Five Ways Policymakers Get Cause and Effect Backward
There are many reasons why socialism fails everywhere and every time it is tried. One primary reason is the propensity of socialists to confuse the cause and effect relationship. Due to this confusion, the remedies put forth by socialists and Keynesians try to solve the effect instead of tackling the cause. It is analogous to treating symptoms instead of the disease.
In this article, I will highlight this tendency with a few examples and show how government does damage to society through misguided actions arising out of this confusion between cause and effect.
One: Economic Growth Is Stimulated By Increasing the Circulation of Money
In a healthy economy, more money circulates in the economy because consumers buy more products and businesses invest more to produce new products and services.
Cause = healthy economy
Effect = higher circulation of money
Keynesians, however, assume the relationship holds in reverse. That is, they think that higher rates of economic growth can be generated by promoting faster circulation of money. Thus follows the misguided Keynesian prescriptions of ultralow interest rates, quantitative easing, capital injections, bailouts, and deficit spending to combat recessions.
Two: Eliminating Cash Transactions Leads to Higher Economic Growth
Recently, the government of India imposed on its people a misguided policy called “demonetization” in an effort to promote a “cashless economy.” The logic is as follows: in developed nations, people mostly use electronic monetary transactions with relatively few cash transactions. Therefore, eliminating cash transactions and forcing people to use electronic transactions will lead to healthier economic conditions similar to those of developed nations.
In truth, in poor nations people predominantly use cash because monetary transactions are too low in value to justify investment in infrastructure to support electronic transactions. As an economy grows and people get wealthier, the average cash transaction will be high enough to justify electronic transactions. So, the relationship is the other way around. Higher economic growth leads to elimination of cash transactions.
The misguided policy of the Indian government is leading to disastrous economic consequences for poor people in India, who rely on small cash transactions in their daily lives.
Three: Deadly Diseases Lead to Poor Economic Growth and Higher Poverty Rates
In what regions of the world are people least affected by diseases like malaria, dengue and cholera? Developed nations. Even in nations with high poverty rates, people who are well off are less susceptible to these diseases, because they can afford medicines, hospital care, and prevention measures such as mosquito repellents and environments free of stagnant water, where mosquitos can breed.
Eliminating diseases does not lead to economic growth. Many deadly diseases such as smallpox and polio have been eliminated. Many charitable organizations invest in disease prevention and health improvement initiatives. The Gates Foundation invests heavily in reducing infant mortality in India. Jimmy Carter has been successful in raising billions of dollars for health education and disease prevention in Africa. Yet these initiatives and billions of dollars make little difference in improving the macroeconomic conditions in poor nations.
What Africa and India need are conditions that stimulate rapid economic growth. As people become richer they can afford better medical care and better living conditions that help them fight diseases and stay healthier.
Diseases do not cause poverty. Poverty is the reason for the higher prevalence of deadly diseases.
Four: Proliferation of Small Firearms is Impeding Economic Development in Africa
Peter Thum, an American entrepreneur and “humanitarian,” was so appalled by the proliferation of guns and other small firearms in Africa that he started a company called Founderie 47 to tackle the problem. His company buys small firearms from Africans, destroys them, and uses the recycled parts to make high-end designer watches and jewelry that sell at prices ranging from $25,000 to $200,000. The funds thus obtained help in the procurement and destruction of thousands more weapons.
Behind Thum’s venture is the assumption that the proliferation of firearms is causing the youth of Africa to participate in destructive civil wars instead of engaging in economic activity that will improve the well-being of Africans.
Brilliant idea? Not so fast! Peter Thum’s got it backwards. The reason the youth of Africa are picking up firearms is because they don’t have jobs. In other words, lack of economic development is the reason for the proliferation of firearms, not the other way around.
Believe it or not, given a choice between a decent job and joining a group of militants, almost all people will choose jobs.
Five: Illiteracy leads to Poverty
What is the most important thing that India needs to eliminate poverty? “Education,” replied a friend of mine. By “education” he meant formal school and college education.
Most people in India believe that lack of education is why poor people are unable to escape poverty. So, the Indian government, which is always dominated by socialists regardless of which party is in the majority, allocates billions of rupees towards providing schooling and college education at a highly subsidized cost. As people get better education, they can get jobs and thus escape poverty. Right?
Wrong! Take Cuba and Nicaragua, for example. The communist governments of these countries launched massive campaigns to eliminate illiteracy. They were successful in almost eliminating illiteracy decades ago. Yet, Cuba and Nicaragua today are among the poorest nations in the world, with per capita GDP rankings of 128 and 165.
This is another example of socialists confusing the cause and effect relationship. Illiteracy in Cuba and Nicaragua was high because of poverty. As people's economic conditions improve, they prefer to obtain better education for their children. This is what happened in the four Asian tigers—Korea, Taiwan, Hong Kong and Singapore—over the latter half of the twentieth century.
Treat the Disease, Not the Symptoms
Illiteracy, the prevalence of deadly diseases, violent civil wars, and uncontrolled population growth are all effects of poverty, which stems from low economic growth. They are not the causes of low economic growth. All of them can be eliminated by creating conditions for rapid economic growth.
The easiest and fastest way to achieve high economic growth rates is through free enterprise systems and free markets. Let’s create free market conditions, such as less centralized government control (democratic and dictatorial), and more free trade. Good things will follow.