At the end of part 2 of this essay, I had briefly touched upon the notion of credit-constraint and observed that the necessary condition for being poor was the inability to borrow. To reiterate, if you have wealth then of course you are not poor. Even if you have no wealth, you are not poor as long as you can borrow.
It’s time to explore that bit. We are all born poor. We are born without a dime in our pockets — indeed we are born naked. But those of us who are fortunate enough to be born to non-poor parents are not poor at birth. Our lifecycle is such that our parents “loan” us what we need to survive and grow. You could say that they release our credit-constraint.
The credit our parents provide us allows us to become skilled and thus create wealth, only part of which we consume. The rest we provide to the next generation to release their credit-constraint, just like our parents did for us. In effect, we repay the loan from the previous generation by giving loans to the next generation. It’s an intergenerational transfer of wealth. Continue reading