Thursday, September 29, 2016

More on Wealth, Poverty, and Politics

image from Amazon
Economist Thomas Sowell has a new edition of his classic book Wealth, Poverty, and Politics, and talked about it in the latest Uncommon Knowledge interview.

Peter Robinson starts the interview with a quote from the book, which serves as a theme:

It is not the origins of poverty which need to be explained. What requires explaining are the things that created and sustained higher standards of living.
In explaining what he means by that, Dr. Sowell says,

There are actually books with titles and subtitles about the origins of poverty. Well, the entire human species began in poverty. So I don’t know why we say, what is the origin? Perhaps the Garden of Eden or someplace. But more than that, you’re trying to explain why some countries are poor rather than trying to explain why other countries are more prosperous. There’s no explanation needed for poverty. The species began in poverty. So what you really need to know are what are those things that enable some countries, and some groups within countries, to become prosperous.
He further explains that there are unstated assumptions about income inequality that are false, but are left unexamined. To use another quote from the book,

One of the key implicit assumptions of our time is that many economic and social outcomes would tend to be either even or random, if left to the natural course of events, so that the strikingly uneven and non-random outcomes so often observed in the real world imply some adverse human intervention.
So, there’s this idea being promulgated that, because people are equal, their outcomes should be equal. But people aren’t equal. They are equal before the law—no class of humans more deserving of justice than any other—but people are different in intellect, drive, learning, creativity, desires, preferences, and circumstances.

Dr. Thomas Sowell
image from Uncommon Knowledge
And people are located in different places. Dr. Sowell talked about the Zaire River in Africa, which carries more water than the Mississippi. But it is full of falls and cascades that make it mostly non-navigable, while the Mississippi smoothly changes elevation by only about four inches per mile. People living by the Mississippi, then, have a water route that people living by the Zaire River do not.
He also talked about isolation, such as caused by mountains. People living in isolated Afghan mountain villages live at approximately the same level of poverty as people in isolated Appalachian mountain villages. And people who live discovered on isolated islands are found living very little different from stone age people. Isolation means less trade, less learning from others, less benefiting from others.

So it isn’t some rich person taking away from a poor person; it is a rich person doing what it takes to escape from poverty.

We basically know what those things are. One of the main sources of wealth is human capital. Here’s another quote from the book:

The welfare state reduces the incentives to develop human capital. And receiving the products of other people’s human capital is by no means as fundamental as developing one’s own human capital.” [18:30]
Following the quote, Peter Robinson asks “What is human capital, and why does the welfare state suppress the incentives to develop it?” Dr. Sowell answers, “Well, human capital is the ability to create the material things that constitute wealth.”

A classic example. In the 1970s, Uganda decided that the Gujaratis of India were just too wealthy and controlled too much of the economy. They sent them out, and they wouldn’t let them take their wealth with them. So the Gujaratis arrived mostly in England, destitute. And the Ugandan government has taken over all this material stuff. Over a period of a relatively few years, the Gujaratis were prosperous in England, and the Ugandan economy collapsed, because they didn’t have people who could do what the Gujaratis were doing. And so they no longer had the same production.
It's also one of the problems with trying to solve things by confiscating the wealth of the wealthy. All you can confiscate is the material wealth. You cannot confiscate the human capital.
Confiscating wealth from those who created it and giving it to those who didn’t create it only moves things around, not wealth-generating capabilities.

And income redistribution is wrong-headed in other ways. Talking about the concern that the top 10% have undue influence over society, Dr. Sowell says,

TS: 53% of American households are going to be in the top 10% at some point or other in their lives. You talk about these percentages as if these are ongoing, the same set of people in this bracket, and that bracket. Most Americans do not stay in the same 20% bracket for more than one decade.
PR: So it’s largely a life cycle: you’re poor when you’re young, and doing well when you’re old.
TS: Yes. And there’s nothing mysterious about that. Probably most people in this country, when they started out at entry level jobs were not making what they’re making when they’re forty years old. Heaven knows, I was making $2 a day to deliver groceries, and depended on tips for the rest. [17:20]
He later added,

Somebody said the other day that they want to ease the pain of people in poverty. The pain of poverty is what got many people out of poverty. [35:23]
Peter Robinson ended the interview by having Dr. Sowell read a passage from the book, which summarizes the fallacy of economic equality as a goal:

It is by no means obvious why we should prefer trying to equalize income to putting our efforts into increasing output. People in general, and the poor in particular, seem to vote with their feet, by moving to where there is greater prosperity, rather than where there is greater economic equality.
Rising standards of living, especially for those at the bottom economically, have resulted not so much from changing the relative sizes of different slices of the economic pie as from increasing the size of the pie itself, which has largely been accomplished without requiring heady rhetoric, fierce emotions, or bloodshed.
Does it not matter if the hungry are fed, if slums are replaced by decent and air conditioned housing? If infant mortality rates are reduced to a tenth of what they were before? Are invidious gaps and disparities all that matter? In a world where we are all beneficiaries of enormous windfall gains that our forebears never had, are we to tear the society that created all this apart because some people’s windfall gains are greater or less than some other people’s windfall gains? [40:34]
Thomas Sowell always offers up truth with good humor and common sense. So even when he says what he has said before, we enjoy it. Let’s summarize with a couple of basic economic principles:

·         Thou shalt not covet. [I wrote about this April 26, 2013]

·         Live the principles that build social capital. [I wrote about this February 24, 2012]

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