Index

1. Introduction
2. Wealth
2.1. What is wealth
2.2. How wealth emerges
2.3. How private property boots wealth
3. Globalization
3.1. A reinforcement of wealth creation
3.2. Common criticisms
3.3. Some empirical results
4. Poverty
4.1. Two kinds of interventionism
4.2. African case
5. Foreign aid
5.1. Food and clothes
5.2. Education
5.3. Healthcare
5.4. National industry subsidizing
5.5. Public Works
6. Conclusions
7. Bibliography

1. Introduction

“Is foreign aid the solution to global poverty?”

A 2005 United Nations report called for a doubling of foreign aid to poor countries as the means to reduce poverty. Yet the 2006 Nobel Peace Prize was awarded to a for-profit microloan bank and its founder, an apparent vindication of the ideas of Peter T. Bauer, Henry Hazlitt, Deepak Lal, and others. As Bauer wrote, “Development aid, far from being necessary to rescue poor societies from a vicious circle of poverty, is far more likely to keep them in that state....Emergence from poverty requires effort, firmly established property rights, and productive investment.”

Today’s world economy is filled with contrasts. While in some regions we find people dying of starvation, in others the concern about consumption becoming too high to be sustainable is taping shape.

These sharp differences have prompted some populists and ideologists to blame the rich for the misery of the poor and to ask for international redistributions of wealth. It is easier to find opulent societies guilty of having plundered underdeveloped communities than to explain why some people can prosper and other cannot.

And it is also easier to simply imagine that one can improve poor peoples’ lives by removing wealth from one place and putting it elsewhere than implementing the ideas that one would have to develop after reflecting seriously.

Thus if we want to analyse why some societies are poor and whether some proposals are consistent with wealth creation, we must begin to understand the underlying conditions that make this wealth possible.

Therefore our essay will be organised in four sections. The first one is devoted to the definition of wealth, its foundation and its economic sources. Afterwards, we will study which are the implications of globalization on the sources of wealth. Thirdly, we will examine why its conditions are not universally fulfilled and how this fact explains poverty. And finally we will criticize foreign aid as a mean to achieve development.

2. Wealth

2.1 What is wealth?

Human being act purposely to achieve ends. A human being needs means to fill the gap between his current state of affairs and his desired state of affairs. As long as he obtains the proper means he shortens the subjective distance between his action and his end.

We can thus say that an individual is richer than another if he is closer to fulfilling his ends, and this will depend on the quantity and the quality of his means. Under this perspective, wealth is the relative abundance of suitable means in relation to one’s ends.

This may appear a very simple definition, but we can extract some important corollaries which distinguish it from other definitions of wealth, avoiding popular misinterpretations.

First of all, wealth is directly related to individual ends. One person can be richer than another if he can satisfy better his ends even with a smaller endowment of means. This does not mean that men without ends are the richest, but that one cannot consider that the size of the wealth is equal to the size of the endowment of properties. People with hard-to-realize ends need by definition more means to achieve them and thus one should not consider necessarily this greater abundance as a sign of higher wealth.

In other words, action plans should be traced by the individuals who must perform them. Obtaining the same good can represent little wealth to some and too much (too costly to be obtained) to another.

Secondly, one should not only consider the direct means that satisfy the ends, but also the entire production process that enables the achievement of those direct means.

Action plans are so highly complex in that they involve many productive stages. Consumption goods are just the final stage and thus all previous stages that allow individuals to produce consumption goods are also considered wealth.

Therefore, capital must be included in our definition. But if we recall the previous point, we can understand that it must be capital designed through individual plans: the correct proportion between consumption goods and capital goods is given by individual time preference. Forcing capital accumulation (or capital consumption) means banning the achievement of the most valued ends and thus the destruction of wealth.

Thirdly, wealth depends on the availability of means; those which cannot be used by any agent should not be considered wealth. That obviously excludes from our definition such terms as “natural wealth”, which tries to compare wealth with the abundance of natural resources.

Of course, natural resources may be wealth, as far as they are needed to fulfil one individual’s ends. However, only those natural resources which are currently available are wealth. World inhabitants are not richer by the fact that planet’s core is formed by iron and nickel. We cannot still extract those minerals and that makes them useless.

Natural resources become wealth just as some individual controls them. This is in fact related to our previous remark. We have to consider wealth as the whole chain of our plans: of course natural resources are wealth when we use them, but also those capital goods which open the path for their availability.

A community can live on the hugest deposits of natural resources. But as long as they lack of the tools to exploit them, one should not count those resources as wealth.

Until now, we have defined wealth and sketched some of its characteristics: it is a set of available means inserted in the plans of an actor to fulfil his ends. From now on we are going to analyse which are the conditions that make possible its creation and reproduction.

2.2 How wealth emerges

We have already said that any material resource cannot be considered wealth unless it is available to an individual’s plan.

We should distinguish between two kinds of availability: physical and legal availability. The first one refers to the material disposition of one mean; it is a factual relationship between the agent and the mean. The second one implies having ultimate decision-making powers.

Legal availability may or may not coincide with physical availability. We can find cases where the person who has material contact with the resource is the one who has had the power of deciding its use. But we can also have cases where the individual who has the material disposition is not the one who has decided its destiny (for instance, a worker who follows an entrepreneurial plan may have the physical availability but as long as he follows the wishes of the entrepreneur, he lacks legal availability.)

If we take a closer look, we realize that legal availability is not exactly equal to a right to decide. Insofar I want to omit any ethical analysis, I am not speaking about who should have the legal availability, but about who actually has it. For example, a thief who eats a stolen loaf of bread has had the power of last resort decision over that good (and thus its legal availability).

In other words, legal availability is completely related with effectively inserting one mean in our plans (subjective side), while physical availability refers just to the material use of the resource (objective side).

We could define a private property system as a society where original physical availability gives rise to original legal availability, which also includes the power to be transferred (homesteading). Furthermore, those to whom the legal availability has been transferred must retain it either until it is further transferred or until the mean is consumed and perishes (enforceable voluntary agreements).

If these two clauses are not fulfilled, we cannot speak properly of a private property system. Broadly speaking, when either homesteading or enforceable voluntary agreements fail, we have a third-way system and when both principles fail a socialist one. Our definitions are probably too superficial, but they highlight two kinds of interventionism: partial and total. The first one influences the assignment of legal availability (either at the beginning or in later stages) and the second one places every single mean of a society under the power of some people who has neither homestead it nor acquired it by enforceable voluntary agreements.

Because of we have stressed the role of availability in our definition of wealth, we must now raise some conclusive remarks on who will enjoy the wealth in each system:

• Private property system: People who make one resource available for its first time or who obtain that resource through a voluntary agreement have the power to decide its use. Wealth includes all those means originally or derivatively acquired.
  
  There are incentives both for discovering and reaching unowned resources and for trying to get other’s means through persuasion and negotiation. And as far as there is no coercion, people can engage in long run plans which imply the spending of its resources and efforts during an extensive period of time during which they will not satisfy their ends[1].

• Third-way system with no homesteading: Some people, who for the sake of simplicity can be called politicians, decide who gets the original legal availability. From that point on, enforceable voluntary agreements among individuals fix the legal availability of resources. Wealth does not include those means whose physical availability has been brought about for the first time.
  
  As resource discovering and creation does not involve wealth, people have no incentive in such discovery or creation. Plans start at the point where politicians give people the means; thus, we have an exogenously-determined plan creation scheme. People pursue those ends which are possible with the means provided by politicians. If one end can only be fulfilled through other kind of means, there is no incentive in either obtaining or creating it.
  
  For that reason, only political followers will devote their efforts to the creation of means. Everyone else will not work unless they are coerced. But then we have two additional problems regarding wealth.
  
  First of all, we have so far established that action plans must be traced by the individuals who have to perform them. Otherwise we may prevent them to work enough or may obligate them to work too much. In both cases, wealth is destroyed either by restraining the creation of more wealth or by imposing the production of some goods which are too costly to the actor.
  
  Secondly, politicians cannot know which are the ends and, more importantly, the hierarchy of those ends of everyone in society. They face an insurmountable information problem derived from the fact that there are not prices for original factors of production and thus they cannot employ economic calculation. In this situation, people will be forced to employ their scarce time in the creation of means which are not useful. Therefore, in addition to the previous case, wealth is also destroyed by providing means which are of no utility. Obviously, any plan coming from them will be suboptimal.
  
  Of course we can also consider the case where people are not coerced to work in the creation and discovery of means. In that scenario, goods would only be produced by altruists who are willing to spend their time in other people’s welfare. Unless we were in a society of altruist citizens, the non-realized plans would be immeasurable, as far as actors would lack of the plenty majority of means they needed. And even if we lived in that altruistic society, the problem of information previously analyzed would be the same.

• Third-way system with no enforceable voluntary agreements: Politicians choose the consignees and the conditions of resource transfers. Wealth does not include the transfer-use of a resource: one cannot gain anything from exchange.
  
  In this situation there is no incentive for including other people’s satisfaction in one’s plan scheme. No individual (but altruists) will engage in the production of means which are not directly useful to them. Cooperation is de facto destroyed. We can only find a sum of autistic and self-sufficient individuals.
  
  Like before, politicians can either force people to produce means which are not directly needed, or let things go on. In both cases, wealth is hugely damaged.
  
  Any production through coercion would only create useless goods because we do not have prices for original factors of production (as long as they are not sold in the market) and thus economic calculation cannot be employed.
  
  If society keeps its autistic organization, there will be no cooperation, no specialization and no reassignment of goods among people. All this implies non-created wealth.

• Socialist system: Politicians impose the entire set of actions to an individual. He can trace no project, as far as he is part of a central plan. There is no wealth, but for politicians. They choose what to do according to their purposes.
  
  There is no incentive for action because no one can earn its outcome. People are totally directed through coercion to fulfil politician’s ends. From an individual perspective wealth destruction is absolute. Just a few men—politicians—can be said to have access to wealth. But even they, as long as there is no market for any specific factor of production and thus prices, cannot use economic calculation and cannot assign their basket of resources and slaves efficiently[2].
  
  One special case must be included in the socialist system. It is possible for a society not to have an explicit Bureau of politicians who suppress homesteading and enforceable voluntary agreements, but an arbitrary ultimate power with a high level of uncertainty over its behaviour. In that case, people cannot foresee what the consequences of their actions will be, because they depend on others. Society lacks of an explicit rule but suffers from a highly discretionary power.
  
  We include this arrangement inside the definition of a socialist system since decisions of last resort do not depend on homesteading and voluntary agreements but on the will of other individual. That this individual tolerates on some days a property right scheme and violates it others, does not change the fact that the whole society is subjected to a third party’s decree.
  
  When there is a temporary property rights environment in the socialist system, people can engage in creation of new resources and exchange their products. However, the scope of their plans will be very focused on the short run, as they ignore whether they will retain their resources in the future.
  
  People here tend to avoid any immobilization of resources, look for very liquid assets, and prefer consumption over saving. Insofar their resources can be plundered at any time, it is better to consume now than later.
  
  In this scenario wealth destruction is very high. Individuals renounce to long-run plans within which there are always more productive projects than within short-run ones[3].

The conclusion is pretty obvious. A private property system is a prerequisite for wealth creation. Without homesteading and enforceable voluntary agreements there is no foundation for wealth, and almost every opportunity disappears or gets subjected to politicians’ desires.

2.3. How private property boots wealth

Once we know that private property is a prerequisite for wealth creation, we have to explore the ways in which individuals arrive at that result in a private property system.

First of all it is necessary to recognize the fundamental role that cooperation—what is more usually named “division of labor”—plays. Cooperation and division of labor benefits its participants in at least three ways: economies of scale, diversification of abilities and specialization.

Economies of scale refer just to that situation in which there are positive synergies from cooperation. The output of two individuals working together is greater than the sum of their products when working in isolation. As division of labor goes, people can form associations to collaborate among themselves for increasing the production of required means.

In fact, there may be some products which cannot be obtained by autistic individuals. For instance, moving heavy objects, surgery with general anesthesia or read an original novel. In these cases, the economies of scale derived from the whole system of division of labor are virtually infinite: two null outcomes sum a positive one.

Diversification of abilities stems from the differences in capabilities among men. Some people are more skilled at some task than others. If individual A needs a mean x to reach his ends but has plenty of difficulties to get it, while individual B, who can produce it easily, has several problems in obtaining mean y, whose production A mastered, it is sensible to them to cooperate.

They both can profit from the different abilities of other people. Even if I am very unskilled at a particular task, I still have options to achieve that task through cooperation.

This leads us to the third benefit of division of labor: specialization. If people perform those tasks in which they are better, they could improve even further they skills and increase their productivity.

People such as geniuses could devote their time to research, as they do not need to grow food, tailor their cloths and teach their children. Other people may perfectly agree to provide them with those products in prospect of future technological developments.

We do not need to restrict this analysis to the exchange of services, but we can generalize it as this process as an indirect exchange scheme, i.e. people create means, which are not directly needed for their own ends but for other people’s. Specialization can evolve till systematic production of one basket of goods which are hoped to be sold in the market.

Everyone who wants to participate in this huge spontaneous organization—capitalists, workers, entrepreneurs or consumers—has to find his place looking for profit opportunities.

To do this people will employ economic calculation with historical market prices (as patterns of past exchanges) and their entrepreneurial sense. Decisions about what to produce (and what to consume), who to produce for (and who to buy from) and how to produce (and which are the conditions of the purchase) modify the previous productive structure.

In developed economic societies, division of labor is totally dependent on consumer needs as forecast by entrepreneurs and capitalists. Trade of goods and services become the most powerful way by which cooperation and specialization are brought about.

Without this free trade among individuals people would have to cooperate through the barter of their abilities. Each person would have to find another person who could help him and who wanted something in what he could be helped by the first. Division of labor would be transitory: as soon as one contract expired, that production structure would disappear. Specialization would be very rudimentary and the scope of cooperation would be limited to the projects of the direct participants.

What exchange allows is an increase of the size of the division of labor to every person that participates in the market, even without being aware of it, and to have individuals specialized in some production processes which have not been explicitly asked by anyone.

Then we get to the third stage of economic development. When people know that they can sell some good continually in the market and buy other goods with the proceedings, it becomes profitable to reduce the opportunity cost of that productive activity in order to retain as much revenue as possible. In fact, sales depend on consumer’s willingness to buy and that depends on offering some product better than other sellers. Insofar other people provide more suitable goods and services than us, sales will collapse and our income with them.

Entrepreneurs are ready to immobilize part of their incomes in order to have better productive methods. Capital allows them to incorporate more machines and technologies, to start new business and to devote time to research and develop better products which aim at consumer’s needs.

Division of labor through exchange makes capital accumulation possible: people know that their task is to produce some goods and that their performance will be the better the more capital they employ. They save part of their earnings to invest in their previous production processes (amortization) or in new ones.

This way, wealth is created in an asymptotic proportion. On the one hand, production of goods and services increases hugely—i.e. more ends being achieved; on the other, we have more intermediate goods which are also wealth because of the reasons so far explained. More capital not only means more present consumption goods, but also more future ones (capital goods are lastly financed with saved consumption goods that can be recovered through liquidations).

Societies get richer as far as their proportion of consumers goods in relation to capital goods gets smaller, although its absolute number grows[4].

Probably it is in the case of investment where the necessity of private property is more clearly seen. People will only be disposed to spend resources in roundabout methods of production that take a considerable time to mature if it is foreseeable that their proceeds will be retained by the owner. Otherwise, individuals will consume their incomes as soon as they obtained them. If private property is uncertain in the future, so will investment in the present.

3. Globalization

3.1 A reinforcement of wealth creation

We have so far analyzed what is wealth and how people organize themselves to create it. Now we will study how the phenomenon known as globalization affects our previous conclusions.

Globalization is just an expansion of the extent of the division of labor[5], i.e. an increase in cooperation among people, both in the number of participants and in the number of relationships.

This change may have been motivated by several factors, such as reductions in transportation costs due to better technology, an improvement of communications or a higher respect for private property (for instance, a reduction on trade barriers means allowing more enforceable contractual agreements among people located in different countries). But in any case, the nature of globalization is the same wherever it comes about: the spontaneous division of labor adapts itself to the new capitalists, workers, entrepreneurs and consumers and becomes more wealth productive.

A deeper and more extensive division of labor implies more economies of scale, wider range of individual abilities and more opportunities for specialization.

Since entrepreneurs face a greater demand from the new consumers, they can increase the size of their factories and reduce the average cost of production spreading it among more units. Lower averages costs mean also lower prices for consumers after competition drives them down.

A wider range of individual abilities diversifies the qualities and quantities of suppliers: there are more people who can do more things. Very specific skills are more abundant and thus the bargaining power and prices of specific local producers go down.

Finally, thanks to the economies of scale and the greater number of abilities, specialization can be focused to very concrete issues, increasing thus productivity and creativity.

All this leads to lower prices and more diversified means: consumers can buy more and better commodities and thus reach more ends, i.e. more wealth is created.

Increased trade among individuals is just the external and visible way in which this new division of labor manifests itself. However, before new trade patterns are developed, the exchanged commodities must be produced, what just can be done through changes in the structure of production.

Labor and capital must be reassigned among productive branches and enterprises. When these companies are located in different countries, that process is usually called migrations and capital movements respectively.

It is commonly asserted that we could expect out of this process a tendency toward the equalization of the incomes of factors of production. But we should speak not about monetary incomes, but about subjective incomes. Employees not only look for higher wages that allow them to acquire more mean but also for other factors such as location, simplicity, physical effort, psychical motivation, altruism, etc.

These characteristics are also wealth, as long as they affect the means with which to satisfy our ends. Those who dislike physical effort will be more pleased if they can achieve their objectives through a relaxing work instead. In fact, improving workplace conditions is another kind of remuneration that must be financed with capital[6].

There is only one way by which wages can be increased without destroying wealth, this is by increasing labor productivity[7]. Labor productivity can only be increased through capital, either by more capital accumulation or by incorporating technological advances in the form of capital goods.

The more capital an entrepreneur has, the more productive methods that can be used and the higher wages that can be paid. However, capital accumulation is a very hard task. Capital is savings and to save one has to restrict its consumption.

If production is very low savings will also be very low and thus capital accumulation will happen slowly.

This is where capitalist enter into the picture. Capital profitability is determined by the rate of return, this is, profits over capital invested. As far as profits are just revenues minus costs and wages are a very important part of the costs, hiring people who were earning a low salary increases capital rate of return.

For instance, if I earn $11000 from my business and to run it I have to spend $10000 a year–out of which 5000 are wages—my rate of return is 10% (profits=1000, capital expenditure=10000). If I could hire people who are willing to work for half of the previous wages, my rate of return pumps to 46%[8].

The much higher profitability of the low wage scheme will push entrepreneurs to hire those people who are willing to work for half of the previous wages and due to their competition, these wages will go up (and also high wages will tend to go down in order to find a work place). This is just wage arbitration among homogeneous workers.

Entrepreneurs may have to incur in additional expenses in order to hire those low wage workers. This can happen, for example, if it is necessary for the production center to relocate closer to where the people work.

Likewise, we can illustrate it just changing the above numbers a bit. If entrepreneurs can only reach those workers by paying 1000 extra dollars, rate of return will be around 30%, a figure which is lower than 46% but that it is still far higher than 10%. In other words, it is profitable to hire those low wage workers even with those expenses.

Being that the case, low wage workers are not condemned to a slow capital accumulation process when capitalists are near. Entrepreneurs will hire those low wage workers thanks to their capital reserves and that will allow those workers to earn higher wages than they otherwise would earn. Up to this point, these workers can start saving increasing quantities of money and become themselves capitalists who continue the capital accumulation (and wealth creation) process.

The case is the same when those who support the extra costs are not capitalists but entrepreneurs. With migrations entrepreneurs are not the ones who seek workers; it is the workers who seek entrepreneurs, and the ones assuming the costs Instead of capital looking for lower wages, those earning low wages are looking for higher productivity[9].

In any case, the capitalist’s seek for profits allows workers to reach a more diversified supply of labor opportunities which makes possible better combinations of their job preferences with higher wage rates[10].

The resulting division of labor system will encompass all the benefits studied in the previous section but in a deeper form. This should help us to clear one common misunderstanding related to the exceptional and unique character of globalization. As a legacy of German historicism and Marxist theory of History, globalization is seen as a new stage in human development that requires some ad hoc economic theory.

On the contrary, economic principles comprised in the previous section would be enough to describe globalization. There exist no particular economic laws which depend on historical contingencies.

The prerequisite of private property and the profits from division of labor led by exchange and capital accumulation are an a priori truth apart from the concrete circumstances in which they take place. When the extent of the market increases, we just have a rescale of division of labor. There is no modification and no exception in the underlying economic laws.

3.2 Common criticisms

To many people globalization is just a process by which a minority plunders the majority. It is a zero-sum game in which losers outnumber by far the winners.

Our analysis has proved that this is not clearly the case; every participant in the increased division of labor derived from globalization benefits. Anyway, in order to give a more solid ground to our conclusions, we are going to address those critiques.

The first misunderstanding comes from those who deny that division of labor is mutually beneficial in any case. If one person is better than another in everything, there would be no profitable exchange as far as the first individual can provide for himself all that he need. As there will not be any specialization, the first individual will monopolize all the production and will exclude the second one from the division of labor system. We may call it “the absolute advantage theory of trade”.

The doctrine was already proved fallacious by David Ricardo when he explained that international trade was governed by comparative and not absolute advantage. If individual A can produce 10 television sets or 3 cars in 12 hours and individual B 8 televisions and 2 cars, then if both work in isolation and try to diversify production, the maximum output achievable in a day would be:

Individual A: 10 television sets and 3 cars
Individual B: 8 televisions sets and 2 cars
Total output: 18 television sets and 5 cars

However if both cooperate and individual A specializes in TV production and individual B in car production, total output is given by:

Individual A: 20 television sets
Individual B: 4 cars
Total output: 20 television sets and 4 cars

Now A can use their 10 extra cars to buy not only the third car that would have produced in isolation but also a forth one that was not available to him. B on the same way can use his two extra cars to buy 10 television sets, which represent two more than those that could produce in isolation.

Trade is mutually beneficial in physical terms for both individuals even when one of them does not have an absolute advantage in any good. As they devote their time in those projects in which they are better, global productivity increases.

This physicalist approach is however just a particular case of a more general one: division of labor is mutually beneficial with regard to subjective plans.

Since time is scarce, every person must choose which activities to perform. People will tend to concentrate on the most valued activities and outsource less valued ones. But to do that, any person must compare the cost of acquiring that activity in the market (this is, hire another person to do it) with the cost of performing it by himself.

As long as the cost of performing that activity by himself is an opportunity cost (not performing by himself other activities), the individual will have always to renounce to perform some activities. If the cost of being provided that non-performed activity by the market is inferior to the profits he derives from it, then there will be incentives for cooperation, even if that individual is absolutely superior in both tasks.

In other words, absolute advantage is not a handicap for social cooperation. Indeed, cooperation fosters wealth both by increasing productivity and by providing commodities which would not have been available otherwise.

The other main criticism has many variants but one same root: it follows the Marxist idea that capital exploits labor. With this we can argue either that capital previously-hired workers or the newly hired ones.

Let’s focus on the first idea. We have seen that in globalization there is a tendency toward the equalization of incomes for homogeneous factors of production. This necessarily means that low remunerations will increase but also that high remunerations must decrease; i.e. Third-World workers will enjoy higher wages but “national” workers will suffer from lower salaries[11].

The fallacy of this argumentation lies on the implicit assumption that the only form of income for “national” workers is wages, what implies that national workers must remain national workers even when we are exporting capital (so they will not discover any profit opportunity for investing abroad).

If being a capitalist becomes exceedingly profitable thanks to foreign low wage workers, there is no reason to suppose that national workers cannot invest part of their savings to hire foreign workers. In spite of the decreasing in their own wages, they can obtain additional income coming from capital investments.

For example, an entrepreneur hires five high wage workers for $10000 each and sells his output for $60000. The rate of return of this investment will be 10000/50000=20%.

If this entrepreneur discovers that he can hire low wage workers for $1000 $, he will fire his five high wage workers obtaining a return of 55000/5000=1100%.

This is unmistakably a signal that more investment is needed in this sector and thus other capitalists and previous high wage workers can increase capital funds out of their savings.

For instance, the five workers might have saved $1500 each one from his last salary and hire these low wage workers for that price. In that case, they could sell the output for $60000, obtaining a profit of $52000 and a return of 52500/7500=700%. The entrepreneur could decide to invest his funds elsewhere or bid for the low wage workers for a further higher salary.

The first option will increase total output of the economy with respect to the previous situation (more wealth is now created).

The second one would leave the high wage workers with a new trade-off: to form a cooperative and compete with low wage workers or to become stockholders of a more capitalized enterprise that wants to enter in that sector. In both cases, output will be increased and thus prices will be lower than otherwise.

Finally, workers could also think not to be able to compete in that sector, and thus to invest his savings in satisfying the additional demand that will come out of the huge profits of his previous employer. Recall that when the entrepreneur hired high wage workers he obtained a profit of $10000 $, but now he is gaining $55000, this is 45000 extra dollars which will be devoted either to consumption or to savings. Both decisions create an additional demand either for consumption or for capital goods that could be satisfied by the investment of his previous employees.

Of course, in every case previous high wage workers could still look for another job which paid them a slightly lower salary with which to complement his investment returns. Newly, more output and thus more wealth is created.

We can summarize our conclusions in the following scheme. When one entrepreneur finds new low wage workers, fired ones can:

7.1. Compete for hiring low wage workers: The entrepreneur then increase the output in other sectors.
7.2. Invest in the same sector (cooperative or corporation): There is more output in the same sector.
7.3. Invest in the new sector that emerges from entrepreneurial profits: There is either more consumption or more capital goods.
7.4. Look for new jobs: More output in other sectors.

As we see, the net result of the appearance of new workers is to increase total wealth: there is a greater quantity and variety of consumption and capital goods and then lower prices. Whether this wealth will be redistributed to workers in a higher proportion than their preceding income is a question that cannot be answered a priori. The point is that if they act properly—by inserting themselves into the more complex division of labor system and aiming to solve other people’s needs—they can be clearly better off as there has been created more wealth.

This conclusion is equally valid when we talk in aggregate terms. Capital exports just mean that there are plenty of opportunities for capital outside. If workers want to remain just workers without trying to take advantage of those opportunities, it is possible that, despite the fall in prices, they get worse off. However this would just represent a shortcoming in grasping which the necessities of people are: when there are individuals willing to work for a low salary what is needed is more capital, not higher wages.

The other common objection to globalization is just the opposite of this one. Capitalists still exploit workers, but this time foreign ones. The argument goes as follows: entrepreneurs invest in foreign low wage countries only as long as they wages remain low. When their wages begin to rise, capital goes outside the country (hot money) looking for other low wage zones.

This argument is much simplistic than the earlier. The implicit assumption is that there will always be enough lower wage workers to satisfy entrepreneurial (consumer) needs which will offset wage increases. Unfortunately, labor is the only real scarce factor of production[12] and as capital is accumulated, labor must receive increasing remunerations, at least in real terms.

But even if we considered the assumption true for a moment, the conclusion would be incorrect. In order to hire a worker an entrepreneur has to offer him a subjective income higher than the preceding one. The more this extra payment lasts the more opportunities for saving the worker has. One entrepreneur could disinvest from one country after having stayed there five years, but during that period their workers could have become capitalists who invest by themselves[13] (and this includes the ability to hire that infinite bunch of lower wage workers that is supposed to exist).

3.3 Some empirical results

Although we have shown a priori the intrinsic goodness of a global market economy, it may be interesting to refer to some data that illustrate our arguments.

Xavier Sala-i-Martin has performed some empirical research[14] that show that the number of poor people—defined as those who earn less than $826 a year—has diminished from 1200 millions to 800 in the period 1970-2000. The results are far more impressive if we take into account that world population has doubled in that period and that thus poverty in relative terms has gone down from 37% of world population to 13%. These results are pretty similar to those of Surjit Bhalla who suggests that poverty—$2 a day—has fallen 60% to 23%.

Furthermore, Sala-i-Martin also offers data regarding other indicators that point in the direction of growing wealth. Life expectancy has increased from 60 to 67 years, child mortality has fallen from 10% to 6%, literacy has grown from 64 to 80% and access to potable water has risen from 25% to 80%.

Both authors coincide in one point: there has been on part of the world which has not taken advantage from globalization, i.e. Africa. For instance, Sala-i-Martin says that “We are living in a world which is not perfect, although it globally improves, but it is also a world in which Africa is a disaster. The question is who to blame: Africa or globalization”. Similarly, Bhalla states that: Zero 2$ is likely in all parts of the World in 2015, except in sub-Saharan Africa. This region’s share of the world’s poor people is expected to rise from 36% today to almost 90% in 2015[15].

Our target in the next section will be to explain how wealth can be destroyed, looking at particular policies that have isolated African people from globalization.

4. Poverty

4.1 Two kinds of interventionism

Up to this point, we have studied which are the foundations and representations of wealth: private property and division of labor manifested through commodities exchanges and capital investment. However we have also seen that in some parts of the world—Africa—people has been systematically unable to create wealth.

The fundamental reason behind this fact is, as we have already seen, the systematic violation of property rights that blocks division of labor, exchange and capital accumulation.

This violation may come either from a State which explicitly abolishes private property or from a state of affairs in which legal availability is not generally respected. In these cases people would lack incentives to cooperate in a huge scale division of labor, as long as very long-term plans would be subjected to the arbitrary decision of another person or group of people.

Systematic interventionism creates alternative networks of labor to those that would have prevailed in a free market. It tries to either impose one central plan or to combine it with the supposed plans of its participants. During the time in which this alternative networks function, any other association is perceived as sabotage of the central plan: people who do not summit are hampering the collectivist organization.

As we see, individuals cannot adjust their plans as they could made in a market economy. No more than the people who are endowed with the legal availability over all the resources is capable to modify the individual’s position in the network. No profit opportunity can be detected precisely because no profit opportunity exists: individuals cannot follow their own plans and thus no one can find any end to be satisfied. Exchange cannot take place and capital accumulation makes no sense. It is the State who decides how much is saved and consumed and how savings must be spent to create machines, materials and other productive structures.

Wealth destruction—poverty—with explicit interventionism is clear. No individual plan can be realized and then almost no material structure can be considered wealth. Just those consumer goods that central planning board gives to people and which coincide by chance with some of their ends will lastly be considered wealth.

Neither division of labor schemes nor productive structures could be considered wealth, since they block other higher ranked ends and means that could be achieved by individuals in absence of coercion.

Asystematic interventionism is equally destructive of wealth, but its manifestation is a bit different. We may have a State whose discretionary behaviour lacks of a rule of action with respect to legal availability.

In this context, people would be led by their expectations of coercion. If they foresee that they will be deprived in the future of the legal availability over their means, they will shorten their plans until the point in which they hope to be able to use their means. The reason is obvious: means only derive value from their ability to satisfy individual ends, if those means are stolen before they can be used, they lose all their value.

Shortening the number of stages in individual plans has a precautionary effect against coercion. If the period between means creation and means consumption is very short, asystematic violence is less likely to occur; it has less time to materialize. The longer the period of the plan, the higher the probability of asystematic interventionism to happen, even if we considered that a given government is not a priori very willing to coerce people.

So far we can already say that the effect of asystematic interventionism is always to shorten the number of stages of people’s plans and we know that among the longer there are always more productive plans, which implies a narrow margin for social cooperation and for capital investment.

When we fulfill our ends through the division of labor, we place other people’s ends as a mean of ours. This human cooperation can be done horizontally (an association of various people who try to satisfy other person’s ends) or vertically (I satisfy the needs of another person which in turn were the means for satisfying a third person ends).

Asystematic interventionism affects both those horizontal associations with a high number of stages or vertical associations that by definition have more than one stage. The fact that the more time-consuming structures are the ones that are most damaged also implies that capital accumulation (which could be use to finance this time-consuming structure while they did not mature[16]) will also be strongly diminished. The range of division of labor is greatly reduced and resources are normally consumed as one gets them because there is no investment opportunity.

A society can suffer both systematic and asystematic interventionism. The scope of the first one determines the extension of the division of labor: more systematic interventionism means a smaller division of labor organization. The hardness and regularity of the second increases the uncertainty over legal availability and thus the complexity of the division of labor that remained outside systematic interventions.

Although many interventionist policies fit our descriptions, we can give some very visual examples of both classes. Taxes and regulations are kinds of systematic interventionism. Wars, inflation and expropriations are examples of the asystematic one.

Taxes imply that some people spend wealth without having created it, i.e. there is a complete loss of legal availability over resources. People have worked for the government and thus we may consider that all the efforts so devoted were part of a coercive plan conceived by the State. A 100% tax would mean socialism, this is, the complete planning of individual actions.

Regulations force or prevent some actions to happen. In this sense, it is a sort of construction of society and cooperation. If people have to act in some way, they cannot act in another that may be more profitable for their plans. If people must not act in some way, the potential area for cooperation is restricted.

Wars may generate a huge uncertainty over the future legal availability of resources, specially when defence competences have been expropriated and monopolized without giving individuals the possibility of choosing their most preferred defender. During a war, insecure people try to provide themselves as fast as possible with the most elementary consumption and protective goods. There is no place for long term investments.

Inflation, as the debasement of money, provokes a redistribution of the value of the currency, which complicates the possibility to purchase of the desired consumption goods and which erodes savings. The consequences is clearly a tendency to buy consumption goods before its prices increase more and to transform savings into assets that do not loss value, even if they are very illiquid.

Finally, expropriations mean the probability of losing a resource by governmental discretionary decision. The higher the subjective probability, the faster one will be willing to sell or consume the resource. Therefore, that means it will not enter into long-term plans.

4.2 African case

It is clear that any society that suffers from any of these diseases must suffer from wealth destruction (impoverishment). Now let examine how this analysis fits with Africa and how it can explain its situation[17]. We will mainly use Heritage 2007 Index of Economic Freedom data:

• Taxes: Although there are countries with very high top rates[18], unfortunately it does not seem that this factor radically separates Third from First World. This does not mean nevertheless that the African tax system does not destroy wealth: every resource appropriated coercively by government as we have seen provokes this effect. African societies would do much better without it.
  
  We must include in this point another kind of taxes that do not depend on African governments but which are also very harmful: First World tariffs. If we remember Ricardian or Association Law, we would expect African people to join the international division of labor by producing low value and low specialized goods (such as food, clothes and so on) at very cheap prices. In that case, foreign capital could enter the country and progressively increase productivity, wages and capital accumulation.
  
  However Western tariffs—mostly in agriculture—block this process. By rising African commodities’ prices, they become non-competitive and non-interesting for western consumers[19]. This means that the investment in those projects turns non-profitable and thus Western capital cannot be interested in them. Western politicians expel them from international division of labor.

• Regulations: Many African countries suffer a very intrusive bundle of regulations: in days to open a business[20], in investment[21] or in the labor market[22], i.e. entrepreneurship, capital accumulation and division of labor are highly restricted in Africa. Individual plans depend on the approval of some planners who hamper wealth creation. Regulatory interventionism is one of the main problems of Africa.
  
  
• Wars: Many African countries have been involved in wars during the last decades[23]. Statist wars destroy society and division of labor, give government absolute powers to direct the economy and provoke many human casualties. Societies can very hardly create wealth during a war, specially if an omnipotent government is established. Clearly this has been another important factor that explains African current situation.
  
  
• Inflation: Huge inflation rates are a constant in most of African countries[24]. Inflation is a tax on liquid savings and a distorter of economic calculation. As we have so far commented, the result of inflation is a shortening of plan’s stages, which means capital consumption and disinvestment, this is, wealth destruction.
  
  
• Expropriation: Asystematic attacks on legal availability over a resource are governmental expropriations. Individuals lose control over the means they need to fulfil their plans (and thus wealth is destroyed) and if they expect that situation to repeat in the future, they abandon wealth creation. Many African countries have suffered from land and enterprises expropriation/nationalizations[25] what have greatly reduced further investment and capital accumulation.

If one had to sum up Africa’s main problem it would unquestionably be the lack of respect for property rights. Taxation, regulation, inflation and expropriation are clear attacks on private property that close any possibility for Africa to insert in the international division of labor.

Mauritius, Botswana and South Africa are the South-African countries whose population is most prosperous[26] and, according to Heritage, are also the three with more respect for property rights.

We have identified a priori the disease. We have shown that it fits with reality. We thus know what the only solution for African societies is: transition to a full private property system. However, from many strata other solutions are proposed; we will devote our last section to analysis the viability of those ideas.

5. Foreign aid

Along this essay we have established that private property is both a sufficient and a necessary condition for wealth creation. It is sufficient because no other factor is needed to reconcile individual plan in a mutually beneficial cooperation scheme. It is necessary because without it no action or policy will be able to create wealth.

Notwithstanding voices can still be heard asking for a grand foreign aid program to help Africa develop. Their proponents generally do not explain the concrete ways in which this aid will foster wealth; it is just assumed that it will.

Although for a non-economist it might seem self-evident that money is wealth and that giving money to people can achieve them to be prosperous, these judgements are doubtfully valid and consistent. The Western observer tends to think with his backward experience, i.e. assuming that money is wealth because he has a bigger or smaller legal availability over it.

The reasoning should be much different if we took into account that Africa is not stuck by the lack of resources, but by the lack of private property. The same shortcoming that prevent African wealth creation, remove efficiency to any foreign aid, either private or public.

It may be useful to prove this point by examining the ways in which foreign aid could be used and what would be their consequences. Before of that, it is necessary to clarify one point.

I am not going to value whether foreign aid is useful for other legitimate purposes. My argumentation will just be concerned with development and wealth creation, this is, with the ability of individuals to fulfil increasing numbers of ends. Despite being against public foreign aid, I do not want to question private charity’s movies. I will just show that if the purpose of the donor is to help African people to be able to create wealth, it will simply not work in absence of private property.

5.1 Food and clothes

The most primary destiny of foreign aid is to buy food and clothes—as kinds of very basic products—to Africans. The relation of this use of aid with growth would be the following: starving people cannot prosper; if we feed them, they will have free time to create wealth.

The reasoning has a problem of causality inversion. What we try to explain and solve is African poverty, one of whose signs is starvation. Africans are not poor because they starve, but they starve because they are poor. Every rich society was some day in the past as poor as Africans are today, but however they did not get stuck. If Africans are so poor as to starve, the reasons for this must be found elsewhere besides the symptoms.

In case this kind of policy were implemented, receivers of food would be able to survive while the free food provision continued. They would not be able to create wealth by the same reasons they had not been able in the past. And as soon as aid stopped, starvation would continue.

Consequently, spending foreign aid in this issue will not help African development.

5.2 Education

Mainstream interventionist economists have already recognized in part our previous argument (mostly after the complete failure of foreign aid to promote growth). Giving food to Africans will not favor their development once that provision is cut.

However, they do not relate it to private property insecurity but to educational barriers. The idea has been sum up in the motto “If you give a man a fish he will eat today but if you teach him to fish he’ll eat for a lifetime”. Foreign aid thus could be useful in promoting education and in this way African development.

This reasoning still fails to recognize what the true problem is. African people already know how to fish or how to grow their lands. It would be naïve to suppose that after centuries of having lived with the Nature they do not know anything.

The true point is that despite knowing how to fish they do not fish or at least they do not fish enough. In other words, they do not use their knowledge to form economic plans. And they do not do that due to the reasons we have already sketched: there is no l a private property system in Africa.

Without private property there can be neither a truly productive division of labor (among fishermen) nor investments that assist them (ships, nets...). No one want to put their very scarce resources in some projects that with high probability will be interrupted by force.

Extensions of the argument are equally invalid. Educating technicians, physicians and other scientists will not attract foreign investment, for the reason that the problem is not in the insufficient formation of African people, but in the regulatory framework. Africa has already a comparative advantage in costs that is not currently exploited by foreign companies because of that framework. Nothing would change with better education.

In fact, the foreseeable consequence is that those scientists formed in Africa emigrate to the First World, where they are required and where that kind of projects can be realized.

5.3 Healthcare

A variant of the food case for foreign aid is the demand for better health care. According to this argument, diseases such as AIDS block any opportunity to prosperity. If Africans had better health, they could create wealth.

The argument might be plausible if healthy African population would be able to get richer, but this is not the case. Although diseases are a huge problem, they are not the problem that prevents many people—healthy and unhealthy—from fulfilling their ends.

In fact, two of the richest African countries—Botswana and South Africa—are also two of the most affected by AIDS, whereas other very poor countries such as Congo have much lower AIDS infection rate.

5.4 National industry subsidizing

Another part of the economic literature thinks that a Third World problem is the lack of national industries which could sell in national and international markets since they are immediately swept away by more efficient multinational corporations.

Some of them defend infant industries tariffs to protect national markets and others propose to subsidize the industries in order to compete in international ones; subsidies that could be paid with foreign aid.

This argument completely misses the point. Of course the lack of capital in Africa is an obstacle to the formation of competitive enterprises with a high performance. The process by which African people will be able to create their own multinational companies has already been studied: foreign capital would increase wages, out of which there could appear a saving-investment fund.

Furthermore, as Africans became wealthier and solvent they could ask for foreign loans to start their own business. Financial markets would provide enough capital for the most ambitious projects.

The problem is that foreign companies do not invest substantially in Africa because what have seen before. Africans have to enter in the international division of labor to supply now the goods and services which are required by consumers not by politicians.

There is no point in forcing the appearance of industries that are far more inefficient that other competitors. It would just be a complete waste of resources, whose effects would be similar to the food and clothes argument: Africans employed in subsidised industries would receive a net transfer of income, but they would not be able to spend it productively while private property is under attack.

5.5. Public works

The last possible justification for foreign aid is public works. Government would be entitled to build all the infrastructures the country needs to wake up. Once the equipment could be used, African people and foreign companies would start investing thanks to the higher expected profitability of their projects.

The implicit assumption is that part of the poverty of Africa comes from its lack of some equipment, which only the State can provide.

And this is the reason why it is false. Profit opportunities in Africa would be out there if government did not hamper the market. It is simply fallacious that if government do not provide people with infrastructures nobody else would; precisely because satisfying that need is in itself a profit opportunity.

But the problem of this proposal is the same than in previous cases. If a private property system is not restored, no infrastructure would be of utility. Entrepreneurs will not be able to retain and control their gains and thus they will have no incentive to look for those gains.

Governmental expenditure would moreover constitute a case of systematic interventionism that reduces the extent of the market and summits it to central planning orders. Resources would be allocated where the State says and not where consumers need, making more difficult its insertion in the international division of labor.

6. Conclusions

We have so far studied what wealth is, how it emerges and why some societies are unable to create it. The main conclusion has been that private property is a sufficient and a necessary condition for development.

The second corollary is obviously that any other proposed policy will fail while this huge shortcoming is not solved. Likewise, we could say, following P. T. Bauer, that foreign aid is neither a necessary nor a sufficient condition for development: Foreign aid is clearly not necessary for economic development, as is obvious for instance from the very existence of developed countries. All of these began as underdeveloped and progressed without foreign aid. Moreover, many underdeveloped countries have advanced very rapidly over the last half century or so without foreign aid.... There are many such countries in the far east, south-east Asia, East and West Africa and Latin America. Nor is foreign aid a sufficient condition. It cannot, for instance, promote development if a population at large is not interested in material advance, nor if it is strongly attached to values and customs incompatible with material progress.

All this implies that foreign aid is useless. But P. T. Bauer was going a bit further in the quote which opened this essay by saying that “Development aid, far from being necessary to rescue poor societies from a vicious circle of poverty, is far more likely to keep them in that state.”. Could foreign aid be not only useless but also harmful?

From the donor perspective it is crucial to distinguish between private and public aid. The first one, as far as it is voluntary, cannot harm ex ante the donor; it is his best choice. Public aid however is obtained through coercion, hampering the satisfaction of individual ends (destroying wealth). As P. T. Bauer once more stated it is “redistribution from poor taxpayers in rich countries to rich people in poor countries”.

From the receiver’s perspective it is necessary to distinguish whether he keeps the legal availability or not. In the first case, it is clear that every gift raises disposable wealth for the receiver, as long as the number of available means to satisfy his ends increases.

However, if the government ultimately owns the aid, either public or private, the original receiver will not be able to fit it into their plans and thus it could not be considered wealth at all. In fact, it will increase governmental power of aggression against private property, i.e. the root of all evils.

Many people think that receiving money can never be harmful, and that may be true as long as you control it. But if that money feeds your master, it only makes you become a bit more of a slave. There is no paradox in African people asking for the end of foreign aid or as the Kenyan economist James Shikwati puts it: Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. And thus he claimed: For God’s Sake, Please Stop the Aid![27]

The following graph illustrates perfectly our reasoning:

[28]

There is only one path to development: capitalism. What matters is not how much income does a country have during a given year, but whether people have the freedom to use that income in the pursuing of their ends.

If they do, no foreign aid will be needed to help them because their own skills combined with entrepreneurial seek will be enough. If they do not have this freedom, then not even all the resources of the world would allow them to prosper.

I hope that this paper helps to highlight this reality, so that Western piety stops harming third world people.

7. Bibliography

Bauer, Peter, and Basil S. Yamey, “The Economics of Under-developed Countries”, Cambridge University Press.

Bhalla, Surjit, “Imagine There’s No Country: Poverty, Inequality and Growth in the Era of Globalization”

Böhm-Bawerk, Eugen, “Capital and Interest”, Libertarian Press

Del Castillo, José Ignacio “Dinero caliente y globalización” http://www.liberalismo.org/articulo/174/

Fredrik Eirkson, Fredrik, “Why Aid does not work” http://news.bbc.co.uk/1/hi/sci/tech/4209956.stm

Hayek, Friedrich, “Prices and Production”, George Routledge & Sons

Hazlitt, Henry, “Man vs. The Welfare State”, Arlington House.

Hazlitt, Henry, “The Conquest of Poverty”, Foundation for Economic Education.

Heritage Foundation, 2007 Index of Economic Freedom

Huerta de Soto, “Money, Bank Credit and Economic Cycles”, Ludwig von Mises Institute

Mises, Ludwig von, “Human Action”, Scholar’s Edition, Ludwig von Mises Institute

Reisman, George, “Capitalism”, Jameson Books

Reisman, George, “Globalization: The Long-Run Big Picture” http://www.mises.org/story/2361

Roberts, Paul Craig & Schumer Charles, “Second Thoughts on Free Trade” http://www.vdare.com/roberts/second_thoughts.htm

Rothbard, Murray, “Man, Economy & State”, Scholar’s Edition, Ludwig von Mises Institute

Sala-i-Martin, Xavier, “Globalización y Reducción de la Pobreza”, FAES

Shikwati, James, “Interview in Der Spiegel”, http://www.spiegel.de/international/spiegel/0,1518,druck-363663,00.html

Strigl, Richard von, “Capital and Production”, Ludwig von Mises Institute

Wickman Kurt, “Whither the Common Agricultural Policy”, Timbro