Poverty is not a disease

The War on Poverty was officially started by President Lyndon B. Johnson in his State of the Union address on January 8, 1964. Studying his speech and subsequent programs, one gets the idea that poverty is something terrible that happens to people, like polio or cancer.  We can help these folks fight this disease through effective governmental action.  The Office of Economic Opportunity was set up in the US to wage this war. Foreign aid by the World Bank, the US and other countries was expanded to continue the fight throughout the world – particularly in Africa – as if poverty were like malaria or Aids.  More than two trillion dollars have been spent on this war in the past fifty years – far more than the wars in Vietnam, Kosovo, Kuwait, Iraq and Afghanistan. The world has little to show for it.  Poverty rates in Africa are worse today than they were in 1964.

What is poverty, anyway? If you look back at the human species for the past 35,000 years or more, you can see that poverty – rather than being an unusual disease – is the natural state of human beings. There have often been rulers – a ruling class some of whom have lived comparatively better off – but the vast majority of all people have always lived hand to mouth – many starving, many in poor health with inadequate shelter, education, clothing and food.  When the Pilgrims arrived they found that the Indians in North America in 1620 lived a very primitive life, moving from place to place following game animals.  The Native Americans lived lives in all probability not much differently from that experienced by the early human families in Europe in 37,000 BC.

Even after the rise of civilization and writing began in the Middle East in 3500 BC, life for the average person was not much better. From all we can tell, production methods throughout the world were generally poor. The average number of bushels of wheat per acre in 1770 AD was about the same as the bushels per acre in 1770 BC – or 3770 BC for that matter.  Nothing really improved until the Industrial Revolution which took place starting about 1770 in England. At that time, some people hit on the idea of combining the wealth of a few people to create factories to mass produce textiles, pottery, iron, and many other products.  For the first time in recorded history, mass production reduced the prices of many commonly used household goods – and enabled the creation of a middle class. Millions moved up from poverty to lower middle class status.

In the process of improving the lives of millions of people, the industrial revolution also enriched many thousands of people who were smart enough to create the industrial engines that created all this national wealth.  These were the entrepreneurs who managed to assemble enough capital to fund the new ventures. Without the entrepreneurs the Industrial Revolution would not have occurred, and millions would still be living in poverty – as are most of the residents of Africa and millions of those in the rest of the world today.

The appropriate question, thus, is not “Why is there poverty?” but “Why is there not more wealth?”  Where there is the opportunity for entrepreneurs to assemble capital and create new enterprises, many people rise from poverty to middle class status.  This happened in Korea, Taiwan, Singapore, and Malaysia and today is happening in India and China.  Why has it not happened, generally, in many other areas such as Africa?  Because these areas lack political stability and the rule of law.  Entrepreneurs cannot flourish without law and order.  For an entrepreneur to persuade others to put their money into his enterprise, he has to assure them that they will receive profits from the business.  They have to be confident that the profits will not be confiscated by the government or criminals or destroyed by warfare.

Fifty years ago, the people of Taiwan and Korea were generally living in poverty. American entrepreneurs were allowed by the governments of these countries to set up businesses which employed local labor to mass produce products for the American – and later world – markets. The governments assured law and order. They let the entrepreneurs keep their profits. The results were astounding.

South Korea, now the world’s 13th largest economy, had a per capita GNP of only $100 in 1963. It has risen to more than $30,200 in 2010. Why? Because it encouraged foreign entrepreneurs to set up businesses there.  India’s economic policy after independence was characterized by state intervention in labor and financial markets, a large public sector, business regulation, and central planning. Instead of encouraging entrepreneurs, India required elaborate licenses, regulations and red tape to set up businesses between 1947 and 1990. The result: twenty five percent of Indians today live below the poverty level of one US dollar per day and 85% (almost a billion people) lived in 2008 on less than $2.50 per day.

What constitutes poverty is largely in the eye of the beholder.  In the US in 2008 about 13.2% were officially designated as living in poverty. The poverty level for 2011 was set by the US Government at $22,350 (total yearly income) for a family of four. In India the comparable number was $365 per year.  The average person living in poverty in the US today has a color television set, a rented home with central heating, a car, indoor plumbing, a refrigerator, a washing machine, a dryer, a stove or microwave, and is not starving.  The children attend schools free of charge with free luncheons, and are picked up by a free school bus.  In India, those in poverty have none of these things.  The income that constitutes the definition of poverty in the US has been increased every year since counting began. As a result, regardless of the improvement in the actual level of living of the US population, the number living in poverty is always reported as being about 12% — and probably always will be, since those in charge of poverty programs need to have a constituency for their programs.

What can be done to reduce poverty?

This, of course, is the wrong question. The right question is, “What can be done to increase wealth?” Wealth can be increased anywhere by the same methods: Provide a system of law and order that encourages entrepreneurs to set up businesses using local labor to make profits producing products and services.  Keep the regulations and taxes low. High taxes reduce business formation and increase poverty.

According to a 2007 study by the Goldwater Institute, low-tax and low-spending US states are more successful at reducing poverty than their high-tax, high-spending counterparts. “The 10 states with the lowest tax burdens saw a 13.7 percent decline in poverty during the 1990s (more than double the national average) … Meanwhile, the 10 states with the highest tax burdens suffered an average poverty rate increase of 3 percent.”

So, the answer to the question, “What causes poverty?” is this: Poverty is caused by any system in any country where law and order does not prevail, or those who have high taxes and high regulation of business.  Poverty is reduced by lowering taxes and regulations so that entrepreneurs can form businesses and make profits from them.

About Arthur Middleton Hughes

Arthur is currently Vice President of The Database Marketing Institute based in Fort Lauderdale, FL. Arthur is the author of 11 books, the latest of which is Strategic Database Marketing 4th Edition (McGraw-Hill 2012). A BA graduate of Princeton with an MPA in Economics and Public Affairs, Arthur taught economics at he University of Maryland for 32 years. He is an Austrian Economist.
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