Economics has often been called the science of wealth, with the alleviation of poverty as one of the justifications for both the pursuit of wealth and the study of that pursuit (economic theory). In the language of politicians, if we want to feed more people we need to make the economic pie bigger. This process of making the economic pie bigger is known as the accumulation of wealth. Yet the connection between wealth and poverty is not as obvious as this type of analysis suggests, for it is often not an inverse relationship. Generating wealth can, and often does [actually] generate and not alleviate poverty. This insight has been noted by many economists (as well as by the Old and New Testaments), yet it has been ignored by the mainstream of the profession and more importantly by society as a whole. The purpose of this paper is to first look at this critical history of wealth-creating poverty and second to provide the outlines of a Veblenian explanation of this process.
*Note: Veblenian economic theory is from the well-known critic of capitalism, Thorstein Veblen, and highlights the relationship of economic theory to social and cultural phenomena. This perspective allows economists to view the economy as an evolving entity rather than a static phenomenon.
Wealth and Poverty in the History of Economics
Our discussion of the relationship between wealth and poverty starts with the first serious student of economics, Plato. Plato, quoting Socrates, told us why both wealth and poverty are bad for society: “Wealth and poverty,.., the one brings luxury, idleness, and revolution, and the other illiberality and the evil of bad workmanship in addition to revolution” (Republic IV 422a). Socrates suggested that a guard be placed at the gates of the city to keep wealth and poverty out. Yet, wealth and poverty are not seen as two evils but as different sides to the same evil. for the wealth of the rich man is the cause of the poverty of the poor. For Plato, this happens because the high consumption of the rich creates shortages for the poor.
Adam Smith saw wealth in terms of the material prosperity of the society as a whole. The primary cause of poverty in Adam Smith’s economics is an insufficient production of real wealth, which he defined as “the annual produce of the land and labor of the society” (Smith 1976a, 12). The obvious solution to this problem is to increase the wealth of the community, and it is toward this end that he wrote An Inquiry into the Nature and Causes of the Wealth of Nations. By defining wealth in terms of the production of goods and services, Smith was contrasting his notion of wealth with that of the Mercantilists, who defined wealth in terms of gold and silver. For the Mercantilists the purpose of wealth was to enrich the merchant class and the state, with little concern for the position of the poor. Smith switched the discussion to a form of wealth that cannot be accumulated in only a few hands and he was clear that this real wealth must be widely shared.
“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath, and lodge the whole body of the people, should have a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged” (96). Like Plato, however, Smith noted the damaging effect the love of wealth has on the public’s morals.
This disposition–to admire, and almost worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition–though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages. (Smith 1976b, 61-62)
The Development of the Scarcity View of Wealth
The rise of neoclassical economics switches the emphasis of economics away from the conditions that promoted economic growth and toward the allocation of scarce resources between competing wants, with “scarcity” becoming a fundamental concept. This causes wealth to be defined in terms of scarcity and transferability, qualities normally associated with financial assets.
Wealth is not such for economic purposes, unless it is scarce and transferable, and so desirable that someone is anxious to give something for it. (Bagehot 1888 t32)
[Wealth] . . . These sources of human welfare which are material, transferable and limited in quantity. (Clark, 1965, p. 1).
Wealth is not wealth because of its substantial qualities. It is wealth because it is scarce. (Robbins 1984, 47)
As wealth was no longer directly related to the production of goods and services, it was no longer connected with improving the well-being of the whole population, especially the lot of the poor. “That mankind as a whole shall become richer does not, of necessity, involve an increase in human welfare” (Clark 1967, 107).
The development of the scarcity of wealth takes place just when real scarcity ceases to be the mare economic problem facing capitalist economies. When Plato and Adam Smith referred to wealth as the production of goods and services that provided for the material needs of the community, meeting these needs was the central concern.
That is, the central economic problem was how to produce sufficient output to supply all the necessary goods and services to the existing population. The industrial revolution tackled this problem, such that by the second half of the nineteenth century the central economic problem became how to consume, the existing distribution of income. all the potential output of businessmen at rates of return that are acceptable to these businessmen. Western capitalist economies had moved from a “supply-constrained economy” to a “demand-constrained economy.” In a “demand-constrained economy” scarcity takes on a new meaning, for the scarcity of the neoclassical economist is not real scarcity. Scarcity is not based on the inability of nature to provide the necessities of life to support the population of a society but is instead an artificial scarcity, one that is created by the business system in order to maintain the rate of return on wealth and the social power that attaches to “scarce” wealth.
John Maynard Keynes noted that capital is kept artificially scarce to increase the return for its owners. “Our argument,” Keynes wrote, “leads towards the conclusion that in contemporary conditions, the growth of wealth, so far from being dependant on the abstinence of the rich, as is commonly supposed, is more likely to be impeded by it. One of the chief social justifications of great inequality of wealth is, therefore, removed” (1936. 373). By expanding capital to reduce its scarcity, Keynes felt that you can keep the positive aspects of competitive capitalism while gradually eliminating the “cumulative oppressive power of the capitalist to exploit the scarcity value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital’ (Keynes 1936. 376). The cost to society of maintaining the inequality that is a necessary aspect of maintaining a high rate of return for wealth is high unemployment and lower economic growth. In a very real sense, just as in Plato, wealth can cause poverty.
Toward an Institutionalist Theory of Wealth and Poverty
The neoclassical economic theory contains a great insight in its attempt to explain both wealth and poverty with the same theory. For the neoclassical economist, wealth ultimately springs from productivity and the reward for economic efforts (whether waiting or work), while poverty is explained due to the absence of productivity and the inability or unwillingness to work and wait.
There should be no doubt that wealth and poverty can be generated by the same processes. The fallacy of the neoclassical approach lies in the assumption that the key determinant variables are individual characteristics and not social structures and institutions. The obvious benefit of the neoclassical story is that it absolves both society and, more importantly, the affluent of any responsibility in the creation of poverty and only a minimal role in its alleviation.
Three economic processes are at the center of the creation of wealth and poverty, and it is in these processes that we are to find the possibilities of lessening poverty in the rich as well as in the poor countries. These processes are the social creation of scarcity, social exclusion, and the assignment and shifting of costs. Taken together these three factors go a long way toward explaining the generating of both wealth and poverty.
Social Creation of Scarcity
The neoclassical explanation of poverty starts with the assumption of scarcity, and this is the right starting point. However, scarcity is not, as orthodox economics suggests, a function of nature, either the “niggardliness of nature” or the unlimited wants of human nature. In a modern capitalist economy, scarcity is socially created, in fact, needs to be socially created in order to generate wealth and at the same time generate poverty. Scarcity exists whenever the supply of a good or service does not meet the demand for that name good or service. This imbalance is fundamental to the creation of wealth and poverty. Yet this imbalance is not due to natural factors but is instead the result of social institutions and social processes.
The social creation of scarcity is one of the most important, and least recognized, insights of the founder of institutional economics-Thorstein Veblen. The process of creating scarcity is exposed in two of Veblen’s most well-known ideas: conspicuous consumption and industrial sabotage. Conspicuous consumption is the process in which the act of consumption takes on meanings beyond that of mere need satisfaction. While all consumption has an element of social communication attached to m conspicuous consumption is based on the attainment of status through consuming. The conspicuous consumption of the leisure class plays an important role in the maintenance of the social order, for it sets the standards of honor and right behavior for the rest of society to emulate. The emulation of the consumption patterns of the leisure class by the lower class insures the acquiescence of the lower classes, for it is their buying into (pun intended) the legitimacy of the social order, thus distracting them from questioning it.
As the lower classes attain the consumption levels of the leisure class it is necessary for the leisure class to continually raise the bar and engage in even higher levels of conspicuous consumption. This speeding up of the consumption treadmill keeps the leisure class ensured of their position at the top and keeps the lower classes preoccupied with ways to keep up with the accelerating pace of higher and higher levels of consumption. However. it is important to note that the status derived from conspicuous consumption requires that only a limited number of society’s members actually attain the goods and services that are truly conspicuous. If BMWs existed in the same numbers as Toyota or Nissans, their conspicuous value would greatly depreciate and eventually disappear. These goods must be scarce for them to have status.
This process of artificially generating the demand for goods and services is brought to perfection in the development of the modern corporation, in what Galbraith has called the “revised sequence.” Corporations artificially create the demand for goods and services and then set out to meet this demand, earning large profits in the process. This process is essential to the generation of income and wealth for the leisure class. Yet the function we are concerned with here is the creation and maintenance of socially created scarcity. These high levels of consumption, both by the leisure class and by the leisure class wannabes (i.e., the middle class) raise the price of goods and services that could go toward the meeting of the basic needs of the poor. This is particularly true when we consider goods such as housing, where the demand for large landholdings of the affluent force the poor to live on smaller and smaller plots. We see this being played out m just about every city in the United States as increasing demand for real estate by the affluent bids up the prices of housing and forces the poor out into the streets. The increased demand for gas by SUVs means that all have to pay higher prices at the pump. For the poor, this means a reduction in their consumption of other basic needs. This drama is played out on the world scale with the United States often being a net importer of food, even with countries experiencing severe malnutrition. Thus conspicuous consumption raises the demand for goods and services, keeping them permanently scarce.
But conspicuous consumption is only half of the Marshallian scissor of socially created scarcity. Modern technology and industrial efficiency are always conspiring to eliminate scarcity and solve the economic problem. In order for wealth to be created, this tendency must be kept in check, and it is done so by the process Veblen labeled industrial sabotage. Industrial concentration and monopoly are necessary in order to keep profits high, and it does this not only by stifling competition but more so by limiting production to keep prices higher than they need to be. Thus the production of many goods and services is kept well below the level that will meet all the basic needs of the society. Keynes noted this tendency when he argued for the need to reduce the scarcity value of capital. Doing this will eventually lead to the euthanasia of the renter class. Thus at the micro-level industrial concentration generates scarcity, while at the macro-economic level this is done by keeping the value of money higher than it need be, i.e., keeping interest rates too high. While the stated reason for keeping interest rates high is to prevent inflation (a problem that disproportionately affects those with wealth), the net impact is to keep production below society’s potential, creating scarcity. This scarcity shows up not only in higher prices but also in the poor not having their basic needs being met.
Social exclusion is necessary for both the creation of wealth and the creation of poverty. They are two sides of the same coin. This is best seen in examining the role social exclusion plays in the creation of wealth and high incomes. As we have already seen, all wealth starts with the creation of private property. By definition, private property is social exclusion; it is the assignment of the rights of an object to a single unit or person at the expense of society as a whole. While there are many good reasons for doing this, there are also many bad reasons. The right to private property must always have a social limit placed on it to ensure it is used to promote the common good. Take the most basic asset in the economy, the holding of a job. If one has a job with minimal or no exclusionary attributes, then one will have a job that has low pay and low or no benefits.
The competition from all potential replacement workers is too intense for the jobholder to demand and get better pay or benefits. It is only through exclusionary devices that the pay associated with a particular job (the income flow from the asset) can rise. Such devices include unions, minimum wages (and tenure), and other barriers to potential asset holders. These exclusionary devices do two things: they reduce competition between jobholders and they exclude competition from non-job-holders. Assets that have higher income flows require even higher exclusionary barriers to maintain their value. In fact, wealth is directly related to its scarcity, and social exclusion is necessary to create this scarcity. One’s income level is determined by a large number of social and economic networks, all of which have, to a certain extent, exclusionary devices. For the poor, these devices prevent them from participating in the economy and society.
Assignment and Shifting of Costs
Markets are instituted processes. Quoting Bill Dugger, “Markets involve at least the following three elemental processes of institutionalization through collective action: 1) Vesting the participants with collective power, 2) allocating costs, and 3) exercising sovereignty. These three processes demonstrate an important institutional proposition-the artificiality of the market. Markets are artificial, not natural. Human action, not divine intervention, makes markets” (Dugger 1989, 609). Too little work has gone into the second process of instituting a market Dugger mentions, the allocating of costs. Much of the creation of wealth and poverty is carried out in this process. Economics, at its most basic level, is about how society provides for its material reproduction. This material reproduction involves numerous costs, some of which have a market standing, that is, must be paid through market transactions and some of which do not have market standing, i.e., they are not paid through the normal process of market transactions. In the production of electricity, because of the past assignment of property rights, costs such as fuel, labor, buildings, interest, and so on all have a market voice and all must be paid. Yet many necessary costs created by the normal activity of generating electricity do not have a market voice and thus are not paid by the market participants. These are the classic externalities that are a normal part of the operation of markets. Thus the pollution created by generating electricity is paid for by those who ingest it into their system. The full cost of the worker-a living wage that pays for the necessary costs of caregiving upon which all in society depend-is often borne by the workers’ families and by that outside of the workforce. This is especially the case for the poor. Part of the cost of inventing the technology that generates electricity has been subsidized by taxpayers. In fact, the wealth of the owner of the electricity plant is directly related to his ability to shift cost away from himself and on to his workers, the neighboring communities, and society as a whole. This is true of all economic activity, and most often the costs are shifted away from the affluent and onto the poor.
Conclusion
Since 1980 the United States has experienced significant growth in wealth and incomes, yet the extent of poverty hasn’t declined noticeably. The inability of economic growth to solve the problem of poverty evidently is linked to the fact that much of the growth in wealth is at the expense of the poor. This is particularly true when we consider that the forms of wealth that have grown the most are those tied to their scarcity value. When the amount of wealth has grown much faster than the output of the economy, part of it has to come from either a redistribution of existing wealth and incomes (as we have seen with real declines in real incomes of the poorest 40 percent) or in a shifting of costs away from capital gains and more toward workers and communities. In a very real sense the last thing the poor need is more accumulation of wealth.
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Dugger, William M. “Instituted Process and Enabling Myth: The Two Faces of the Market.” Journal of Economic Issues 23. no. 2 (June 1989): 607-16.
Keynes, John Maynard. The General Theory of Employment Interest and Money. London: Macmillan, 1936.
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By Charles M.A. Clark
Very interesting. Thank you.