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Quora Answer : Why do most poor people remain poor?

Jul 17, 2012

It's asking the question the wrong way around. The right question is : why do the rich remain rich? As long as the rich manage that trick, then the poor have no option but to remain poor, simply because wealth is a relative rather than absolute property. (We can all have TVs but when everyone has a TV, a TV no longer makes you rich.)

Investigating why the rich remain rich is an easier task, and the answer can be boiled down to one simple principle : positive feedback loops in the economic and social system.

These range from, the rich are better able to educate their children to become rich (including the academic and professional skills needed to get good jobs, the intangible social skills needed to fit in, and the know-how of how to work the system to their benefit.). The rich are better connected with each other and so have more opportunities to strike up mutually beneficial relationships with already rich and powerful people. The rich have more information about how the system works. The rich are not distracted from pursuing their goals by secondary problems that lack of money exacerbates. Eg. if they get ill they can pay for medicine and hospital treatment without this disrupting their other plans. If they lose their job they are not so desperate as to be forced to take the first that comes along, however disadvantageous the terms.

The questioner rightly points out that in some exceptional cases, some very poor people have managed to become rich. But these are statistical exceptions. (If they weren't exceptions, the questioner wouldn't be asking the question, as the poor would habitually be becoming rich and vice versa.) As these are exceptions, the important fact that needs explanation is the low rate of social mobility.

And this is best explained by those feedback loops.

Note, that the higher instances of social mobility in the West in the mid 20th century were the result of a) a growing technocratic culture, b) government constraints on the economy and c) unions.

In the first case, the rapid technological development meant that professional skills that could be learned in formal educational environment, were relatively more important than the social / "insider knowledge" skills that the rich teach their children. As a result, poor but clever kids coming through state schools could get better paying jobs.

However, as the economies of the West have undergone increasing financialization and shifted to service businesses while offshoring their manufacturing and engineering jobs, social skills and system know-how that aren't taught in schools have started to reassert their importance. And social mobility has correspondingly declined.

A discussion on Tribe

Just posted the above quote to a discussion on Tribe. My full post :

Michael, you ask three questions :

1) how do you define poor?

2) what are the necessary conditions for creating new wealth?

3) Why do people in Hong Kong earn 10 times as much as people in China?

Well, to take 3) first, maybe people in Hong Kong earn 10 times as much as people in China because people in China earn only a tenth of the Hong Kong salary.

I'm interested in your reaction to this quote. (Assuming it's true.)

"Multinational companies sourcing production in China are having an enormous impact on the global economy, lowering wages and rolling back labor rights. Workers in China assembling healthcare products for companies such as Viva and Sport-Elec are being forced to work 16 hours a day, seven days a week (with just 12 days off a year) for 16 cents an hour. There is no overtime premium. The workers have no health insurance and no pensions. If they try to organize, they will be fired, perhaps even beaten and imprisoned. "


(See RaceToTheBottom)

Now we can agree that it doesn't matter if the (arbitrary) value on the wage-slip seems to be falling, as long as the price of what you need is going down as fast or faster. Sure, a number is meaningless. But it seems that with this race to the bottom it's not just the number on the pay-slip. It's conditions of work which are getting worse.

So, one way I'd define "poor" is not merely that low number on your pay-slip, but a position of economic disempowerment, where you are obliged to take lousy jobs, with long, hard and abusive conditions because those are the best of the lousy options available to you.

When I say PovertyIsIncreasing, I don't mean just wages going down, but that this group of poor and disempowered people is growing. More lower-middle class Westerners are falling into it as they lose permanent jobs and have to take on less secure, lower-paid, temporary jobs. And more third-world farmers are losing their livelihoods and land (due to competition from heavily industrialized and government subsidized Western farmers) and are being pushed into it. Once again, it wouldn't matter if the poor farmers were just freely choosing to exchange hard, unrewarding work on the land for hardish, slightly better paid work in factories. But they aren't. They are really being pushed by the market. (And by governments that tolerate rich groups enclosing land. Last week my friend here in Brazil went to look at a slot in a condominium which was built illegally on previously common land less than 10 years ago. The government or other authorities are unlikely to do anything about this theft, although the enclosed land contains 3 rivers and many fruit trees. Before the enclosure that fruit would have been available to anyone who decided to go and pick it.)

So let's get to the second question. Is all this, perhaps, worth it? Do we need this kind of crap exploitative economic system to create wealth and progess in society?

I don't see why.

Between the late 40s and early 70s, under a roughly Keynsian consensus, and where centre-left governments often pushed for improvements in Labor protection, we saw plenty of technological innovation. Scientists and inventors are as much motivated by curiosity and acclaim as they are by wealth. And capitalism could function perfectly well to create new industries and millionaires, despite the greater government restriction. So clearly innovation and wealth can be created without extreme exploitation.