Poverty Inc.: An Economic and Libertarian Analysis

Walter E. Block, Nathan Fryzek, “Poverty Inc.: An Economic and Libertarian Analysis”, in “Etica & Politica / Ethics and Politics, (2017) XIX/2″, Trieste, EUT Edizioni Università di Trieste, 2017, pp. 431-456

WALTER E. BLOCK
Joseph A. Butt, S.J. College of Business
Loyola University New Orleans
wblock@loyno.edu
&
NATHAN FRYZEK
Joseph A. Butt, S.J. College of Business
Loyola University New Orleans
nwfryzek@gmail.com

Poverty Inc.: An Economic and Libertarian Analysis

ABSTRACT

According to the movie Poverty, Inc. voluntary contributions to inhabitants of poor countries from church and other such groups hurt the recipients instead of helping them. These transfers of income should be stopped in the name of economic development. For one thing, they breed dependency; for another, their volatile delivery schedules hurt the local economy. The present paper takes sharp issue with these contentions.

KEYWORDS 

Charity, economic development, free enterprise, foreign “aid”

I. INTRODUCTION

Poverty Inc. (Miller, 2014) is a film which makes the case that foreign aid to poor countries is detrimental to their local economies.

The praise for this film has been so enthusiastic, indeed overwhelming, we must wonder why it has not yet won the Academy Award for a documentary, and, indeed, its writers Nobel Prizes in economics. (1)

We have an entirely different view of this film. It favors buying local (thus attacking national and international trade), and opposes private charity (which, as far as we are concerned, is part and parcel of the free enterprise system and thus is apodictically beneficial). (2) It also misconstrues economic volatility, and thus misses the positive role of the speculator.

In section II, we consider, and reject, the underlying economic premises of the film. In section III we cite some of the hagiographic praise for it, and offer a critical alternative perspective. We conclude in section IV.

II. THE UNDERLYING ECONOMIC PREMISES

A offers to B the following deal: A will give B “stuff”, from time to time at moments to be determined, solely, by A. The “stuff” will consist of all kinds of things: a car, a motorcycle, a bushel of wheat, shoes, a ton of cotton, a violin, a bushel of corn, 100 chickens, 5 cows, another car, a second bushel of corn, etc., bloody etc. These gifts, from one individual A, to another person B, will be delivered at random. Sometimes, a gift of these sorts will be made every day, every other day, every month, every other month, every year, every other year. Sometimes every third week, month, year. These offers will be made on entirely unpredictable basis, with no rhyme or reason. All the recipient can do is accept these gifts on a piecemeal basis or refuse them. That is, every time a discrete offer is made, he can accept it or not. He too can do so on a random basis. For example, he may wish to accept all offers that begin with an a (apples) none that begin with a b (bananas) all that begin with a c (carrots, cars) and may switch his acceptances randomly. We posit that none of the items offered are garbage goods. That is, we do not include sewerage, or poisons. Nor, even, do we deliver from A to B so much of any item that the marginal utility thereof is negative. (3)

Now for the $64K question, or, rather, a series of them: is A violating B’s rights in making this offer? Is A, B’s benefactor or exploiter? If B accepts A’s offer, what will happen to B’s wealth? Will it increase or decrease? Will B become unemployed as a result of A’s largesse? If we were B’s economic advisor, would we advise B to tell A to take a hike, or to be grateful to him and accept his offer with alacrity? 

When put in these terms, it is clear that these questions are the raving of a madman. The reader by this point has lost all patience with the authors of this present article. He is likely to say, where can I get a hold of an A like this? How lucky is B? I wish I were in his shoes. A violates B’s rights? What controlled substance are you imbibing, you economic illiterate? Have you ever heard of indifference curves or production possibilities curves? (4)  Of course B’s position will be improved by these charitable offers. Were this not the case, B, fool that he would be, would simply refuse these gifts. (5)

But what about the volatility? B cannot count upon the timing or type of gifts forthcoming from A. It is simple. If the unlikely case, B has an option. He can simply refuse to have anything whatsoever to do with A. B can simply spurn A and his offer. B can say to A, a pox on you and your gifts. Never darken my doorstep, ever again.

However, if B does accept A’s beneficence then we as economists are entitled to deduce that, at least in the example sense, B’s lot is improved by this decision of his. Otherwise, he could scarcely have accepted it. Nor is this conclusion of ours a mere empirical one, true, perhaps, in most but not all cases. Au contraire, this is a rather of apodictic certainty. To deny this would be equivalent to accepting a logical contradiction. Matters are of course different ex post. B might for any number of reasons regret his acceptance of these highly volatile cornucopia; perhaps he will regret this because he has become dependent upon these gifts. Maybe, his enthusiasm for learning, for education, for self-improvement will have a atrophied. But, no matter. It simply cannot be denied that ex ante he necessarily gains, that A is his benefactor, not exploiter, and this is our sole concern at this point.

Let us now shift gears. Instead of an individual A making this offer to B, it is C, a group of persons, making this offer to D, another collection of people. And, we stress the Cs are relatively wealthy, and the Ds, poor.

So, again we ask, should D accept C’s largesse? Is C a benefactor or exploiter of D? Is D’s economic welfare enhanced or worsened if he follows this this siren song of C’s and avails himself of C’s wealth? Again, also in this case, it is difficult to resist the notion that if D accepts this wealth, given, again, on a very volatile basis, he will be better off than if he does not. Yes ex post, it is merely an empirical claim that D can jump to a higher indifference curve with C’s help than without it. It is hard to reject the conclusion that D ought to be grateful to C, and not resentful.

Why do we go on and on, and on and on some more, about this point? Why are we beating a dead horse in this regard? Do we not have pity for dead horses, and for long-suffering and by now very bored readers? No. Not a bit of it. We do so because of Poverty, Inc. and the very positive reactions to it, by commentators who really should know better. (6)

But are we not committing the falling of composition with our claim that if B would be better off accepting A’s offer, then the same goes for D vis a vis C? No, we are not. However, we concede, there are certain differences between the cases, which we now explore.

First, consider the case of the chicken farmer who has just purchased 1,000 of these fowl. Whereupon C starts giving out eggs to all and sundry. How long will this orgy of gift giving continue? Who knows? (7) C is arbitrary and capricious in this regard. What will now happen to the local egg producer? Well, this great supply of free eggs will drive down the price of this commodity to zero, or near enough so as to make little or no difference. The argument against our thesis is that at least one member of the recipient group, D, the domestic egg producer, will be bankrupted, so all can no longer say that it is an apodictic truth that all the Ds will benefit.

The consumers? Surely. But the producers? Not all of them certainly not those forced to compete with the C’s, who are giving it away for free. But even here we have not given full credit to our critics. For they will deny that even the consumers will gain. Yes, they will concede, in the short run, when they gobble up all the free eggs. But when this donation ceases, and the domestic egg farmers lie in ruins, their economic welfare, too, will take a nosedive.

But we go too fast here, with this objection. If we accept it, what can we say to the counter objection that what C did to the chicken farmers in this case is precisely what Henry Ford and his ilk did to the horse and buggy industry; the computer to the typewriter and (Kodak) film industry; the air conditioner to the industry producing fans. No. We must maintain that the free enterprise system benefits all market participants, but that the whip and bridle and saddle makers and blacksmiths, etc. were no longer part of the market after Henry Ford got through with them, and that the same applies to those producing typewriters, fans and films. The authors of the present article offer now to sell to all readers a pair of shoelaces for $1 million. Are there any takers? We thought not. Are we then market participants? Not at all. In order to deserve that honorific, we must make a commercial transaction with at least one other party, and this we have failed to do with our shoelace offer.

But the same exact situation pertains to the chicken farmer in our example. He previously was part of the market, before the advent of the free egg-bearing Cs. However, this is no longer the case. (8) If we say that he was exploited by the Cs, with their free eggs, we are logically compelled to apply the same assessment in all these other cases. But we cannot do any such thing without jettisoning the entire free enterprise system, along with its necessary concomitant, competition. If we wish to support the new aforementioned technology that outcompeted the old, we cannot say nay to the Cs, who economically obliterate the chicken farmer in our case of the temporary free eggs.

But all is not lost to the chicken farmer in the recipient country. He can borrow a leaf from McGee’s (1958) analysis of the Standard Oil case of 1911. What went on there? According to the muckrakers (Tarbell, 1904), Rockefeller adopted a policy eerily similar to the Cs. Standard Oil would lower prices drastically (9) driving out local oil refiners. They would finance the resulting temporary losses with funds forthcoming from Rockefeller refining plants in the rest of the country. Then, when the local competitor was bankrupted, the Standard Oil supplier would jack up prices astronomically, and use these revenues to finance still other similar takeovers. McGee (1958) demonstrated that as a matter of historical record, this just did not happen. Also, that this scenario was theoretically invalid. All the targeted local supplier needed to do was to temporarily stop operation and then start again when Standard Oil boosted their own prices.

If our local egg farmer is the recipient nation followed through with McGee’s (1958) analysis, he would cease selling eggs while their prices hovered at the zero levels; instead he would create more chickens with them. Then, when the Cs stopped their egg “dumping” he would be in a position to make a “killing.” There would then be few eggs available, apart from his. He would be able to raise prices up to the level right before that point where they would attract commercial imports from abroad.

Would this actually occur? Not bloody likely. The chicken farmer would be roundly condemned if he did any such thing. He would be accused of price gouging. He might even be imprisoned. That is why the recipient country is so poor. Not because of the generosity of the Cs, as alleged in Poverty, Inc. Rather, due to the fact that free enterprise does not prevail in the country. If it did, they would be the Cs, not the Ds, and donate goods and services to poor nations. (10)

This is what entrepreneurship is all about, contrary to Poverty, Inc. The chicken farmer irons out the price oscillations engendered by the Cs. When the latter distribute eggs for free to all and sundry, he pulls out of this market, raising prices to a level higher than they would have been, without this act of his. Then, when the Cs abruptly cease their distribution and prices catapult, he starts in again selling eggs, lowering the prices that could otherwise prevail. (11) In sharp contrast, when government engages in such speculation, there is no such fail-safe mechanism that tends to ensure a reduction in the standard deviation of prices.

Another criticism of the Cs is that the Ds will become dependent. Even if so, still, we maintain that in the ex ante sense if not the ex post, the recipient necessarily benefits. Should a law be passed prohibiting the Cs from giving miscellaneous goods to the poor Ds on this ground? If so, and to remain logically consistent, we must ban all sorts of goods from the marketplace. Gambling, addictive drugs and alcohol are obvious choices. But people become dependent on all sorts of other goods and services and we would have to prohibit them all. For example, chocolate, skating, bicycling, the music of Mozart, tobacco, professional sports. (12) Such a course of action would hardly be acceptable with the system of laissez faire capitalism supported by the Acton Institute, (13) the creators of this economically uninformed film.

But do not poor people become dependent on welfare, unemployment insurance, social security, and other such blandishments of the social justice realms of the political economic spectrum? Would this not, also, apply to what the Cs are doing to the Ds? Yes and no. Yes, these statist programs do indeed foster dependency on their recipients. (14) No, in the sense that there is a disanalogy between statist depredations and the voluntary acts of the Cs. First of all, it is not at all the case that the charitable and governmental sectors of the economy are aligned with each other in contradistinction to the capitalist sector. No, no, no, it is rather free enterprise and charity are on the one side of the barrier and the state is on the other. Both markets and the eleemosynary segments are based voluntary interactions. Only the public sector receives money by the threat of violence (taxation).

Secondly, the government attaches stringent conditions to its distribution, the voluntary sector does not. For example, in welfare, if there was a “man in the house” the welfare “client” would lose all benefits. This did not break up the black family; rather it precluded it from forming in the first place (Murray, 1984). Another instance is unemployment insurance. Here, payments are cut off if the recipient takes a job. The religious organizations which mainly give support to the poor (the Cs) impose nothing remotely resembling that pernicious requirement. (15)

Then there is the problem of locavorism fomented by this execrable film. (16) Spokesman for it continually inveigh against international trade and urge, instead self-sufficiency. But this is highly problematic. It reckons without the concept of comparative advantage. If people grow their own food, instead of allowing the free market to determine the roles of local and imported supplies, people will be poorer. This position was first attacked by Adam Smith in 1776 and completely demolished by David Ricardo in 1817. Since that time it has been regarded by virtually the entire economics profession that the correct lenses through which to look at international trade is that of comparative advantage. 

III. HAGIOGRAPHY 

Consider the following excessive praise, which is the veritable tip of the iceberg:

“Winner of over 50 international film festival honors, the $100,000 Templeton Freedom Award, and the €5,000 Best Documentary Award from the FIFE Environmental Film Festival in Paris.” (17)

True, all true, unfortunately.
Consider the following statement (Funfschilling, 2006):

“The film was made by the Acton Institute, a Michigan-based think tank which promotes free enterprise within the framework of Christian theology.”

This is problematic from not one but two perspectives. First, this film does not “promote” free enterprise. Rather, it tears it down. The charitable sector is every bit as much a part of the free enterprise system as is any other, such as business, corporations, (18) self-employment, lending, borrowing, buying, selling, etc. In what way does “Poverty, Inc.” deprecate laissez-faire capitalism? It does so by attempting to make the case that charitable donations are part of the problem, not the solution, of poverty in the underdeveloped world. Second, charity is part and parcel of “Christian theology.” It is difficult to see how this can be denied. And, yet, the film lambastes Christian churches for giving well-meaning but harmful donations to poor people living in Africa, Latin America and other economically desolated areas.

In the view of Harger (2015):

“The feature-length documentary challenges the prevailing culture of charity and promotes entrepreneurship as a positive alternative to ending world poverty…. the Acton Institute is dedicated to promoting free market principles within the framework of Christian theology. “‘It contains good news: the solution to poverty already exists, in the entrepreneurialism of the poor themselves. It also conveys a challenge: to retire the top-down systems of aid delivery that bring as many problems as benefits,’ Lips said.

“‘Poverty, Inc.,’ which covers topics such as international orphanages, nongovernmental organizations (NGOs), the 2010 Haiti earthquake, TOMS shoes, Bono, and U.S. agricultural subsidies, has already been screened on more than 150 occasions to more than 10,000 people in 16 countries and 22 U.S. states, according to an Acton news release.

A comment on the foregoing: It is difficult to see how this film “promotes entrepreneurship.” Those churches and NGOs, too, are acting entrepreneurially. A more accurate assessment would be that “Poverty, Inc.” supports some entrepreneurs, and castigates others. “… promoting free market principles within the framework of Christian theology?” No, it attacks the free enterprise principle of charitable giving, which is at the very foundation of Christian theology. “… the entrepreneurialism of the poor?” If they were so entrepreneurial, they would not be poor in the first place. “… top-down systems of aid delivery?” The only institution that fits this rubric is the government. And, yet, this film targets, mainly, NGOs and churches, hardly emblematic of anything “top down.” TOMS shoes, is a private company, and Bono a private citizen. Neither actually exemplify anything “top down.’

Bowyer (2015) avers:

“… Poverty Inc. really is independent — ideologically speaking. It critically examines an industry the chief product of which is good will and social status (virtually crying out for ‘smug’ emission standards) and attracts more celeb endorsements than soft drinks and weight loss combined. In fact, the poverty industry is the one industry which has such high social status that celebrities actually give money to it, in order to associate their names and faces with it rather than the reverse (which is the usual arrangement). For decades celebrities have been clamoring over one another to be chosen to stand in front of a mic and warble to the world, asking if ‘they know it’s Christmas over there…’ in Africa, and to declare that they are the ones who get to declare, ‘We are the world,’ or, ‘We are the One(s) which will end poverty in our day.’ Second-rate rockers get knighted for being in on stuff like that. The poverty industry oozes good will and social status from every crevice, like oil from shattered shale, only goodness instead of evil hydrocarbons.

“But the big question is, ‘Does it actually work?’ And the almost-as-big question is, ‘Who would we need to talk to in order to get the right answer to the big question?’

“The answers are (in reverse order): ‘The poor themselves,’ and, ‘No, it does not.’

“Poverty Inc. talks to the poor themselves about what the poverty industry has done for them, and it finds that, although emergency aid is welcome and often helpful, the long-term system in which wealthy western powers exclude the global poor from trade and dump hyper-subsidized, western-produced consumer goods on them is of great harm. This system’s victims are (in order of most-to-least harmed): poor nations and US taxpayers. Its chief beneficiaries are (in order of most-to-least benefited) gigantic western agri-businesses and professional NGO executives.”

The present authors stand second to no one in our condemnation of the smug Hollywood socialist stars. (19) But, fair is fair. Here, on one rare occasion, they are not to blame. Rather, the fault lies, here, with the Acton Institute and their economically illiterate film. If private charity is really harmful to its targets, does it also violate their rights? Does this Michigan think tank advocate banning by law all private giving to the poor? That is the logical implication of their screed, and, yet, one wonders whether they would accept this conclusion. Hopefully not. Yes, “…wealthy western powers exclude the global poor from trade” and for this they are quite properly condemned. But that is not the core of this film. Rather, it is that they “dump hyper-subsidized, western-produced consumer goods on them” and that this “is of great harm.” We hereby offer this challenge to the Acton Institute: please “dump” all of the “hyper-subsidized, western-produced consumer goods on” the present authors. Let us see if this does us any great “harm.”

According to La (2015): “In some circumstances, supplying outside aid can even contribute to a country’s poverty. As a struggling business owner states in the film, ‘no local business can compete with free.’ When a country receives material aid, local businesses cannot compete with the influx of free items. By the time the aid ends, all local suppliers may be gone, priced out of existence. The movie cites Enersa as one example of this unfortunate effect. Enersa, a Haitian solar panel company, was almost bankrupted after the 2010 Haiti earthquake by donations of solar panels en masse from the developed world.”

Tough on Enersa. Too bad for them. (20) They were not good entrepreneurs. The manufactured a product that was outcompeted, just as in the case of the members of the horse and buggy industry, those producing typewriters, hula hoops, the pet rock, and others that were also forced out of business. If the car industry were to suddenly and intermittently cease production, speculators would either stockpile cars for the purpose of arbitrage and/or entrepreneurs would spring up with horse and buggy companies in the meantime.  (21) Just as in any other part of a market economy, Adam Smiths’ invisible hand would guide capital as if by an invisible hand, into the possession of those capitalists who best served consumers with it.

Debruge (2015) has so much to say about this film; we shall reply on a step by step basis:

Claim 1: “Provocative doc from Acton Institute fellow examines why those in need aren’t always thankful for giving — and what can be done to better improve their situation. As if poverty weren’t a challenging enough phenomenon unto itself, time has revealed that good intentions by outsiders can in many cases make the problem worse — a cruel irony that serves as the basis of Michael Matheson Miller’s ‘Poverty Inc.,’ an easy-to-understand docu-essay with a tough-to-accept message, especially as it implies that some aid organizations may actually be cashing in on their concern. The idea isn’t to discourage giving, but rather to illustrate how the current paradigm doesn’t work, providing clear examples and practical solutions that serve as a useful conversation-starter flexible enough to enrich discussions everywhere from college campuses to community churches — in addition to activism-oriented film festivals, of course.”

Response 1: The idea isn’t to discourage giving? This author must have watched a different film other than the one produced by the Acton Institute. If this documentary does not discourage precisely that, then no movie does.

Claim 2: “Miller’s point could hardly be more apparent than in the case of a Rwandan egg farmer who was just getting his business started when a well meaning American church decided to send free eggs to his starving countrymen: Overnight, the local entrepreneur found himself unable to sell his own goods in the market, and though locals benefited for a short time, when the church turned its philanthropic attention elsewhere, it had driven the farmer out of business and inadvertently crippled the local egg economy.”

Response 2: The church most certainly did not “drive … the farmer out of business.” He could have laid low, borrowing a leaf from the non-existent independent oil refiners “exploited” by Standard Oil (McGee, 1958). Then, when the egg cornucopia abruptly stopped, he would have been in the driver’s seat, except for the fact that if he “took advantage” of resulting high egg prices, he would have been accused of “gouging,” and dealt with harshly. That is the explanation of Rwandan poverty; lack of free enterprise (Gwartney, 1976; Smith, 1776), not charitable giving.

Claim 3: “This micro-example, relayed anecdotally by an NGO exec and illustrated via rudimentary animation (for lack of an interview with the primary source himself), echoes in many forms over the course of the film, from interviews with small-time business owners whose own Third World endeavors couldn’t compete with a sudden influx of ‘free stuff’ to someone as high-profile as expresident Bill Clinton, who delivers a mea culpa before Congress after his policy of dumping American-subsidized, tariff-free rice on Haiti wiped out local agriculture: ‘It was a mistake,’ Clinton confesses. ‘I had to live every day with the consequences of the loss of capacity to produce a rice crop in Haiti to feed those people because of what I did.”

Response 3: Clinton is indeed guilty of many, many economic crimes, (22) but this is not one of them. (23) To the contrary, suppose this administration had, instead, “dumped” these agricultural products on any advanced country. Would it have harmed the latter? Of course not. They would have simply resold them elsewhere, where profits from them could be maximized. Yes, Haiti suffered, alright, but not from being “dumped” on; instead, from too much regulation, too little respect for private property rights, etc.

Claim 4: “It feels good to give, Miller acknowledges, and the U.S. and other cultures are to be commended for their awareness of and involvement in Africa since the days when Band Aid and infomercials featuring fly-covered, distendedbellied Ethiopian kids raised the issue of starvation, while giving a misleading impression of Africa as a barren, resource-poor continent. The problem, ‘Poverty Inc.’ cautions, is that few pause to think what happens after they’ve written the check, never fathoming that the mere act of giving can actually have a detrimental effect.”

Response 4: Giving can actually have a detrimental effect? The present authors now offer to give to Debruge the following: a Cadillac car, a Stradivarius violin, a year’s supply of beer, a ton of sugar, and a gift certificate for $10,000 to be used at Wal-Mart. Actually, we make no such offer. We fear that if we did, he would take us up on this “offer” of ours, contrary to his views. In response, he would probably claim that “logical consistency is the hobgoblin of little minds.” But, hopefully, this reductio ad absurdum will take at least a little wind out of his sails.

Claim 5: “It all comes down to the old ‘give a man a fish’ vs. ‘teach a man to fish’ quandary, wherein donations provide a temporary fix, whereas training and help building connections to the world market could empower a way out. Firsttime helmer Miller hails from the Acton Institute, a free-market think tank with a theological thrust, and though his documentary displays no overt religious leanings, it’s decidedly pro-capitalist, implying that the poor’s only hope is to earn their way out of their current predicament, when it’s clear that the same system hasn’t exactly succeeded in eliminating poverty in First World countries. Still, Miller avoids the manipulative tricks of lesser filmmakers, presenting his argument with lucidity and reason. Whereas others give without thinking, ‘Poverty Inc.’ provides genuine food for thought.”

Response 5: Yes, teaching someone to fish is all well and good, but so is giving him one. This, too, helps him, at least ex ante; otherwise, he would be free to decline this offer. No one is stuffing, whole, a fish down a man’s throat and choking him. This act of benevolence is entirely a voluntary one! Giving a man a fish allows him to focus his efforts on additional production elsewhere. For example, a man who was given a fish was then able to craft a hat as he didn’t need to fish that day to survive. Then his wealth would be increased by that a hat; we assume that if he was not given a fish he would have spent the day fishing for one. Similarly, if an economy is given a few thousand eggs, yes, domestic egg production will likely fall, but those who were producing eggs who are now crowded out will allocate their labor and capital to something else, and even if their capital is not all general enough to be transferred the key point is that any and all of the additional production will be a net gain in goods produced in the economy. The general public should be forgiven for misunderstanding this concept. However the same cannot apply to the supposedly sophisticated Acton Institute, however, we have a great deal of blame to place. For a think tank whose members should be at least familiar with economic concepts, the Candlemakers Petition should have been taken into account by them. Their ignorance of this text, written over a hundred years ago in 1850, is exemplary of the ignorance of all too many people regarding economics. (24) The theory of comparative advantage put forth by David Ricardo as well as the Candlemakers Petition by Frederic Bastiat are both well over 100 years old, and even so both of the fallacious arguments destroyed by their writings are still espoused to this day. Sad.

We now turn to yet another supporter. States Perry (2016): “… there’s lots of ways we can support each other. But flooding the markets with stuff is not one of them.”

Oh yeah? The present authors wish that the market would be flooded with all sorts of “stuff.” We would be far richer than now we are. Did France and Israel suffer when the Germans paid reparations to them? To believe this is to believe anything.

This is part of an interview Perry (2016) did with interview with Mark Weber, a co-producer of the film:

“Perry: Your film highlights the unintended consequences of international aid that is intended to do good. Can you name an example that particularly stands out to you?

“Weber: The one that really struck me is a story in Haiti of a solar-panel company called Enersa. It was started by two Haitian gentlemen, Jean-Ronel Noel and Alex Georges. They’re Canadian educated. They decided to come back to Haiti to build their country. They saw a tremendous opportunity for renewable energy and harnessing sunlight. They began, kind of the cliché entrepreneurial story, in their garage working with LEDs and things. They eventually grew and grew and grew, built a manufacturing plant, and had been employing a number of people, mostly men, mostly from pretty tough areas of Haiti. It’s an incredible success story of local people driving development in their own country.

“Then the earthquake hits, and the factory held up, but it was damaged. Within a couple of weeks, they had it back up and running again. But because of the international relief effort, all of a sudden there was a flood of solar panels coming in from international NGOs to help Haiti. They went from selling 50 solar panels a month to selling five in six months. They were almost decimated by the relief effort.”

We have already, above, had occasion to refer to the plight of Enersa, but could not resist, saying one more time, this is to misconstrue the reality of entrepreneurship. The free market system is one of profit and loss. There is nothing, nothing whatsoever, diabolical about one firm, or even many, (25) going bankrupt.

V. CONCLUSION

The main criticism of these charitable donations is that they are unreliable, and breed dependency. We find it difficult to agree with this explanation. It is important to define the economic realm to be discussed. For example, an economic analysis of welfare focusing only on the recipients may find the system of governmental redistribution beneficial, while if all members of the economy are considered a very different conclusion might be reached. For the purposes of this paper only the local economies which are recipients of free foreign goods are considered, not in order to be blind to the global economy, but to more closely gain an understanding of the economic phenomena at play when we look closely at a few effects. While looking at economies which are extorted in order to send foreign aid abroad would give us a broader base of understanding, such a paper would not give its readers the same sense of depth.

Consumption Gain

The first, most immediate effect of free goods entering an economy is the gain to consumers. If goods are given directly to consumers this gain is obvious – consumers are enabled to consume the free items given to them, while they still have their initial income to be used to consume even more goods. It is difficult to see, at least at the outset, how anyone could consider this first effect detrimental. (26) Another possible way goods could be distributed to consumers is through some form of government cronyism on the receiving end of foreign aid. If such goods are given to a local government instead of to consumers directly then the bureaucrats and politicians may very well decide to charge their citizens for the goods meant to be given to them for free. But this form of distribution enhances consumer consumption by increasing supply, thus bidding down the prices of the relevant goods. This allows consumers to purchase more goods with their base income and therefore attain a higher indifference curve. (27) Worse, even, than selling the charitable gifts to the populace is the state keeping them for itself. Then, they are more than not likely to be used to defray the costs of the “Three M’s”: monuments, Mercedes and machine guns. (28)

Producer Displacement

The purported negative effect of the “dumping” of free foreign goods into a receiving economy is the displacement problem. There are multiple ways local producers might be displaced by foreign goods. One possibility is that free goods might be supplied to an economy is in a constant flow. An example of this might be a monthly delivery of free shoes to local consumers. While this would most likely put some or all local producers out of business, they would be able to predict such inflows of goods and would therefore be able to reallocate their general capital to other uses while disposing of their specific capital equipment. While the loss of the value of specific capital will be seen as a loss in this scenario, it must be remembered that even if all the capital used by local producers of shoes before the introduction of foreign aid were to have been specific, the local economy still  would not suffer a net loss of goods produced as the shoes previously produced by the locals are now being supplied by foreigners. The latter, at the very least gain leisure time, and, presumably, can move over to the production of other goods and services now more needed by consumers. (29)

The second way free goods might enter an economy is sporadically. In this system of aid goods are bequeathed to the poor at random times in various and continually changing quantities. This increases the amount of uncertainty for local entrepreneurs or business owners in comparison to the first, constant flow method of aid. In this second scenario, the prices of various goods are more volatile. This means that those who invest in businesses must bear more risk, for a sudden surplus of goods in a specific industry would, ceteris paribus, reduce profits in that industry. 

There are those who will contend, as do the writers for Poverty, Inc. that the poor people in the recipient country would have been better off if the donors had kept their shoes to themselves, and not burdened the third world country with them. To them we ask, suppose there were a hooligan who smashes the free shoes. Would this criminal really help the economy? To think this is to be victimized by the broken window fallacy (Hazlitt, 1946). Is the broken window fallacy false if the windows are coming in for free in random quantities at random times? Of course not. A window is a window is a window, and breaking them, or, destroying shoes, is scarcely a way to help develop an economy.

Why have we been so harsh? If this film were made by Michael Moore or Bernie Sanders or Elizabeth (Pocahontas) Warren we would not have been so critical. We might not have even reviewed it. But this movie comes to us courtesy of the Acton Institute contrast which has as its mission support of the free enterprise system. (30) However, voluntary charity is surely a crucial aspect of that institution. This film was given a sizeable monetary award by no less than the Templeton Foundation, which also supposedly also stands for private property rights and free enterprise. (31) It is one thing when the denizens of the left mislead the public about economic matters. We expect no more and no less from them. But when libertarian advocates of laissez faire capitalism do so, we find it necessary to protest, and to do so vociferously.

Supporters of this film want to poor to have a voice. Yes, of course, everyone should have a voice. Free speech (Mill, 1859) and all that. But this is not at all what the advocates of “giving a voice” to the downtrodden have in mind. Rather, they aver, in effect, that the poverty-stricken have something of substance to contribute to their own rescue from their economic affliction. But given that this is the case, an immediate objection arises. If the poor are so full of information about curing poverty; if they know so much about addressing their plight, why are they so deprived in the first place. And a corollary. Given that they are enmeshed in paucity, could it be, could it possibly be, that they really know little about the causes of economic development? After all, while medical patients, too, should be given “a voice” in their own care, it would be the rare commentator who would assert that they know more about attaining good health than the surgeon who is their doctor. Yes, there is a strong albeit imperfect analogy between the sick and the poor. Neither relishes their present condition. Both wish to change their situation for the better. Neither knows quite how to do so on their own, otherwise, strong assumption coming up, they would have already altered their situation for the better.

One last point. This film nowhere mentions the sainted name of Peter Bauer. (32) Doing a presentation on foreign aid while entirely ignoring him is like covering Objectivism without mentioning Ayn Rand, or libertarianism while excluding Murray Rothbard and Ron Paul, or Austrian economics without including, Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises, Friedrich A. Hayek and Murray Rothbard. It is not merely an oversight. It is an insult.

Another last point. Bill Gates goes so far as to characterize (Moyo, 2009) as “evil” and “promoting evil.” (33) We entirely support Mr. Gates in this assessment, not only of that book, but, also, and for the self-same reasons, the movie “Poverty, Inc.” (34) Suppose there were a “bad” Bill Gates. Well, there is, a purposefully evil George Soros. What would he do? He would give money to poor people, with the express purpose of making them economically listless, dependent upon them; they would refuse to take jobs, given the largesse he showers down upon them. (35) Then, when the recipients have had their human capital atrophied, this donor ends his money transfers, leaving the helpless. But, this evil monster attained his fortune in the first place through purely voluntary means, and does not now involve government in any way in these charitable donations of his. (36) How would we assess such occurrences? Would this then amount to a market failure? No, not a bit of it. All we could say is that these transfers of funds would be beneficial to both parties in the ex ante sense, but not ex post, at least to the receiver. But this no more constitutes market failure than when a businessman errs, and loses money, in the commercial for profit sector of the economy. This is merely an aspect of the free enterprise system. Errors occur. Had the recipients known of the effects upon them, they might well not have agreed to accept the funds. Voluntary interaction is necessarily beneficial to both parties only ex ante. This obtains, usually, ex post also, but not always. This would be a counter example.

References: 

Anderson, William L. 2001. “Talking Down the Economy.” March 16; https://mises.org/library/talking-down-economy

Barnett, William II. 2003. “The Modern Theory of Consumer Behavior: Ordinal or Cardinal?” The Quarterly Journal of Austrian Economics. 6 (1): 41 − 65; http://www.qjae.org/journals/qjae/pdf/qjae6_1_3.pdf

Bastiat, Frederic. Petition of the Candlemakers. N.p.: Middlebury, (2010 [1845]). PDF: http://sites.middlebury.edu/econ0450f10/files/2010/08/bastiat.pdf

Bauer, Peter T. 1981. Equality, the Third World, and Economic Delusion, Cambridge: Harvard University Press 3 M’s, mmm

Bauer, Peter T. 1982. “Ecclesiastical Economics is Envy Exalted,” This World, No. 1, Winter/Spring, pp. 56-69.

Bauer, Peter T. 1984. Reality and Rhetoric: Studies in the Economics of Development, Cambridge Mass., Harvard University Press.

Bauer, Peter T. 1991. The Development Frontier: Essays in Applied Economics. Harvester Wheatsheaf

Bauer, Peter T. and Basil S. Yamey. 1957. The Economics of Under-developed Countries, The University of Chicago Press, Chicago, Il.

Block, Walter. 1980. “On Robert Nozick’s ‘On Austrian Methodology’.” Inquiry, Vol. 23, No. 4, Fall, pp. 397-444; http://www.walterblock.com/publications/on_robert_nozick.pdf; http://www.walterblock.com/wp-content/uploads/publications/on_robert_nozick.pdf; Spanish translation, Libertas, Vol. 14, No. 26, May 1997, pp. 71-131

Block, Walter E. 1991. “Dumping on the Economy: Why Artificial Prices Encourage Waste,” Journal of Pricing Management, Vol. 14, No. 2, Spring, pp. 21-26.

Block, Walter. 1999. “Austrian Theorizing, Recalling the Foundations: Reply to Caplan,” Quarterly Journal of Austrian Economics, Vol. 2, No. 4, winter, pp. 21-39; http://www.mises.org/journals/qjae/pdf/qjae2_4_2.pdf; errata: http://www.mises.org/journals/qjae/pdf/qjae2_4_9.pdf.

Block, Walter. 2003. “Realism: Austrian vs. Neoclassical Economics, Reply to Caplan,” Quarterly Journal of Austrian Economics, Vol. 6, No. 3, Fall, pp. 63-76; http://www.mises.org/journals/qjae/pdf/qjae6_3_4.pdf

Block, Walter. 2007. “Reply to Caplan on Austrian Economic Methodology” Corporate Ownership & Control, Vol. 4, No. 2, November, pp. 312-317. http://www.virtusinterpress.org/additional_files/journ_coc/issues/COC_(Volume_4_Iss ue_3_Spring_2007_Continued2).pdf

Block, Walter. 2009A. “Rejoinder to Hoppe on indifference” Quarterly Journal of Austrian Economics; Vol. 12, No. 1: 52–59; http://mises.org/journals/qjae/pdf/qjae12_1_4.pdf

Block, Walter E. 2009B. “Rejoinder to Machaj on Indifference,” New Perspectives on Political Economy, Volume 5, Number 1, pp. 65 – 71; http://pcpe.libinst.cz/nppe/5_1/nppe5_1_5.pdf

Block, Walter E. with William Barnett II. 2010. “Rejoinder to Hoppe on indifference, once again.” Reason Papers, Vol. 32, pp. 141-154; http://reasonpapers.com/pdf/32/rp_32_9.pdf

Block, Walter E. and J.H. Huebert. 2008-2009. “Defending Corporations (reply to van Eeghen.)” Cumberland Law Review, Vol. 39(2), pp. 363-385; http://www.walterblock.com/wp-content/uploads/publications/block-huebert_defendingcorporations-2009.pdf;
http://cumberland.samford.edu/lawreview/article/39/2;
http://blog.mises.org/archives/010631.asp;
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Bowyer, Jerry. 2015. “Poverty Inc.: Finally A Film Exposes A Deeply Flawed Industry.” November 16, Forbes; https://www.forbes.com/sites/jerrybowyer/2015/11/16/poverty-inc-finally-a-film-exposesa-truly-corrupt-industry/#50f12f8e5bc8

Callahan, Gene. 2003. “Choice and Preference,” February 10; https://mises.org/library/choice-and-preference

Carden, Art. 2008A. “Should We Buy Only Locally Grown Produce?” July 15; https://mises.org/library/should-we-buy-only-locally-grown-produce 

Carden, Art. 2008B. “The Locavore’s Dilemma: Local Food, Continued.” August 18; https://mises.org/library/locavores-dilemma-local-food-continued 

Casselman, Ben. 2016. “No, Bill Clinton Does Not ‘Know How’ To Fix The Economy.” May 20; https://fivethirtyeight.com/features/no-bill-clinton-does-not-know-how-to-fix-the-economy/ 

Collingwood, Robin G. [2014]1945. The Idea of Nature. Martino Fine Books 

Debruge, Peter. 2015. “Film Review: ‘Poverty Inc.’” November 28; http://variety.com/2015/film/reviews/poverty-inc-film-review-1201649597/ 

Desrochers, Pierre and Hiroko Shimizu. 2012. The Locavore’s Dilemma: In Praise of the 10,000-mile Diet. PublicAffairs; https://www.amazon.com/Locavores-DilemmaPraise-000-mile-Diet/dp/1586489402 

Funfschilling, Danielle. 2016. “Poverty, Inc – Fighting poverty is big business but who profits the most?” October; http://olivbusua.blogspot.com/2016/10/poverty-inc-fightingpoverty-is-big.html 

Gates, Bill. 2017. “Interview on foreign aid.” http://www.economicpolicyjournal.com/2017/04/bill-gates-vicious-attack-onanti.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+eco nomicpolicyjournal%2FKpwH+%28EconomicPolicyJournal.com%29 

Gwartney, James, Robert W. Lawson and Walter E. Block. 1996. Economic Freedom of the World, 1975-1995; Vancouver, B.C. Canada: the Fraser Institute (308 pages); http://www.amazon.ca/Economic-freedom-world-1975-1995- Gwartney/dp/0889751579/ref=sr_1_1?s=books&ie=UTF8&qid=1336605884&sr=1-1; http://www.fraserinstitute.ca/pdf/catalogue.pdf; isbn: 0-88975-157-9; http://www.fraserinstitute.org/researchandpublications/publications/7094.aspx; http://www.fraserinstitute.org/research/economic-freedom-of-the-world-1975-1995

Harger, Jim (November 13, 2015). “Acton Institute film about poverty wins $100,000 Templeton Freedom Award”. Grand Rapids Press. MLive. Retrieved 23 December 2015. http://www.mlive.com/business/westmichigan/index.ssf/2015/11/acton_institute_film_about_pov.html 

Hazlitt, Henry. 2008 [1946]. Economics in One Lesson. Auburn, AL: Mises Institute; http://mises.org/books/economics_in_one_lesson_hazlitt.pdf https://mises.org/store/Economics-in-One-Lesson-P33C1.aspx 

Hessen, Robert. 1979. In Defense of the Corporation Stanford, CA: Hoover Institution Press, 

Huebert, J. H. and Walter E. Block. 2008A. “In Defense of Corporations, Tax Breaks, and Wal-Mart” November 24; http://www.jhhuebert.com/articles/corporations.html 

Huebert, J. H. and Walter E. Block. 2008B. “In Defense of Corporations, Tax Breaks, and Wal-Mart” November 24; http://web.archive.org/web/20090120022151/http://jhhuebert.com/articles/corporations. html 

Huebert, J. H. and Walter E. Block. 2008C. “Response to Long on Corporations, Unions, and Wal-Mart.” December 12; http://www.jhhuebert.com/articles/corporations2.html; http://web.archive.org/web/20090120022151/http://www.jhhuebert.com/articles/corpora tions2.html 

Huebert, J. H. and Walter E. Block. 2008. “Response to Long on Corporations, Unions, and Wal-Mart.” December 12; http://jhhuebert.com/articles/response-to-long-oncorporations-unions-and-wal-mart/; http://www.jhhuebert.com/articles/corporations2.html; http://www.lewrockwell.com/blog/lewrw/archives/024387.html 

Klein, Peter G. 2008. “Long on the corporation.” November 10; http://archive.mises.org/008924/ 

La, Marie. 2015. “The Poverty Industry: Who profits the most?” May 18; The Stanford Review; https://stanfordreview.org/the-poverty-industry-who-profits-the-most67179d406cba#.6v31pymnk

McGee, John S. 1958. “Predatory Price Cutting: The Standard Oil (New Jersey) Case,” The Journal of Law and Economics, October, pp. 137-169 

McGee, Robert W. 1990. The Trade Policy of a Free Society, Capital University Law Review 19(2): 301-41. Reprinted in Prace Z Zakresu Ekonomii Politycznej I Historii Mysli Ekonomicznej (Works on Political Economy and the History of Economic Thought), Akademia Ekonomiczna W Krakowie Zeszyty Naukowe Nr. 389 (Cracow Academy of Economics Scientific Book Number 389), Cracow, Poland: Cracow Academy of Economics, 1992, pp. 87-127. http://ssrn.com/abstract=2848054 

McGee, Robert W. 1993. “The Case to Repeal the Antidumping Laws,” Northwestern Journal of International Law & Business 13(3): 491-562. http://ssrn.com/abstract=2858524 

McGee, Robert W. 1994A. A Trade Policy for Free Societies: The Case Against Protectionism, Quorum Books. 

McGee, Robert W. 1994B. U.S. Trade Policy Toward Malaysia and Thailand: Recent Case Studies, Western Pacific Journal. 4: 40-61. http://ssrn.com/abstract=91189 

Mill, John Stuart. 1947 [1859]. On Liberty, Northbrook, IL: Ahm Publishing, 

Miller, Michael Matheson. 2014. Poverty, Inc.: Fighting poverty is big business. But who profits the most? http://www.povertyinc.org/ 

Moyo, Dambisa. 2009. Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. 

Farrar, Straus and Giroux Murray, Charles. 1984. Losing Ground: American Social Policy from 1950 to 1980, New York: Basic Books 

Perry, Suzanne. 2016. “Nonprofits Get Critical Look in New Film on Fighting Global Poverty.” The Chronicle of Philanthropy. January 11; https://www.philanthropy.com/article/Nonprofits-Get-Critical-Look/234876

Ricardo, David. On the Principles of Political Economy and Taxation. 3rd ed. N.p.: Batoche, (2001 [1817]). PDF: http://socserv.mcmaster.ca/econ/ugcm/3ll3/ricardo/Principles.pdf 

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Stevo, Allan. 2010. “Will Africa’s Leaders Call for an End to Foreign Aid?” August 14; https://archive.lewrockwell.com/orig11/stevo4.1.1.html 

Tarbell, Ida. 1904. The History of the Standard Oil Company. New York: McClure, Phillips Carden, 2008A, 2008B; Desrochers and Shimizu, 2012. 

Williamson, Kevin D. 2016. “The President Is Not ‘in Charge of the Economy.’” May 17; http://www.nationalreview.com/article/435465/bill-clinton-hillary-clinton-economy1990s-ronald-reagan-george-h-w-bush

Notes

(1) The latter is a bit over the top, but not the former.

(2) At least in the ex ante sense

(3) Or we assume away all costs or disposal of any of these items. They can be made to disappear costlessly if B tires of any or all of them. We also assume away any taxes.

(4) In the former case, B, the recipient, moves to a higher indifference curve than before. In the latter case, B, or all the B’s in the country, also transit to a higher one. For the Austrian critique of indifference curves, see: Barnett, 2003; Block, 1980, 1999, 2003, 2007, 2009A, 2009B, Block and Barnett, 2010; Callahan, 2003; Rothbard, 2004, pp. 265, 267; Wysocki, 2016 

(5) Would it make any difference to our analysis if A were rich, and B, poor? Of course not. It would be more than passing curious for a poor man to be able to subsidize a rich man in any case.

(6) Here are some of the highly positive recommendations and evaluations of this film: Bowyer, 2015; La, 2015; Debruge, 2015 

(7) That is precisely the point of the volatility; the pons asinorum of the objection to this entire process on the part of the critics of this type of foreign aid.

(8) And the same can be said for those whose services are no longer required thanks to the auto, the computer, the air conditioner

(9) A different cause, but the identical effect of the C’s lowering egg prices by “dumping” them on the underdeveloped country. On “dumping” see Block, 1991; McGee, 1990, 1993, 1994A, 1994B

(10) For the claim that economic freedom accounts for economic development, see Gwartney, 1976; Smith, 1776. 

(11) If he zigs when he should have zagged, he loses money, and is thus less able to exacerbate price variations in the future.

(12) Don’t tell us no one is addicted to the SuperBowl or the World Series

(13) https://acton.org/

(14) Although they too are beneficial to the recipients at least ex ante

(15) Yes it cannot be denied, churches often require recipients to say a prayer, write a letter of thanks to donors, but this hardly fosters dependency.

(16) For a critique, see Carden, 2008A, 2008B; Desrochers and Shimizu, 2012. 

(17) http://www.pittstate.edu/calendar/event-detail.dot?id=07ecddad-baa4-4c74-a68f-f8fbb066afa1#.WM8VsdLyuM8

(18) Block and Huebert, 2008-2009; Hessen, 1979; Huebert and Block, 2008A, 2008B, 2008C; Klein, 2008

(19) See the South Park episode dedicated to the smugness of Hollywood: https://en.wikipedia.org/wiki/Smug_Alert!

(20) Yes, it was a personal (economic) tragedy for them (at least until they got back up onto their feet), but that is part and parcel of being a businessman. There are losses as well as profits. Why should we pity them any more than any other failing concern, and, under capitalism, that is the order of the day. If you can’t stand the heat, stay out of the kitchen. 

(21) Or perhaps other substitutes such as motorcycles, trucks, bicycles, etc

(22) Anderson, 2001; Casselman, 2016; Williamson, 2016

(23) We speak here, only, of the giving to the poor countries of U.S. farm surpluses generated by subsidies; not of the latter.

(24) States Rothbard (1995) in this regard: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

(25) Dare we once again mention the sad plight of the horse and buggy industry, or all those laid waste to by the computer revolution?

(26) However, this is precisely the contention of the film under discussion.

(27) For a critique of this model, see fn. 5 supra

(28) The monuments need not be statues of the dictator. They could also be a steel mill, the product of which costs 5 times the price of this product on the world market. The car is the transportation for the cronies of the dictator. And we all know what the third item is all about.

(29) 9 This, presumably, is exactly what the horse trainers, whip makers, blacksmiths and members of other occupations displaced by the introduction of the automobile: took position in that or yet other industries. It is apodictically true that those who accept the eggs gain in utility due to revealed preference and utility maximization.

(30) On March 15, 2017 it announces itself as “Eliminating poverty through economic freedom.” https://acton.org/. Well, what about the economic freedom of the Cs, to give charity to poor people in underdeveloped countries? Part of its mission statement reads as follows: “The Acton Institute is a think-tank whose mission is to promote a free and virtuous society characterized by individual liberty and sustained by religious principles.” But most of the donors of eggs and other such commodities are church groups. What about the religious principle of charity?

(31) https://www.templeton.org/

(32) Bauer, 1981, 1982, 1984, 1991; Bauer and Yamey, 1957. In the spirit of this author, let us say the following: We only oppose government to government transers of wealth, commonly mischaracterized as foreign “aid.” Our analysis of private donations, the target of Moyo and Poverty Inc., is entirely different. The latter is part of the free enterprise system, not the former. When statism rears its ugly head in this context, we arrive at the “3Ms”: monuments (they need not be a statue of the dictators, although typically they are; they can also include a steel mill which produces this product at five times the international price), Mercedes (the dictator’s transportation) and machine guns (we all know what those are for.)

(33) From the context of his remarks, we infer that Gates was assessing the book, not its author, in this critical manner.

(34) For an (erroneous and unwarranted) support of Moyo (2009), see Stevo (2010)

(35) Many very wealthy men fear giving their young impressionable children too much money too soon, lest this sort of thing have these very negative effects upon them.

(36) But suppose he did. Posit, that is, that this donor somehow involved the state apparatus in his nefarious scheme to undermine the skills of recipients in poor countries. Then, he would be not a crony capitalist but the equivalent in the charitable sector. He would then be a crony donor. We owe this point to Larry Beane.

 

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Walter Block

Walter Block

Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com.

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