Bryan Caplan  

Portfolios of the Poor: Highlights

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Gorman on Health Reform... Good Question...
How markets free individuals from degrading family ties.
Approaching several people for loans before getting one is not merely an inconvenient outcome of the financial shallowness of the informal sector, but a source of stress and shame.

For migrants who have left poor families in the village to make good in the city, this embarrassment is acute.  Somnath from Delhi... avoided recourse to relatives at all costs, because he was ashamed and anxious that, if he couldn't repay on time, he would strain the relationship.  Similar feelings were voiced by as many as half the Delhi respondents...
How multinationals are doing good while doing well.
Seeing the poor could not afford many of their existing products, multinationals like Proctor and Gamble and Unilever found a solution by selling single-serve packets of shampoo to poor households in India.  The single-serve packages, costing a few cents each, turned out to be a popular option for people lacking the daily cash flow to easily purchase large bottles of shampoo, regular-sized tins of tea, 200-count bottles of aspirin, and the like.
Why Americans who "can't save" are big babies.
Nomsa [a 77-year-old South African raising four grandchildren] may seem extraordinary, saving a third of her monthly budget, but her saving patterns are not much different from most of her neighbors.
Why the poor pay more.
Finance for the poor means dealing with a lot of small loans and, when savings services are on offer, many small deposits.  For providers, small-sized transactions mean limited scale economies and thus high costs per transaction.  Out of necessity, "pro-poor" microfinance institutions tend to charge the highest rates of all; microfinance banks serving better-off consumers tend to charge the least.  Even if Compartamos [a Mexican bank for the poor] had earned no profit and paid no taxes, their interest rates would have still had to be 60 percent per year to cover costs of their strategy for small-scale lending in Mexican villages and towns.
The drudgery of the micro-credit co-op.
...most consumers... continue to transact largely in the informal sector, and it is not hard to see why.  The interface with the microfinance institutions remains the weekly village meeting, a breakthrough of the 1970s that is now looking somewhat stale: meetings consume too much precious time, there is no privacy, individual needs go unrecognized, the male workers tend to patronize the women members, and more and more members skip the meeting if they can, preferring just to show up and pay their dues as quickly as possible.


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COMMENTS (32 to date)
El Presidente writes:

Bryan,

Why Americans who "can't save" are big babies.

"Nomsa [a 77-year-old South African raising four grandchildren] may seem extraordinary, saving a third of her monthly budget, but her saving patterns are not much different from most of her neighbors."

That is a truly embarassing thing for an economist to say. I hope you'll reconsider what might have been an attempt at humor. Refutation of your criticism is contained in the third clause of the excerpted sentence. There is nothing extraordinary about Nomsa's MPS according to the author's observations of Nomsa's peers with similar standards of living and similar constraints. In this instance, it may be just as likely that savings is evidence of circumstance as of virtue. You should really be careful about hurling insults at poor people or pitting some against others . . . if you want to be reasonable. Otherwise, knock yourself out, and please stand a good distance away from me so that people will not confuse us. Tell us, if you would, how much a person living in Los Angeles should save if their gross annual income is $17,920 (this is not an arbitrary number; full-time minimum wage before taxes).

According to the US Department of Health and Human Services, poverty occurs at $10,830 annual income in the present year. This is calculated as three times the annual food expense for a single individual, which they estimate at $3,610 (about $300/mo). Subtracting that from the aformentioned income leaves the individual with $14,310. Average rent for a studio apartment in Los Angeles is $1,378. Why not get a roommate then, right? Average rent for a 2-bedroom apartment is $2,206, making the individual's share $1,103. Multiplied by 12 this is an annual housing expense of $13,236. Subtracted from the remaining income, the individual is left with $1,074. Since they're frugal, let's say they exclusively use public transportation. A monthly fare pass for the LA Metro transportation system is $62, or $744 annually, leaving our individual with $330 to save. But wait, they still need utilities. Electricity is a minimum of $7.00/mo. increasing with even minimal usage, which comes to a minimum of $84. Natural Gas is a minimum of $5 per month, before any metering, so that's another $60 per year. Water expense based entirely on metering averages $40.88/mo per household (24HCF usage, avg household size = 2.83). For our two bachelors, this amounts to $28.89/mo ($346.68/yr). Sewer is billed based on water metering ($3.27/HCF) which comes to $16.96/mo ($203.52/yr). Trash collection costs $24.33/mo ($291.96/yr). So, utilities to this unit cost $926.16/yr. Our bachelor's portion is $463.08. This is going to be a problem for his saving aspirations because it puts our bachelor in the red $133.08. But I'm sure they don't need to purchase clothes or health care and they can go without food every now and then, right?

Far-fetched you say? Roughly 20% of all HOUSEHOLDS in Los Angeles survive on this income, and they're not all single young bachelors. Another 20% isn't very far from it. They must be real cry-babies for not saving, huh? I bet our bachelor would have no problem maintaining a romantic relationship, putting himself through college, enjoying an occasional social outing, etc. No, wait, those are luxuries. How could I have made such a stupid mistake?

"Rent will advance, while wages will fall. Of the aggregate produce, the land owner will get a constantly increasing, the laborer a constantly diminishing share. Just as removal to cheaper land becomes difficult or impossible, laborers, no matter what they produce, will be reduced to a bare living, and the free competition among them, where land is monopolized, will force them to a condition which, though they may be mocked with the titles and insignia of freedom, will be virtually that of slavery."

Henry George ~ 1879

DWAnderson writes:

A couple of suggestions for El Presidente's family: (i) get below average housing that rents for below average rents; and/or (ii) move out of Los Angeles.

Dan Weber writes:
I bet our bachelor would have no problem maintaining a romantic relationship, putting himself through college, enjoying an occasional social outing, etc. No, wait, those are luxuries. How could I have made such a stupid mistake?
I probably hurt myself socially by living below my means when I was a young bachelor making less than your hypothetical, but spending opulently to attract a mate results in having a mate who expects opulent spending.

But El Pres points out that 20% of people survive on that income. But I bet someone making $19,712 also considers it "impossible" to save a tenth of his money, despite clear evidence that lots of people survive on 90% of his income.

No matter how much money you make, you can find excuses that you "have" to outspend it. And no matter how much money you make, there is someone surviving on 10% less than you.

But no one gets elected promising deferred gratification.

(What's up with the formatting? It looks like this comment has an extra line break before the paragraph starting with "No matter.")

Frazier writes:

Maybe this is just me thinking of a more family - oriented society like those found in Mexico, but there are plenty of instances where asking for money, or working with or for family members is considered the norm and nothing to be ashamed about.

It can be a way for the more wealthy previous generations, who have their entire live's worth of wealth and experience to sponsor, encourage, and teach the next generation what it takes to succeed.

I just wanted to point out that the first point was relative to the society that you are in and not an inherent advantage of markets.

Also, the second point, is a little exagerated with "doing good". It seems more like the companies are adjusting slightly so they can still compete in markets where customers need to buy small amounts. I'm not impressed.

Eric writes:

El Presidente's hypothetical bachelor also probably qualifies for some government assistance that would help him out:

I put in some reasonable guesses at govbenefits.gov -- living alone, 17,920 annual income, no high school diploma, no assets, needs help filing taxes, uninsured, etc. -- and it pointed out these in particular:

Section 8 housing assistance
Adult education funding/tax benefits for education
CA Low Income Home Energy Assistance Program
Medical/Dental Expenses Tax Credit
Preventative Health Services
Volunteer Income Tax Assistance
EITC (not totally sure whether he qualifies for this)

Of course, whole families living on this income have access to a much bigger range of assistance.

And he could do OK with a much lower monthly rent, even without Section 8. If he's willing to take the chance that he might have to move again, he could get this place for $695/mo.:

http://losangeles.craigslist.org/sgv/apa/1201846608.html

If he doesn't want to take that risk (or wants to save a little more):
http://losangeles.craigslist.org/lgb/apa/1201862811.html

Zac Gochenour writes:

El Presidente, I am being charitable and will just assume you did not really think about your response before posting it. Its filled with emotion and short on sense.

Your question is like asking "Please tell me how much a person bringing home $100K/year could save living in the upper east side of Manhattan!"

Let them get roommates. You hint at this, but your example assumes that to get a roommate you need an apartment about nearly twice the size costing almost twice as much.

If you can't find enough roommates, maybe Hollywood life just isn't for you. In my city (Baltimore MD), $1300/month gets me a 3-bedroom townhouse, with a yard, in a low-crime suburban neighborhood.

El Presidente writes:

DWAnderson,

A couple of suggestions for El Presidente's family: (i) get below average housing that rents for below average rents; and/or (ii) move out of Los Angeles.

(i) What is "below average" housing in Los Angeles? Give me a number for "below average" rent and we'll work that into the equation.

(ii) Apply Solow and make (n) negative over whatever period you choose to reduce (L) by 20%. Tell me how that works out for total and average output in the long run.


Dan Weber,

But El Pres points out that 20% of people survive on that income. But I bet someone making $19,712 also considers it "impossible" to save a tenth of his money, despite clear evidence that lots of people survive on 90% of his income.

Yeah, I guess they'd spend it foolishly on clothing and health care since they can't wear their Taco Bell uniform all the time and their employer doesn't provide health care. Who needs those things, right?

No matter how much money you make, you can find excuses that you "have" to outspend it. And no matter how much money you make, there is someone surviving on 10% less than you.

Surviving is what you do until you die. Bryan was talking about saving, not surviving, and he was fairly blunt in his assessment of Americans' ability to save. The elephant in the room is that there are trade-offs, opportunity costs of saving. Anybody with income can save, but what do they lose for doing so (present consumption), and what will they gain (future consumption)? What grand purpose will the extra $1,792/yr go to achieve and how long will that take? A person in poverty has to have the patience of Job to have a prayer of advancing, whether it's Nomsa or our LA bachelor.


Zac Gochenour,

Your question is like asking "Please tell me how much a person bringing home $100K/year could save living in the upper east side of Manhattan!"

Yeah, except it was minimum wage and it was any part of Los Angeles, which covers about 470 square miles as opposed to the 23 in Manhattan, to say nothing of the restriction to the "upper east side". I didn't ask how a moderately wealthy person could save in one of the most expensive neighborhoods on Earth, I asked how a fairly common laborer could save in one of the largest Cities in the country. So, your comparison is exactly right . . . except for the part where it's exactly wrong.

If you can't find enough roommates, maybe Hollywood life just isn't for you.

We weren't talking about me. We were talking about 20% of the labor force of Los Angeles. I will refer you to my suggestion for DWAnderson (ii) and see if you get different results. By the way, Hollywood is not a City, it is a neighborhood, and it is derisively though affectionately referred to as "Holly-hood" by those of us who have worked with its poor population and have seen the squalor that resides beneath the Hollywood Hills. If you wanted to make a point about opulent luxury, you should have said West Hollywood, Brentwood, Century City or Beverly Hills which are entirely contained within the borders of Los Angeles but are independent cities so that they don't have to play by the same rules . . . and so that poor people are forced out of them and into the other areas whose statistics I am using for the purpose of this demonstration. The numbers are already adjusted to exclude the most luxurious parts of the economic region. Hollywood life is exactly what these people have and it's nothing like what you seem to think it is.

In my city (Baltimore MD), $1300/month gets me a 3-bedroom townhouse, with a yard, in a low-crime suburban neighborhood.

Good. Now adjust the income down to $12,792 since minimum wage is lower in MD.

kebko writes:

El presidente, I think all of us actually have personal life experience in the situation you propose. In my early 20's while I was in school & starting a business, I lived on less than $5,000/year. I don't think I'm that uncommon. In fact, according to my Social Security records, I would qualify as the 20% poor you are talking about in as many years as not. Of course, I live comfortably, so when you draw a picture of the helpless underclass, I don't identify with it, instead I want to feel defensive. But, I am those people, or at least I have been. And I would expect that goes for most of us.
Just like the people in the documentary, my income has not travelled in a straight line. We scrape by when we have to & we save when we can. If you're painting a picture of a permanent underclass of a never-changing bottom quintile, then you're missing the point.

Dan Weber writes:

What grand purpose will the extra $1,792/yr go to achieve and how long will that take?

The same reason someone making two dollars a day saves their money. They'll have savings equivalent to 10% of their salary accumulating every year. They'll have a cushion. They'll have the audacity of hope.

I've seen people earning six-figures blow through their entire salary and still go on credit cards to finance basic "needs." I'm not calling out the poor for being profligate; lots of people at all levels try to live beyond their means.

We have millions of people living in this country illegally who still manage to save money. What is the difference between them and those born poor here? What can we do to make the latter group behave more like the former group?

El Presidente writes:

Dan Weber,

I guess what I'm driving at is that there is some base level of consumption below which we cannot rationally say a person honors their self by saving rather than spending. Some of us apparently estimate that to be the minimum caloric intake required to sustain life. Others of us believe it is somewhat higher. Comparing the circumstance of Nomsa with that of Americans who say they cannot save doesn't disclose the illusory lies of greedy Americans making minimum wage, big babies that they must be. It discloses the callousness of those of us who insist that prosperity must necessarily be preceded by suffering in even one case. I don't accept it, and I never will. It is inhuman and inhumane. It shames a profession that purports to tell people how they can improve their lot to tell them instead that they must first increase their suffering in order to later relieve it. There is enough out there to relieve it NOW, but we insist that it should not be relieved by the aid of others who can most afford to assist so long as they refuse to do so. We preach marginal analysis to people abutting absolute constraints, and we are worse for it. I do not wish to be part of a profession that subscribes to this dogma as a first principle. Maybe I am alone in that, but I suspect I am not. I believe it keeps some of the better minds away from the profession, though occasionally they find themselves in the profession by some sort of accident and they wish to do something about it.

Having sold my own blood to buy food it strikes me rather deeply. I hope that doesn't offend anybody, but I'm not sorry if it does as it would be a result of their foolishness, not my imprudence.

Zac Gochenour writes:

I see El Presidente missed my point entirely about living in Manhattan as it compares to the cost of living in Los Angeles.

If someone making 100K in Manhattan was having trouble saving because he lived in an opulent neighborhood, what would the natural recommendation be? For him to move out of his penthouse and in to something a little more within his means. Maybe this means he has to move into a studio, or share one with a friend. Or maybe it even means moving to Brooklyn or New Jersey AND getting a roommate.

When I worked in DC I wanted to live in Arlington, but was saddened by the apartment prices. I only took home about 25K a year after tax, so how could I pay $1100/mo in rent and save? I looked for 2 bedrooms, but at around 1600 I still felt my share of 800 would make life difficult for me after utilities, etc. So I got 2 roommates, one guy slept on the couch and paid half price, so my share was only 600 and utilities split three ways.

Now I pay 1300/mo for a 3 bedroom townhouse, which is typical for where I live. I don't need all that space, so I rent out a room to a friend for 500/mo. This is great for my friend, who made about $13000 last year, but its not a really exceptional deal. In the past year, he's been able to save enough to start classes in community college this summer and pay his way out of credit card debt.

What I'm trying to illustrate by example is the idea that there is "some base level of consumption below which we cannot rationally say a person honors their self by saving rather than spending" faced by almost anyone in America is outright insulting to people who actually are making the necessary sacrifices, not to mention people in other countries surviving on far, far less and still managing to save.

At best you're simply confused and wrong, at worst your philosophy is essentially evil.

Redbud writes:

"It discloses the callousness of those of us who insist that prosperity must necessarily be preceded by suffering in even one case. I don't accept it, and I never will."

Wow. I TOTALLY accept suffering, and it has served me well. Wealth is what we don't spend, what we save. If this requires suffering, so be it.

How does one lose weight, or become healthy or fit? Every time we climb a hill, our legs get stronger. Suffering (or toiling) for rewards is the American way!

Suffering is NOT BAD! Suffering enables all kinds of great stuff. It is nothing but payment -- in behavior -- for a reward. Suck it up!

El Presidente writes:

Zac Gochenour,

Evil?

I see Zac Gochenour believes his point that people may sort themselves for optimal outcomes needn't be applied in the aggregate and thus he fails to realize that even with optimal sorting poverty would remain. What seems individually rational to you is collectively insane. Move the bottom 20% of earners out of Los Angeles and they will be replaced by people just like them the next day. They fill a niche and it will be filled by them or by somebody else until it is squeezed from existence, modified so that it no longer requires their poverty. On the list of things to be insulted about should be the notion that some people should start out poor and that they remain poor mostly because they're too stupid or stubborn to be any better off. That's the logical conclusion of what you've said. When kebko writes,

"If you're painting a picture of a permanent underclass of a never-changing bottom quintile, then you're missing the point."

kebko falls into this same logic trap. No matter if every poor soul eventually became rich (which they don't), they would still be subjected to poverty initially, and why? Do we not have enough resources to prevent this? Is poverty the magic ether that causes the parts of the universe to adhere to one another?

Why do you suppose that I am not insulted by my own words after going from having to sell blood for food while holding a full-time job and carrying a full course load to having a graduate education and a respected position? Do you suppose I am an imbecile, or could it be rather that I do not blame myself for the extent of hardship I experienced nor do I credit myself for the extent of blessing I have received. The sacrifice was not my solitary shame and the success is not my glory alone. I am not so arrogant as to believe that I am the sole cause of my state of being, and that is why I have no qualms with calling it as I see it, as I have lived it, as I have seen others live and die. There is a difference between having an internal locus of control and putting the weight of the world on your back. The first is rational constrained optimization; the second is fuel for egotism or rationalization of unjust injury. Sometimes you might have to amputate your leg to save your life. There is no shame in amputating the leg, but it is not an honor to your self that you should do so; it's a necessary evil, one harm to forestall another. The injustice is not in the offering but in the demanding.

There is no cause for you or anyone to be insulted when I say that such sacrifice is unnecessary. It is likewise impossible for you to avoid because the power to prevent it lies with other people who will not. It is not your fault. It certainly wasn't mine. Be insulted if you want to, but that would be yet another waste. That would be like a rape victim blaming themselves. Not uncommon, but certainly not reasonable.

When Redbud says,

"Suffering is NOT BAD! Suffering enables all kinds of great stuff. It is nothing but payment -- in behavior -- for a reward. Suck it up!

it smacks of masochism and self-delusion. If I was to use common vernacular in response, I'm sure my comment would be forcibly edited. Suffice it to say there is a particular place where Redbud can put that remark if suffering is their nirvana.

floccina writes:

El Presidente how can we take you seriously when you do not know the meaning of the word roommate?

I lived much of my adult life spending less than minimum wage. Have you ever had low income?

Take a look at the book "Your money or Your Life"'

BTW I am sure that there are people living in LA making minimum wage and saving 30% of there income.

Gary writes:

While going to school, I lived on $9k per year while paying $7k per year in tuition. It wasn't difficult at all - in fact, I lived well. I was also living in Vancouver, which is not a cheap city.

If I had been earning $6 an hour and working full time (with two weeks of vacation) instead of going to school, I could have easily saved $3k per year out of $12k in income. 25% savings... not bad.

redbud writes:

Redbud: "Suffering is NOT BAD! Suffering enables all kinds of great stuff. It is nothing but payment -- in behavior -- for a reward. Suck it up!"

Presidente: "it smacks of masochism and self-delusion. If I was to use common vernacular in response, I'm sure my comment would be forcibly edited. Suffice it to say there is a particular place where Redbud can put that remark if suffering is their nirvana."

Redbud: Sorry, dude. This deluded masochist understands that Christmas and birthdays come every year. No surprises. Plan ahead, and pay for what you need and want. Planning allows rewards, too.

Suhit writes:

Well, the whole single serve story in India is wrong.

A company called Calvin Care (if I remember correctly) from the southern part of India first created this.

Seeing the success of this product, the multinational companies copied.

Now, you can get anything in India in small serves. That is directly connected to better production facilities, small grocery stores which can sell these products costing Re. 1 or 2 cents at retail and still make money combined with the cash flow issues of the poor.

I have heard this so many times and it is always wrong. I think Prahalad started this to sell his book but the real story is different.

ajb writes:

El Pres refuses to confront the major issue which is the unwillingness to move out of Los Angeles. Furthermore, there are lots of poor people who get married and have children who have no business starting a family they can't afford. In addition, there are plenty of people who started out with enough to live on who then chose to drop out of college and find themselves in dire situations because their work prospects are poor.

Part of prudence is in fact, Living far below what is "acceptable" for the community if your income is low enough.

I have friends from the Far East who gave up jobs as professionals to work for almost nothing in doughnut shops and the like over here, yet managed to save enough to start their own businesses and prosper. In contrast, I routinely see people earning safely above minimum wage who simply "cannot save." Even if we make allowances for those earning min wage with little recourse and truly dire circumstances, there is no excuse for the vast number of workers with steady jobs at decent wages who never put enough money away for retirement nor a rainy day and who make consumption decisions (including not postponing marriage and kids) that are guaranteed to put a strain on their resources, if circumstances turn ugly. It is these people that we should rightly chastise.

Dan Weber writes:

We have millions of people living in this country illegally who still save money and improve their lives. They come with just the clothes on their back and don't have a pot to piss in. They can't even rely on the rule of law to protect them.

What is the difference between them and those born poor here? How can the latter group replicate the success of the former group?

Tracy W writes:

Average rent for a 2-bedroom apartment is $2,206, making the individual's share $1,103.

Get three room-mates. This makes the individual share $552, or $6,618 a year. This also cuts down on your individual share of utilities. When did having a bedroom to yourself become a necessity? How many poor people in 3rd world countries have bedrooms all to themselves?

And why do you think that you're shamed by having to give blood to get food? What's shameful about that? That blood could well have saved someone's life, you should be proud.

There is enough out there to relieve it NOW, but we insist that it should not be relieved by the aid of others who can most afford to assist so long as they refuse to do so.

In other words, we believe in freedom of people to decide how to best spend their own resources. I have no problems with that.

We preach marginal analysis to people abutting absolute constraints, and we are worse for it.

1) Everyone faces absolute constraints. Go ask any environmentalist.
2) Marginal analysis happens whether we preach it or not. People were making budget decisions, be those of money or of time, long before the first economist. We have 24 hours in a day, and they have to be divided somehow.

No matter if every poor soul eventually became rich (which they don't), they would still be subjected to poverty initially, and why?

What do you mean by poverty here? There is a big difference between going to bed hungry because you can't afford food, and having to share a room. There are a lot of charitable efforts even in the USA, as Eric observes, aimed at the former.

JackofSpades writes:

Almost every time I read a post by El Presidente, it brings to mind that famous line from Macbeth; "full of sound and fury, signifying nothing.

I've read and re-read his posts today several times, and I just can't understand what's got him so worked up.

For nearly five years of my life I lived in a studio apartment with three other roommates. It was all I could afford. I owned about four sets of clothes which I hand washed and dried with an iron to save on laundry expenses. I lived on Ramen noodles and Chef Boyardee ravioli. Our furniture consisted of folding camping chairs, plywood, and inflatable matresses. And yes, El Presidente, I often had to sacrafice social outings and romances and the like. But I still don't see why you think my standard of living was so pitiful that society was somehow obligated to take money from other people to make my life easier. Frankly, I was proud of the my life and lifestyle. Part of the reason why we lived the way that we did was to be able to save more. We had no TV, cell phones, no internet, no PCs, and no cable. All of that, plus splitting a studio apartements rent four ways allowed each of us to save nearly half of our income. In short, every sacrafice I made was worth it, and as much as El Presidente tries I doubt he will be able to convince me that there was something wrong with the way I lived.

"It discloses the callousness of those of us who insist that prosperity must necessarily be preceded by suffering in even one case. I don't accept it, and I never will." I'm not even sure what this is supposed to mean. Do you seriously think that long term success must never be preceded by short term sacrafice? Not ever, even in one case? This is a bizzare idea, but even more it is ahistorical.

I've never understood the idea which states that because I had a hard start in life, I'm entitled by right to someone elses money to make my life easier or more comfortable. Perhaps, El Presidente, you can inform me how I am so entitled.

One more parting note. Even when I was at my poorest (and those days are a few years behind me), I never felt like my life was somehow so miserable that it needed intervention or rescuing. Time and time again, I hear redistributionists describing how low income people in menial jobs live such degrading lives that there is an ethical responsibility to give them other peoples money. As far as I can tell, the only thing which would have rendered my lifestyle humiliating would have been the condecension of people like El Presidente.

El Presidente writes:

Redbud,

Planning allows rewards, too.

It certainly does. But telling poor people to suck it up is like slapping them after they've been shot (adding insult to injury). It isn't necessary to disregard or invalidate their experience of want in order to get them to a better place. It's convenient, but it isn't necessary.


ajb,

El Pres refuses to confront the major issue which is the unwillingness to move out of Los Angeles.

Please refer to the beginning of my previous comment to Zac Gochenour. It is a collectively irrational suggestion. People are not poor simply because they are mismatched to communities. There are poor people nearly everywhere, and more or less so based upon the characteristics of the community.

Also refer to my comment to DWAnderson. Ceteris paribus, according to the Solow growth model, a declining population results in a decrease in output, and an increase in output per worker owing to the greater capital intensity until depreciation consumes the excess capital. The reverse will be true of whatever community these poor people move to; greater ouput but lower average standards of living. Then their capital intensities will equalize or their populations will revert and things will be just about the same as before.

Because of these things, you are making an error by adopting a fallacy of composition. You and others can continue to tell me I'm wrong if that pleases you, but it won't make you right, and I'm playing by your (neoclassical) rules. Your argument wouldn't stand a chance if we were playing by mine.


Dan Weber,

What is the difference between them and those born poor here?

The difference is point of origin, the status quo, expectations.

How can the latter group replicate the success of the former group?

Only by redefining success. Maslow had a hierarchy, but we don't seem to handle multi-modal success very well in economics.

I won't tell people that they have a moral obligation to settle for less so that their peers can take what they haven't earned. If you would like to, be my guest. I will tell them that, as a practical matter, their odds are better if they choose to do so. But I won't be rude about it. I won't be callous. It just wouldn't be right. We hear right-wing economists bemoan progressive taxation all the time because they argue that redistribution is unfair. Well, the reality is that redistribution happens continuously by means of leverage without the aid of taxation. Producers are constantly trying to enhance producer surplus through price discrimination and anti-competitive behavior. It is a fairly weak moral priciple if it only applies to the behavior of government, just as it would be if the tables were turned.

"when the president does it, that means that it is not illegal"

~ Richard Millhouse Nixon

Nomsa does have a moral obligation, but it isn't to the profits of others. The one thing that is unquestionably virtuous about the behavior described is that Nomsa saves in order to care for her grandchildren. There is a moral obligation at work. There is something worth celebrating. We don't need to denigrate others in order to celebrate that. But it becomes absurd when we seize on the virtue of nurturing children to wipe away the hardhsip of the context in which she does it, or to belittle others who face their own hardship. It's a low blow. Saving rates differ by country, by society. If this were strictly a matter of individual moral character, why would that occur? Are some races or nationalities predisposed to good character while othes are predisposed to bad character? This line of reasoning can't lead to any sort of good conclusion.

El Presidente writes:

JackofSpades,

Do you seriously think that long term success must never be preceded by short term sacrafice? Not ever, even in one case? This is a bizzare idea, but even more it is ahistorical.

I think nothing of the sort. I distinguish between sacrifice and suffering. If I have a million dollars, I can sacrifice the money to buy somebody a meal without suffering because of it. I might choose not to, but I can.

Are property rights based on natural law or on social constructs?

You say:

I've never understood the idea which states that because I had a hard start in life, I'm entitled by right to someone elses money to make my life easier or more comfortable. Perhaps, El Presidente, you can inform me how I am so entitled.

You're a big advocate of self-made people, right? "Riddle me this, Batman."

What is anybody entitled to besides the value they produce from their own labor? If your answer is "nothing" (and I believe it must be), then how is anybody entitled to land, which they could not possibly have produced? If they are not entitled to land, how are they entitled to refuse its use to others? If they are not entitled to refuse its use to others, how are they entitled to rent? If they are not entitled to rent, we have serious problems defending current economic practice based on rights, entitlements, morality, etc., because we're lying through our teeth.

There is one factor of production missing from the Cobb-Douglas production function. Can you name it? It is also missing from the Solow growth model. It is the same factor of production used to exploit the British people under the Corn Laws David Ricardo wrote about. It is the same factor of production used to exploit southern freedmen under sharecropping. It is the same factor used to sequester serfs through enclosure laws. Is this getting any clearer now?

If we are going to talk about who is entitled to what, we need to be talking about everything, not just the parts we are comfortable with. We may find that entitlement isn't a single superior moral principle and we might even want to combine it with some others. I never argued that anybody is entitled to receive something from others. If you don't believe me, go back and read what I wrote. You won't find it unless you put it there.

Economics is a discipline based on pragmatism. We don't have to be jerks to be pragmatists. Utility IS a pillar of morality, but it is not the only one. Virtue (aka Duty) IS a pillar of morality, but it is not the only one. Conscience IS a pillar of morality, but it is not the only one. We don't have the luxury of bending morality so that it fits our preferences and this moment. This is not a multiple choice test, but if it was the answer would be "D. All of the above". If you want to be tough about something, be tough about that, and apply it to everyone.

Dan Weber writes:
The difference is point of origin, the status quo, expectations.
I'm on board with expecting people born in this country to save. Low expectations can be a horrible thing to do to a person or a group.
How can the latter group replicate the success of the former group?

Only by redefining success.

.
How about success as: having enough to eat, getting your children an education, and saving money so you that some day you don't have to work. Millions of immigrants, many here illegally, achieve that level of success. And that's an absolute level of success, not a relative level.
I won't tell people that they have a moral obligation to settle for less so that their peers can take what they haven't earned.
I think this is the money quote. They shouldn't save money because their peers will steal it? The Man will swoop in and steal their savings account if they dare rise above their station?

Savings is how you defend yourself from The Man. You derided someone having a month's salary saved up, but without assets you have no leverage when your boss says you're getting a cut in pay.

Maybe someone should go tell the immigrants to stop saving up money, because their peers are taking it.

But I won't be rude about it.
Better late than never.
JackofSpades writes:

"What is anybody entitled to besides the value they produce from their own labor? If your answer is "nothing" (and I believe it must be), then how is anybody entitled to land, which they could not possibly have produced?"

I take my cue from John Locke's Second Treatise, where he states "Every man has a property in his own person. This nobody has any right to but himself. The labour of his body and the work of his hands, we may say, are properly his. Whatsoever he removes out of the state that nature hath provided, and left it in, and mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature placed it in, it hath by this labour something annexed to it that excludes the common right of other men."

So, yes, my answer to your question is indeed "nothing", and I think Locke articulates a perfectly rational basis to apply this principle to even land.

I do notice, however, that you didn't actually answer my question. Rather, you went the old route of answering my question with a question.

"I never argued that anybody is entitled to receive something from others."

Good. I'm glad we agree.

El Presidente writes:

JackofSpades,

So, yes, my answer to your question is indeed "nothing", and I think Locke articulates a perfectly rational basis to apply this principle to even land.

Alright, let's apply Locke's principle. If a person claims a piece of land but does not improve the land, the land cannot be theirs exclusively and thus cannot be sold for real consideration. So, until a person actually improved any particular piece of land they did not possess a defensible title to the land itself and thus perpetrated extortion or fraud by selling the privilege to deny its use to others; a privilege that was not theirs to sell.

Now let's apply your principle, since it is different than Locke's. If you claim that a person is entitled to nothing but the value they impart, they are never entitled to land EVEN IF THEY IMPROVE IT. They are entitled only to the value of the improvements they make.

You're going to have to choose whether a person is entitled to the value of their labor or something more. If you stick with your first answer ("nothing"), the value of anything extra may be theirs, but they are not entitled to it by some moral principle. It is not theirs by right. It is theirs only by custom, by social construct, by the consent of their neighbors and peers.

El Presidente writes:

Dan Weber,

I'm on board with expecting people born in this country to save.

I'm not. If they choose not to save, who are we to tell them they're wrong?

How about success as: having enough to eat, getting your children an education, and saving money so you that some day you don't have to work. Millions of immigrants, many here illegally, achieve that level of success. And that's an absolute level of success, not a relative level.

Sounds pretty good to me, but I wouldn't limit it to that. It might be different things for different people.

Savings is how you defend yourself from The Man. You derided someone having a month's salary saved up, but without assets you have no leverage when your boss says you're getting a cut in pay.

I get your point and I agree wholeheartedly. I have no disagreement with the notion that a person may need sufficient leverage in order to negotiate effectively. A month's salary won't really cut it. It's a start though; I think we can agree on that.

NEEDLE writes:

If I understand your line of reasoning,El Prez, then you are not entitled to anything or to claim ownership of anything unless you actually produce it yourself. Clothing, housing, food are all items that would fall under your argument. If you have not produced(manufactured?) these items yourself, how can you claim ownership of them? If you can purchase these items, why can't you purhase land? If you can own these things why can't you own land?

El Presidente writes:

NEEDLE,

If you have not produced(manufactured?) these items yourself, how can you claim ownership of them?

Trade, of course. You surrender what you have produced in exchange for what somebody else has produced.

If you can purchase these items, why can't you purhase land? If you can own these things why can't you own land?

In essence, titles to land are artificial. They might be useful, but they are NOT the same as title to the value one produces through their own labor. If we were going to be very strict about applying this principle, nothing taken from land is itself the exclusive property of anyone. Only the value they add to it is theirs, and only this value is a proper basis for exchange. My dispute is not with any exchange of value that both parties are logically entitled to exchange, but land is different because nobody can make it. You can only improve land. The supply curve is vertical, nearly perfectly inelastic, so land owners hold shares in a monopoly of sorts. Demand for land, which is used to produce everything else, drives up the price of their shares.

Land is particularly tricky because of capitalization of value. The proximity of one piece of land to another is a factor in the price of those parcels. The improvements that exist on proximate land are another factor. These are the result of capitalization of value and they are the object of speculation. Speculation provides no added value. So, speculators get to demand money (a claim on the value added by others) without adding value, which is the antithesis of the stated principle: nobody is entitled to anything but the value created from their labor. Land isn't the only object of speculation, but our refusal to acknowledge it in our production function and growth models suggests to me that it deserves special remedial attention.

That said, I believe property rights in land and material goods are fine as a social construct, a pragmatic way to organize our economic relationships. We need to understand though that they are not absolute and must be subordinated to the wellbeing of people because that is the purpose of society itself. This is where economists are trained to fail. We are taught and teach explicitly that normative analysis is outside the purview of economics, and implicitly that economics is not only separate from but also superior to normative analysis. This conveniently allows us to address people calling out problems as "big babies" who ought to "suck it up". It permits us to use the suffering of one person to dismiss the suffering of another.

needle writes:

land titles would seem to me to be as valuable and real as any other article or piece of property that you can claim ownership to. you either bought it for an agreed upon price or traded something of value to acquire the right to claim ownership or inherited it from someone who did. to say that land titles are artificial and are merely an illusion,( my words not yours ) that society affords to an individual or group would call into question the ability of anyone to claim ownership of anything. while I do agree that we as citizens do have an obligation to society I do not believe that society may lay claim to my property that was legally obtained even for "the greater good".I guess that I hold to the notion that government and society exists to benefit me, not the other way around.

El Presidente writes:

needle,

land titles would seem to me to be as valuable and real as any other article or piece of property that you can claim ownership to. you either bought it for an agreed upon price or traded something of value to acquire the right to claim ownership or inherited it from someone who did.

. . . or killed, displaced or defrauded those who got there before you. I'm just saying, that's a prominent feature of history and our land titles can frequently be traced back to such events.

to say that land titles are artificial and are merely an illusion,( my words not yours ) that society affords to an individual or group would call into question the ability of anyone to claim ownership of anything.

It certainly would. Which would then cause us to ask whether we should have such a capacity. I think we can make a good case that property rights can be advantageous to society in several ways. I don't think we can make a good case that unqualified property rights are the basis of morality or an optimal arrangement for society. We must decide what qualifications will attend property rights and we will need a basis on which to do so. We'll need to have some discussion and deliberation.

I guess that I hold to the notion that government and society exists to benefit me, not the other way around.

How about all of the above, as in "of the people, by the people, and for the people"? Should government and society benefit only you, or should they benefit people generally?

needle writes:

well, prez, as a final response; private ownership of property, to include land, is as old a concept as man has ever recorded. the redistribution of another man's land because some deem it unfair for him to own what he does seeing how it denies that ownership to others is ridiculous and flies in the face of western civilization. oops, my bad, marx was a product of western civilization, nevermind.

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