What gives the government the right to forcibly redistribute wealth from the rich to fulfill the needs of the poor?
The above seems to be the battle cry of many free market idealists, which inspired me to write this article. Surprisingly, many people who offer this contention aren't rich, and are unwitting beneficiaries of government control.
My initial thought was a bit cheeky. The middle class is currently paying about 50% of their income in taxes, while the rich pay about 15%. The rich buy politicians to keep it this way. What gives a rich person the right to steal from the middle class – not for their needs – but for sport?
Although there is a lot of truth to that, it's still important to address the main point: the aversion to the government using force to redistribute wealth. This sounds good in concept, and if you keep it in abstract terms it's hard to disagree with it. However, the superficial appeal of a concept is far less important than its real world result. With that in mind, let's have a look at a real free market in action.
After I wrote my first free market essay, I found the perfect example of a free market in this Economist article. A free market was established in Hong Kong, which economist Milton Friedman described as "the world's greatest experiment in laissez-faire capitalism." If a free market enthusiast like Friedman endorses it as such, it seems fair to draw conclusions about the free market based on this "experiment."
Crazy Like a Fox
The Economist article has an unmistakably negative tone about the increase of government regulation, calling it the "erosion" of the free market, and including quotes like, "[the government has the instinct to] to spend other people's money and meddle in other people's affairs" (Milton Friedman) and "better…to rely on the…hidden hand than trust the clumsy bureaucratic fingers" (Sir John Cowperthwaite). No economists with alternate views about regulating capitalism were quoted.
The first paragraph asks if Hong Kong will become less prosperous as it becomes more regulated, but it doesn't even acknowledge the possibility that it might become more prosperous. Similarly, the last paragraph says, "The costs of rising intervention will take a while to appear—and may always be hard to measure, especially with mainland China growing so fast." It assumes – before evidence can be observed – that there will be costs, and makes no mention of potential benefits.
The article says, "Secondary consequences are inevitable," and proceeds to quote a member of the legislature speculating about future job losses as a result of minimum wage. It frames that one politician's predictions as fact, when it should have cast doubt in light of the evidence to the contrary.
I pointed out in my previous essay that unemployment in America hasn't improved as the real value of minimum wage declined over several decades, even though the tax laws and income levels have also been favoring the wealthy to an increasing degree. In fact, unemployment did just the opposite and increased. This disproves the correlation that would be predicted by trickle down economics (at least for values of minimum wage within an inflation-adjusted $10/h), and it provides strong evidence that undercompensating the common people for their labor is bad for employment. I explained the likely reason for that in my essay. (Short answer: trickle-up economics.)
I was disappointed by the overt bias in this article. It's hard to write something without your own perspective bleeding through to the surface a little, but a conservative slant this blatant is the stuff of Fox News, not a respected publication like The Economist aims to be.
The Result: Life in a Free Market
The article boasts that Hong Kong went from being one of the poorest countries to one of the richest, based on GDP per capita. Since this compares the free market to the previous regime of oppressive Chinese communism, improvement is unsurprising, and it doesn't tell us how the free market would compare to regulated capitalism, socialism, or a mixed economy. (Looking at the list of countries by GDP per capita, there's no clear correlation between this statistic and government type. The figure might have more to do with the country's natural resources than its distribution of wealth.)
It's also important to note that GDP per capita is a misleading measure of a country's wealth, since it's merely an average that doesn't take into account how the wealth is distributed. A few super rich outliers can inflate the average while the general population remains impoverished. So how wealthy are the poor and middle class in Hong Kong?
You need look no further than the first paragraph of the Economist article to get a sense of how poor the poorest are; the proposed minimum wage was between HK$23 ($3) and HK$33 an hour. The natural assumption is that living must be cheap in Hong Kong for these people who work for under US$3/hour to survive, but it's quite the contrary; Hong Kong ranks #9 in the list of the most expensive cities in the world. New York only comes in at #32. You're likely already picturing horrid living conditions, but the reality is far worse than most outsiders could imagine.
I found an unsettling exposé in Arabian Business Magazine, which reveals that "unscrupulous landlords are charging around $200 a month for people to live in a cage." The cages are stacked on top of one another, and even the larger ones on the bottom are too small for the tenants to stand up inside of them. Pictures are included, and they're deeply upsetting.
Of course, those are the poorest of the poor, and a complete analysis should consider the middle class as well. The most recent detailed resource I was able to find about that was this South China Morning Post article from 2010, which is the same year as the Economist article. (Keep in mind the US$3:HK$23 exchange rate as you read it.) Here's a brief overview: as the GDP per capita increased from 2005 to 2010, the top 10% income bracket saw considerable gains, while the bottom 10% income actually decreased, and the middle 80% increased marginally, but not enough to cover inflation. The economy boomed, but only richest benefitted.
The bottom 10% income averaged HK$2500 per month, which is only US$326. Just as alarming is how few people would qualify as middle class. Statistician Dr. Paul Yip Siu-fai, a senior lecturer at the University of Hong Kong, says that HK$55,000 (US$7174) per month would be about middle class, and yet only 10% of households make that much – and that still isn't enough to live comfortably in a city much pricier than New York. In Hong Kong, there essentially is no middle class; there is only an impoverished serf class serving a super-rich minority.
Freedom: Less Really Is More
With that in mind, let's revisit the original moral argument for the free market: the belief that it's wrong for the government to use force to regulate the market, which restricts the freedom of the business people.
First I want to call your attention to what Hong Kong's state of affairs means in terms of freedom. Most of the population is kept in the sort of crushing poverty that precludes educational, entrepreneurial, and other opportunities, and for those who can afford it, it's often a choice between opportunity and food. Hong Kong's population is even dwindling because so few people can afford to raise children.
At this point, the flaw in the "moral" argument is obvious. When left unhindered, the rich use their power to create an event horizon of indigence from which the laboring masses cannot escape. Restricting the freedom of the privileged few a little would increase the freedom of the majority a lot. Less really is more.
Granted, I'm sure you could come up with semantic distinctions between the government using the force of law and the rich using the power of capital, or some abstract, philosophical reason why a tycoon's right to rack up a high score trumps a worker's right to have opportunities and resources to show for his effort – but try explaining it to someone who has to work for $3/hour so they can afford to sleep in a cage, and see what kind of a reaction you get.
What This Means for America
It might be tempting for the free market faithful to dismiss this dystopian result out of hand or rationalize it away, but that would be hard to justify given Hong Kong's striking similarity to every other unrestricted economy. The free market's failure to provide an effective working and trading environment is as predictable as gravity.
The message is even clearer when we contrast Hong Kong with the western European nations which are outshining us in quality of life; they consistently regulate more heavily than the US, and most of them go so far as to include active socialist parties. Whose example should we follow?
Even Adam Smith, the originator of capitalist philosophy, understood the value of government control. In The Wealth of Nations, he wrote about Britain's exploitive East India Company and concluded that capitalism had to have limits so that it would benefit the many instead of the few. Sadly, this part of his wisdom has gone largely ignored. Free market romanticists like Ayn Rand, Peter Schiff, and Milton Friedman caricature Adam Smith as a social Darwinist and quote his passages out of context, in much the same way religious extremists cherry pick bible verses to support their agenda.
Still, viewing increased government as desirable is counterintuitive, since we mainly associate it with corrupt politicians, taxes, and the line at the DMV. (Although some political corruption is bribery not to regulate in the first place.) But regulatory government is like the police force; it makes mistakes and there is corruption, but it'd be an awful world if it weren't there.
