Big Government leads to
Serfdom an
d Poverty

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24-10-2006

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Equality and growth: a non-linear relationship.

The question whether equality is beneficial for economic growth and progress has occupied the minds of the greatest scientific thinkers as well as policy makers. Evidence from a broad panel of recent academic studies shows the relation between income inequality and the rate of growth and investment is indeed robust however not linear..

In his study " Inequality and Growth in a Panel of Countries"  Robert J. Barro (Harvard University) found  that higher inequality tends to retard growth in poor countries and encourage growth in well develloped regions. In their study for the World Institute for Development Economics Research , Giovanni Andrea Cornia and Julius Court (2001) reach similar conclusions. They found that both very high egalitarianism and high inequality cause slow growth, and that the relation between equality and growth follows an inverted U-shape curve. The authors therefor recommend to pursue moderation also as to the distribution of wealth and particularly to avoid the extremes.

equality-gini-coefficientExtreme egalitarianism leads to incentive traps, free-riding, high operation costs and corruption in the redistribution system, all reducing a country's growth potential. However also extreme inequality diminishes growth potential through the erosion of social cohesion, increasing social unrest and social conflict causing uncertainty of property rights.

Therefore public policy should target an ‘efficient inequality range’. The authors claim that such efficiency range roughly lies between the values of the Gini coefficients of 25 (the inequality value of a typical Northern European country) and 40 (that of countries such as China and the USA).

The precise shape of the inequality-growth relationship depicted in the Chart obviously varies across countries depending upon their resource endowment, history, remaining levels of absolute poverty and available stock of social programs, as well as on the distribution of physical and human capital.

See also :  Inequality and Growth: What Can the Data Say? Abhijit V. Banerjee and Esther Duflo
See also :  Does equality reduce growth? Some empirical evidence. by Marta Bengoa a and Blanca Sanchez-Robles a
See also :  The Path To Sustainable Growth - Lessons From 20 Years Growth Differentials In Europe.
 
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The Road to Serfdom. This masterpiece of Nobel Prize laureate Friedrich Hayek is an eye-opener, strongly advocating the free market principles. In this all-time classic Hayek persuasively warns against the authoritarian utopias of central planning and the welfare state. Fascism, communism and socialism share these utopias. For the implementation of their plans these authoritarian ideologies require government power over the individual, inevitably leading to a totalitarian state. Every step away from the free market toward planning reduces people's freedom and is a step toward tyranny. Planning also cannot assess consumer preferences with sufficient accuracy to efficiently co-ordinate production. However in a free market, "Price" is the all-inclusive source of information, guiding entrepreneurs to produce whatever is wanted and directing workers wherever they are most needed. Free markets also provide the entrepreneurial climate for a thriving economy and for releasing the creative energy of its citizens. Free individuals in their native strive to develop their talents and to improve their fate produce spontaneous progress. All public interference in the economic process disturbs the market equilibrium, distorts the optimal allocation of resources and consequently reduces the level of wealth. Where planning replaces free markets people do not only loose their freedom and individuality. Resulting slow growth also increases welfare demands causing dependence similar to slavery. In the end people's self-reliance and self-respect is ruined, and citizens are degraded to a means to serve the ends of the collective mass.

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More Books of
Friedrich Hayek here
  • The Tragedy of the commons  by  Garrett Hardin   Free access and unrestricted demand for a finite resource ultimately dooms the resource through over-exploitation. This occurs because the benefits of exploitation accrue to individuals, each of which is motivated to maximise his or her own use of the resource, while the costs of exploitation are distributed between all those to whom the resource is available (which may be a wider class of individuals than those who are exploiting it). The theory itself is as old as Aristotle who said: "That which is common to the greatest number has the least care bestowed upon it.      more here
tragedy_of_the_commons
  • The Farm Problem    Edited by Paul L. Poirot    This anthology includes writings by John Chamberlain, Edmund A. Opitz, Grover Cleveland, W.M. Curtiss, Clarence Carson, and E.C. Pasour Jr., among others. After more than 70 years of government intervention, these damaging policies continue to plague American agriculture. The resulting distortion of the price system and an unconscionable tax burden can only be eliminated by a return to the free market.                  Download as PDF


The Farm Problem

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martin_de_vlieghere

Dr. Martin De Vlieghere is economist and doctor of philosophy since 1993.  His PhD was written on the conditions of modernity in the works of Habermas and Hayek. He has been assistant professor at the Department of Philosophy of the University of Ghent. He is president of the "Free Association for Civilization Studies" and member of the board of directors of Nova Civitas. 
Paul Vreymans
is econometrist and advisor at the Free Institute for Economic Research. As an international businessman he is a close witness of Europe's industrial collapse and the rise of the parasitical bureaucratic complex. He is a founding member of the Brussels' think tank WorkForAll.


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