Acton Institute Powerblog

Efficiently combating poverty

This essay won firstplace in the essay contest of the Acton Institute’s 2020 Poverty Cure Summit, which took place on Nov. 18-19, 2020. This essay is presented as it was submitted. – Ed.

Eradicating poverty, or at least effectively reducing it, is one of the oldest and most debated issues in the field of economics. Several solutions have already been presented and yet the problem persists in many places. The specificity of each region of the globe makes it even more difficult to fight poverty. The measures that have been shown to be most efficient go through the path of economic freedom and human capital development.

During the Poverty Cure Summit, I was able to hear from several people genuinely concerned about global poverty and its consequences for individuals. In the panel “Privatisation, Enterprise, and the path to Prosperity,” I watched the speeches of Mr. Salim Mattar, for which I have great admiration. He has expanded liberal ideas in Brazil in a very honorable and didactic way. His presentation made it clear that generating wealth combats poverty. Only through the free market, the expansion of private initiative, the valorization of individuals,nd the reduction of the functions of the State, can prosperity be achieved.

Poverty and unemployment are problems that hinder economic freedom. The more poverty there is the less activity there will be in the free market and consequently the less economic growth. The market economy is not a zero-sum game in which, for one individual to get richer, the other needs to be impoverished. Although, this zero-sum game can occur, when the government hands public money to small interest groups instead of using it for a legitamate purposes such as health or education. Such groups influence politicians to pass laws that make it difficult for small businesses to enter in the market. Market bariars are created by high levels of bureaucracy,  taxes, or even encouraging direct investments and subsidies to their sector of the economy. An example of this in Brazil was a public policy, which allocated huge amounts of public money to choose some companies as “national champions.” The effectiveness of this program is widely debated as some companies have filed for bankruptcy and others have been investigated for corruption crimes. These groups are strongest in places where the State is big, where power is very centralized, and where politicians want to control the functioning of the economy.

People in an economy should not be treated as mere numbers or simple work pieces. Attempts to centrally plan an economy, with some government officials determining what should be produced or consumed, suppress human essence and the natural differences between people. Each human being has a unique preference, dreams, and individual goals that should not be eliminated if we respect and defend the basic issues of individual freedom. It is important to remember that humans are the main resource of an economy, so it is necessary that all individuals are inserted in this economic environment and that no one is left behind. Joseph Sunde said that when each individual is protected, defended, and their basic freedoms are guaranteed, we open doors to new levels and forms of relationship, collaboration, service, innovation, and love. Economists must develop their ideas and projects with this focus on individuals, otherwise the whole sense of the profession will be lost.

Fighting poverty is like dealing with a chronic disease and using palliative measures will not solve the problem. As Milton Friedman explained, one of the great mistakes is to judge policies and programs by their intentions rather than their results. Poverty needs to be tackled with a focus on the long term. It is necessary to develop an environment conducive to the generation of individual wealth, so that citizens improve their quality of life. Therefore, the efficiency of macroeconomic policies will only be sustained when there is a strong base in microeconomics. Here the state’s fundamental role is highlighted: to watch over private property, to establish and enforce contracts, and to facilitate the free market. The state must refrain from creating excess bureaucracy and a tangle of laws that hinder entrepreneurship.

The State has extremely important functions and must act in a specific way. Engaging in entrepreneurship is never a function of the state. In contrant, the function of the private sector is to generate jobs, seek profit, and offer the best products and services. Companies are created to satisfy some demand for a product or service; the incentive to carry out this commercial operation is profit. Therefore, the logic of profit must not be seen as something negative. Instead it must be seen as the factor that moves people and companies to offer products and services. Through profit, companies are incentivized to offer goods either of a higher quality, or that did not exist previously. The vast majority of the products and services that are important for our daily lives exist because some individual or group decided to supply a need. They bore the risk of this operation, innovating and aiming at a future profit.

For private companies to exist, they need to bill amounts that cover their costs then obtain profits that make it worthwhile for the owners. Since public companies do not have this “concern,”  they do not have the same responsibility because, in case of losses, the cost will be covered by taxpayers’ money. The negative repurcussions of the loss are not  restricted to the  responsible party. Deficient public companies, which are the majority, generate a loss of capital to the public coffers regardless of whether the population consumes what it offers.  Such a loss needs to be understood as a loss for all as a nation. The loss due to public ownership of companies is especially pronounced in Brazil. During the management of Mr. Salim Mattar as secretary of privatization, the presence of the Brazilian State in 698 companies was identified. During the same management, participation in 84 companies, representing R$ 150 billion to the public coffers, was either privatized or closed. More important than the money raised was the end of the flow of public money for this function.

Therefore, when the path is opened for economic freedom, we have the fertile ground for the emergence of new competitive private companies. These new companies result in new areas of activity, new jobs, and new income. In the absense of Government run business, creative destruction can occur in the economy. Creative destruction refers to the constant innovation mechanism by which new production processes replace outdated ones. This promotes a revolution in people’s lives as well as driving economic development. Reinforcing the point about technologies, products, and services that we enjoy today are the result of a satisfied demand, this process promotes lower costs and increases people’s accessibility to important things. When individuals are free to innovate and find a favorable economic environment to apply their projects, technologies such as messaging apps emerge that allow communication between people. It may seem strange to some, but services such as SMS (short message service) had a cost that limited the connection between people with lower income and today, in a way, this cost is non-existent, giving access and social economic inclusion so that individuals can connect to each other. Some critics of this innovative process, perhaps, do not wish to understand that today’s pains are tomorrow’s gains.

When the State manages resources efficiently, they can be allocated, for example, to education programs. Programs can be implemented through partnerships with the private sector or direct Government programs. More efficient alternatives to the current education system are not lacking; new paths must be tried. Education plays a fundamental role in human development. The economist Gary S. Becker, in his work on human capital, supports this thesis of investment in education. He argues that investment in the education of individuals will develop new skills and improve existing ones. This will improve the quality of the workforce, fill jobs that require higher qualifications, increase productivity, and generate personal wealth. The end result of having more skilled people will reflect across the entire economy and will ultimately reduce poverty. Finally, greater access to education will promote social mobility and make it possible to generate wealth that will be perpetuated for next generations.

Wealth creation is the most efficient way to combat poverty because of the positive cycle that emerges  from economic freedom. For instance, in the founding of a small business, the benefits flow to the local community by offering  more products and services and to the owner, who will be able to enjoy new items that improve his quality of life. In search of profit, this small business can generate jobs and local income. Small businesses, new businesses and established companies, will increasingly need skilled professionals. That is why we must prioritize the development of human capital. Finally, those who govern must leave the field of ideas, have the courage and focus to put into practice measures that generate effective results. In this perspective, the role of the government needs to be limited to its specific functions, guaranteeing the freedom of the people and consequently of the economy.

Matheus Cosso Resende

Matheus Cosso Resende studies economics at Universidade Presbiteriana Mackenzie - Sao Paulo, Brazil. He is a student researcher at Mackenzie Center for Economic Freedom. Matheus is an enthusiast on economics and believes in the power of education to break down barriers. His great objective is to pass on all his acquired knowledge to contribute to the formation of a free, inclusive and prosperous society.