Why is the number of poor people in Africa increasing when Africa’s economies are growing?

By Laurence Chandy

2015 marks the 20th year since sub-Saharan Africa started on a path of faster economic growth. During that period, growth has averaged 5.2 percent per year. Meanwhile, the number of people on the continent reportedly living under $1.25 a day has continued to creep upwards from 358 million in 1996 to 415 million in 2011—the most recent year for which official estimates exist.

What can explain these divergent trends? 

The most obvious explanation would be if all the benefits of growth were captured by the rich, resulting in ever-increasing inequality within each country. But the data don’t show much evidence of that, thankfully. Distribution trends within African countries are a wash: The distribution is widening in about as many countries as it is narrowing. And in most countries the distribution isn’t changing much at all. It might be that the very richest people—the top 1 percent—are enjoying more than their share of the spoils of growth but that this is missing from the data, as this rarified class tends not to participate in household surveys from which distributions are derived. Yet, in the absence of supplementary data to back this theory up, such as the tax records used to measure top incomes in rich countries, this is mere speculation. Moreover, there is certainly evidence of rising average incomes for the people who do participate in surveys. 

Instead, there are five factors that can account for sub-Saharan Africa’s disappointing poverty numbers.

The first is the region’s rapid population growth of 2.6 percent a year. While African economies are generating more income, that income has to be shared among an ever-increasing number of people. Since the region’s income is growing faster than its population, average incomes are rising and the share of Africans living in extreme poverty is falling—from 60 percent in 1996 to 47 percent in 2011. But the rate at which poverty is falling is less than the rate at which the population is rising, so the number of people living in poverty continues to grow. More generally, sub-Saharan Africa’s record on economic growth looks much less impressive in per capita terms. The World Bank has just released a revised growth forecast for the region in 2015 of 4.0 percent. When you lop off 2.6 for population growth, you’re left with per capita income growth of only 1.4 percent. Compare that with the world average where projected economic growth of 2.9 percent combined with population growth of 1.1 percent results in per capita income growth of 1.8 percent in 2015. So, in per capita terms, Africa’s growth this year is expected to be below the global average.

The second factor is the depth of Africa’s poverty compared to poverty elsewhere. In other words, poor people in Africa start further behind the poverty line. So even if their income is growing, it is rarely enough to push them over the $1.25 threshold. In 2011, the average person living in extreme poverty in Africa lived on 74 cents a day, whereas for the rest of the developing world, it was 98 cents. I’ve written before about the implications of this trend for poverty reduction in Africa here.

The third factor is that even though inequality isn’t rising in most African countries, inequality is already at unusually high levels. Where initial inequality is high, it is to be expected that economic growth delivers less poverty reduction, since the absolute increases in income associated with rising average incomes will be that much smaller for the have-nots versus the haves. Moreover, the degree of inequality that exists on the continent is worse than it looks. The fact that Africa is divided into so many countries masks big differences in income between them. If Africa were a single country, its inequality would look much worse—worse even than Latin America. Since incomes across African people vary so widely, only a fraction of people are likely to cross the poverty line at any one time. That contrasts with India where a concentration of people immediately below the $1.25 mark means that even a small increase in incomes can result in a sudden flood of people moving above the poverty line.

The above three factors explain why you would expect relatively little poverty reduction for a given amount of growth in Africa compared to elsewhere (in technical terms, a lower poverty elasticity). But they can’t explain why the number of poor people in Africa has actually increased since the start of the century. For this we need the two final factors.

The fourth factor is that there is a degree of mismatch between where growth is occurring and where the poor are on the continent. To be sure, the region’s growth acceleration has benefited some of its poorest countries, including Ethiopia, Mozambique, and Rwanda. Yet others such as the Democratic Republic of the Congo and Madagascar have recorded little or no growth over the past 20 years, and the number of poor people in these countries has risen accordingly. So long as a handful of the region’s fragile states struggle to build and sustain economic momentum, the number of poor people in Africa need not fall. 

The fifth and final factor concerns data quality. Poverty estimates are drawn from household surveys which in most African countries are conducted infrequently. Those that do take place often suffer from operational glitches that affect the credibility of the results. Take Nigeria, which accounts for a quarter of the people on the continent living in poverty. There are some well-documented flaws with its most recent national survey of living standards (not to be confused with the issues concerning the country’s national accounts, which were recently rebased). When new data become available, be prepared to discover that Nigeria’s poverty rate is considerably lower and has been falling at a faster pace than previously thought. As a general rule, aggregate poverty numbers for Africa should be handled with care, and small increases or decreases should not be taken too seriously.

The dissonance between Africa’s growth performance and its poverty numbers is a striking phenomenon that demands an explanation. While intuition may lead us to call into question the region’s growth—it only benefits the rich, the quality of growth is deficient, the growth numbers are exaggerated—the above five factors suggest that the answer can instead be found by analyzing Africa’s poverty data more closely.  


Laurence Chandy is a former fellow in the Global Economy and Development program and the Development Assistance and Governance Initiative. His research focused on poverty, fragile states, aid effectiveness, and globalization.

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George Ayittey in TED: Dead Aid

Culled from TED Blog

Economist George Ayittey gave a blistering talk at TEDGlobal 2007, laying out his case that not only has Western aid not helped in most African countries — it’s actually hurting.

We asked Ayittey for his thoughts on the new book Dead Aid, which has lately been burning up the talk shows and opinion columns with a message similar to Ayittey’s. Author Dambisa Moyo says that aid is killing the very countries it’s supposed to help. She singles out for criticism the celebrity crusades to “save Africa,” and the skewing view they present of African life.

(You can also download the unedited notes for this interview, including reading list, sources and more.)

Dambisa Moyo’s new book is drawing new attention to the question of aid in Africa, and her thesis is quite like yours, but aimed at a mass-market audience (as she said on Charlie Rose). Do you think it is risky to sensationalize the issue?

I don’t think Dambisa is sensationalizing the issue strong enough. Americans were justifiably outraged when AIG, which received billions in U.S. taxpayer money in bailouts, paid out hefty bonuses to its executives. So where is the outrage when African leaders, who receive U.S. taxpayers’ money in foreign aid, build palaces for themselves while their people wallow in abject poverty?

More important, the presumption that Africans don’t know what is good for them and that Americans or other foreigners know what is best for Africans is extremely offensive. If you want to help American farmers, you ask them what sort of help they need and whether such assistance is working. Why don’t Americans ask Africans what type of aid they need and whether the aid Americans have provided is working? So what is wrong with an African, Dambisa, telling Americans that the foreign aid they are providing isn’t working and it is “Dead Aid”?

It’s clear that Moyo’s thesis draws from your work. How would you respond to those who assert that her views and yours are idealistic and ideological?

Our critics have not been paying attention to the literature on foreign aid. Our views are neither idealistic nor ideological but rather factual. There are three types of foreign aid: humanitarian relief aid, given to victims of natural disasters such as earthquakes, cyclones and floods; military aid; and economic development assistance. We have no qualms with humanitarian aid, and I am sure our critics would agree that military aid to tyrannical regimes in Africa is the least desirable. Much confusion, however, surrounds the third, also known as official development assistance or ODA. Contrary to popular misconceptions, ODA is not “free.” It is essentially a “soft loan,” or loan granted on extremely generous or “concessionary” terms.

The consensus that emerged decades ago was that foreign aid had not been effective in reversing Africa’s economic decline. Dambisa and I are simply restating a fact. And it is not just Africa. That foreign aid has failed to accelerate economic development in the Third World generally was also accepted. In 1999, the United Nations declared that 70 countries — aid recipients all — are now poorer than they were in 1980. An incredible 43 were worse off than in 1970. “Chaos, slaughter, poverty and ruin stalked Third World states, irrespective of how much foreign assistance they received,” wrote the Washington Post, on Nov. 25, 1999. Except for Haiti, all of the 13 foreign aid failures cited — Somalia, Sierra Leone, Liberia, Angola, Chad, Burundi, Rwanda, Uganda, Zaire, Mozambique, Ethiopia and Sudan — were in Sub-Saharan Africa. The African countries that received the most aid — Somalia, Liberia and Zaire — slid into virtual anarchy.

Is there a fundamental place where you diverge from Moyo?

Though we are both on point regarding the failure of aid programs in Africa, we diverge in two respects.

First, Dambisa wants all aid to Africa stopped in five years, which won’t happen. Over the decades, various African civic groups and persons, including myself, have called for a cutoff of aid to Africa. In a report drafted during a five-day forum hosted by UNESCO in Paris in 1995, more than 500 African political and civic leaders urged donor nations to cut off funds to African dictatorships and called for free elections in such nations within two years. If the West could impose sanctions against Libya and South Africa, then Africans could also call for sanctions against their own illegal regimes.

Second, I believe that the foreign aid resources Africa desperately needs to launch into self-sustaining growth and prosperity can be found in Africa itself, not in China as Dambisa believes.

Moyo’s work speaks to that deep urge among Westerners to “do something” — even something that may be deeply unproductive. What’s a more productive way to “do something”?

I think Westerners should resist that urge to “do something,” because the worst type of help one can receive is that which doesn’t solve your problem but compounds it. If Westerners want to help, they must carefully scrutinize and reform current aid policies to make them more effective. Both the Clinton and Bush administrations tried to but failed. Business as usual is no longer an option, which is what both Dambisa and I are against.

Foreign aid should be tied not on promises of African leaders but to the establishment of a few critical institutions:

+ An independent central bank: to assure monetary and economic stability, as well as stanch capital flight out of Africa. If possible, governors of central banks in a region, say West Africa, may be rotated to achieve such independence. The importance of this institution resides in the fact that the ruling bandits not only plunder the central bank but also use its facilities to transfer the loot abroad.

+ An independent judiciary — essential for the rule of law. Supreme Court judges may also be rotated within a region.

+ A free and independent media to ensure free flow of information. The first step is solving a social problem is to expose it, which is the business of news practitioners. The state-controlled or state-owned media would not expose corruption, repression, human rights violations and other crimes against humanity. In fact, it is far easier to plunder and repress people when they are kept in the dark. The media needs to be taken out of the hands of government.

+ An independent Electoral Commission to avoid situations where African despots write electoral rules, appoint a fawning coterie of sycophants as electoral commissioners, throw opposition leaders in jail and hold coconut elections to return themselves to power.

+ An efficient and professional civil service, which will deliver essential social services to the people on the basis of need and not on the basis of ethnicity or political affiliation.

+ The establishment of a neutral and professional armed and security forces.

The establishment of these institutions would empower Africans to instigate change from within. For example, the two great antidotes against corruption are an independent media and an independent judiciary. But only 8 African countries have a free media in 2003, according Freedom House. These institutions cannot be established by the leaders or the ruling elites (conflict of interest); they must be established by civil society. Each professional body has a “code of ethics,” which should be re-written by the members themselves to eschew politics and uphold professionalism. Start with the “military code,” and then the “bar code,” the “civil service code” and so on. These reforms, in turn, will help establish in Africa an environment conductive to investment and economic activity. But the leadership is not interested. Period.

Effective foreign aid programs are those that are “institution-based.” Give Africa the above 6 critical institutions and the people will do the rest of the job.

Africa is poor because it is not free.

George Ayittey responded to emailed questions from TEDAfrica Director Emeka Okafor and editor Emily McManus. Download the unedited notes from this interview, an 11-page PDF with reading lists, noted sources, and much more. TED intern Mischa Nachtigal prepared this edited blog post.

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Aristotle: Politics

Aristotle was an ancient Greek philosopherand scientist born in the city of StagiraChalkidice, on the northern periphery of Classical Greece. His father, Nicomachus, died when Aristotle was a child, whereafter Proxenus of Atarneus became his guardian.[3] At seventeen or eighteen years of age, he joined Plato’sAcademy in Athens[4] and remained there until the age of thirty-seven (c. 347 BC). His writings cover many subjects – including physicsbiologyzoologymetaphysicslogic, ethics, aestheticspoetry, theater, music, rhetoriclinguistics, politics and government – and constitute the first comprehensive system of Western philosophy. Shortly after Plato died, Aristotle left Athens and, at the request of Philip II of Macedon, tutored Alexander the Great beginning in 343 BC.

Our purpose is to consider what form of political community is best of all for those who are most able to realize their ideal of life. We must therefore examine not only this but other constitutions, both such as actually exist in well-governed states, and any theoretical forms which are held in esteem; that what is good and useful may be brought to light. And let no one suppose that in seeking for something beyond them we are anxious to make a sophistical display at any cost; we only undertake this inquiry because all the constitutions with which we are acquainted are faulty.

We will begin with the natural beginning of the subject. Three alternatives are conceivable: The members of a state must either have (1) all things or (2) nothing in common, or (3) some things in common and some not. That they should have nothing in common is clearly impossible, for the constitution is a community, and must at any rate have a common place- one city will be in one place, and the citizens are those who share in that one city. But should a well ordered state have all things, as far as may be, in common, or some only and not others? For the citizens might conceivably have wives and children and property in common, as Socrates proposes in the Republic of Plato. Which is better, our present condition, or the proposed new order of society.

Part V
Next let us consider what should be our arrangements about property: should the citizens of the perfect state have their possessions in common or not? This question may be discussed separately from the enactments about women and children. Even supposing that the women and children belong to individuals, according to the custom which is at present universal, may there not be an advantage in having and using possessions in common?

Three cases are possible: (1) the soil may be appropriated, but the produce may be thrown for consumption into the common stock; and this is the practice of some nations. Or (2), the soil may be common, and may be cultivated in common, but the produce divided among individuals for their private use; this is a form of common property which is said to exist among certain barbarians. Or (3), the soil and the produce may be alike common.
When the husbandmen are not the owners, the case will be different and easier to deal with; but when they till the ground for themselves the question of ownership will give a world of trouble.

If they do not share equally enjoyments and toils, those who labor much and get little will necessarily complain of those who labor little and receive or consume much. But indeed there is always a difficulty in men living together and having all human relations in common, but especially in their having common property. The partnerships of fellow-travelers are an example to the point; for they generally fall out over everyday matters and quarrel about any trifle which turns up.

These are only some of the disadvantages which attend the community of property; the present arrangement, if improved as it might be by good customs and laws, would be far better, and would have the advantages of both systems. Property should be in a certain sense common, but, as a general rule, private; for, when everyone has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business.”

How immeasurably greater is the pleasure, when a man feels a thing to be his own; for surely the love of self is a feeling implanted by nature and not given in vain, although selfishness is rightly censured; this, however, is not the mere love of self, but the love of self in excess, like the miser’s love of money; for all, or almost all, men love money and other such objects in a measure. And further, there is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state. ………. No one, when men have all things in common, will any longer set an example of liberality, or do any liberal action; for liberality consists in the use which is made of property.

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James Madison: The Federalist No. 10 (1787)

James Madison was an American statesman and Founding Father who served as the fourth President of the United States from 1809 to 1817. He is hailed as the “Father of the Constitution” for his pivotal role in drafting and promoting the United States Constitution and the Bill of Rights.

To the People of the State of New York:

AMONG the numerous advantages promised by a well constructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction. The friend of popular governments never finds himself so much alarmed for their character and fate, as when he contemplates their propensity to this dangerous vice. He will not fail, therefore, to set a due value on any plan which, without violating the principles to which he is attached, provides a proper cure for it.

The instability, injustice, and confusion introduced into the public councils, have, in truth, been the mortal diseases under which popular governments have everywhere perished; as they continue to be the favorite and fruitful topics from which the adversaries to liberty derive their most specious declamations.

The valuable improvements made by the American constitutions on the popular models, both ancient and modern, cannot certainly be too much admired; but it would be an unwarrantable partiality, to contend that they have as effectually obviated the danger on this side, as was wished and expected. Complaints are everywhere heard from our most considerate and virtuous citizens, equally the friends of public and private faith, and of public and personal liberty, that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority.

However anxiously we may wish that these complaints had no foundation, the evidence, of known facts will not permit us to deny that they are in some degree true. It will be found, indeed, on a candid review of our situation, that some of the distresses under which we labor have been erroneously charged on the operation of our governments; but it will be found, at the same time, that other causes will not alone account for many of our heaviest misfortunes; and, particularly, for that prevailing and increasing distrust of public engagements, and alarm for private rights, which are echoed from one end of the continent to the other. These must be chiefly, if not wholly, effects of the unsteadiness and injustice with which a factious spirit has tainted our public administrations.

By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community. There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.

There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests. It could never be more truly said than of the first remedy, that it was worse than the disease. Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.

The second expedient is as impracticable as the first would be unwise. As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other; and the former will be objects to which the latter will attach themselves.

The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.

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Voltaire Philosophical Letters: On Commerce

Voltaire (real name François-Marie Arouet) (1694 – 1778) was a Frenchphilosopher and writer of the Age of Enlightenment. His intelligence, wit and style made him one of France’s greatest writers and philosophers, despite the controversy he attracted.

He was an outspoken supporter of social reform (including the des, freedom of religion and free trade), despite the strict censorship lawsand harsh penalties of the period, and made use of his satirical works to criticize Catholic dogma and the French institutions of his day. Along with John LockeThomas Hobbes and Jean-Jacques Rousseau, his works and ideas influenced important thinkers of both the American and French Revolutions.

Commerce, which has brought wealth to the citizenry of England, has helped to make them free, and freedom has developed commerce in its turn. By means of it the nation has grown great; it is commerce that little by little has strengthened the naval forces that make the English the masters of the seas. At present they have nearly two hundred warships.%3have nearly two hundred warships.

 Posterity may learn with some surprise that a little island with nothing of its own but a bit of lead, tin, fuller’s earth, and coarse wool, became, by means of its commerce, powerful enough by 1723 to send three fleets at one time to three different ends of the earth – one to guard Gibraltar, conquered and kept by its arms; another to Portobello to dispossess the King of Spain of the treasures of the Indies; and the third to the Baltic Sea to prevent the Northern Powers from fighting.   

When Louis XIV was shaking Italy, and his armies, already in possession of Savoy and Piedmont, were ready to capture Turin, it was up to Prince Eugene to march from the depths of Germany to aid the duke of Savoy. He had no money at all, a thing without which towns are neither taken nor defended. He appealed to some English merchants. In half an hour he had a loan of fifty million; whereupon he delivered Turin, beat the French, and wrote this little note to those who had loaned him that sum: “Gentlemen, I have received your money, and I flatter myself that I have employed it to your satisfaction.”  

All this makes an English merchant justly proud, and allows him boldly to compare himself, not without some reason, to a Roman citizen; moreover, the younger brother of a peer of the realm does not scorn to enter into trade. Lord Townshend, Minister of State, has a brother who is content to be a merchant in the City. When Lord Oxford was governing England, his younger brother was a factor at Aleppo; he did not want to return home, and died there. 

This custom, which unfortunately is beginning to go out of fashion, appears monstrous to Germans infatuated with their quarterings. They are unable to imagine how the son of a peer of England could be only a rich and powerful bourgeois, whereas Germany is all Prince: there have been at one time as many as thirty Highnesses of the same name, with nothing to show for it but their pride and a coat of arms.   

In France anybody who wants to can be a marquis; and whoever arrives in Paris from the remotest part of some province with money to spend and an ac or an ille at the end of his name, may indulge in such phrases as “a man of my sort,” “a man of my rank and quality,” and with sovereign eye look down upon a wholesaler. The merchant himself so often hears his profession spoken of disdainfully that he is fool enough to blush.

Yet I don’t know which is the more useful to a state, a wellpowdered lord who knows precisely what time the king gets up in the morning and what time he goes to bed, and who gives himself airs of grandeur while playing the role of slave in a minister’s antechamber, or a great merchant who enriches his country, send order from his office to Surat and to Cairo, and contributes to the wellbeing of the world.  

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Friedrich Hayek: The Use of Knowledge in Society (II)

It will at once be evident that on this point the position will be different with respect to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts.

 If it is today so widely assumed that the latter will be in a better position, this is because one kind of knowledge, namely, scientific knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant. It may be admitted that, as far as scientific knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the difficulty to the problem of selecting the experts. What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem.

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.

We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques.

And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries.

This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely immune to the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer.

If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such. Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the significance and frequency of changes which will make substantial alterations of production plans necessary. Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of importance would be required, the task of drawing up a comprehensive plan governing all economic activity would be much less formidable.

It is, perhaps, worth stressing that economic problems arise always and only in consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?

The fairly widespread belief in the affirmative is not, as far as I can ascertain, borne out by the practical experience of the businessman. In a competitive industry at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager. How easy it is for an inefficient manager to dissipate the differentials on which profitability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist. The very strength of the desire, constantly voiced by producers and engineers, to be allowed to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work.

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability.

The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the “man on the spot.”

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John Locke (1824): Two Treatises of Government (1)

John Locke (1632-1704) was an English philosopher who is considered to be one of the first philosophers of the Enlightenment and the father of classical liberalism. In his major work Two Treatises of Government Locke rejects the idea of the divine right of kings, supports the idea of natural rights (especially of property), and argues for a limited constitutional government which would protect individual rights.

Though the earth, and all inferiour creatures, be common to all men, yet every man has a property in his own person: this nobody has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men. For this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to, at least where there is enough, and as good, left in common for others.

He that is nourished by the acorns he picked up under an oak, or the apples he gathered from the trees in the wood, has certainly appropriated them to himself. Nobody can deny but the nourishment is his. I ask then, when did they begin to be his? when he digested? or when he eat? or when he boiled? or when he brought them home? or when he picked them up? and it is plain, if the first gathering made them not his, nothing else could. That labour put a distinction between them and common: that added something to them more than nature, the common mother of all, had done; and so they became his private right. And will any one say he had no right to those acorns or apples he thus appropriated, because he had not the consent of all mankind to make them his? was it a robbery thus to assume to himself what belonged to all in common? If such a consent as that was necessary, man had starved, notwithstanding the plenty God had given him.

We see in  commons, which remain so by compact, that it is the taking any part of what is common, and removing it out of the state nature leaves it in, which begins the property; without which the common is of no use. And the taking of this or that part does not depend on the express consent of all the commoners. Thus the grass my horse has bit; the turfs my servant has cut; and the ore I have digged in any place, where I have a right to them in common with others; become my property, without the assignation or consent of any body. The labour that was mine, removing them out of that common state they were in, hath fixed my property in them.

But the chief matter of property being now not the fruits of the earth, and the beasts that subsist on it, but the earth itself; as that which takes in, and carries with it all the rest; I think it is plain, that property in that too is acquired as the former. As much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property. He by his labour does, as it were, enclose it from the common. Nor will it invalidate his right, to say every body else has an equal title to it, and therefore he cannot appropriate, he cannot enclose, without the consent of all his fellow commoners, all mankind. God, when he gave the world in common to all mankind, commanded man also to labour, and the penury of his condition required it of him. God and his reason commanded him to subdue the earth, i. e. improve it for the benefit of life, and therein lay out something upon it that was his own, his labour. He that, in obedience to this command of God, subdued, tilled, and sowed any part of it, thereby annexed to it something that was his property, which another had no title to, nor could without injury take from him.

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Friedrich Hayek: The Use of Knowledge in Society (I)

A claim for equality of material position can be met only by a government with totalitarian powers.

F. A. Hayek (1899–1992) is undoubtedly the most eminent of the modern Austrian economists, and a founding board member of the Mises Institute. Student of Friedrich von Wieser, protégé and colleague of Ludwig von Mises, and foremost representative of an outstanding generation of Austrian School theorists, Hayek was more successful than anyone else in spreading Austrian ideas throughout the English-speaking world. He shared the 1974 Nobel Prize in Economics with ideological rival Gunnar Myrdal “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena.”  Among mainstream economists, he is mainly known for his popular The Road to Serfdom  (1944). From


What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

This, however, is emphatically not the economic problem which society faces. And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it. The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been obscured rather than illuminated by many of the recent refinements of economic theory, particularly by many of the uses made of mathematics. Though the problem with which I want primarily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain methodological questions. Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged. But, as I now see these problems, this is no accident. It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society. This misconception in turn is due to an erroneous transfer to social phenomena of the habits of thought we have developed in dealing with the phenomena of nature.
In ordinary language we describe by the word “planning” the complex of interrelated decisions about the allocation of our available resources. All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the first instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner. The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an efficient economic system.

The answer to this question is closely connected with that other question which arises here, that of who is to do the planning. It is about this question that all the dispute about “economic planning” centers. This is not a dispute about whether planning is to be done or not. It is a dispute as to whether planning is to be done centrally, by one authority for the whole economic system, or is to be divided among many individuals. Planning in the specific sense in which the term is used in contemporary controversy necessarily means central planning— direction of the whole economic system according to one unified plan. Competition, on the other hand, means decentralized planning by many separate persons. The halfway house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly.

Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.

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Frederic Bastiat: The Candlemakers’ Petition (Part 2)

There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.
It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.

We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle that guides your entire policy. Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense? We have our answer ready:
You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.

Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, “Yes,” you reply, “but the producer has a stake in their exclusion.” Very well! Surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.
“But,” you may still say, “the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.” Very well! If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.

Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?

But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else’s would be tantamount to accepting the equation: +×=+–; in other words, it would be to heap absurdity upon absurdity.

Labor and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labor that constitutes value and is paid for.

If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market. Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.

Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labor withstand the competition of foreign labor when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.

To take another example: When a product—coal, iron, wheat, or textiles—comes to us from abroad, and when we can acquire it for less labor than if we produced it ourselves, the difference is a gratuitous gift that is conferred upon us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us.

The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

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Frederic Bastiat: The Candlemakers’ Petition (Part I)

As described by Andrew Beattie, The “Candle Maker’s Petition” is a satire of protectionist tariffs written the by great French economist, Frederic Bastiat. In many ways, it expanded on the free market argument against mercantilism set forth by Adam Smith, but Bastiat’s target was government tariffs that were levied to protect domestic industries from competition. In Bastiat’s “Candle Maker’s Petition”, all the people involved in the French lighting industry, including “the manufacturers of candles, tapers, lanterns, sticks, street lamps, snuffers and extinguishers, and from producers of tallow, oil, resin, alcohol, and generally of everything connected with lighting” call upon the French government to take protective action against the unfair competition of the sun.

They argue that forcing people to close “all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds – in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses” will lead to a higher consumption of candles and related products. In turn, they reason, the industries that those in the lighting industry depend on for materials will have greater sales, as will their dependent suppliers, and so on until everyone is better off without the sun.

From the Manufacturers of Candles, Tapers, Lanterns, Candlesticks, Street Lamps, Snuffers, and Extinguishers, and from the Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting. To the Honorable Members of the Chamber of Deputies. Gentlemen:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity for applying your—what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, and, as for principles, you deny that there are any in political economy; therefore we shall call it your practice—your practice without theory and without principle.

We are suffering from the ruinous competition of a foreign rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly that we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

Be good enough, honorable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged? If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.

If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.
Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.

The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honor of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc. But what shall we say of the specialties of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.


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