Social democracy (or welfare state) may feel like the nice middle point between laissez faire capitalism and communism that many people feel comfortable with. Among the many arguments that proponents of social democracy espouse in favor of such a system there’s their concern for the poor, they ask, in a minimal state society who would help the poor?
The hidden premise in the argument is that the state really helps the poor and that it is part of the capitalist system to bring about poor people. They see a middle-sized state with moderate intervention in the market as the solution to such problem, they reject communism/socialism for well-known historical facts (authoritarianism, impoverishment, etc.).
Although an easy response to the question maybe to say that charity would help to combat said poverty, there is a more definitive yet difficult answer. One must counter the premise that the state helps to reduce poverty in any way.
The first part of the answer is look at the nature of the state, but why? To see which type organization, we are dealing with. Why does the state exist and how is it that society is under it? The state is an organization you are part of or are under from the moment you are conceived, you don’t choose to be part of it, you just happen to be born somewhere within its borders and therefore under its rules.
The state is an organization that you have are part of without choosing to do so, no one is ever presented with a contract to accept the rules of the state. In other words the state regulates you without your consent. The question remains why is there a state in the part of the world you are born?
This is a historical question, the answer lays in there, if you look at every state in the world you will find that the territories under them where conquered by them at some point in time (For more on the subject see Oppenheimer The State 1908), no one in those territories was ever asked if they wanted to be part of this state or another (Even in the event of a referendum the ones that reject it are forced to stay in the territory they are).
Now, let’s assume that we are the government and there’s poverty in our lands, what can we do to at least try to help? Which tools does a social democratic government have to combat poverty?
Money is key, the government in a social democracy has a monopoly on the money supply so what happens if they try to use this tool to combat poverty. It can do three things either contract, fix or expand the money supply, these three things will affect the entire economy, and in this circumstance badly, since changes in the money supply that are not dictated by supply and demand distort relative prices and therefore the communication system that prices are. In other words, it will cause inflation or deflation (the bad one, that means the one not generated by an increase of supply of all goods in the market).
Welfare may be the next possible option, which means giving money to poor people, but this has its own problems. First, that money you are giving is being taken from somebody else by taxes so you would be making someone richer at the expense of making somebody else poorer. Plus, by giving money away, the people receiving the money will not have an incentive to work since they are getting money anyway by doing nothing, so production will decrease affecting everybody in the economy.
Even if this redistribution is made from up to down, that means taking from the rich to give to the poor, it will still create problems since the rich are basically people that saved. Thus, if you take money from them general investment will decrease therefore affecting the expansion and creation of business, businesses that otherwise would have created jobs and bid up wages. Note that as F.A Hayek said, the means by which the state redistributes the wealth to make a society more egalitarian, are the same methods by which a tyrant would benefit a racial elite (F.A Hayek - The Road to Serfdom 1944), which means taking from someone by force to give to somebody else.
What about lowering the price of products to make them cheaper so more people can afford them? This would again create problems. Let me illustrate it this way: if person A buys X amount of a product and then the price of that product is lowered then person A will buy more of that product, that means there will be less amount of X product in the shelfs than before. In other words whoever gets first to the product will get it, richer people will be able to buy more of it before more modest people get there. The other problem is that investment in the price-controlled product will also decrease since it is now cheap and not as profitable as before thus less people will want to produce it.
That illustrates how any price control will fail to help to combat poverty even minimum wage laws that the only thing they do is to make illegal hiring someone below certain price. Then the employer that values certain worker with a price that is below the minimum will simply not hire him.
Now, let’s come to one of the main features of a social democracy, to give services for free so people that cannot afford them on the market, can get them by the state. Of course, nothing is ever “free,” always somebody is paying for it, in this situation, everyone by means of taxes is paying for these services although many of them are not even using those services.
Even worse, low-income people that are supposedly being helped by these, are actually not, since they are being taxed before they use the state services therefore being impoverished and getting nothing in return. Instead, they are financing the people that have the time to go and actually get those services. This is true for state-run services like the public school system and healthcare.
Furthermore, the money that is being taken to finance these services would have been used (if people want) to create private schools or hospital that would be more efficient than state-controlled ones. The idea of a social democracy comes from the proposition that there is a third way between capitalism and socialism. Ludwig Von Mises already took on this position and showed that a third way always leads to socialism, since one intervention in the market distorts it, prompting the government to intervene again.
What then can a social democratic government do to combat poverty? At this point it is safe to say that government through its interventions is the source of poverty and nothing it can do will help, it’s no surprise since as I have mentioned that the state does not get its members voluntarily. Basically, what the government can do is to stop being a social democracy and embrace the free market, just let the people be free to create wealth.
