Wealth vs. Poverty

Another insight from Basic Economics: wealth is the most effective weapon available against poverty.

Now that I have heard it, it seems self-evident. Poverty is the lack of money (in one sense). Wealth is an abundance of money. The best way to eliminate a lack is with an abundance, so wealth can eliminate poverty. Logical, right?

Yet the biggest complaint I hear about capitalistic economies is that the rich get richer and the poor get poorer. Wealth is, by this measure, exacerbating poverty. How can this be? Mostly by making a false statement.

In an efficient capitalistic free market, the top level of wealth does rise. Note that it is the level of wealth, not necessarily individuals within that. If you were rich in 1975, you might well be richer today, but you were also passed like you were standing still by Warren Buffet and Bill Gates. In addition to the top level rising, the bottom level rises, too. The bottom levels of American wealth today drive better cars (measured by durability, reliability, etc) than many in the top levels did 50 years ago. Better goods indicate greater wealth.

The trouble comes when the gap between the top and bottom levels widen. The absolute value of an individual's wealth is only relevant when compared to a contemporary (it seems). So the fact that I am wealthier by nearly any measure than my grandfather was, or the average Bangladeshi is, makes no difference if my neighbor is wealthier than I am.

So being poor today may feel poorer than yesterday, but that is not objectively the case. As America has created wealth, it has reduced absolute poverty. Further reductions will never be achieved by reducing wealth (through large taxation and welfare programs), but rather by creating more and more of it. Wealth can fight poverty; little else can.