Tuesday, April 14, 2020

Extract: On Poverty

Hayek also points out that there is also no substantial prevention of the competitive knowledge discovery process if governments create schemes for subsistence welfare. Even 17th and 18th century Britain – the first country to undergo the huge changes in the relative value of knowledge that accompanies industrial growth – had what was known as the Poor Law, which provided for subsistence initially for the landless laborers no longer needed due to rises in agricultural productivity. Indeed, even if systemic poverty is eliminated, fallibility ensures that from time to time, those who are successful may suffer sudden misfortune and lose all their wealth, and perhaps some abilities. 

In such cases, the government could provide for a minimum subsistence if the electorate so wished, without causing any destruction of the underlying knowledge discovery and wealth creation process. Hayek cautions that though he government may give financial assistance through some kind of negative income tax that established a minimum income level, but they should not seek to create monopolistic bureaucracies to deliver it. They should instead allow competitive private players to deliver the basic services to the recipients of basic welfare and let the welfare recipients choose the providers they want. This could be done, for instance, by issuing food stamps, clothing stamps, shelter stamps, and healthcare stamps that could be used to purchase food, clothing, shelter, and heath insurance from competitive private players. A monopolistic bureaucracy that provides the services rather than the targeted subsidy is sure to distort the knowledge discovery process by crowding out the competitive process. Hayek also agreed that in wealthy countries the level of welfare might also be deemed to be higher than a level of basic physical subsistence. 
To take the concept of basic welfare further, it is also conceivable that basic financial assistance to the indigent can be structured as an at-risk loan. Those that work themselves back to a degree of self-sustenance can repay their loans as a percentage of their earnings until it is fully paid back, but those who do not manage to do so would not pay it back as long as their income remained below what was defined as subsistence in that nation. Once we study the nature of banking and bank credit, it will become clear how any country, including poor or developing countries, might use this technique, which we will discuss again in the chapter on Development Economics.

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