The Real Solution to Poverty

First Published: 2007-05-18

Originally posted at TCS Daily May 3, 2007 and reprinted here with the kind permission of Dr. Kling.

"In this report, our Task Force on Poverty calls for a national goal of cutting poverty in half in the next 10 years and proposes a strategy to reach the goal." – Center for American Progress Task Force on Poverty

Poverty may fall in half in the next ten years even if we do not enact any of the recommendations of this task force. In fact, a reasonable guess is that the recommendations themselves would, if anything, slow the rate of progress against poverty.

The point of this essay is to simply state the obvious. If you look at poverty from the broad perspective of international and historical comparisons, the solution to poverty is decentralized entrepreneurial activity under capitalism.

The capitalist solution to poverty is unsatisfying to many people, because it is not planned or intended. Policymakers and anti-poverty programs per se are not involved.

The phenomenon of unplanned results exceeding planned outcomes is quite widespread. As Nassim Taleb points out in his new book The Black Swan, and in this fascinating interview, human planning tends to work poorly when compared to trial and error. He argues, for example, that many medical discoveries are serendipitous, while systematic efforts such as those of the National Cancer Institute often yield disappointing results.

In Hayekian terms, we say that order emerges, and often this order has little to do with the intentions of planners. For example, in Iraq the Bush Administration intended to create a swift transition to democracy, and to set an example throughout the Arab world. However, democracy is a phenomenon that cannot be imposed by planners. Instead, it must emerge, and Iraq was not ready for such a transformation.

The Source of Wealth

In the United States, the poverty threshold for a family of four is just under $20,000 a year in income. However, consider what would happen if you were to force every family of four all over the world the world to live on $20,000 a year. The majority of families would say, "Thank you." Outside the United States, there are more people living under our poverty threshold than over it.

Perhaps as many as one billion people are living on less than one-tenth of our poverty threshold, or less than $2000 a year for a family of four.

If $500 a year per person represents extreme poverty, then consider that in the year 1800 the average income per person in the world was half that. What we consider extreme poverty today would have been considered upper-middle-class two hundred years ago. If that seems implausible, consider that even in Africa longevity has more than doubled over the past hundred years. This reflects better nutrition and public health, even though African economies on the whole are doing very poorly. William Nordhaus, in The Health of Nations [PDF], argues persuasively that if improvements in longevity were included in GDP, then our estimates of growth over the last century would roughly double.

Overall, as David R. Henderson and Charles L. Hooper wrote three years go for TCS, virtually every American alive today is in the top one percent of income, if one takes a worldwide historical perspective. It would be better to live on $20,000 a year in America today than to be a relatively wealthy person living here one hundred years ago.

The ultimate source of our wealth is our moral and mental development. With moral development, we are able to trade peacefully with strangers, create habits and institutions that reward work more than theft or expropriation, and value education and learning. With mental development, we have accumulated knowledge that enables us to achieve high levels of productivity.

More than 100 percent

Our moral and mental development, and the high productivity that accompanies it, have taken place under a system of decentralized capitalism. I would claim that the capitalist system accounts for more than 100 percent of the reduction in poverty that has taken place over the past hundred years.

How can capitalism account for more than 100 percent of the reduction in poverty? Is that mathematically possible?

If we take into account the factors that have retarded poverty reduction, then we can argue that, by overcoming those factors, capitalism accounts for even more than 100 percent of poverty reduction. That is, if world poverty has fallen from 90 percent to 20 percent over the past 200 years, then capitalism would have reduced it by even more were it not for the retarding factors.

Ironically, the biggest factor retarding the capitalist solution to poverty may well be the crusade to end poverty using conscious planning. Certainly if one includes among the planned solutions to poverty the experiment with Communism (and I see no reason why it ought to be excluded), then the case against intentional anti-poverty efforts is rather compelling. Simply compare poverty in North Korea with that in South Korea, for example.

William Easterly, in The White Mans' Burden, draws a sharp distinction between searchers and planners and international development. Searchers, who operate in a decentralized, trial-and-error manner, help reduce poverty. Planners at development agencies such as the World Bank, who operate in a centralized, paternalistic manner, do not.

Measuring Outcomes

How can advocates like the Center for American Progress persist in proposing centralized, planned solutions for poverty? I think that the key to maintaining faith in these ideas is to focus only on intentions. If a program is intended to reduce poverty, then it is an anti-poverty program. Instead, I believe that anyone who sincerely wants to do something about poverty needs to focus on outcomes.

The first step in moving from a focus on intentions to a focus on outcomes is to face facts. Robert Rector of the Heritage Foundation points out that Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.

Eighty two percent of poor households have air conditioning. By contrast, 35 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning.

Nearly three-quarters of poor households own a car; 30 percent own two or more cars.

Ninety-seven percent of poor households have a color television; over half own two or more color televisions; Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception; Seventy-three percent own microwave ovens, more than half have a stereo, and a more than a third have an automatic dishwasher.

Rector would not deny that there is real poverty in the United States. The point is, however, that the standard definition of poverty includes many families who are far from destitute. A common-sense definition of poverty would focus on the truly destitute. My guess is that this would include a lot of people with severe mental disabilities, for whom such policy proposals as housing vouchers and college tuition subsidies offer little benefit.

Sometimes, I wonder if the anti-poverty crusaders even care about the outcomes of the policies that they propose. For example, do food stamps reduce poverty? If so, then one would think that those concerned with poverty would count food stamps when they measure people's income. Instead, they rely for the most part on data on family incomes that exclude government assistance of any kind. That is, the crusaders make policy pronouncements as if poverty reduction depends entirely on government assistance, and yet they measure poverty as if government assistance has no effect whatsoever.

The intentions of the anti-poverty crusaders are good. However, the results of centrally-planned anti-poverty efforts are small, and perhaps negative (certainly very negative in the case of Communism). Decentralized capitalism, in which no one sets out to broadly reduce poverty, is the best anti-poverty program.

Arnold Kling is author of Learning Economics and Crisis of Abundance.

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