Thursday, June 26, 2008

Everything Must Change (Part 1): Minding the gap

My friend posted a review of book that I've been wanting to read. My friend makes this comment:
[Author Brian McLaren] deals with our over consumption of the world’s resources, the growing gap between the rich and poor, our war-prone proclivities, and the failure of the Church (and even other religions) to provide a different “framing story” from which to act upon. Solving this last one is the key to solving the other three.
The book may identify more issues than just these four. And the book may very well give good reasons for why these problems are problems worth solving. But, for the first three, my guess is that it assumes that these problems are agreed upon by the reader. For two of the problems listed, I'm not sure that I think they're problems worth trying to solve. Specifically, I am not worried about:
  1. the growing gap between the rich and the poor
  2. our overconsumption of the world's resources
I initially started this as a comment directly on his blog. But it quickly got way too long to be a comment. So I'm posting my reply as blog post. In fact, even my reply is too long to be just one blog post. I think I need at least two (maybe three). In this post I'm going to talk about the gap between the rich and the poor. In my next post, I'll share my opinions on overconsumption. But first, minding the gap...

I don't consider the fact that there's a gap between the rich and poor to be a problem worth solving. A "solution" to this problem has a few problems of it's own:
  1. It ignores what the real goal of poverty reduction should be.
  2. It ignores the benefits that come to the poor as a result of the gap
First, what is the real goal of poverty reduction? Increasing the wealth of the poor. The size of the gap between the rich and the poor is not the source of poverty. Imagine a country in which the poorest person earns $1 million annually, and the richest person earns $100 billion annually. That is a huge gap. The richest person earns 100,000 times as much as the poorest person, or $99.999 billion more per year. But in that country, the poorest person still incredibly wealthy. Now, consider a different country in which the richest person earns $100,000 per year and the poorest person less than $100 per year. The gap is smaller. The richest person earns 1000 times as much as the poorest person, or $99,900 more. The gap between the rich and the poor in the 2nd country is much much smaller. But the poorest person is much worse off in the 2nd country. Reducing the gap does not necessarily make the poor better off.

I think that an assumption in the problem is that the amount of wealth available is a fixed pie, like a pizza. If my slice gets bigger, then someone else's slice must get smaller, and it doesn't matter if my slice is the smallest slice or the largest slice. The goal, if wealth is fixed, is to make sure that everyone gets the same size slice. If there's a gap between the biggest slice and the smallest slice, that's a problem.

But the assumption is wrong. Wealth is not fixed. It can, and does, grow. Here's a thought experiment. Imagine a group of 10 people. And in this group, is a single dollar, and nothing else. The wealth of that group in total is $1. The guy who happens to be lucky enough to be holding the dollar can purchase from others whatever he wants. No one else has any purchasing power. But they have talents. And they can use those talents to create things. Things that sold for the dollar, or bartered for things. But getting the dollar gives them a lot of purchasing power. Much more so than bartering. So they all want the dollar, and use their talents to make things for the dollar.

Eventually someone makes something that the dollar holder will trade for, and does. At this point, what is the wealth of the group? It's risen. It used to be $1. Now it's $2. One guy has a dollar, and another guy has something that's worth $1. Every time anyone makes something worth trading for the dollar, the wealth of the group grows. After 10 trades, that group no longer has to worry about dividing up a $1 pie. The pie has now grown to $10. This is, of course, true in the US, too. Wealth here is not fixed. So when the pie grows, knowing how much the rich have, tells you nothing about how much the poor have. Worrying about the gap ignores the problem: figuring out how to help the poor.

Since I'm no longer worrying about how big the gap is, and only worrying about how the poor are doing. I want to talk about the purpose that the gap serves in making the poor wealthier.

In the early 1800's almost nobody had a flush toilet. Everyone had to figure out a way of dealing with human biological waste. And the mechanisms that were employed were unsanitary, to say the least. Disease was a problem as a result of not being able to easily dispose of waste. Everyone in that world was poorer than everyone in today's world where running water and flush toilets are the norm. But how did we get from there to here? How did we all get richer? The answer is that there was a gap between the rich and the poor.

Initially, running water and flush toilets were exclusive options in only the wealthiest households. And rightly so. Installing the required plumbing system is expensive, especially when the knowledge of how to do it is brand new. Things have to be figured out or the problem that's being solved (dealing with human waste) is replaced with a worse problem (dealing with human waste and leaky plumbing). So, it cost a lot of money to figure those things out. And only the rich could afford to pay for the figuring.

But once it was figured out, it became highly profitable to sell the products of this knowledge. The first guy to have a toilet paid handsomely for it because the guy selling it had to do so much work. But the 2nd installation was a *LOT* more profitable for the seller than the first one., since the seller had already figured some things out. Other people noticed this profit and wanted in on it. So the number of toilet sellers increased. But to win a share of the people who wanted toilets, the toilet sellers had to offer something more. And the easiest way was to cut a bit into their profit margin. A huge profit margin cut by a few percent was still a big profit margin. Multiply by millions of installations and thousands of sellers, and the cost of getting a toilet is now a tiny fraction of what it used to cost. And because toilet sellers and plumbers have been incessantly improving their products over time, what we have now works much better than what they had then. Not only is it dramatically cheaper. It's better. And nearly everyone has at least one. This is just one example of how the poor today are wealthier than than rich of 150 years ago. Compared to 150 years ago, we live in the wealthy world that I mentioned above.

Notice that the toilet, and all of its health benefits, came because it was developed at the exclusive expense of the rich. The rich paid for *all* of the development costs. And the poor paid for none of them. Had there been no rich with sufficient funds to cover the expense, the toilet would never have been developed. No one would do all the figuring out for free. It required that someone be wealthy enough, and have sufficient excess money to fund the development. Had no one been wealthy enough, we'd all today be poorer.

This example is not just true for the toilet. It's true for cars, for televisions, for VCRs, for cell phones, for houses, for aspirin, for computers, and for most of what we take for granted as basic necessities in our modern society. All of those things have made us all a *LOT* wealthier. And *all* of those things exist specifically because there's a gap between the rich and the poor. A gap that allows the rich to fund the R&D of things that competition over time brings to the poor. The gap enriches the poor.

So if you want to help the poor - as I do - try to focus on the poor. Try not to worry about the rich. Wealth is not a pie, such that if one piece is bigger, some other piece must be smaller. Additionally, the gap between the rich and the poor results in a natural, and voluntary wealth redistribution from the rich to the poor. The gap is good news. It's not a problem to try and solve.

In my next post, I'll talk about how to deal with resource constraints. And in a post after that, I hope to talk about how I think that the free market is part of God's plan, not in opposition to it.


Jimazing said...

Excellent post. I like the way you explain your thoughts with illustrations that anyone can understand. I look forward to reading about "God's plan"

Anonymous said...

I want to talk about the purpose that the gap serves in making the poor wealthier.
And *all* of those things exist specifically because there's a gap between the rich and the poor. A gap that allows the rich to fund the R&D of things that competition over time brings to the poor. The gap enriches the poor.

While I'll agree that wealthy people fund R&D because they demand luxuries (which become available to "the poor"), it isn't because of the gap. They fund it because they have disposable income.

My biggest concern about the gap is that it allows the rich to fund injustice.

That said, I don't have a solution. I don't believe in legislating morality and I don't believe in redistributing wealth.

mjh said...

See my follow-up blog post...

mjh said...

it isn't because of the gap. They fund it because they have disposable income.

What is the distinction between "the gap" and "disposable income"?

mjh said...
This comment has been removed by the author.

Post a Comment

I've been getting a lot of friends from facebook starting to read my blog. I'm glad of that. I look forward to comments, critiques, etc. But please do not reference me or any of my family and friends by name. Here's why.