Poverty and Free Markets

Part of this article was originally included in How to end World Poverty. The ideas have been expanded since that article was written.

There are many different opinions on whether markets cause poverty or whether they end poverty

At the 2015 Conservative party conference, UK prime minister David Cameron announced an all-out assault on poverty. He spoke about the root causes, which he believes are centred on employment. He also said the government needs to do more for children in care and to stop prisoners re-offending. These are problems faced in the UK, and doubtless in many other countries considered well off (i.e. high GDP or GNI per capita) and with good infrastructure, both social and physical.

The Free Market Approach

An internet search for free markets and poverty reveals many articles connecting poverty and the free market or laissez-faire economic approaches. Poverty, they say, can be overcome using free market economics. The evidence, they say, is in the relative poverty between countries with free markets (like USA, Canada, most of Europe, Australia etc) and those with more controlled economies (like China, India and Russia).

Free market thinkers believe that all that is required to end poverty is to allow a free market to develop so that enterprise and innovation can take place without government interference. An example some give is to compare Venezuela to Colombia. In many ways these are similar countries but there is one major difference. Venezuela has a socialist government whereas Colombia’s is more right wing. Colombians, in general, have a higher standard of living than Venezuelans thereby proving that free market Colombia helps the poor better than socialist Venezuela. If it were that simple, why did Venezuelans vote for a socialist government? Well, there are many reasons, and they kind of ruin the comparison.

It’s difficult to prove that free markets help the fight against poverty. After all it might be that countries which have less poverty are also those where free markets can be allowed to operate, thus reversing cause and effect. More likely (in this blogger’s opinion) is that the two principles evolved together. There are also arguments that free markets in fact create low wage slavery and land scarcity, and corruption too, leading to people voting for socialism to redress the balance. However this article in The Economist explains how free markets have in fact helped.

Poverty or Inequality?

The more we look in to politics and poverty, the more we find two cohabiting discourses: poverty and inequality. Free market thinkers, and generally those who might be considered right wing, suggest that the inequality discourse is fuelled by jealousy, and that those who are at the losing end of the inequality game are more interested in bringing the winners down than improving their own lot. Those with more of a left wing disposition see inequality as fundamentally wrong, and have promulgated the concept of relative poverty, which effectively means that in any society there will be poor people simply because they are not as well off as the rich people.

It’s easy to get overly cynical about both these points of view for no other reason than those with the most to gain or the most to lose will likely take one side over the other. However there is truth in both.

The Monopoly metaphor in the next section describes one way of modelling the poverty/inequality discourse(s). What results, in my opinion, is that everyone does well during the expansive phase of the game, buying properties on the free market (well, if the dice are feeling lucky) and developing them. But then when properties become scarce, the nature of the game changes considerably.

The Monopoly metaphor

Anyone who is familiar with the game of Monopoly will know that players all start with the same amount of money. Then by luck or judgement they acquire properties which they trade and develop, charging “rent” to other players unfortunate enough to land on them. Eventually one player has a large enough property portfolio that the inevitable happens. They are net gainers of rental income and the others are net payers. The other players gradually exit the game penniless.

This is perhaps the free market outcome. Which means that free markets work well during a growth phase, where supplies are in abundance. But as supplies become scarce, money drifts from the poor to the rich at increasingly faster rates.

In East London, there have been riots. Not especially nasty ones, but the cause is illustrated using my Monopoly comparison. People living in an area close to the centre of London (Shoreditch) have found that their landlords have increased their rents beyond what they can afford to pay. This is because the area has attracted investment and people with more money. Properties have been improved and the area has become a desirable place to live. The new people are pricing out the old. Of course they are angry. If this was Monopoly, a player has just plonked a hotel onto Whitechapel Road. Do the other players retreat gracefully from the game or do they stop playing by the rules?

So free markets work well for a while but even if everyone’s wealth is increased, the inequalities which result from this system still put power in the hands of those with money. Eventually, relative poverty becomes absolute poverty and we end up with some kind of revolution or a type of feudal system.

The solution

The problem first. Unlike Monopoly, real life is not constrained by the rules of a board game. In effect, a real life situation where inequality becomes intolerable by many will result in the equivalent of forcing through changes in the rules, stealing money from the other players or in tipping the board over in anger! What does this mean?

Forcing through rule changes

The Monopoly rules are often adapted by players who agree to “house rules”. This implies some kind of democracy. In the real world, countries with a free market tend to also be countries with democracies. (This wasn’t always the case, Chile under Pinochet being an oft-quoted example). So if enough people agree that the system is broken, then they vote for a government that they believe would serve them better. This tends to mean a shift to the left and a more redistribution-minded socialist government.

Taking other players’ money

If the inequality is such that democracy can’t resolve it – the three wolves and one sheep voting on what to have for dinner scenario – then an underclass develops. This underclass survives on charity and crime. It is repressed by the state but some kind of equilibrium develops where the state is unable to eradicate the criminal elements and taxpayers resent paying benefits to “these scroungers and criminals”. Every developed country has an element of disenfranchised, resented members of their populations.

Tipping the board over

If democracy can’t resolve issues of inequality and the disenfranchised become sufficiently large in number then we could be looking at protests, organised disobedience and ultimately revolution. Revolutions in France and Russia were ostensibly the peasant classes rising up against the wealthy ruling classes, although both had idealists behind them too. More recently we have seen turmoil in Greece forcing through a change in government, although that was ultimately a democratic change. The point I am making here is not that revolution is inevitable, but that we can’t expect people to play by a set of rules which they believe to be unfair. They would rather end the game than play a losing position.

Rule changes?

Unlike Monopoly, where the rules by which money changes hands are clearly laid out, governments can make rules up as they go along. A good recent example has been the quantitative easing (QE) program which has been in place for many leading currencies. This has been criticised for failing to benefit those who need the most support, rather bennefiting the rich and causing a rise in stock market values as the new money finds a home.

But QE has opened the door to more socially progressive (or some would say, regressive) versions of wealth creation. “QE for the people” in its various forms is starting to be taken seriously, notably by the Labour Party in the UK. This means spending newly-created currency on job-creating infrastructure projects which will be of tangible benefit to the country. A more direct approach is known as “helicopter money”, where new currency is pretty well given out to people directly to spend as they will. In Scotland, a form of helicopter money known as the Scotpound has been suggested. This is more like a glorified LETS and would only work if the Scotpound could be used to pay taxes, otherwise what is its worth?

So is poverty avoidable

Perhaps a better question is: Is abundance universally attainable? In Monopoly, no, it’s not. Once the growth phase is over, players are pitted against each other with increasing stakes. The game can’t go on forever. But imagine Monopoly with some form of QE or wealth redistribution, that allows players to remain in the game with some tangible hope of getting out of the poverty traps. Imagine that a system exists where rent is always affordable (unlike Shoreditch) money always available without having to grovel or cheat. Would that be a system that could sustain a leading free market democracy which has come to the end of its growth phase into the 21st century?