The Best Antipoverty Program Ever Tried Was Letting People Trade

For almost the whole of human history, the great question of economics was how to avoid starving.

Think about that before you listen to anyone tell you that the market system is the cause of poverty. Poverty is not a product of the modern world. Poverty is the default setting of the human race. It was the condition of nearly everyone, nearly everywhere, nearly always, until a few centuries ago, when some societies stumbled into an arrangement that let ordinary people make things, swap things and keep a share of what they earned. The remarkable fact is not that poverty still exists. The remarkable fact is that, in much of the world, it has become something we can talk about as a problem to be solved instead of a fate to be endured.

And yet one of the most common claims in American politics goes like this: capitalism produces poverty, and only government rescues people from it. I want to take that claim seriously, state it as its best defenders would, and then show you what the historical record says. The short version is the title of this post. The most effective antipoverty program ever tried was not a program at all. It was permission to trade.

The claim at its strongest

The argument has a long pedigree. Karl Marx and Friedrich Engels, writing in the mid-nineteenth century, looked at the mill towns of England and saw crowded slums, child labour and twelve-hour days. Engels published The Condition of the Working Class in England in 1845. Those conditions were real. Nobody has to make them up. The case for the left's thesis is that markets, left alone, concentrate wealth in a few hands, push wages down toward bare subsistence and leave the weak behind. Government, in this telling, is the only force strong enough to restrain the strong: minimum wages, safety rules, pensions, public schools, transfer payments.

There is a second, more modern version. Free trade, the argument goes, lets factories move overseas, destroys towns that depended on a single plant and leaves the displaced worker with a worthless skill. Economists on both sides of the aisle have documented real pain here, and I will come to it.

Here is what I would say in answer, in order.

1. The poverty came first. The mill towns were awful, but the people who moved into them were mostly coming from the farm, and they came because the farm was worse. Economic historians argue to this day about how fast living standards rose in the early decades of the Industrial Revolution, and the honest ones concede that the first generation had a hard time. They do not argue about what came next. Over the following century, wages, life expectancy, diet and housing in the industrial countries improved at a rate with no precedent in history. The economist Deirdre McCloskey has made the case at book length that ordinary people's dignity and incomes rose because new ideas and new trade were allowed to flourish. You can disagree with her. You cannot find an earlier era in which the poor of a whole nation grew steadily better off.

1. The reforms the left credits to government were paid for by growth. Pensions, public schools, safety inspectors and sewer systems are real achievements, and conservatives support many of them. But a society that produces nothing cannot afford them. Wealth had to exist before it could be shared, and it was trade, specialisation and investment that produced it.

1. The most dramatic anti-poverty events in modern history involved governments getting out of the way. Let me give you two.

China, 1978

In December 1978, the Chinese Communist Party held the Third Plenum of its Eleventh Central Committee, and Deng Xiaoping's faction launched what became known as "reform and opening up." The details were messy, and I will not pretend that China became a free society; it did not and has not. But on the economic side, something changed that the party's own earlier policy could not have produced.

Farmers had been working collectively land they did not own. In the years after 1978, households were permitted to farm particular plots under contract and to sell the surplus above a fixed quota at market prices. Rural families who had been told for decades what to grow began deciding for themselves. In 1980 the government created its first special economic zones, Shenzhen among them, where foreign investment and export manufacturing were welcomed and the rules were looser than elsewhere. Over the next decades, hundreds of millions of people moved from the countryside to factory jobs and cities.

I will not quote a poverty number here, because I would be quoting from memory and this is exactly the kind of figure you should check yourself. The World Bank's Poverty and Inequality Platform publishes the series, and you can look up the line for China before and after 1978. I am confident you will find the direction of the line is not in dispute. The point is the mechanism: a very poor country allowed its people to trade with each other and with the world, and it stopped being as poor as it was. Nothing about it was a transfer program.

India, 1991

India had been a different kind of case. After independence in 1947 it chose a mixed economy dominated by planning, with a web of licences, quotas and permits that Indians called the "License Raj." If you wanted to build a factory, expand a plant or import a machine, you needed a government permit, and the people who issued permits had their own incentives, as we know.

In 1991 India faced a severe balance-of-payments crisis. A new government under Prime Minister P. V. Narasimha Rao, with Manmohan Singh as finance minister, cut import controls, abolished a great deal of industrial licensing and opened the economy to foreign investment. Notice who did this: a government of the Congress Party, a party with a socialist heritage, forced by hard arithmetic to admit that the permits were the problem. India's growth accelerated in the years that followed, and the middle class expanded. Again, the figures are available from the World Bank and from India's own statistical agencies, and I would urge you to check them instead of trusting me.

The lesson in both cases is the same, and it is not that government is irrelevant. It is that the largest single thing a government can do for the poor is stop preventing them from earning.

Why trade especially helps the poor

Now let me make the argument that I think is the most neglected one in the American debate: why open markets are particularly good for people on the bottom of the income ladder.

The first reason is prices. A poor family spends most of its money on goods: food, clothing, shoes, household items, a used car. Those are the goods most exposed to tariffs and most helped by imports. A tariff is a tax on the thing the family has to buy, and because the poor spend more of their income on goods than the rich, a broad tariff takes a larger bite from them. who really pays a tariff, following the dollar from dock to shelf follows the dollar from the dock to the shelf. The wealthy hardly notice an extra few dollars on a pair of shoes. A mother of three notices.

The second is opportunity. Adam Smith put the foundation of the argument in 1776: the division of labour is limited by the extent of the market. A small market supports few specialists. A big one supports many. Letting a small business in Ohio sell to Ontario, or a shoemaker in Vietnam sell to a family in Tennessee, enlarges the market for both. The poor are the people most dependent on finding a first job and a first customer, and it is the newcomer who suffers most when the door is closed.

The third is competition against entrenched firms. Protection is rarely a gift to the poor. It is far more often a gift to the established producer, who gets to charge more. I, Pencil and the price system, how nobody plans your breakfast shows how a price carries information that no planner could gather, and what happens when you jam that signal.

And the fourth is history's verdict on the alternative. Smoot-Hawley in 1930 raised tariffs on a long list of goods, and other countries retaliated. Economists differ on how much of the Depression to blame on it, and Smoot-Hawley, 1930, what the tariff did and what it did not do is honest about that dispute. But no serious scholar argues that it helped the poor. Look at the closed economies of the twentieth century, from the Soviet bloc to the high-wall experiments in other places, and look at where people tried to move. They moved toward the open economies.

The strongest objection: inequality and the people who lose

The best answer from the left is not that trade fails to make the world richer. It is that the gains are unequally shared, and some people are hurt badly. I think that objection has real force, and I owe it a fair answer.

Start with inequality. It is true that in many countries the rich gained more than the poor in absolute dollars in the decades of globalisation. That is a fact about the shape of the gains. It is not evidence that the poor lost. A person who goes from nothing to something has gained, even if his neighbour went from something to a great deal. The left has a legitimate value claim here, that large gaps are corrosive, and a conservative should respect it as a value claim. But it is a different claim from "capitalism produces poverty," and it does not support the conclusion that cutting the size of the pie helps the person with the smallest slice.

Then there are the losers. In 2013, the economists David Autor, David Dorn and Gordon Hanson published a well-known paper, often called "the China shock" paper, finding that American communities most exposed to rising Chinese imports suffered job losses and weak recovery, and that the adjustment was slower and more painful than economists had assumed. Conservatives should read it, and should not pretend it is a Marxist invention. It is not. The harm to a town that loses its plant is real. A man of fifty-two who has been a machinist for thirty years is not comforted by the fact that consumers across the country enjoyed lower prices.

So what follows? The honest conclusion is not that we should wall off the economy. Here is why.

1. The closed economy hurts the same people more quietly. The harm from a tariff is spread across every household, a few dollars at a time, and no one holds a press conference about it. The harm from a factory closing is concentrated and televised. That does not make the first harm smaller in total.
2. Technology and consumer choice cost jobs too. Automation, changes in what people buy and changes in transport have cost far more positions over the decades than any one trade partner. Blocking trade would not stop those forces.
3. Targeted help does more than blanket protection. If a community is hurt, the answer that serves the person is help for the person: a real chance at retraining, mobility, lower taxes and fewer licensing barriers, so that the machinist or his children can start something new. The conservative reforms in this area are about removing the barriers that keep the displaced from moving on, and they are worth a post of their own.
4. Some national-security exceptions are legitimate. Nobody serious believes a country should be wholly dependent on a hostile one for what its defence needs. That is an argument about security. It is a narrow one and should be argued on those terms, not smuggled in as a general case for walls.

The Republican Party has not always been a free-trade party, and Republicans were the tariff party first, from Lincoln to McKinley tells that history without flinching. But the party that Ronald Reagan led and the movement that followed him on trade made a bet that Americans can compete if the field is level and the rules are clear. Whatever your view of any particular modern dispute, that is a bet about the capacity of ordinary workers, and I think it is the right one.

Seven words to keep handy

When someone tells you capitalism creates poverty, try this: compared to when, and compared to where?

Compared to when: before the markets opened, nearly everyone was poor, and a bad harvest meant starvation. Compared to where: look at which societies people leave, and which they try to enter. Families do not risk their lives to cross the sea toward the planned economy.

When someone tells you tariffs protect the little guy, ask who pays for them and which goods they cover. When someone tells you a free-trade deal killed a town, grant the pain and then ask what the town's alternatives would have been under a different policy. Honest answers to these questions do not always favour my side, and I do not expect them to. But they tend to move the argument from slogans to mechanisms, which is where conservatives usually win.

If you want the broader catalogue of what both parties get wrong, seven trade myths both parties repeat, tested against the record tests seven of them, and free trade, tariffs or managed trade, three theories side by side lays out the main alternatives side by side.

What the poor actually need from a government

I'll finish the argument with a point that gets lost in the shouting. Nothing here means government has no role. The rule of law, enforceable contracts, secure property and honest courts are what let a poor person start a business at all. The poor in many countries are poor not because they lack talent but because they cannot get a licence, a title or a bank account without paying a bribe. In our own country, the job-killing barriers are different but familiar: licences to braid hair, zoning that blocks cheap housing, rules that favour the established firm. If you want a program that lifts people up, start by taking those off their backs.

That is the dividing line, and it explains the whole debate. The left looks at the poor and asks what government can give them. We should ask what government is taking, blocking and forbidding, and whether the poor would be better off if it stopped. The record, from Shenzhen to New Delhi to the mill towns of Lancashire, says the second question is the one that works.

The bottom line

• Poverty is the natural condition of mankind. Trade, specialisation and secure property are what lifted large parts of the world out of it, and the record from China after 1978 and India after 1991 shows what happens when governments let people trade.
• Tariffs are a tax on goods, and the poor spend the highest share of their income on goods. Open markets lower prices where the family budget is tightest.
• Take the left's best objection seriously: the gains are uneven, and some towns and workers are hurt. The answer is help for the worker and removal of the barriers that trap him, not a wall that taxes every household.
• Check the numbers yourself. The World Bank and the national statistical agencies publish them, and the direction of the trend is not in doubt.
• Next time somebody says only government can fight poverty, ask which of the most dramatic cases of poverty reduction in history began with the government loosening its grip.