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Aaron McKenna: Capitalism didn’t create poverty, it inherited it (and now it’s fixing it)

Oxfam won a PR coup this week with the simple line that the richest 85 people in the world have more wealth than the poorest 3.5 billion. But there’s one problem with that message – inequality isn’t actually keeping people in poverty.

Aaron McKenna

OXFAM WON THE INTERNET during the week, scoring a PR coup with the simple and straightforward line that the richest 85 people in the world have more wealth than the poorest 3.5 billion. In a clever tweet they asked, “Have yacht or have not? The gap’s getting wider and it’s keeping people in poverty.”

Clever, simple, viral… But not true, insofar as inequality is keeping people in poverty.

Go to China today and you will find one of the fastest growing classes of rich people in the world. They are making huge gains from China’s massive economic growth and they flaunt the cash. A popular story in Bloomberg BusinessWeek recently talked of a Chinese student in the United States having his parents wire over $50,000 to add to the $20,000 in his account so he could buy a luxury car for school. Chinese students spent $15.5 billion on new and used cars in the US in 2012 and 2013. A comparable group of American students purchased $4.7 billion in vehicles in the same period, according to the article.

Pretty sickening, right? But it’s a tiny part of the story. In 1980, China had an extreme poverty rate of 85 per cent. Extreme poverty is defined as people living on less than $1.25 per day. Today, the extreme poverty rate in China is 10 per cent and falling. Some 680 million Chinese have been lifted from extreme poverty and many of them have been elevated into an urban middle class not dissimilar to our own.

How did China lift so many out of extreme poverty?

What happened in China that they managed to lift more people than the combined population of the EU and Russia out of extreme poverty in 30 years? The same thing that created garish millionaires and billionaires and that do-gooders would blame for poverty in the first place: the Chinese became capitalists.

Capitalism didn’t create poverty in China. It inherited a socialist nation that could barely feed itself, and over 30 years of free market reforms it has wiped out 90 per cent of extreme poverty in the country. For all the troubles that growth might bring, that is a hell of an achievement.

Indeed, since the fall of the Soviet Union we have lifted a billion people out of extreme poverty globally; more than halving the rate of it in the developing world, from 43 per cent to 21 per cent. There’s still 1.1 billion people subsisting below that line, but as Bill Gates pointed out during the week there is a very real opportunity to do the same again in the next twenty years and eradicate extreme poverty altogether.

Pointing and shrieking at capitalism and inequality might score some cheap points, but it isn’t helpful in the material task of actually getting that billion souls out of crushing poverty; and helping lift the billion above them and the billion above again into better living standards.

Inequality fluctuates

Inequality tends to go in swings and roundabouts with major economic growth. England had a Gini coefficient, which measures income inequality, of 0.4 in 1823. It shot up to 0.63 in 1871 as the industrial revolution sent more wages to those who worked in factories versus fields, and delivered big gains to the factory owners and industrialists themselves. Today, it’s 0.32 – a 25-year low.

In those terms, that looks like good progress. But the likes of Oxfam want to laser focus in on a billionaire investor who just purchased his new luxury yacht.

However, the human race as a whole – and in almost every microcosm you can look at – is richer than it has ever been. There are fewer people living below that $1.25 line today than before; and there are more people living middle class lives here at home than ever.

The massive economic growth that has delivered these gains, along with technological advancements on a par with the industrial revolution, have driven inequality as those with capital make money from investing in the boom. History shows that this will flip over time, with more of the gains going to wages than capital. In the meantime, while we fret over relative inequality another billion people will be in the process of getting lifted out of actual poverty.

It is not a zero sum game, where money gone to buy a yacht deprives kids in Africa of food. The economic growth that delivers the yacht delivers the food, and a lot more effectively than collectivised farms and socialised industry ever managed. (Indeed, the move to opening up China to capitalism was in direct response to the ‘Great Leap Forward’ to enforce communism and wipe out capitalism, which also lifted about 30 million people out of poverty… by starving them to death.)

Education is the only path out of poverty

The main problem with inequality is when it starts to cut off opportunities for social mobility. This is the Upstairs, Downstairs world of landed gentry and servants; and the way to avoid it is by investing dividends of growth into education. We are living in a technology-driven age of economic growth, and it the well-educated who will reap the benefits of higher wages and the opportunity to grow their own wealth through innovation.

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Regardless of whether it’s in the developing or the developed world, education is the route to prosperity and social mobility. Education is the leveler for equality of opportunity.

The United States invested heavily in education through the first half of the 20th century, building many public schools and enacting the likes of the GI bill to offer all soldiers returning from war the chance of higher education. Two economists at Harvard, Claudia Goldin and Larry Katz, see increased education as the driver of equality and social mobility; with other studies showing increased college enrollments in the late 1940s leading to a notable break between the earnings of children and their parents.

Teach a man to fish…

In the great welfare states of Europe we have actually seen slower uptick in social mobility. Nations here took the view that we needed equality of outcomes rather than of opportunity, pouring more into income support than education early on. Spend more on making poverty tolerable than helping people get out of it does not deliver a long-term uplift, harking back to the age-old adage about teaching a person to fish versus simply giving them a fish to eat every now and again.

Inequality isn’t the problem that keeps people in poverty. It’s a symptom of the growth from capitalism that is uplifting so many, and history shows that income gaps will narrow in future before they expand again some day. We need to focus on the real problems that stand between 1.1 billion of our family and even basic acceptable living: the chance at a good education, freedom from corrupt governments, and a shot at building their own free market success stories. Those success stories will also put a few people in Bentleys. But I’d focus on the 1.1 billion success stories, personally.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.

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