Friday, October 15, 2010

The Fallacy of Relative Poverty

I’ve been spending a lot of time thinking about relative poverty lately. It’s really come to the fore as people continue to want to talk about poverty in Canada. The amazing thing about Canada is that there is virtually no poverty as measured by the UN, that is people living on less than $1.25 (US) a day. About 80% of the world population lives on less than $10 a day ( Even those receiving the absolute minimum level of state support in Canada receive more. Nobody in Canada starves to death, in fact one of the biggest health issues associated with poverty in Canada is obesity.

So why is there so much concern about relative poverty? An incredibly cynical view is that there are a remarkably large number of people who benefit from “helping” the poor. There are social workers paid quite healthy incomes to help those receiving social assistance live on 20% of what a social worker earns. One quote I’ve come across and can’t source (sorry folks I tried) is a social worker is someone paid $60,000 a year to tell someone how to live on $12,000 a year. The cynicism arises when we consider that if we stopped believing that the person receiving $12,000 a year needed extra help, that person would be out of a job that pays much better than average. While this likely plays a role in the ongoing debates about relative poverty, I’d like to think it isn’t the main conscious factor.

The general objection to relative poverty is that it is somehow unfair that some people have a lot more than others. Why is it unfair? Why do we care that somebody else has more, or less, than we do? Is it reasonable to care?

In reality I suspect concern over the relative income or wealth of people dates back to the class warfare of Marx and others of that line. But I think it might be useful to take another look at why a reasonable person might care. There are only two reasons I can think of to care how much somebody else (assuming I and they have met the basic needs of life) has.

The first is simple and ugly – envy. Envy is not new; it’s arguably been with humanity since the beginning. It is not a virtue, it’s a vice. Mosst religions prohibit envy, yet some in Canada seem to be making a positive fetish of it. If I’m earning enough to live comfortably and enjoy some reasonable luxuries how does it harm me if you can have more luxuries? I currently make a decent living, but there are people around who get paid a lot more. Does that mean I should enjoy my Friday afternoon beers with my colleagues less, just because we’re having beer & nachos instead of champagne & caviar? Are we all really that petty? Maybe we are, if so, shouldn’t we be trying to reduce our pettiness?

The other reason why people might be concerned with relative poverty is a mistaken belief that we are playing a zero sum game. People think that someone else being rich automatically means that someone must be poor. That is simply false. There is not a fixed sum of wealth available to a population, we can and do create wealth all the time. In fact the absolute number of “rich” people is and has been growing for years. People move from incredibly poor to just poor all the time. Some even go from incredibly poor to incredibly rich (though that is admittedly rare). Some one becoming rich due to a new invention or becoming a rock star doesn’t knock somebody else out of the rich group. My being rich doesn’t mean you can’t be. In fact it often means the opposite.

I know what some of you are thinking – I claim to be an economist, how can I be claiming scarcity isn’t real? The simple answer is that I’m not. We’ve seen over the last 20 or 30 years that increasing trade allows increased specialization, productivity and wealth for all those involved. We aren’t yet anywhere near the amount of trade we could be engaged in. The fact that people in Canada trade raw materials to China in exchange for manufactured goods doesn’t mean that people in Africa have less of either to consume.

I’ll end with a simple thought experiment. Imagine a group of aliens lands in a sparsely inhabited area, let’s say Canada. These aliens somehow manage to raise the incomes of everyone in the country to more than twice what it was before and leaving everyone else in the world with the same real income they had. Do we really believe the world is a worse place as a result? Relative poverty has increased.


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