that really hasn’t worked going to make it better. I would understand and support it if we saw results that aid really makes a difference in providing a foundation for sustainable growth that would enable developing nations to lift themselves out of poverty, but this has not been the case. Aid often goes to the hands of corrupt leaders or gets squandered away. Further it is too often connected to ideology that has little or nothing to do with development or poverty, e.g., population control. How many millions of dollars a year go into population control programs despite little or no evidence of a causal relationship between increased population and poverty? In fact, population can often be a positive element for economic growth. See Jacqueline Kasun’s book The War Against Population or Julian Simon’s the Ultimate Resource.

But what if the problem is not insufficient aid, but something else?
According to Hernando de Soto the problem is the Mystery of Capital. There are billions of dollars of “dead” assets in the developing world. Assets that cannot be turned into capital and thus can’t be an engine for economic growth. There is also a lot of saving in the developing world. De Soto writes:

Even in the poorest countries the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. In Egypt, for instance, the wealth that the poor have accumulated is worth fifty-five times as much as the sum of all direct foreign investment ever recorded there including the Suez Canal and the Aswan Dam. In Haiti, the poorest nation in Latin America, the total assets of the poor are more than one hundred and fifty times greater than all the foreign investment received since Haiti’s independence from France in 1804.

He then writes:

If the United States were to hike its foreign aid budget level to the level recommended by the United Nations—0.7% of national income—it would take the richest country on earth more than 150 years to transfer to the world’s poor resources equal to what they already possess.

Because these assets are not properly documented with legal title etc, they cannot be turned into capital to start businesses and create wealth like they are in the developed world where we do this every time an entrepreneur mortgages his house to start a business. Now DeSoto’s work is not a panacea, but it addresses some serious problems that need to be addressed. It also recognizes that rule of law, private property, and economic and entrepreneurial opportunity are needed for development.

The One Campaign is exciting, and it is supported by host of cool people. But although it feels good it doesn’t mean that it is the answer. The problem is a lot more complex than the One people make it out to be, but their way has been tried and tried to little avail. Maybe government aid isn’t the answer after all.

This Sunday I went to Mass at a parish I’d never attended before. I was quite pleasantly surprised—the music wasn’t bad, the rubrics were followed, the homily focused on the gospel, they chanted the Agnus Dei, and prayed the prayer to St. Michael afterward; not apparently liberal and better than many typical “suburban rite” parishes. But, during the petitions, one of the prayers was for leaders of nations, that they would eradicate poverty. Here is a classic example of the right desire, poverty eradication, and the wrong way to go about it, government. It also betrays the common misunderstanding that governments solve poverty. Now, leaders of nations and governments do have a role in poverty reduction. They need to create rule of law and enforce contracts. They can help reduce regulation and tariffs and open their borders to free trade. But leaders of nations do not eradicate poverty, nor does aid from the developing world. What eradicates poverty is business. Entrepreneurs and businessmen who create jobs and opportunity and wealth. Michael Novak called small business “the strategic vocation for helping the poor.”

The desire for poverty alleviation through government involvement is a prime example of good intentions combined with unsound economics. Many people have good intentions, but they don’t understand basic economics so they often support solutions without “thinking beyond stage one” as Thomas Sowell says. A prime example of this is the enormously popular One Campaign. Thousands of people are signing on to a good intention without knowing whether the proposed solution will bring about their desired outcome. Good intentions are a start, but they’re not enough and Bob Geldof is wrong when he says do something even if it doesn’t work.

If it doesn’t work—stop doing it. Activism shouldn’t be done for the sake of being active. This is the problem with too many Hollywood stars and other “professional” activists. Activism should have an end that is beyond itself, so if it doesn’t work, we should use our minds to apply reason to the situation and come up with a plan that might. C.S Lewis said that “progress isn’t going forward if you’re going in the wrong direction.” You’ve got to stop and turn around. Acton Senior Fellow, Jay Richards argues that the Bob Geldof idea is reflective of many who believe that their actions or policies will be either good or neutral, but never harmful. But despite what they may believe that is not the case. Often things that don’t work exacerbate the problem. Hence the Acton Message, Don’t Just Care, Think.

We need to have good intentions, but this is only a beginning. If we are going to care about poverty and economic policies then we should begin by taking economics seriously. Some books I recommend include Basic Economics and Applied Economics both by Thomas Sowell, and of course Economics in One Lesson by Henry Hazlitt. Bono is a force for good intentions, can you imagine all the good he could do if he connected his intentions to sound economics?

Western Europeans often talk about the homogeneity of American politics and how the parties hardly differ from one another. One reason why Europeans believe this is because they often pay attention to US politics only during a presidential campaign, so they do have some justification. But while their opinion is understandable not only does it fail to reflect the real difference between the left and the right in America; it obscures the homogeneity of Western European political life.

What is interesting about the Western European perspective is that despite a multitude of parties all over the EU, the major ones are all more or less the same: left leaning, big government, egalitarian and morally relativist. There is a lot of noise, but no real serious diversity. Most of them are less distinct from each other than they are from conservatives in the US. In how many countries in Western Europe does there exist real debate about the welfare state, free market solutions to poverty, labor laws, the importance of the family, and the morality of abortion. Issues that are of central importance to many Americans are looked at as unsophisticated by a great many Europeans.

European parties are great in number, but almost none of them support a free economy, minimal government involvement, and strong and vibrant families and churches. If the Europeans want real diversity of thought they should begin to question the social democratic welfare-state model. So far this is usually only done by parties such as the greens or the communists who argue for even more government involvement.

The social democratic welfare state is failing and has sapped the cultural and spiritual energy of Western Europe. Unemployment is high, economic growth stagnant, and the elderly of tomorrow may find themselves out in the cold. They won’t have any children to help them and the government will not be able to take care of them because the dwindling population won’t be able to fund the welfare state. Maybe what the Europeans need in their political life is real diversity: a party that advocates personal responsibility, strong families, free markets, and a culture of life. That would be novel.

Jay Richards’ previous post on Richard Rahn’s article “Not Rocket Science” illustrates Huxley’s famous statement about a fact destroying a theory.

Jay quotes Rahn’s lists of the politicians and development experts who support increased foreign aid.

It’s no longer just politicians and economists. Bono’s One Campaign is designed to get the developed nations to contribute 1 percent of their GDP to foreign aid for the poorest countries. No doubt Bono and many other supporters have good intentions. But good intentions don’t fight poverty. Economic opportunity, entrepreneurship, and free trade do.

Using the Heritage Foundation/WSJ “Index of Economic Freedom” Rahn lists example after example of the success of countries who liberalized their economies, and failures of those that haven’t.

The economically freest societies are the most prosperous, and the most economically repressive societies are the poorest.

Ireland 30 years ago was among the poorest countries in Europe. It then made a major shift toward freeing up its economy -- e.g., its maximum corporate tax rate is only 12 1/2 percent (it ranks No. 3 out of 157 countries in the index). As a result, it now has the second-highest per capita income in Europe and is far ahead of the old leaders like Germany (No. 19) and France (No. 44). (Note, when I refer to per capita income, I do so using the Purchasing Power Parity measure which accounts for local price differences.)

In Eastern Europe, Estonia is economically the freest (No. 7), and Romania the least free (No. 92), though the latter is now making progress. Both countries started out at roughly the same level 16 years ago, but now Estonia has almost twice the per capita income of Romania. Much of the credit for Estonia being the most successful transition country goes to its brilliant and able free-market former prime minister, Mart Laar.

On the other hand, the biggest recipients of development aid over the last quarter-century, for the most part, have gone nowhere economically. Egypt (No. 129), the biggest recipient of development aid in the last quarter-century, is a prime example, with a per capita income about 5 percent of Ireland’s.

Despite the evidence you will continue to hear Kofi Annan and the others clamoring for more aid and more generosity. Instead of aid, they should start asking to reduce tariffs and subsidies and encourage and assist developing countries to set up market economies guided by the rule of law.

Hernando de Soto’s book The Mystery of Capital illustrates that what is needed is not more aid, but the ability to turn assets into capital and less government regulation and interference in the economy.

The One Campaign is right to care about the poor in Africa and elswhere. Perhaps if we could get Bono’s good intentions and passion behind sound economics we might see some real change.