Causes of Poverty - what is the margin for error?
Is it logical to expect poor people to exercise MUCH better financial judgment than rich people?
The question seems odd. After all, look at the self-help section in any bookstore, and you’ll find hundreds of titles by rich people about how to get richer.
But the thing is, if one expects poor people to get wealthier by saving their money, then one expects them to exercise a far greater level of financial discipline than one expects from the wealthy. Ironic, no?
Terp, who works daily with the poor (as I have and continue to do, albeit in a very different capacity), says this in my post on political theory:
i can tell you, most are poor because they and their families made poor financial decisions. consider most of the gang bangers with whom i deal: these kids worry about food and shelter, but have ipods and new bball shoes.
That is the standard wisdom of most conservative thinkers: the poor are poor because they did it to themselves.
Let’s consider some of Terp’s kids. Say one of her kids is actually working at a fast food joint, and is earning about $10,000 a year after taxes.
Say that kid "squanders" $500 (just about enough to buy two pairs of BBall shoes and one iPod, more or less).
This kid has made a decision to squandering" 5% of their income. We know nothing about the other 95% - which may (or may not) have been wisely spent.
Now consider the guy who makes a profit of $100,000 a year (after taxes), and squanders $20,000 on exactly the same items (100 pairs of BBall shoes and 100 iPods, or so). We know nothing about the other 80%.
Now, in such a case, the rich person has probably shown much worse judgment than the poor person. But the rich person comes out ahead? Why?
Well, two main reasons:
(1) Even when the wealthier person squanders a major quantity of money, that remaining $80,000 is sufficient to build wealth.
(2) The rich person’s ridiculous purchases actually generated sellable assets - maybe he takes a loss, but he can recover somewhat by dumping the extravagance on eBay.
This is the case more often than you’d think: squander $20k on a vacation in the Maldives - and you’ll find yourself surrounded by wealthy investors who frequent that location - those contacts are gold. (Which goes to say - corporations aren’t as stupid as some people think when they schedule vacations/board meetings in Bermuda). Same principle works for high fashion items, expensive cars, artworks, and many other "extravagances."
But if a poor person squanders any sum of money, they fall backwards quickly.
For a poor person to become wealthy (or even middle class) - they have to show MUCH better financial judgment than the rich people.
Maybe it seems reasonable to some to expect a 100% "wise choice" on resource expenditures from poor people, while tolerating an 80% "wise choice" by rich people. It doesn’t seem reasonable to me - or fair. I think it’s likely that people make a fairly constant number of poor decisions, regardless of social class. But - as is often the case - any mistake by the poor has a much larger impact on their possibilities. Meanwhile, the mistakes of the rich are merely set-backs, which sometimes generate larger profits.
Now - my approach also has the advantage over the "bad character" school of being empirically testable: just look around the world. Go to the poorer countries - you’ll often find people saving at a much higher rate than in America, but still falling backwards. Why?
It COULD be that these people are not exercising enough fiscal wisdom.
It COULD also be that structural matters have a much greater importance on total wealth than character.
I tend to favor the latter - simply because it makes no sense to expect poor people to be so much smarter than rich people. People are people, the world round - they do the best they can under the circumstances in which they live - and they make mistakes. But it just ain’t fair to expect perfection from them as a prerequisite for moving up - particularly when the people who are actually moving up have never shown it, don’t need to show it, and may be better off when they abandon some of the "wise financial planning" ideas.
By the way - I just noticed that this post came under the issue, "Is capitalism the most effective economic system?" I still think it is - but ONLY if we can clear away our unhelpful, irrational expectations - like that ridiculous expectation that poor people have caused their own poverty by their bad choices.
whereIstand Tags
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