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Critics of capitalism from Marx to Bernie Sanders claim that the free market exploits the working class for the benefit of the rich; and even some “classical liberals” of recent vintage argue that capitalism needs to be supplemented by a guaranteed basic income or the like.

The critics have matters precisely wrong. In the free market, workers’ marginal productivity, discounted by the rate of interest, determines their wages. Employers will not pay workers more than they contribute to the value of the product, and the pressure of competition prevents employers from paying less than this. In order for wages to rise, marginal productivity must also rise.

How can this be achieved? Mises answers:

In the capitalist society there prevails a tendency toward a steady increase in the per capita quota of capital invested. The accumulation of capital soars above the increase in population figures. Consequently the marginal productivity of labor, wage rates, and the wage earners' standard of living tend to rise continually. But this improvement in well-being is not the manifestation of the operation of an inevitable law of human evolution; it is a tendency resulting from the interplay of forces that can freely produce their effects only under capitalism.” (Human Action, Chapter 21)

If this is so, programs like redistributive taxation that interfere with the accumulation of capital harm the poor.

What are the effects of confiscatory taxation on capital accumulation? The greater part of that portion of the higher incomes which is taxed away would have been used for the accumulation of additional capital. If the treasury employs the proceeds for current expenditure, the result is a drop in the amount of capital accumulation. . . Confiscatory taxation results in checking economic progress and improvement not only by its effect upon capital accumulation. It brings about a general trend toward stagnation and the preservation of business practices which could not last under the competitive conditions of the unhampered market economy. (Human Action, Chapter 32)

One might raise an objection to this line of thought. If even the unhampered market benefits workers more than the welfare state, aren’t there people, e.g., the disabled and infirm, who are unable to work? How is the free market good for them? As one might expect, Mises has anticipated the objection:

Within the frame of capitalism the notion of poverty refers only to those people who are unable to take care of themselves. Even if we disregard the case of children, we must realize that there will always be such unemployables. Capitalism, in improving the masses' standard of living, hygienic conditions, and methods of prophylactics and therapeutics, does not remove bodily incapacity. It is true that today many people who in the past would have been doomed to life-long disability are restored to full vigor. But on the other hand many whom innate defects, sickness, or accidents would have extinguished sooner in earlier days survive as permanently incapacitated people. Moreover, the prolongation of the average length of life tends toward an increase in the number of the aged who are no longer able to earn a living ... The very existence of a comparatively great number of invalids is, however paradoxical, a characteristic mark of civilization and material well-being.

Charity will take care of such people, Mises suggests. Against those who favor laws that guarantee the indigent an income, Mises says,” It is, moreover, an illusion to believe that the enactment of such laws could free the indigent from the degrading features inherent in receiving alms. The more openhanded these laws are, the more punctilious must their application become. The discretion of bureaucrats is substituted for the discretion of people whom an inner voice drives to acts of charity. Whether this change renders the lot of those incapacitated any easier, is hard to say.” (Human Action, Chapter 35.)

But wouldn’t a guaranteed income for everybody solve this problem? Because everyone would receive the annual income, the poor would not be subjected to degrading bureaucratic supervision. Murray Rothbard has a characteristically incisive rejoinder: “The one element that saves the present welfare system from being an utter disaster is precisely the red tape and the stigma involved in going on welfare. The welfare recipient still bears a psychic stigma, even though weakened in recent years, and he still has to face a typically inefficient, impersonal, and tangled bureaucracy. But the guaranteed annual income, precisely by making the dole efficient, easy, and automatic, will remove the major obstacles, the major disincentives, to the ‘supply function’ for welfare, and will lead to a massive flocking to the guaranteed dole.” (For a New Liberty, Chapter 8.)

David Gordon is Senior Fellow at the Mises Institute, and editor of The Mises Review. Contact: email.