Capital and poverty

"Governments have not pursued a policy aimed at increasing general prosperity and raising the standard of living, but rather one aimed at impoverishing the people."

-Ludwig von Mises

In a previous article, I shared Austrian economist Ludwig von Mises's views on the crucial role of trade between nations in maintaining peace. This time, I'll share my notes on what he wrote about the importance of capital accumulation.

Capital and well-being

The political class typically assumes that the availability of capital has no relationship to the well-being of the population—or absurdly claims that the relationship is detrimental. This is a serious error. From Mises's perspective, it is often forgotten that capital accumulation is synonymous with wealth creation, since investment is what increases an economy's productive capacity.

Governments in Latin America have acted as if capital formation were of no importance, at best. Unfortunately, it is often openly opposed, which amounts to economic suicide.

Through predatory oversight, increased regulation, trade restrictions, and excessive public spending, governments have increasingly hindered capital formation. For Mises, this historical neglect puts Western civilization at risk because the absence of capital is synonymous with poverty.

What has led to the progress we enjoy is precisely the continued accumulation of capital, which makes possible greater production of goods and services, which raise the standard of living of all members of society—regardless of how much wealth they have at their disposal individually, because the greater the accumulation of capital in an economy, the higher the average income of families.

Capital accumulation is a fragile process

For individuals—future investors and entrepreneurs—to be willing to sacrifice present consumption for future benefits, several conditions must be met. Among the most important are: 1) certainty about the future; 2) a reasonable tax burden that offers clear benefits and a better business environment; 3) minimal, simple, and transparent regulation; 4) government intervention in the economy only in exceptional situations, such as in the case of monopolies, the resolution of externalities (effects on third parties), and the provision of public services and infrastructure; and 5) in exchange for our taxes, the government must guarantee personal safety, private property, the provision of justice, and the enforcement of contracts between individuals.

Capital accumulation is a fragile process that cannot occur in an environment where trust does not prevail.

Unfortunately, countless public policies implemented in Mexico, far from generating wealth, have fostered poverty and very low wages. Hence the great need to raise awareness among government officials and legislators to design and implement public policies that promote capital formation. Only then will our country be able to eradicate poverty, an unacceptable situation that affects tens of millions of families.

The Austrian thinker reminds us that it is not through union pressure, but through the accumulation of capital, that people will be able to access higher wages and a better standard of living. Around the world, the most successful countries in capital accumulation—Switzerland, Germany, Denmark, the United Kingdom, Norway, etc.—are those that have achieved higher standards of living for their respective populations. Best of all, capital, when conditions are favorable, multiplies.

A bright future?

In 1942, Mises predicted a bright future for Latin America. Unfortunately, his prediction has yet to materialize. In his view, the destruction of capital caused by World War II in Europe would somehow level the playing field so that Latin America, which emerged virtually unscathed from that conflagration, could close the development gap.

Eight decades later, Europe has surpassed the standard of living it enjoyed before the World Wars, and Latin America continues to suffer from a relatively low level of development.

In my opinion, the failure to close the development gap has to do with certain cultural traits that condemn us to failure. Creating an environment conducive to wealth accumulation begins with a Cultural Shift. For example, for some strange reason, in our country, "capitalism" is a dirty word, and this perception is sinking us. In a new dictionary, the word capitalism should represent, first and foremost, capital formation and therefore greater wealth for all.