From poverty to prosperity through opportunity
- Peter Lorenzi
- Feb 22, 2023
- 7 min read
More from the management files.
Proverb: Give a man to fish and we will not be hungry for a day. Teach a man to fish and he will never go hungry.
Peter Lorenzi: No one ever escaped poverty by someone else throwing money at he poor person. Poverty is the absence of opportunity and hope, not the absence of money.
Why poverty, opportunity, justice
To understand the importance and nature of wealth and wealth creation, we need to understand poverty, poverty's definition, nature, causes and effects.
First, consider some basic truths:
1. Creating – not re-distributing -- wealth reduces poverty.
2. Wealth creation requires economic growth.
3. Economic growth increases relative poverty.
4. Relative poverty is a form of inequality, not poverty.
5. Not all inequality constitutes unfairness or injustice. “Life is unfair.”
6. Social justice is an issue of opportunity, process and outcomes.
7. Poverty and social injustice today are most often the result of a lack of opportunity.
Poverty is at the root of many of our social, cultural problems, including race, health, education, and perhaps most of all – opportunity. We can create wealth without reducing poverty, history shows that as more wealth is created, more people move out of poverty.
Bono: “In the United States,” he explained, “you look at the guy that lives in the mansion on the hill, and you think, you know, one day, if I work really hard, I could live in that mansion. In Ireland, people look up at the guy in the mansion on the hill and go, one day, I’m going to get that bastard.”
Thomas Aquinas: "Envy according to the aspect of its object is contrary to charity, whence the soul derives its spiritual life... Charity rejoices in our neighbor's good, while envy grieves over it."
Overview of poverty prior to progress and prosperity
To understand poverty, progress and prosperity, we have to come to grips with the history of human development, which can best and simplest be characterized as the progression from global poverty to global prosperity. This progression has been marked by (1) unprecedented, unrelenting increases in the creation of multiple forms of wealth, (2) tremendous reductions in absolute poverty, and (3) massive resulting increases in income and wealth inequality. Real, significant progress started about the time of the Industrial Revolution. The driving force was free-market capitalism. The development of entrepreneurial business, modern management practices, and enlightened forms of leadership provided the basis for sustaining and increasing the initial spurt of industrial growth that also guided us from the industrial age to the service economy and to the modern information economy to today’s knowledge- and data-based network economy.
Reflect back two hundred years and the dilemma is clear: 94% of the world’s one billion people live in absolute poverty, living on a very real edge, and threatened on a daily basis by natural forces, e.g., disease, starvation, pestilence, extreme weather. War was often the means to secure limited resources and to subjugate people for the benefit of nobility. Wealth was almost a surreal concept for all but the world’s one percent, and wealth was almost exclusively natural wealth, mostly limited and hoarded whenever possible. What natural wealth that could be created and renewed by human effort, e.g., crops, forests, were unproductive, labor intensive, and subject to the whims of Mother Nature. Life itself was “nasty, brutish and short,” with infant mortality above 50% and life expectancy less than forty years.
The world was in a precarious state. Half of all newborns died before reaching the age of five. Plagues had the possibility of wiping out major portions of the population. Changes in the climate could make food production highly unpredictable. There was little room for error, little savings (and almost no personal wealth), and little resistance to the natural forces of Mother Nature. Malthus’ forecast was that people would continue to populate faster than food production could increase, producing even more dire circumstances for those fortunate (or unfortunate) enough to survive childhood. In brief, Mother Nature was often a hostile force in human development, not a benevolent provider of the resources people needed to survive. Until humans had better control over the environment and the ability to systematically create new resources and wealth, did the human prospect really show promise. And for all but the last two hundred years, Mother Nature controlled man's fate more than any war.
Defining and understanding poverty
Measures of poverty have long focused on an absence of wealth, income or the basic necessities for survival – food, clothing, shelter. To understand and address poverty, it is critical to understand absolute poverty, relative poverty and consumption.
1. Absolute poverty is a condition that occurs when a person’s or a household’s income falls a specific threshold level of income, i.e., below the ‘poverty level’. As explained by an NAS panel, "Absolute thresholds are fixed at a point in time and updated solely for price changes.... In contrast, relative thresholds, as commonly defined, are developed by reference to the actual expenditures (or income) of the population." In 2013, the American government-established absolute poverty threshold for a single person under the age of 65 was $12,119.
2. Relative poverty serves as the basis for political arguments in favor of income re-distribution, intended to eradicate inequality. Most western economies outside the United States, household poverty is defined as income below 60% of the median household income. Note this World Bank discussion of measuring poverty.
3. Consumption is a better outcome indicator than income, is easier to measure than income, and better reflects a household’s ability to meet basic needs.
Yet the single most expressive way to define poverty today is a lack of opportunity.
· In the twenty-first century, almost half the world — over 3 billion people — live on less than $2.50 a day.
· The GDP (Gross Domestic Product) of the 41 Heavily Indebted Poor Countries (567 million people) is less than the wealth of the world’s 7 richest people combined.
· Nearly a billion people entered the 21st century unable to read a book or sign their names.
· 1 billion children live in poverty (1 in 2 children in the world). 640 million live without adequate shelter, 400 million have no access to safe water, 270 million have no access to health services. 10.6 million died in 2003 before they reached the age of 5 (or roughly 29,000 children per day).
· In the United States, poverty -- in relative or absolute terms, but not necessarily terms of consumption -- exists primarily among children in single-parent or recent immigrant households.
Understanding poverty and prosperity at the start of the twentieth century
America’s wealthy top one percent did not inherit it [1]
“In 1900, it required a net worth of $39,000 to be classified as America’s top 1%. The median factory worker earned just shy of $500 per year. At the end of the Gilded Age, it would have been a fair claim to suggest that the United States resembled an aristocracy, as over half of America’s richest 1% received at least $20,000 in inheritance. Statistically speaking, if you were at the top crest of America’s wealth distribution, it was more likely than not that your wealth could be tied to receiving something from your parents. Modern America, with all of its hand-wringing over the role that intergenerational wealth transfers play in creating systemic unfairness at a minimum and consolidated political power at a maximum, overstates the extent to which calcified wealth is present in the United States today.
Understanding and preventing twenty-first century poverty[1]
Concerns about poverty stem from the growing gap in incomes and the contradictions of growth in both wealth and income inequality. Economic growth increases the income gap while decreasing the number of people living in absolute poverty.
The primary issues remain: What constitutes poverty? Is poverty a relative or an absolute term? Is poverty an absence of wealth, income, consumption or opportunity? Is poverty defined as near-starvation? or food uncertainty? Or is it the absence of an opportunity for education? Or lack of access to medical treatment?
1. Census data as far back as 1988 showed three essential behaviors that characterized American adults not in poverty. They finished high school, worked for one year, and married and stay married. For more perspective, Google “three causes of poverty.”
2. More than ten years later, the recommended strategy was similar. William Galston, an assistant to President Clinton, said, to avoid poverty, do three things: finish high school, marry before having a child, and produce the child after you are 20 years old. He noted that only 8% of people who do all three will be poor; of those who fail to do them, 79% will be poor.[2]
3. Poverty is relative and place-specific. A person considered ‘poor’ in the United States may appear wealthy to the poor in another country.
4. Robert Rector of the Heritage Foundation (link) noted these conditions of Americans defined as poor by the Census Bureau.
· 46% of all poor households own their own homes.
· 76% of poor households have A/C (30 years ago, 36% of U.S. had A/C).
· The average poor American has more living space than the average person in Paris, London, Vienna, or Athens.
· Nearly three-quarters of poor households own a car; 30 % own 2 or more.
· Ninety-seven percent of poor households have a color television.
· 78% percent have a VCR or DVD; 62 percent have cable or satellite TV.
[1] http://www.globalissues.org/issue/2/causes-of-poverty [2] James Q. Wilson. The family way. Wall Street Journal. January 7, 2003.
Fact: As absolute poverty dropped sharply, relative poverty increased
A mathematical demonstration of the last thirty years of global economics illustrates the point. Opportunity and process improvements in the past thirty years have improved political and economic outcomes to people with daily incomes of $1, $10, $100, $100, or with comparable differences in initial wealth. A tripling of incomes in thirty years produced a decline in absolute poverty (one of the United Nations’ Millennium goals of that period) and an inevitable growing disparity in incomes and wealth. The $9 daily difference between the two lowest income levels is now $27. The difference between the top and the bottom has grown from a daily $99 to $997. Equal growth rates across income levels produce variability (inequality) in wealth and income outcomes. Analyses of income inequality often ignore income mobility, intergenerational wealth transfers, government transfer payments and benefits (estimated by Robert Rector as over $22 trillion in the past thirty years in the United States), single-parent household economics, and the positive correlation between age and wealth. Wealth transfers, charity, foreign aid, and loan forgiveness can mitigate much of the negative results of the disparities, but they do not correct inequalities in income or wealth. Death and taxes produce that relative equality.
Final thoughts and reflections
A world of equal outcomes is the fundamental goal of socialism, yet socialism has more often than not meant a sharing of less and decaying wealth while also restricting or oppressing social justice in terms of opportunity or judicial due process. Under capitalism, social justice in outcomes is a likely outcome of social justice in opportunity and process. More so, capitalism creates the wealth that socialism intends to consume. The tragedy of the commons better illustrates the flaws importance of private property than does it demonstrate the value of socialist equal sharing. Without the wealth generated by capitalism, socialists would not have the needed resources to re-distribute.
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