Poverty and Hunger in Economic Theories

by H. Aeschbach, 2010

Hunger and extreme poverty are primarily economic problems. When people starve, there is poor distribution of food within and/or between regions. If food is valued properly and the poor have the economic power to buy food, e.g. with government issued coupons, food shortages lead to decreased food consumption in all people, heavier people would lose weight, poorly nourished people would survive. Poverty tends to maintain itself. As everybody strives to live in “normal” ways people see a certain level of consumption as “necessary”, even if they cannot afford it. The poor hardly save. They rarely change their ways because attempts to improve themselves involve risks. In a crisis, poor people go into debt, but for them, interests are much higher than for the well-to-do; they rapidly become more deprived and essentially enslaved by “loan sharks” and potential employers. As poorer people borrow from the well-to-do, interests are a flow of resources from the poor to the wealthy.
Laissez faire capitalism lead to incredible wealth in a few but only gradual gains, with significant ups and downs, in the working majority. Abominable conditions of the poor repeatedly lead to political unrest and eventually to communist dictatorships and fascism. The Soviet Union proved to the West that a completely different economic system can lead to similarly rapid development: Russia moved within two generations from medieval poverty to living standards of modern countries while reaching militarily superpower status and leadership in space exploration. The Soviet Union ultimately collapsed as it was unable to maintain the arms race; but free market capitalism still grapples with most serious problems. Much of the Third World hardly benefits from technologies developed in the First World. Latin America still develops much slower than the now highly developed regions.
For poorly understood reasons, child mortality plummeted even in the poorest regions, where there is no clean water, no medical care, and chronic malnutrition. Throughout the Third World, most children reach adulthood: there has been an unprecedented population growth. The “Green Revolution”, food aid, and improvements in political priorities prevented mass starvation in all but a few areas.
A basic economic dilemma remains: capitalism does not work well without continuous ruthless expansion, including the exploitation of Third World labor and gradual depletion of the world’s resources. Capitalism is inherently oriented towards increased gains, not quality of life. The destruction of the world as we know it is conceivable if not likely.

18th century:

In 18th century Europe, while capitalism developed, mercantile systems still dominated economies, and educated people held that poverty was necessary to motivate farmers and craftsmen to produce. Adam Smith, professor of “moral philosophy” at Glasgow university, first described basic capitalist principles and “laissez faire” free market economies. For him, wealth consists of the goods that all people of society consume. He saw the “invisible hand” in free market trade to benefit all. Adam Smith did not consider interests to have an important economic function. In the Inquiry into the Nature and Causes of the Wealth of Nations, (1776), he advocated low, government-regulated interests, since in countries where interests were forbidden, “this regulation increased the evil of usury”. Smith was deeply concerned about the poor, but he seemed essentially optimistic. He donated much to charities.

19th century:

Thomas Robert Malthus, David Ricardo, and other economists of the early 19th century were pessimistic, seeing the poor as having little chance to improve their fate. Malthus saw the populations growing faster than the food supply; Ricardo’s “Iron Law of Wages” maintained that all attempts to improve the real income of workers were futile. Like Smith, these later economists were concerned with the fate of the poor. Ricardo saw the conflicts between industrialists, land owners, and poor workers. Malthus, the first full-time economics professor, was deeply concerned about the severe problems of the real world. Smith, Malthus, and Ricardo were all conservative economists, but they very much disagreed with each other about appropriate economic policies.
During these early days of capitalism, many became rich in the stock market (e.g. Ricardo and his father were very successful), capitalists extracted large profits from their industries, but workers, including young children lived in abject poverty and endured incredible abuse by factory supervisors and others. Few idealistic, intelligent entrepreneurs created islands of humane micro-economies.

Robert Owen, a self-taught economic and social thinker from Wales, realized visions that actually worked well. Sadly, the small investments needed to improve conditions were not replicated by the many who visited his New Lanark model mill and community outside Glasgow, Scotland. Other communities founded or inspired by Owen were temporarily quite successful, but the will to work out minor conflicts was lacking. His New Harmony community in Indiana eventually failed largely over differences about the form of government and the role of religion. Philosophically, his communities were comparable to the Kibbutzims of modern Israel. Owen was personally very interested in the optimal treatment of young children as he recognized this phase of development as pivotal. Acknowledging labor as the source of wealth, a stated goal of his was to make the poor productive. He was not religious but had the great insight that “man’s character is formed by circumstances”, or the environment in which he grows up; he recognized that a civilization’s institutions largely shape the behaviors of man. However, in his later theoretical thoughts, he went to extremes, including proposals to abolish money and private property.
Owen’s vision succumbed to greed and political conservatism, but his influence was important, particularly with regard to later social thinking and the worldwide consumers’ cooperative movement. Accusations made against him were malicious and absurd; he was soon considered a “utopian” rather than a thinker who demonstrated the value and applicability of his theories. His son, Robert Dale Owen was an Indiana and federal lawmaker, whose liberal ideas were important. His letter to president Lincoln, urging the end of slavery, was reported to have greatly influenced Lincoln.

Karl Marx was a true economist and utopian. Following tenets of earlier economists, he astutely analyzed the serious problems of capitalism, predicting business cycles, the rapid decline in self-employed workers, the formation of huge corporations, and social upheaval. He recognized how religion had, through much of history, been abused by powers who wanted to maintain the status quo. He described how the freedoms and economic rights of the poor had been suppressed by the established powers, industrialists, land owners, and other well-to-do members of the bourgeoisie. Marx stressed the liberties of individuals and sought an economic system that empowered workers. He added utopian theories about the future rise of the working class that, according to his beliefs, would necessarily result from historical forces. In the twentieth century, Marx’s ideas were abused by dictatorships. But even when Marxists were democratically elected, they were feared and suppressed, if not assassinated. A notable exception is the Indian state Kerala.
In the late 19th century, conditions for workers gradually improved, but this was not the result of a unified political effort to create humane economic institutions. Progress was largely coincidental: the rapid population growth was outpaced by increased food production, growing imports from colonies, and improved technologies.

Devastating business cycles were now readily recognized. Capitalist economies extended into many colonies in Asia and Africa. The British historian and economist J. A. Hobson clearly saw ethical and ecological problems of economic developments. He described the colonies as the place for capitalists to invest, since investments in Europe only lead to a glut of products which workers could not afford. In his book Imperialism (1902), he went so far as to predict that capitalism would destroy the world. The concepts of increasing workers’ salaries and establishing retirement and disability payments, so that the poor could afford more of the cheaply produced goods, was not prevalent.
Alfred Marshall of Cambridge, widely considered the greatest economist of his time, was most concerned about the causes and cure of poverty. However, he had no “easy solutions” and stressed time as an element in all adjustments and developments.
The Norwegian-American economist Thorstein Veblen analyzed and described the degenerate, ruthless, and exploitative business world of the USA. He basically saw conventional economic wisdoms as worthless when trying to understand human behaviors.
Concerning the social wrongs of the Victorian era, Robert Heilbroner noted in The Worldly Philosophers: “the complacency of the official world was not merely a rueful commentary on the times; it was an intellectual tragedy of the first order.”

Early and mid 20th century:

The prominent Cambridge economist John Maynard Keynes gradually distanced himself from the prevailing “laissez faire” economic thinking. His teacher Arthur Pigou, follower of Alfred Marshall, explored and described effects of economic activities on social welfare. Keynes was deeply distressed by the Versailles Peace Conference in which the allies demanded reparations from Germany, that, as he saw it, would destroy the German economy, and he predicted the impending “devastation of Europe.” He was very concerned about unemployment and suggested public works to reach unemployment before the Great Depression and before working out his new theories. His later works explained how in recessions and depressions, unemployment had to be dealt with by private and/or public investments. When the private sector could not produce jobs and income for the unemployed, he recommended the government substitute for that deficiency. Only in minor contractions were monetary policies, mainly easier credit and lower interests, adequate.
Milton Friedman, a most influential “laissez faire” economist at Chicago University, stressed a stable money supply and minimal centralized government involvement in the social and economic functioning of society. He early advocated a progressive income tax system that included negative income taxes (a guaranteed income) for the very poor. He believed in school vouchers issued by governments, giving rich and poor equal access to schooling, rather than having poor schools for the poor and sell endowed schools for the well-to-do. He advocated a volunteer army which he expected to be more committed and efficient, and he advocated the legalization of now illicit drugs. He considered his approach an efficient way of helping the poor. Sadly, conservative governments worldwide utilized his monetary theories, expanding the affluents’ wealth, but ignored his proposals that were to complement these policies.

Gunnar Myrdal, sociologist, diplomat, and leading socialist economist of Sweden, was very interested in the problem of poverty. Invited to study the problems of Blacks in America in the early forties, he presented his theory of “cumulative causation”, of poverty breeding poverty. For years, he studied the problems of India and other Third World countries: he recognized that these countries deserved much multilateral aid that must not be considered primarily economic investments. He rejected the term “developing countries”, stating that Western Europe and the USA developed faster than countries like India, that the poorest regions hardly developed at all. The monumental study The Asian Drama (Pantheon, 1968) contains many observations and suggestions how to gradually lift underdeveloped countries out of poverty. He addressed the problem of “soft states” with poor legal systems, considerable corruption, and poor infrastructure. He noted that industrialization may not help the poor as modern industries are not labor intensive and many artisans lose their income; he stressed the importance of intensive and improved agriculture. Even when democratically organized, the poor are usually not adequately informed to organize and vote in their own interests; instead groups may be driven by religious and ethnic fanaticism combined with impulses to steal the land of others. He described in great detail central issues for progress in underdeveloped countries, including: equalizing income, realizing land reform, investing in people’s education and the country’s infrastructure, fostering greater social discipline, introducing birth control while working on cultural issues related to decreasing family size, limiting or adapting international trade and capital flow to a country’s circumstances.

Late 20th century, turn of century:

Many observers working in Third World countries, particularly representatives of non-governmental organizations and religious charities, described truths that were still largely ignored by academic economists. As stated initially, hunger is primarily due to unequal distribution of wealth and lack of adequate incomes. It was observed that access to modern forms of birth control is much less important than relatively equal distribution of income. In many countries, land reform and other means of equalizing access to work, education, food, and basic services lead to families having less children before modern forms of birth control became available. Most important is the insight that women need to be educated and included in economic activities since women are more involved in the welfare of all family members. Women also tend to be more reliable and industrious; they are much less inclined to gamble, abuse drugs, or abandon their children.
The Indian economist Amartya Sen, also stressed how relative equality of income improved vital statistics in populations. In the poor Indian state Kerala, the life expectancy is higher than that of blacks in the USA. In Great Britain, life expectancy grew most during the decades of World War I and II, apparently due to better sharing of resources. Sen observed that decreasing number of children in Third World families was most closely related to education and employment of women, not family income. Sen was most interested in measures of quality of life or “welfare economics” and was called “the conscience of his profession.” He argued that, in order to achieve economic growth, social reforms, such as improvements in education and public health, must precede economic reform. He stressed the importance of freedoms including freedom to meaningfully develop and express self, ability to work as free agent, freedom from poverty and starvation. He defined five freedoms: political freedom, economic facilities, social opportunities, transparency guarantees, and protective security. He saw freedoms as conducive to, if not a condition for, meaningful development. (A. Sen: Development as Freedom,1999, Knopf)

Hernando De Soto, a very influential economist based in Lima, Peru, describes the importance of poor people having legal titles for their real property. In his native Peru, he successfully countered the Shining Path guerrillas by explaining that the poor were not in a class struggle with capitalists but struggled, as small entrepreneurs, against the inept, conservative legal conditions. They are not a “proletariat” but trying to reach a higher living standard as business people. They do not condemn financial institutions but seek access to them. His think tank’s success in countering the terrorism of a huge guerrilla organization stands out as the ideal way of dealing with radical violent groups. (H. de Soto: The Other Path, 1989, Basic Books)
De Soto observed that in most Third World and former Soviet block countries, people commonly build houses outside legal structures, usually without title for their land, and relying on local agreements with neighbors. Legal acquisition of land and permits to build are, from a practical standpoint, unattainable). Required procedures are extremely time consuming and expensive. Locally agreed upon rules serve the function of official laws. He characterizes houses, erected by the poor outside the legal system, as “dead capital”, meaning that these buildings, which represent savings of the poor, cannot be used as collaterals for desperately needed loans. He contrasts Latin American conditions with the USA where many companies were started with loans on the entrepreneur’s home: capital formation often included the acquisition of a family home. De Soto and his associates have been helping governments to unify and streamline legal procedures for the documentation of land titles; a process that considers local conditions and informal agreements between neighbors. The USA went through similar processes in the early 1800’s, Western European countries around 1900. (H. de Soto: The Mystery of Capitalism, 2000, Basic Books)

Muhammad Yunus, Bangladeshi economist and founder of the Grameen Bank, essentially developed microcredit as a way to lift large populations out of absolute poverty. He recognized the lack of money among the poorest: they often rely on money lenders who charge 10% monthly or weekly, usually cannot pay back, and later have to work like slaves for traders, who lend raw materials but buy crafted products at prearranged prices far below market value. (M. Yunus: Banker to the Poor, 1999, Public Affairs)
He was very persistent in developing cooperative microcredit institutions, run and owned by former and present borrowers. His principles were designed to be replicated in other areas. His genius consists in combining economic knowledge, idealism, and a willingness to learn about human behavior. Rather than basing loans on mistrust, his institutions reward trust and are based on trust. Borrowers need no collateral. His banks were successful because repayments were consistently close to 100%. Yunus recognized that women’s enterprises usually benefited families more and that women were more reliable than men. Borrowers meet regularly to discuss issues; there is informal peer supervision. Yunus required that families borrowing from the bank refrain from demanding or paying dowries, and he greatly encouraged education for all children. His singlehanded efforts helped Bangladesh to develop significantly as measured by the Human Development Index; there has been a significant improvement in quality of life among the poor. While microcredit does not add much to a country’s gross national product, it is most significant in decreasing poverty and helps to equalize income. Microcredit has been growing worldwide; there are commercial profit driven, nonprofit, and charitable microcredit institutions. As Yunus’ Grameen Bank, some microcredit institutions include social and political goals, e.g. decreasing traditions that discriminate against girls and women. A major problem is the expense of running microcredit institutions, supervising the loans and collecting the minute payments; as a consequence, borrowers still pay high interests, maybe 30%. However these payments are only a small fraction of charges demanded by loan sharks and pond shops.

Integrating the insights; conclusions for the twenty first century:

Ethically and economically, basic economic security worldwide, including access to safe water, basic food and medical services, remains pivotal. The negative income tax or guaranteed income, proposed by Milton Friedman, makes sense and could be realized with coupon systems, as used in some countries during war times. As some conservatives suggest, consumption (sales) taxes are much easier to apply than income taxes. To combine these ideas: income taxes are abolished and consumption taxes introduced, a minimum income is added, issued to all people as coupons or special accounts that cannot be used for luxuries, such as alcoholic beverages. If, as Friedman suggests, coupons or vouchers are used for schooling and health care, private institutions may compete with public ones. However, governments must provide good services where private enterprises fail, and private institutions must follow research-based minimal standards. Democratic governments may require that these be nonprofit organizations or cooperatives. Alternately, public health care and educational institutions may be replaced by small, local contractors.

When describing poverty in rural areas and the flux of people into city slums, an important economic issue is barely appreciated. When able, poor rural people buy luxuries brought in from metropolitan areas or even imported from abroad; when rural people put some savings into banks, that money is primarily invested in cities. Money flows from villages to cities to metropolitan areas to the most highly developed countries. Much more Mexican savings are invested in the USA than vice versa. In addition to flight of capital from poor regions, well educated and highly intelligent people leave too. About one third of practicing physicians in the USA and many engineers and scientists were raised and educated in Third World countries. This drain of money and human resources prohibits the development of rural areas and leads to inefficiencies. Even if there is work to be done, and there are materials and craftsmen willing to work, little gets accomplished because very little money circulates in small towns; people would have to use barter agreements. Buildings, schools and roads deteriorate, enterprises fail, but neither local governments nor private resourcefulness are adequate to rebuild the local economy. People have to follow the money. Outside investments, e.g. a factory built in an impoverished region, create a few jobs and return some money to the countryside. However, such investments do not reverse the general trend. Governments and private institutions must help keep a reasonable money supply where the people live. In successful experiments, rural unemployment was decreased by introducing a local currency which may be considered barter coupons. Unfortunately, national laws generally forbid any form of private or local money.

While De Soto suggests that, with improved legal structures, poor people could borrow using their houses as collateral, Yunus proved that appropriate loans do not need a collateral. Both thinkers agree that the poor have the potential to increase productivity, if given an opportunity. De Soto, as previously Myrdal, deplores “soft states” without functioning legal systems. Property contracts are an important aspect of freedom. When the poor, thanks to microcredit and/or property rights, are able to start small enterprises, growth leads to increased incomes and increased tax revenue.
Yunus shook the tenets of financial institutions which are, as he pointed out, built on distrust and rely on the old “trickle down” principles. He went to the poorest and examined their needs, he issued small loans based on trust. In stead of bankers examining the past performance of loan applicants or type of planned venture, peers decide what loans are reasonable. With proven results, nonprofit cooperative banking now attracts small and large philanthropic organizations including the Bill and Melinda Gates Foundation, religious charities, and social investment funds. In addition, profit driven institutions started giving small loans to people who do not qualify for conventional loans.

Economic growth demands an increase in the money supply. Consequently, some of the microcredit could be issued as government grants, based on newly issued money, without creating inflation. Additionally, if there is a guaranteed income, repayments of micro-loans could simply be deducted from these monthly payments, greatly decreasing the costs of administering loans.
In microcredit banking, interests and profits hardly guide investments when seeking to improve people’s quality of life. In all banking, the allocation of loans should be guided by observations of what investments improve people’s lives and the quality the environment.
A logical conclusion is to restrict commercial banking, and to institute development banks, run by elected officials and/or as nonprofit cooperatives. While funded projects must be workable, goals must consider the people and the environment more than profitability. Restrictions on speculative lending also allows governments to exercise more control over the money supply thus decreasing business cycles with deleterious recessions.
Further improvements would result from varied consumption taxes: high taxes for goods that society wants to discourage (including alcohol and products that produce green house gases and/or are other pollution), and minimal taxes on what societies want to encourage (as basic, healthy food items and products that save limited resources). As Friedman suggests, illicit drugs should be legalized; all abusable drugs should be legal. However, high sales taxes on addicting drugs can discourage consumption and raise money for prevention and treatment. Additionally, it must be considered child abuse to expose minors to abusable drugs.
As trade is reevaluated, measures must prevent the flow of money from poor to wealthy areas. Local currencies may be used and transportation with its high use of fossil fuels should be highly taxed. Generally, small local enterprises are much better adapted to local needs. When considering administrative and distribution costs, local enterprises as compared to huge corporations show similar efficiency while keeping higher quality jobs in the community. Particularly in the small countries of Western Europe, small and mid-sized enterprises proved efficient, often finding a niche and adapting to changed environments, thus increasing people’s quality of life and sense of freedom.

The question of poor countries being able to approach living standards of wealthy countries has been answered by history: modern technologies are so efficient that industries can produce anything a modest person needs within reasonable work hours. The exploitation of slaves or child and sweatshop laborers is not needed for a decent living standard of a middle class. World population growth has decreased to the point that no worldwide shortage of food is anticipated; as is the case today, starvation will most likely be due to poor food distribution and wars. It is conceivable that all human beings reach, within decades, a decent living standard. Except for raw materials, countries and regions can be quite self-sufficient.
Wealthy countries have in many ways fallen back in their diligence to educate their children well, and/or to work as hard as many Third World workers. However, rapidly developing countries usually develop huge income differences and maintain unemployment, creating a thin upper class and growing Westernized middle class with the majority of the population staying desperately poor.
An additional problem is the lack of comprehensive development plan that considers pollution, sustainability of development trends, etc. While China is developing rapidly and soon to rival the USA’s gross national product, there is little consideration that its population density does not lend itself to the reliance on private cars; pollution, limited world oil supplies, and rapidly growing production of green house gases are becoming immense problems.

Initial steps for rapid development of poor countries:

– Governments establish money supplies that are adequate for full employment at locally adapted wages. Local governments should establish local currencies, if there is unemployment and/or a problem with money leaving the area. Newly introduced national or federal money and local currency is used to maintain or improve schools and clinics, to pay workers who improve infrastructure, community buildings, etc., and to issue a minimal income for the very poor, unemployed, and disabled.
– Central and local governments plan and guide allocation of money through development banks, without controlling enterprises. Taxation is to encourage for society and ecology beneficial products and production processes.
– Laws must streamline steps for the establishment of decentralized enterprises; land should belong to the farmer’s family; laws should be practical and enforceable; corruption must be fought at every level. As an alternative to land ownership, governments may issue open-ended leases for use without ownership of resources such as minerals and water.
– Child labor and contracts that lead to indentured labor are to be outlawed.
– Countries always invest savings of hard currencies by importing equipment to increase productivity; they severely restrict imports of luxuries by their middle and upper class.
– Poor countries should import machinery and equipment that is slightly dated, cheap, but functional; then learn to produce them themselves with proper adaptations to local conditions; often smaller, if possible more energy efficient, etc.
– Initially, countries should export goods, produced with lowly paid labor and quite modern equipment, in order to have hard currency; these savings are to be used to import more sophisticated means of production and to build institutions of higher education with laboratories, etc.
– Countries educate all children up to secondary education level and, as feasible, undereducated adults, particularly women. Local governments offer incentives for newly educated people to become teachers; teaching is to inspire people, and poor children learn to recognize education as their way out of poverty.
– Whenever possible, Third World countries should cooperate with each other, trading technologies, goods and services, collaboratively building specialized universities, etc.
– Local governments must cooperate with regional and national governments to improve infrastructure, including ready access to safe water, local production of renewable energy, and the construction of efficient rail systems.
– Local and regional governments provide basic health care, particularly prevention and treatment of infectious diseases, obstetric care, access to all forms of birth control, and palliative care.

It is expected that unemployment disappears and workers’ and farmers’ quality of life gradually grow, creating a broad middle class. Countries can then function fairly self-sufficiently, while minding that money does not leave regions and savings stay in the country.

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