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Destroying the Myth: Poverty Is Not Inequality

By: Iván Cachanosky - @ivancachanosky - Mar 17, 2014, 10:57 am

Español According to a recent report by the humanitarian organization Oxfam, there has been an increase in the level of inequality over the last 30 years, causing social problems and an increase in poverty. The most important points that the report puts forth are that half the world’s wealth is in the hands of 1 percent of the global population, and that the 1 percent possesses US$110 billion, or 65 times the total wealth owned by the poorest half of the world population.

Does this, in fact, mean that poverty is increasing? Are the rich truly getting richer, while the poor are getting poorer? When examining these assumptions in detail, they are revealed for the myths that they are.

As with all myths, there is some truth within these as well. The point of confusion is the origin of inequality. It’s true that there are fewer and fewer taking a greater portion of the pie, but this is not necessarily a problem linked to poverty. What we should be asking ourselves is, can this pie be grown or not? That is to say, can wealth be created?

If the answer is no, and this pie cannot be grown, then inequality would indeed be a big problem. Resources would be fixed, and this becomes a zero sum game. However, the economy does not work this way. History has shown that wealth has increased over the long term. Before the Industrial Revolution, poverty was widespread and reached levels as high as 80 percent. At present, that figure has dropped to about 21.1 percent, according to the World Bank.

Further, whether or not there was a greater level of inequality in the past is an important question. In the past, while the population lived under more precarious conditions, the difference between rich and poor was much greater in terms of being able to meet basic needs. For example, 20 percent had access to safe drinking water, while 80 percent did not. What does it matter if the wealth accrued by Bill Gates, to name one tycoon, continues to increase so long as our ability to meet basic needs is not negatively affected? The important thing to note here is that humanity as a whole has come from a less satisfactory situation to a far better situation with the progression of time. Again, is this inequality bad?

That answer depends on whether or not that pie of wealth has grown. The reality is that the world’s GDP has grown tremendously, especially since the Industrial Revolution. The increase in growth is no minor point. If someone were to ask you if you would prefer to have one quarter of a pie or one half, the answer you would more than likely give is: “depends on the size of the pie.” It may just be that the quarter of a large pie exceeds the amount of half of a very small pie. Therefore, greater inequality is not synonymous — not even remotely — with greater poverty. This is a point of view that anyone can agree with.

In the past, having a cell phone was a luxury few could afford, while today there is widespread use. Many years ago, a spare tire for an automobile was a luxury, and today they’re burned during protests. The fact that today’s luxuries become tomorrow’s necessities is the proof that poverty is diminishing far more than inequality is increasing. They are two separate issues that have nothing to do with each other.

These examples also serve to show that there are different types of inequality: one generated by the free market, and the other by the government. The first is the sort of inequality in which most people are still able to more or less meet their basic needs. The second is an action by the government that usually hurts the poor. A clear cut example can be seen today in Argentina where the government “authorizes” the purchasing of dollars for those who earn a monthly income of more than AR$7,200. Since only about 30 percent of workers in Argentina exceed that salary, those with the least means do not have the opportunity to save in a reliable currency. Ironically, they are the ones who most need this kind of opportunity.

Further, this sort of analysis usually neglects the question of “social mobility,” one of the most important points within this context. This requires us to look at whether or not people living in poverty are able to overcome this situation over the course of a few years. The economist Steve Horwitz has cited a study from the University of Michigan that revealed, between 1975 and 1991, 95 percent of US families living in poverty were able to overcome their situation within that time span. Although the data is a bit dated, it demonstrates that upward social mobility is possible.

If poverty cannot be solved through redistribution, then what is the solution? The answer is poverty is solved by generating wealth and producing goods that people demand, and not by distributing existing wealth or printing more money. It is in the production of wealth, the growth of the pie, that solutions to poverty will be found. Redistribution cannot be the answer once we understand that inequality has nothing to do with poverty.

Translated by Guillermo Jimenez.

Iván Cachanosky Iván Cachanosky

Iván Cachanosky holds a bachelor's degree in business administration and a master's degree in applied economics. He's currently an instructor at CMT-Group. Follow him on Twitter at @ivancachanosky.