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Capitalism, Income Gap, and Socialistic Welfare

July 29, 2011
Makati, Philippines

Makati, Philippines

An avowed socialist asked me the following question: “Educate me, whats the stand of objectivists regarding the natural widening income gap that happens in laissez faire? I was thinking kung walang socialistic endeavors to soften the blow of this natural economic occurrence, di magkakaron ng unrest and instability. Like walang unemployment benefits, food stamps, SSS, Pagibig healthcare what not.”

As to to the first question: “whats the stand of objectivists regarding the natural widening income gap that happens in laissez faire?”, I believe this won’t happen in a “real”, genuine laissez faire society. You must be speaking of mixed economies like the United States, Canada, Great Britain, Australia, etc. These countries are not laissez faire capitalist economies. Laissez faire capitalism is a political and economic system that calls for the separation of state and economy.

This political and economic system has the following attributes:

  1. It is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.
  2. It means full, pure, uncontrolled, unregulated laissez-faire capitalism—with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.
  3. Its moral justification does not lie in the altruist claim that it represents the best way to achieve “the common good.”
  4. It is a system wherein all human relationships are voluntary, and that men are free to cooperate or not, to deal with one another or not, as their own individual judgments, convictions, and interests dictate.

Thus, free market capitalism has the following institutions: 1) limited government, 2) rule of law, 3) individual rights, and 4) economic freedom.

All these attributes and concepts are abrogated by socialism or any form of statism.

Meanwhile, the countries I mentioned above are all mixed economies, as they embrace the mixture of excessive government controls and bits of economic freedom. For instance, there is a widening income gap in the U.S. due to massive regulations that make it impossible for potential market players to invest and establish their own businesses, bad economic policies that led to unintended consequences (e.g., Community Reinvestment Act, etc.), cronyism, huge taxes, among many others.

“I was thinking kung walang socialistic endeavors to soften the blow of this natural economic occurrence, di magkakaron ng unrest and instability. Like walang unemployment benefits, food stamps, SSS, Pagibig healthcare what not.”

But it is these socialistic endeavors that cause huge income gap between the rich and the poor and make it difficult for the poor to improve their lives. It is these socialistic endeavors that make them dependent on government freebies and hand-outs. Also, it is these socialistic endeavors that create monopolies and cartels that the Left strongly decry. For instance, America’s racial quota, which was supposedly designed to help Black Americans and minority groups, led to unintended consequences. Economist Walter Williams said, “But for 50 years, the well-meaning leftist agenda has been able to do to blacks what Jim Crow and harsh discrimination could never have done: family breakdown, illegitimacy and low academic achievement.”

The Democrats helped enact the Communist Reinvestment Act in 1979 to supposedly help the poor. This law legally forces banks to lend money to poor people regardless of their incapacity to pay. This led to monstrous unintended consequences, as it helped cause the 2008 economic crisis. Medicaid and Medicare are also bankrupting America and its middle class. Many economists today warn the Obama administration that massive spending on socialist, welfare programs would bankrupt America. In fact, America is already bankrupt because of too much government spending. Obama passed his universal health care yet his administration allowed thousands of politically connected companies to get a waiver, which means these politically connected companies and government unions would not be compelled to abide by the law. Thousands of American businesses and unions asked for a waiver because they couldn’t afford to provide all the ObamaCare benefits to their employees. It would bankrupt them. One of the many companies that strongly reacted to the socialist measure is Starbucks.

Food stamp? Why not just repeal regulations, lower taxes and guarantee economic freedom so that there would be more people to invest and put up businesses? This would bring more jobs to the jobless and local communities.

SSS? I believe it must be scrapped. I believe that privatized social security system is more effective that Pag-Ibig or SSS. The country’s SSS is heavily controlled and regulated by the government. During the term of former President Gloria Arroyo, SSS was heavily politicized due to the executive branch’s appointing and regulatory powers. It is the only player in the private sector. It is a MONOPOLY created by the government. The government should allow more players in the social security market.

Take the case/experience of Chile. There are 20 social security providers in Chile- and this means more competition and better quality of service. José Piñera, president of the International Center for Pension Reform, announced the success of Chile’s privatized social security: “Today we have 20 AFPs. In 14 years no AFP has gone bankrupt. Workers have not lost a dime. Of course, we created a regulatory body that, along with the central bank, set some investment diversification rules. Funds cannot invest more than x percent in government bonds, y percent in private companies’ debentures, or z percent in common stocks. Nor can more than a specified amount be in the stock of any given company, and all companies in which funds are invested must have credit ratings above a given level.”

What we have in the Philippines is a monopoly: Pag-Ibig, GSIS, PhilHealth, and SSS. The government should allow more players in the pension and social security industry. And getting a pension or social security should be voluntary on the part of every individual. It should not be coerced by the government. Both government and private employees should have the right to choose where to invest their money. Social security and pension are a form of investment. You’re investing on your future if ever you decide to contribute a portion of your money or income. The only proper role then of the government is NOT to excessively regulate or control these market players, but to protect individuals against fraud or any kind of corporate crimes.

The Philippines is poor and there’s a widening income gap between the rich and the poor because of too much regulations, high taxes, and BIG GOVERNMENT. Those who get rich in this country are those who have established political connections. Why? Because our political system allows this to happen. The IPPs and power-producers continue to amass money from the government regardless of the volume/amount of power they produce because the law says so. This would not have been the case had they allowed foreign investors or foreign power companies to invest in the country and let them compete with each other.

So the best thing a society can do is guarantee ECONOMIC FREEDOM and remove protectionism and regulations. What do I mean by this? Economic freedom allows every individual to pursue his ambitions, goals, and aspirations.

The only way to sustain inventiveness, innovation, employment, “just” income gap, is to guarantee the following institutions of economic freedom:

  • Individual rights: because no brilliant, gifted men could ever survive or exist in a self-sacrificing society. Brain drain is the only result of welfare state. Look at Sweden. Sweden’s brain drain in Sweden has been alarming.
  • Property rights/ IP rights. Guarantee inventors’, businessmen’s, developers’ and artists’ rights to their own creations/inventions. This made America the greatest nation on earth. Why did most inventors in the past 100 years migrated to the US? Nikola Tesla, Einstein and other inventors from Europe migrated to America because it’s the only nation that time that guaranteed inventors’ right to their creations. Proof: Nikola Tesla sued Marconi over radio patent rights.
  • Rule of law. Look at some African countries? Most Africa countries are rich in natural resource, but investors are afraid to invest in those societies due to lack of rule of law.
  • Limited government.
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3 Comments leave one →
  1. GabbyD permalink
    July 30, 2011 3:38

    interesting video. on taxis:

    the problem isnt regulations VS no regulation. its BAD vs GOOD regulation (see for example NY and Washington DC cabs that the video cites).

    see also this:http://thinkprogress.org/yglesias/2011/07/26/279343/state-incapacity-and-taxi-cartels-in-south-africa/

    “But while in the United States, the cartel typically arises by the government stepping in and setting a cap on the number of taxis allowed to operate in a given city, in South Africa the situation is arguably the reverse. Thanks to a weak state and poor governance, taxi proprietors are basically able to just muscle competition out of existence.”

    • July 30, 2011 3:38

      Thanks for your thoughts, GabbyD.

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