It's Not That Easy To Help The Poor

Let me tell you something very interesting about economics: it is hard to make the poor better off if they don’t make themselves better off. When we do anything in a complex economy, there is a chain of events that extends way beyond our sensory apparatus. The reason why it is very hard to make the poor better off if they don’t make themselves better off is because it’s hard to make any one poor person better off without making another person worse off somewhere else. It’s counterintuitive, but it’s true. Here’s an illustration to explain.

You have £1000 savings, so you decide to give Jack £200 to buy some shopping at Sainsbury’s. The food had to come from somewhere. It didn’t come directly from you, so it either came from other people producing extra food or other people going without that food. Or to break it down more perspicaciously, here’s an individual scenario. Jack gives Jill £10; Jill buys a £10 bottle of wine that would have gone to Tom, who instead buys a cake that would have gone to Dick, who instead buys a turkey that would have gone to Mavis, and so on, until somewhere down the line somebody misses out on something and goes without. Jack’s £10 gift to Jill created a chain of events where someone, somewhere is bereft.

Or here is another scenario. Luis works a bit harder in his vineyard to produce that extra bottle of wine, sacrificing some other task or pleasure. Perhaps the knock-on effect is that he doesn’t buy a cake in Henrietta’s café, which means Giuseppe misses out on Henrietta's purchase of his flowers, and so on, until someone somewhere can’t get the pair of trousers they want. If Jack only had £10 and he gave it to Jill, then Jack gives up £10 worth of goods that he now can’t afford. But if Jack gives up £10 and it means he still doesn’t have to give up anything, then someone else down the line gives up something against their will. If Jack never spends the £10, then he leaves the wine, cake or flowers for somebody else.

It may be slightly easier to grasp this complex chain of events if we instead think of it this way. Jack is quite well off, so draws £500 from his bank account and gives it to Jill. Somewhere down the line the banking system has £500 less, so someone somewhere misses out on a mortgage, or on a loan so buys one less car, whereby a car salesman buys one less laptop, and so on. If Jack took it from his wallet, and had never banked it, his £500 being put in circulation drives up prices to the tune of £500 (not that it would be noticeable to the naked eye), which means Tom, Dick or Harry responds with a bit less consumption or a bit more work. The converse of that point is if you worked for £500 and never spent it then you worked for free, because you cost society nothing in consumption. Your gift to society was £500 of consumption that you never cashed in.

That's not a reason to neglect being kind and generous to the most vulnerable in society - but it remains true, and will always remain true, that increased productivity is the only way to reduce a nation's poverty.