Basic income is an idea that is being discussed in many countries and political circles at the moment. The idea is to give every citizen of a state a certain amount of money, unconditionally every month. It is in essence a proposal to organize the welfare state differently to make it work better.

Understanding economics, this, on the surface, seems like big nonsense. And if you dig deeper you will find that indeed it is. However, amazingly, this idea has even won the support of some people who are sympathetic to free markets.

One of the people who supported this idea, in form of a negative income tax, was Milton Friedman. And in the UK, the Friedman worshiping think tank The Adam Smith Institute, openly supports the approach. So unfortunately, it seems the proposal cannot just be ignored as obviously bad. Some time needs to be spend addressing the arguments and showing why it is a bad idea.

To start with, I want to emphasize that a basic income, provided by the state, is of course completely incompatible with libertarianism. Any form of wealth distribution via mandatory taxes is a blatant violation of people’s liberty. However, there are people who do not argue from principles. They think of themselves as pragmatic. Pragmatists are usually confused about philosophy. They do not want to put things into a broader moral theory. Instead they take every situation one at a time.

Of course principled people tend to choose their principles in the hope that following them will lead to reliably good results. They are therefore just as “pragmatic” as people who reject principles. But since they have a broader theory, they tend to be more successful in achieving their goals. So my aim in this article is to show that following libertarian principles, and rejecting the basic income, indeed leads to better results.

Why do people support the basic income?

There seems to be two groups of supporters. Those who truly believe that the basic income is a good policy and those, more libertarian leaning, who believe that it is the lesser evil. However, looking a little bit closer, it seems that the ones pretending that it is a lessor evil, really seem to buy into some of the basic falsehoods of the real supporters.

So we really can address both groups in the same way. Last year, the Adam Smith Institute published a piece explaining their support for the basic income. Let us take this as a basis to show, why their support is misguided.


The basic income deals with in work poverty

The basic idea of a welfare state is, to use taxation to redistribute wealth from wealthy people to the poor. So far, the poor were meant to be people, who, for whatever reason, were unable to work and provide a living for themselves. That is why, in almost every welfare system, people who want to claim benefits, somehow need to show that they are out of work and unable to provide for themselves.

This makes a lot of sense. It is difficult to make a moral argument in favor of people being able to claim the product of other people’s labour, when they could work themselves. This is too obviously a form of exploitation.

Enter the basic income proposal. It makes an argument that it does indeed make sense to give free capital to people who are able to, and ofter are working. One of the arguments for this, is supposed to be a moral one. The idea here is that in our time, a lot of jobs do not provide enough income to make a decent living. We are told that:

“The clearing power of lower skilled labour is simply not high enough, to provide what electoral willpower, political stability and innovation would require: some form of welfare income policy is necessary.”

This is a conclusion that is being presented after an economic analysis. The analysis is based on piecemeal data collection which allegedly shows that globalization and technology have replaced a lot of unskilled labour. Therefore, low skilled workers cannot make ends meet on their own in a modern economy. The solution is that these workers need to be helped with the incomes of higher skilled workers.

Far from being new, this argument has always been the basic idea behind the welfare state. There are losers in the market place. Therefore, we need welfare politics to balance out the inequality that markets produce. Once the need for welfare is established, the argument then shifts towards what is the best way of providing welfare.

The truth however seems to be that, neither is there a need for state welfare programs, nor would the basic income be the best welfare program if there were such a need.


The reason for poverty is the state

But first things first. Why is there no need for state welfare programs? The answer can be found in economics. Real economics that is. The economics presented in the defense of the basic income, is a good example of how not to do economics. One cannot understand economics by simply analyzing random data and try to find correlations. The foundation of every economic analysis needs to be based on principles of human action. If we do not start with these principles, we are at constant risk of missing at least half of the picture. And if we only understand half of the picture, we, at best, only get it half right. Half right however, is still very much wrong.

This was best explained in Frederic Bastiat’s genius article “That Which is Seen and That Which is Not Seen”. Let us say we have a policy of taking money from a person and spending it on a good A. What we can see now is that the demand for this good A is going up. However, there is of course another side to this policy. Since money can only be spend once, if the money is spend on good A, it is not spend on another good B, which was the original choice of that person to spend his money on. But we cannot see the non transaction of not buying B. We only see the transaction of buying A. Reasoning however tells us, that this non transaction must most likely be true, and we need to take it into account when we examine the economy. So if we were to analyze the situation purely by statistical data, we are doomed to miss half of the effects of that policy. Only arguing from principles can tell us about the full picture.

This is very relevant in this analysis of what is happening in a modern economy. What we see is that markets become more global. What we see is that more and more things are being done with computers. What we see is that it is more and more difficult for low skilled workers to find jobs and that the jobs they can find are often not providing them with a decent standard of living. If you piecemeal all of this data together, you come to the obvious conclusion that the modern economy lets low skilled workers behind.

None of this data is of course wrong. But it is only half of the picture. The other half is much more difficult to see in statistics and can only really be understood indirectly by reasoning from sound economics principles.

Unlike a lot of austrian economists today, I do not believe that these principles are a priori correct. Mises’ praxeology method unfortunately seems wrong. The principles of human action can be observed and tested. And every scientific theory, including the austrian school of economics, should be tested. There seems to be no other way of knowing whether a theory describes reality correctly or not.

But despite this little confusion in the modern austrian school fellowship (of course historically, Mises was the only austrian economist who thought austrian economics was a priori true), the great thing about the austrian school is that its predictions seem to pass the test.

One of the predictions that the austrians have made is that state intervention into the economy leads to misallocations of capital. These misallocations in the economy lead to a loss of productivity and to a crisis when these misallocations are being discovered. This crises is then being addressed by more state intervention, which leads to more loss of productivity etc. A loss of productivity means that not as much wealth is being produced as it could be. Through more and more state interventions in the economy, in the long run, the economy is so distorted and unproductive that it literally start to destroy existing wealth. That is because, at some point, more wealth is being consumed than produced. This then constantly reduces the amount of capital available and makes production more and more difficult.

Other than described in the article, technological progress is the other big factor that increases productivity. So this is not in the way of a good life for the poor. It should make life more and more affordable.

More capital accumulation and an increase in technology should therefore lead to a huge deflation that makes lives more and more affordable. We should be at a point now where being able to afford a roof above our heads and food on the table is possible with a minimum amount of work.

What we are seeing instead, just like the austrians predicted, analyzing state interventions, is a constant increase in the costs of living. People have to spend more and more of their salary to be able to afford a home. And even prices of food in the supermarket are constantly going up. As a reasult, people who have low incomes have trouble to make a living. That this is going on despite the huge advances in technology and despite the huge increase of people taking part in work sharing worldwide in the last 25 years, tells us a lot about how wealth destructive our welfare states have become.

This is a very different analysis from the one presented by the defenders of a basic income. Therefore, it is clear that it is important to get the economics right. If the austrians are correct, then not only is welfare not needed to provide for the poor, welfare is the reason why we have so much poverty. And if that is true then creating more welfare programs will only crush the poor even more. The poor, more than anyone else, need to be freed from the welfare state.

Does the basic income reduce the welfare state

But then there is the argument that the basic income is actually the better deal to the existing welfare state. It makes the welfare state more efficient and therefore reduces the negative effects of it. Or it may even reduce the welfare state all together.

But this does not seem to be correct. At least not if we are really talking about a basic income that provides for a living. Let us first look at the assumption that it makes the welfare state more efficient. The argument is that if everyone gets a basic income unconditionally, there is no need for all the bureaucracy involved in applying and testing eligibility for benefits. This may be true, if we really replace the whole welfare state with a basic income, but that does not necessarily mean it is a good thing. Making tyranny more efficient does not make it any better.

Bureaucracy is nasty, no doubt. However, it is a symptom not a cause of evil. Bureaucracy is the tool to put some constrains on a monopoly of power. Getting rid of this restrain does not help us. It is the state programs that the bureaucracy tries to facilitate that are the problem. Just abolishing the bureaucracy without the state program is usually not helping. As long as we have a state, we will have to live with some bureaucracy. The real solution to the bureaucracy problem is to abolish the state altogether.

The second argument is that the basic income reduces the costs or the negative economic effects of the welfare state. Whether this is true or not seem to depend on how high the basic income is and how it is going to be implemented. The problem is that as soon as the basic income is high enough to actually make a living out of it, the answer seems to be no.

Of course if we had a very low basic income of say £100 per month, then that would be great. No one can live on £100 per month. That means everyone would basically go out and work and pay for the £100 with their taxes themselves. Such a low basic income would essentially be a trick to more or less abolish the welfare state. Great! The problem is, it is too obviously a trick. We might as well be honest and advocate the abolition of the welfare state.

If we take the idea seriously we need to have the basic income set at a level that provides a basic standard of living. What is the lowest amount we might argue for? Assuming that we realistically keep the NHS and replace the rest of the welfare state, we might say we give a person £200 a month for food and £400 to rent a small single room somewhere. That will mean £600 per month per person.

Assuming there are 60 million people in the UK, this basic income would cost the taxpayer 432 billion pound a year. Currently the expense for welfare and pensions together is about 260 billion. And that is assuming you could replace pensions with such a low basic income. So even this very minimal basic income would be hugely more expensive than the current welfare system. That is no good.

A better way of implementing it is to slowly phase it out like a negative income tax. So if you don’t work you get £7200. If you start working you will get less and less until you start paying income tax on everything you earn above £7200. The problem with this is clear. Anyone who does not earn significantly more than £7200 will have a big incentive not to work, at least not officially.

To avoid that, another proposal to implement the basic income is to give people a top up on their earnings until a tax free allowance. Let us assume we have a basic income of £7000 and a tax free allowance of £12000. if you earn nothing, you get your £7000. If you earn something you get a top up of 50% of the different of the tax free allowance and your income. So if you earn £6000, you get another 50% of £12000-£6000. That is £3000, so your total income would be £9000.

There is a problem with this though. It seems expensive. For this to not have big negative effects, the tax free allowance needs to be significantly higher than the basic income. Of course I am all for high tax free allowances, it should be 100% of your income. But if you want a basic income, someone needs to pay for it. The lower the tax free allowance is, the less you can keep from your earnings. In the example above, you need to earn £6000 to make an extra £2000. Even if the tax free allowance is twice the basic income, you still need to earn £2 to have an extra pound in your pocket. This does not seem to encourage people to work.

Advocates of the basic income might counter this argument by saying that the current system is a disaster to encourage people to work, because someone loses all his benefits once he starts working. With the basic income however, he just loses some.

That is true, but it overlooks that everyone gets the basic income unconditionally. At the moment, you still will have to go to the state and ask for benefits. For a lot of people, this is still something embarrassing to do. And of course there are conditions to get the money. It becomes only an option if they are really desperate. But you don’t have to apply for the basic income. This is presented as some kind of natural right of a citizen. As a result, even ordinary people will take it into account in their normal financial planning.

They might start looking for nicer jobs, to top up their basic income. Say for example someone is trying to make a living as an actor. Unless he is famous, he can most likely not make a living out of this. But he might make a few bucks with a gig here and there. Currently, a lot of these people take small jobs in bars or hotels to cover their basic costs. But with a basic income, they might just top their government check up with a few gigs. No need to do some real work anymore. Yes, living on £7200 might be difficult. But then, going out and clean toilets full time, just to top up your basic income a bit, might not be worth the hassle. Never underestimate the value of leisure. Whether it would be worth it or not, would of course depend on how miserable you are living on your basic income.

But there are two problems with a very low basic income. The first is, that, once introduced, it will be politically difficult to keep it very low. People will start seeing it as their right as a citizen and start making the argument that this low level is violating their right. People already make these arguments with current benefits. Luckily, the latter are still very much conditional.

The second problem is, that if we were to replace the welfare state with a basic income and than manage to keep it very low, this would hit people who really do need help, because they are not able to make a living, very hard. They would be unable to make a good living out of the basic income. Simultaneously, they would be deprived of other roots of income. In a society, in which the general mindset is that the state has to care for the poor, it is very difficult to set up private alternatives to the welfare state. So these really weak people, the once that the welfare state was originally designed to help, they would probably be the biggest losers of the basic income.

Now, you might say, well we just give those people a bit more. But then you are essentially starting the welfare state, that we have at the moment, all over again. Immediately, other groups will come and say that they too, will need something extra. In that case, the basic income would not replace the welfare state, but would essentially become an extra on top of it (which is something some socialist argue for anyway). It is as always in politics. It constantly tries to solve the latest problem that would not exists if it wasn’t for politic’s last solution.

Conclusions

No matter how you look at the basic income proposal, it does not seem to produce any good results. If it is set at a decent level, it is very expansive and would hugely discourage people from work. The lower it is set, the less damage it causes to the economy and society. But even set at a level, at which it might not lead to a collapse of the economy, it would still be a very destructive policy. And the really poor and helpless would be the ones to suffer the most under it.

Ultimately, libertarians are correct. Liberty is the solution, not trying to make the state more efficient. If we really want to help the poor, and live in a prosperous society, we need to get rid of the welfare state. There is no alternative to it.