Poverty in Contemporary Economic Thought

Mats Lundahl, Daniel Rauhut, Neelambar Hatti, Mats Lundahl, Daniel Rauhut, Neelambar Hatti

• Publisher: Routledge
• Year: 2021
• eBook ISBN: 9781000368321
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Poverty in Contemporary Economic Thought aims to describe and critically examine how economic thought deals with poverty, including its causes, consequences, reduction and abolition.

This edited volume traces the ideas of key writers and schools of modern economic thought across a significant period, ranging from Friedrich Hayek and Keynes to latter-day economists like Amartya Sen and Angus Deaton. The chapters relate poverty to income distribution, asserting the point that poverty is not always conceived of in absolute terms but that relative and social deprivation matters also. Furthermore, the contributors deal with both individual poverty and the poverty of nations in the context of the international economy. In providing such a thorough exploration, this book shows that the approach to poverty differs from economist to economist depending on their particular interests and the main issues related to poverty in each epoch, as well as the influence of the intellectual climate that prevailed at the time when the contribution was made.

This key text is valuable reading for advanced students and researchers of the history of economic thought, economic development and the economics of poverty.

1 Hayek, welfarism, and the deserving poor

Ingemar Bengtsson and Daniel Rauhut

In 1931, Friedrich von Hayek’s Prices and Production (Hayek 1967) was published, a brilliant book, which was however completely swamped by the sweeping success of Keynes’ General Theory in 1936. Hayek’s argument is that (Backhouse 1991, p. 189)

unemployment occurs because the employment of labour requires capital goods, and the capital goods released when the longer, capital intensive processes are terminated are unsuitable to be used in the shorter processes that need to be started up. Demand for labour is thus, in the short run very inelastic, and unemployment is the inevitable result when shortening of the period of production.

According to Hayek, monetary expansion will not prevent economic crises, and investments will only postpone them. Increased consumption ‘would raise the price of consumption goods relative producer goods, making still shorter processes profitable, thus exacerbating the situation’ (Backhouse 1991, pp. 189–190). By increasing the level of voluntary savings, the crises can be overcome; the longer production processes would then become more profitable again, which would generate a demand for labor (Hayek 1967).

In a context where unemployment meant poverty, Keynes’ argument in favor of stimulating consumption and investments by increased public spending to keep up the aggregated demand gained more interest in politics and in the electorate. The expanding state was considered a savior, not a threat. The claim that the state is a neutral authority, Donald McCloskey (1985) argues, is not only mere rhetoric—it is the worst kind of rhetoric: it touches upon populism, but under the disguise of authority. The debate between Hayek, Keynes, and their supporters lasted for a few years. It was intense, sometimes fierce (Stein 1985). Partly in response to this debate, Hayek developed his political critique of the Keynesian theory and increasing government intervention in his The Road to Serfdom published in 1944. The main message in the book is that economic central control cannot be reconciled with a free and democratic society. Theoretically, enlightened despots can control a centralized economy. From a liberal point of view, however, this is unsatisfactory: the power to do good is at the same time the power to do evil. Hence, an expanding state will not lead to freedom, but to serfdom (Hayek 1993). A serf is not only poor but has also lost his or her freedom.

This chapter aims at discussing Hayek’s view of the causes and cures of poverty. A key aspect for understanding why Hayek mostly addresses poverty indirectly, through his criticism against socialism and welfarism, is that he considers it intimately interwoven with other issues; if you have discussed at length how prosperity is achieved, there is not much to add about how poverty can be abolished.

The chapter starts with a discussion of Hayek’s critique of socialism and welfarism, as contrasted to Hayek’s own concept of the Great Society. Then, we turn to the question, crucial for Hayek, of equality before the law versus material equality. We continue with an account on Hayek’s view of poverty: whether it should be discussed in its absolute or relative sense and whether society should provide for the poor. In the last section, before summing up the chapter, we arrive at the core of the issue: in the view of Hayek, what is, in essence, the cause of poverty, and how should it be cured.

Socialism, welfarism, and the Great Society

When Hayek discusses poverty, it is almost invariably in the context of his criticism of socialism or welfarism. His criticism of welfarism derives from his criticism against socialism, as he considers socialism as the logical end- station of welfarism (Hayek 1960, p. 295f):

Insofar as this means that the coercive powers of government are to be used to insure that particular people get particular things, it requires a kind of discrimination between, and unequal treatment of, different people which is irreconcilable with a free society. This is the kind of welfare state that aims at ‘social justice’ and becomes ‘primarily a redistributor of income’. It is bound to lead back to socialism and its coercive and essentially arbitrary methods.

The common denominator for socialism and welfarism is the idea that the state should use its coercive power to redistribute income toward a particular end. Hayek’s opposition against redistributive policies is based upon two arguments: one addresses the character of rationalistic constructivism and the other directs the ethics behind such redistributive policies. Socialists and welfarists rely heavily on the poverty issue in their argumentation for a planned economy—or more precisely, coercive distribution of wealth toward particular known ends. It is, however, logical for Hayek to address the poverty issue when approaching the socialist challenge. What he has to say regarding poverty is logically independent of socialism; it follows directly from his general view of the facts of life (Bengtsson 2005). One of Hayek’s two main disagreements with socialists concerns precisely the question what these facts are (Hayek 1988, p. 6):

That socialists are wrong about the facts is crucial to my argument […] I am prepared to admit that if socialist analyses of the operations of the existing economic order, and of possible alternatives, were factually correct, we might be obliged to ensure that the distribution of incomes conform to certain moral principles, and that this distribution might be possible only by giving a central authority the power to direct the use of available resources, and might presuppose the abolition of individual ownership of means of production.

The rules, traditions, and morals that govern the Great Society have proven their effectiveness through the history of civilization, and they embody much more knowledge than any one mind can grasp (Bengtsson 2005). Hayek recognizes that crucial parts of the knowledge, which is embedded in the traditions, morals, and other rules that have evolved spontaneously to govern the Great Society, may be destroyed in the project of rationalistic constructivism that socialists advocate. When we design our society to fulfill particular known ends, we also restrict the amount of knowledge that can be utilized and a vast number of unknown opportunities will be lost since a central planner cannot tap into the decentralized knowledge dispersed in society (Leeson 2008). Actually, this part of Hayek’s criticism of socialism is a part of a more general criticism of blind faith in human reason; the idea that we are able to construct a society out of reason that is better than the society the spontaneous evolution offers. Nevertheless, one should not confuse Hayek’s humble attitude toward the tacit wisdom of traditions with anything resembling Social Darwinism as David Miller (1989, p. 313) does: ‘What is characteristic for Social Darwinism is its identification of ethical value with evolutionary success, and by this criterion Hayek stands right in the mainstream’. This is clearly wrong, as Hayek explicitly states the opposite: ‘I do not claim that the results of group selection of traditions are necessarily “good”–any more than I claim that other things that have long survived in the course of evolution, such as cockroaches, have a moral value’ (Hayek 1988, p. 27). However, Hayek holds that those traditions, rules, and morals have made our present way of living achievable; if we appreciate the opportunities that our present society offers us, we should not tamper with its foundations. He states that (Hayek 1988, p. 27)

I do claim that, whether we like it or not, without the particular traditions I have mentioned, the extended order of civilization could not continue to exist […]; and that if we discard these traditions, out of ill-considered notions […] of what it is to be reasonable, we shall doom a large part of mankind to poverty and death.

Hayek argues (a) that it is impossible to design or construct a better order than a spontaneous order for a system with such high degree of complexity as the society and (b) that, as an empirical matter, capitalism is the only such order we know. Hayek admits the logical possibility that other spontaneous orders than capitalism may evolve but appears to doubt that it will ever happen (Bengtsson 2005). He does not claim that the fact that we can keep more people than ever before alive has a moral value, but he claims that we should be prepared to provide for all if we destroy the, spontaneously evolved, institutions of the Great Society.

Hayek’s second disagreement with socialism is more philosophical; he views coercive redistribution by the state as incompatible with his conception of justice and a good society. In brief, redistribution of income for the sake of greater material equality will necessarily imply unequal treatment of men. Hence, this means that some individuals will be used to fulfill the aims of other individuals. They will not be free. For Hayek, liberty is indispensable for real justice, and such policies should thus be refuted on ethical grounds. However, most of the time, he makes the case for liberty a matter of expediency as he views liberty as essential for the Great Society to spontaneously evolve and persist. He is well aware of the possible confusion this might cause, about his ethical position in the issue of liberty. Hayek argues that his case for liberty, and equality before the law, rests only on the matter-of-expediency fact that liberty promotes the best possible usage of knowledge. However, it is a moral position as well for him (Hayek 1960).

The two-level argumentation used by Hayek, that liberty is both a value in itself and a necessary prerequisite for other values, is noted. Barry (1979, p. 67) argues that

the first point to consider is whether liberty is a value in itself or whether it’s worth depends upon other things. Hayek holds both views. But although he does say that freedom is an important moral value irrespective of its consequences his main emphasis is on it being essential for his theory of progress and his theory of the acquisition of knowledge.

Bengtsson (2005) argues that it is because Hayek directs his argument against rationalist arguments that he emphasizes how liberty is the only path to a good society, a society where as much as possible is obtained from the available knowledge, and which is also a society of progress. Only a free society can make use of all knowledge. However, although he is mainly occupied with arguing how liberty promotes other good things, Hayek thinks that liberty is worth fighting for in its own right. In effect, redistribution of income will lead to an unequal treatment of men, which, according to Hayek, is unethical. Consequently, what socialism and welfarism will lead to is also unethical.

Equality before the law or material equality?

The principle of equal treatment of men is not negotiable to Hayek, no deviation from it is acceptable; it cannot be traded for some other good in a calculus of pleasure and pain. Although a principle in its own right, equality before the law is also a prerequisite for true liberty (Hayek 1960, p. 19f):

It is often objected that our concept of liberty is merely negative. This is true in the sense that peace is also a negative concept or that security or quiet or absence of any particular impediment or evil is negative. It is to this class of concepts that liberty belongs: it describes the absence of a particular obstacle – coercion by other men. It becomes positive only through what we make of it. It does not assure us of any particular opportunities, but leaves it to us to decide what we shall make of the circumstances in which we find ourselves.

Hayek defines liberty in a traditional liberal style, as the absence of coercion from other men. The only legitimate use of coercion is to secure a rule of law, equal to all and which is not designed to apply to a particular individual or a particular case. The rule of law should assure to all individuals a private sphere where he is protected against any coercive interference. The particular contents of a man’s private sphere should not be fixed once and for all, since that would limit the possibilities for the individual to use his knowledge when adapting to changes in environment. Hayek recognizes that the solution men have found is abstract rules governing the conditions under which particulars become part of the protected sphere. Such an arrangement permits each individual to shape the content of his protected sphere himself. Therefore, all individuals have incentives to use all their knowledge, which is a desirable outcome for all since in the game of catallaxy, it is the characteristic that you benefit from much more knowledge than you will ever possess yourself.

There is a quite striking similarity between Hayek’s abstract rules and John Rawls’ veil of ignorance.¹ The point is what kind of rule you would prefer when ignorant of the particular circumstances that will prevail when the rule is to be applied. To Hayek, it is more than a thought experiment though, it is rather a matter of how societies have in fact spontaneously evolved; in a spontaneously evolved society, people will follow abstract rules of conduct because abstract rules are the only rules they can agree on (Hayek 1976, p. 4):

Mothers who could never agree whose desperately ill child the doctor should attend first, will readily agree before the event that it would be in the interest of all if he attend the children in some regular order which increased his efficiency. When in agreement on such a rule, we say that ‘it is better for all of us if …’ we mean not that we are certain that it will in the end benefit all of us, but that, on the basis of our present knowledge, it gives us all a better chance, though some will certainly in the end be worse off than they would have been if a different rule had been adopted.

There is a moral dimension too; when the event has already occurred, we know who will gain and who will lose from any particular rule. It would then be impossible to treat all individuals equally. Hayek is well aware of the ethics involved, and his case for liberty, and equality before law, rests not only on the matter-of-expediency fact that liberty promotes the best possible usage of knowledge. It is as well a moral position, which is seen in the introduction to The Constitution of Liberty.

Hayek considers that applying an equal rule of law to all men is the only way to achieve substantial liberty. It is thus perfectly clear why he so intensely insists on an equal treatment of all...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• Notes on contributors
• Preface
• Introduction: poverty in contemporary economic thought
• 1 Hayek, welfarism, and the deserving poor
• 2 Economist and statesman: Keynes on poverty
• 3 Poverty and circular, cumulative causation: the views of Gunnar Myrdal
• 4 Veblen, North, and the institutional economics on poverty
• 5 Sir Arthur Lewis on economic growth and global poverty alleviation
• 6 The economics of being poor: the gospel according to Theodore W. Schultz
• 7 Why poor countries remain poor: the Latin American Dependency School
• 8 Poverty and New Welfare Economics
• 9 Capability deprivation and poverty: Amartya Sen revisited
• 10 Angus Deaton on poverty
• 11 Alleviating global poverty: a note on the experimental approach
• Index