The poor people are not being exploited. They’re being excluded from the higher productivity activities. It’s not that the capitalists are taking a very large share of what they produce. It’s just that they produce very little in the first place.
Emphasis in the original. What does he mean by “excluded from”?
if somebody is expected to be poor, you don’t want to open a bank account for him because the fixed cost of opening a bank account is not going to be recouped through the little money or the few transactions that a poor person is going to make. So banks decide not to include the poor. The same thing happens with other services: if you are going to consume very few kilowatts or kilobytes, it doesn’t pay to connect you and if your expected wage is low relative to a bus ride, it does not pay to commute to work. As a consequence, this generates a trap in which you don’t connect people because they’re poor and because they’re not connected, they’re unproductive and hence poor.
He concludes:
policies can be very important in determining the universality of access to some inputs. I think it’s very important to have a serious discussion of what are these inputs that need to be accessed universally and what is a reasonable strategy to get there.
There are important ideas here. My thoughts.
1. As a metaphor for these ideas, think of people as either living on the grid (where they can be highly productive) or off the grid (where they live in poverty).
2. The tangible components of the grid grid include water and sewage facilities, electricity, communication and transportation infrastructure, and schools.
3. The less tangible components of the grid include property rights, reliable low-cost financial intermediation, a well-functioning legal system, cultural norms that support economic activity, and what Garett Jones calls the Hive Mind (high average intelligence).
4. Both in theory and in practice, the grid requires a stable, well-functioning government. Sorry, anarcho-capitalists.
5. Nonetheless, the grid is very much an emergent phenomenon. You cannot create the grid from scratch. Sorry, seasteaders and charter-city enthusiasts. Sorry, Ricardo Hausmann?
I agree that the point about the poor being poor because they’re disconnected and ignored rather than exploited is a key insight. But I don’t think this claim is actually true:
“The same thing happens with other services: if you are going to consume very few kilowatts or kilobytes, it doesn’t pay to connect you and if your expected wage is low relative to a bus ride, it does not pay to commute to work.”
The problem with that claim is that entrepreneurs clearly are finding it profitable to build mobile phone networks in low-income countries (which include mobile banking services), and buses and jitney vans have long been everywhere in the developing world. So maybe it would be better to distinguish between strong and weak grids rather than a binary ‘on’ and ‘off’.
His statement about bank accounts isn’t right, either. The “fixed costs” of opening a new deposit account are next to zero. It’s an extra record in a database; a few kilobytes of space on a hard drive somewhere. That’s why lots banks are actually willing to pay people to open new accounts these days. I hear deals offered all the time about how you can get a $100 or $150 for opening a new checking account. And with ATM’s and online statements/bill pay, the variable cost of keeping accounts open is pretty low and shrinking, also.
The reason some poor people get shut out of normal financial services is because they chronically overdraw their accounts and leave banks stuck with the losses. A few hundred here, fifty bucks there…you do this to a couple of different banks, pretty soon you won’t be able to open a new account at all because there’s a service that banks report this kind of behavior to and then other banks can search it before opening an account for you, much like the credit reporting agencies.
But even if you can no longer get a checking account, you can convert cash to prepaid debit cards for almost nothing virtually anywhere.
“Both in theory and in practice, the grid requires a stable, well-functioning government. Sorry, anarcho-capitalists.”
I’m guessing you mean government is the sole source, in theory and in practice, for property rights and a legal system. I’d be interested to see your critique of Rothbard, David Friedman, and others who lay out at least a theoretical case for competitive, voluntary provision of those services.
As to whether an an-cap society is viable in practice, secular democracies with universal suffrage were apparently impracticable until the 20th century.
I definitely agree that poor people often dont have enough money to pay for stuff.
Related is the efforts to move “dirty” businesses that hire low skilled workers out of the urban cores. This removes work opportunities for the poor who are left behind or increases the cost of work by imposing the expense of commuting to the suburbs. The city elite are just “revitalizing” the city, but by moving the metal shops, the repair yards, etc. out of town, they are running off the employment needed by the poor, employment that offers skills that can be leveraged as experience grows.
This is absurd. Workers and the poor were much less productive in the past yet had a larger income share.
This is because of the state, simply put. Firms were discouraged from distributing too much income to executives, and individuals were discouraged from earning too much income with very high marginal tax rates. Union density was also higher (as it still is high in some other countries) – the right to work wave and trade liberalization hurt there as well.
Rents are also an issue: IP plays a greater role in the economy, and higher inequality has driven asset prices up and subsequent rents (self reinforcing inequality).
But if you want people to earn more, you should just change the regulatory structure.
Systematically divesting from higher education at the state level doesn’t help with productivity- just want to note that
I think you missed the point. This post is about the differences between poor and rich countries or poor and rich regions within a country — not the differences between rich and poor living in the same place (which would require a different analysis).
That’s not what I’m getting from the excerpt, but okay.
This reminds me that Pope John Paul II defined poverty as exclusion from networks of productivity and exchange.
This is why low income households have been migrating from the coasts to places like Texas, Georgia, and Arizona. Low cost policy frameworks are more inclusive than the high cost, high service policies of the blue cities.
That’s generally a republican talking point, but it’s not really true.
In-Migration to Texas, at least in the most recent year we have data, is driven heavily by migration from Florida, Louisiana, Georgia, and Missouri. Other red states too.
Public Goods in Texas are fairly generous in comparison to other deep red states.
I agree with you, in general. There isn’t that much difference in things like transfer payments between red and blue areas. Housing constrictions are the largest factor, along with all the rent seeking that goes along with that. There has been a significant out-flow of low income households from cities with housing constraints (and high costs). I’m not that concerned with the republican vs. democrat thing, and the parties could easily flip-flop on any topic, but it does seem that for now, the extremely limiting housing policies of the blue cities are driving migration and income patterns, and are responsible for much of the rise in income variance and housing costs.
Hmm, a more detailed blog post on the implications of hive mind conclusions for charter cities potential of success would be quite interesting.
Based on what I’ve seen having only read a few of the synopses and not the book, I could imagine ways in which you could argue that it both bolsters and undermines their probability of success- moreso the latter, but seeing it more spelt out would be interesting nonetheless.
The “Growth” article by Hausmann takes two more or less standard “concepts” of Capitalism, each of which concerns a “working system,” particularly involving the use of inputs and generating something identified as “production.”
Those perceptions are probably flawed. Thus, the understanding of the persistence of the “poor” and poverty where systems of production (as opposed to mere subsistence) exist is likely incomplete if not wrong.
“Capitalism” in its various historical characters (Feudal, Mercantile, Commercial, Industrial, Financial and now, Managerial) is a label we have applied to – a resulting condition. While the condition can be described, it is not a given definable system.
The condition results from particular relationships occurring in specific circumstances. Where there is “Open Access” to the formation and conduct of relationships and the circumstance do not impede them, we observe results something equivalent to “Free Market Capitalism.” Where there are intrusions into the relationships and externalities in the circumstances, we observe modulated results.
However, where there is “Limited Access” to the formation of relationships and circumstances are determined for purposes other than those of individual or wide-spread group objectives (preservation of class structures, e.g.), the “production” achieved is not that of the resultant condition of “Capitalism.”
One framework (often referred to by Arnold) for that broader perspective on “poverty” has been set forth by North, Wallis & Weingast in NBER Working Paper 12795 (2006) and in their subsequent works.
The possibilities for advancements away from poverty probably lie more with changes in social structures toward “Open Access,” the capacities to form relationships in circumstances that will result in a condition of “Capitalism,” rather than concentrate on “production” or its increases through macro-economic theories of adjusting inputs and costs. There is probably a demonstrable need for more of the resulting condition (though voices in our own society decry and denigrate it), requiring more “open” relationships with less constraints.
That has not been the trend in our own society for many, many years now.
“Both in theory and in practice, the grid requires a stable, well-functioning government. Sorry, anarcho-capitalists.”
Anarcho-capitalism is an attempt at elaborating alternate institutional arrangements. It’s against present form of governance, but not against all forms of institutions. So, David Friedman and Rothbard might have many alternate “stable, well-functioning” institutional mechanisms for the grid.
“5. Nonetheless, the grid is very much an emergent phenomenon. You cannot create the grid from scratch. Sorry, seasteaders and charter-city enthusiasts. Sorry, Ricardo Hausmann?”
Cannot agree more!
Folks strongly recommend you read the full article. Many that are disagreeing with these excerpts interpretation are actually aligned witth the msg in the full article.
http://growthlab.cid.harvard.edu/news/what-should-we-do-about-inequality