Wealth creation as a tool to combat poverty — an unintuitive inside look
Framework analysis:
Topic that framework addresses: What drivers underlie true creation of wealth
Confidence in framework’s explanatory power: 7.5/10
TL;DR Notes:
- Poverty alleviation attempts to make less-fortunate people better off & wealthier than before. Wealth generation & wealth distribution are two levers that can help.
- Most talk of poverty alleviation & earnings centers around “wealth accumulation”. For most people, wealth accumulation is similar to wealth distribution. I.e., people want to change how much of the pie they take home or is given to charity.
- Wealth distribution will always be a contentious topic as “the haves” truly believe they deserve everything they have. Add to this that the centers of power lie with “the haves”, wealth distribution is a sub-optimal option.
- Instead we should collectively focus on wealth generation. And ensure this newly created wealth does not concentrate in hands of a few. This conversation is easier — as “the haves” will be less attached to unearned wealth vs existing wealth.
- Consumption is central to concept of wealth. Wealth is an abstract concept used to measure consumable units. We consume things to (a) improve chances of survival, or (b) enjoy surviving
- There are 4 broad categories of generating wealth (i) Conversion of physically un-consumable units to consumable units, (ii) Creating non-physical consumable units, (iii) Psychological manipulation of consumption tendencies, and (iv) more efficient manufacture of consumable units.
“Let’s lift people out of poverty!!”
A refrain that is unlikely to generate any resistance — which is why it’s been a favorite promise of countless politicians, pundits & leaders.
One would think we should have solved the problem by now. But clearly there’s no end in sight.
And rather than understanding its complexity, many of us are content to parrot vague & untested cure-alls such as “education”, or “ending corruption”.
This article attempts to think through the complexity of what is preventing this from happening. It doesn’t offer a solution, but does give you the ability to craft your own favorite solution.
It will also deal mostly with capitalistic/near-capitalistic (e.g., China) societies — a fair choice given it is the prevailing form of economy in the modern age.
Understanding poverty alleviation
Let’s start with defining poverty. It is a difficult exercise, made more complicated by the fact that the standards of “wealth” change over time.
For example, even the lower-middle classes of most developed nations have objectively better lives than nobility from five centuries ago. Access to medicine, infrastructure (even a hot shower), education & entertainment are more widely available to the poor now when compared to a king in the 1500s. Still the king from 1500s would be considered wealthy, while the same can’t be said of the modern poor.
The first take-away becomes that poverty & wealth are concepts rooted in relativity. Therefore, let’s start with defining poverty alleviation as “attempts to ensure that an ever-increasing percentage of society is better off & wealthier than they were previously.”
In fact, the above definition could be the overall goal of a good society (with poverty alleviation coming around as a side-effect over time).*
An obvious strategy to achieve this goal could be to (Step 1) generate wealth at a societal level & then (Step 2) distribute it in some better way.
Most conversations on poverty alleviation end up focusing on this second aspect — the distribution of wealth. Very few delve into the topic of wealth generation, and this is a shame.
A strong focus on wealth distribution alone will always be counter-productive. For one thing, it reinforces the concept that we live in a zero-sum game (where for someone to win, another person must necessarily lose).
For another, humans (like most animals) are built to try and secure access to resources. It will always be difficult to convince people to part with resources they feel entitled to.
Instead, we should focus on wealth creation. Of course, distribution of any newly created wealth will still be a necessity; but it’s important to remember two points:
- It’s easier to discuss distribution of resources for things that no one feels entitled to yet — considering this wealth hasn’t been created
- Even an unequal distribution of wealth is better for the poor (you get something vs nothing). Inequality may continue to rise, but poor lives can still become better from an objective POV. This is basically what has been happening in the modern world thanks to technology’s role in creating abundance.**
We will tackle wealth generation in two different sections. The first one will help us get to terms with wealth & what it really means; while the next section will focus on different ways to generate this wealth.
*Digression 1: It is interesting to note that communism and capitalism both tend to follow similar goals of of society being better off, but with slightly different focus areas.
For example, in communism the focus on would be on ensuring that the average wealth rises (and wealth redistribution is seen as a critical step). In contrast, within idealistic framework of capitalism, it is hoped that everyone’s wealth rises — equality be damned.
** One could argue that humans (being social animals), focus more on relative wealth than absolute wealth. Therefore, there will always be resentment against a system that doesn’t tackle inequality. Even if (as data shows) capitalism has materially improved people’s lives over a long term compared to alternative forms of government — people may still not feel good about it).
Deep-dive into wealth
The first point to note is that wealth and consumption are intricately connected. “Consumption” as used here isn’t a bad word, it simply describes the desire and ability of humans to consume.
Organisms consume things: that’s how we’ve evolved. We consume resources (e.g., air, water, food, shelter) in order to help us (and extensions of our genetic stock) delay death.
Over time even various neuro-mechanisms (read: feelings) have evolved to help organisms on their journeys of survival. Do things that help you survive to feel pleasure; do something that hurts your chances and feel panic. Feelings may have gotten more complicated; but in their pure essence, feelings serve (and will continue to) an important evolutionary purpose (including jealousy, rage, compassion, indignation, love).
For animals capable of higher level of thought & future projection, feelings have also helped pushed us from wanting to merely survive to wanting to thrive — i.e., to be happy & enjoy surviving.
Over the years (for humans) the number of things that can be consumed in order to thrive has grown multi-fold.
Wealth is a practical idea that helps us measure a persons ability to survive & thrive. Often it is a proxy for the number of consumable units that one person has access to.
Deep-dive into wealth generation (i.e, consumable units that help survive/thrive)
Firstly, it is important to focus on the fact that I’m using the words “wealth generation” vs “wealth accumulation”. The two are extremely different & most of us are used to going after wealth accumulation. Wealth accumulation, as the name suggests, is devoted to increasing your share of the pie; while wealth generation refers to a bigger pie.
The key point to note about wealth accumulation is that it focuses on existing consumable resources. This leads to a zero-sum win-lose situation which is not good. Wealth accumulation does very little to improve poverty. In all likelihood, it probably impedes poverty alleviation. Everyone doesn’t magically become better if an elite minority refuses to share resources.
Cue a long parade of dictators around the world that have left their countries worse off (while enriching themselves in the process).
Wealth generation is different — you are expanding the pie.
Let’s think through how a “pie expansion” is even possible in the context of consumables that help one survive & thrive. Four categories seem to emerge.
I. Creating an abundance of physical consumable units through conversions of previous un-consumable resources
- Aiding survival : converting metal, wood & fire to create a pick-axe
- Enhancing survival : converting metals, glass, plastic & rare-earth elements into a smart-phone
II. Creation of a non-physical consumable units
- Aiding survival :information about typhoons may help you avoid certain death at sea
- Enhancing survival: most service-oriented jobs fall here — think paying someone for entertainment, experiences, love, companionship etc.
III. Becoming more efficient with creating consumables using same raw materials : most technological breakthroughs falls in this category. Taking care to avoid over-abundance.
- Reducing waste processes in wealth creation
- Recycling of physically consumable units
IV. Manipulating supply/demand of existing consumable units (borderline ‘wealth creation’)
A. Creating fake scarcity
- Diamonds are a great example of this. DeBeers has effectively curtailed supply and bombarded us with propaganda to create wealth from an abundant natural resource.
B. Destroy “demand” for consumption.
- Think of abolition of slavery. The average non-slave owning person became “wealthier” because his/her points of comparison became less wealthy.
Concluding thoughts
We’ve now isolated the four strategies that can lead to a rise in consumable units that aid surviving & thriving.
I find it frustrating that many ideas on poverty alleviation are difficult to map to the proposed strategies for wealth alleviation. Instead, too often populist policies focus on wealth redistribution — perhaps because its easier to campaign on.
So the next time someone proposes a magical solution to eradicate poverty (or only wants to talk about distribution of wealth)— you should be ready to have an open discussion about whether their proposals lead to a zero-sum redistribution or an actual increase in the available pie.
