An Essay into the Nature and Causes of Poverty — Part 5

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.

The really poor don’t have the ability to initiate this intergenerational transfer, and thus are unable to provide the credit that their children need. Consequently, the children are unable to reach their full potential, and the cycle continues. Poverty breeds poverty and this cycle can only be broken by releasing the credit-constraint that the poor face right from birth.

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The realization of the potential that a human being has at birth requires resources for education and training. Provided those resources have been properly spent, on average the total benefits obtained from education over a lifetime must exceed the total costs. This is evidently so because if the amount spent on training does not exceed the extra earnings from that training, it’s an inefficient use of resources.

Imagine that a person has the potential to be a doctor, and if properly trained would add $10 million to society in terms of medical services provided over a lifetime. If the cost of his training is $250 thousands, that is a good bargain. Not only does he gain his lifetime earnings, society gains too. But if his parents are unable to pay for his education, that is a loss to him for sure and a much greater loss to society. Therefore, if he is given a loan, that loan can be repaid with interest and he, and the society, would be better off than otherwise.

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Let’s be clear about one fact. The necessary condition for poverty in a society is that the masses are illiterate. Literacy is a basic, irreducible minimum. Without mass literacy, it is not possible for a society in the modern age to prosper. You cannot find a single society which is mainly illiterate and somewhat prosperous. And conversely, every society that is broadly prosperous is literate and numerate. Illiteracy and innumeracy are not sufficient but it are a necessary correlate of widespread poverty. Exhibit A there is India and its neighbors. 

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In the context of this essay on poverty, I define education very broadly. It’s the training of people necessary for the production of goods and services. By education I do not mean that everyone should have a college degree. I mean that a person gets the training that is consistent with the person’s innate abilities and preferences. It could mean that someone who is good with his hands becomes a plumber or a carpenter, and someone else becomes a computer programmer. The actual content of the education differs across the broad spectrum of tasks that the market values. 

People differ in their preferences, their opportunities and their abilities. One person may want to be a virtuoso concert pianist and even have the opportunity but if they lack the innate talent, it would be ultimately futile. Thankfully, the world is sufficiently diverse in that it provides opportunities for all kinds of talents and preferences.

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The question naturally arises about which is the proper agency for releasing the credit-constraint that individual families face in the context of education. My submission is that it is not the government. In fact, I would be emphatic in my position that the government must not be involved in education (as defined above.)

The reason for why the government must not be involved in education is simple: government action involves the threat, and the use, of violence while education is an intrinsically non-violent activity. I have addressed that point elsewhere on this blog. [See What should the government do?]

So if a particular family is unable to pay for the cost of training and the government must be prohibited (by a suitable constitution) from being involved in education, who then? The answer is that it is the job of civil society to provide for the education of its members who need support. 

This point is so abundantly clear that it needs no further elaboration. 

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India’s poverty is in a very strict sense entirely man-made. It is not due to some inalterable law of nature that India is so desperately poor. Poverty in India is engineered just as it is in many other societies across the world. The operative word is “engineered.” There is an engineering mentality among the poorly educated (which defines the bulk of the politicians and bureaucrats that hold power over the nation) that designs the poverty that the people suffer from. 

There is a way out of this trap. That’s what I will explore in the next bit in this series.

{Previously: Part 4 of this series.}