Eliminating the Underlying Cause of Poverty as a Means to Global Economic Recovery
30 Pages Posted: 3 Apr 2010 Last revised: 14 Aug 2014
Date Written: March 23, 2011
The public analysis of the causes of the current recession and the ways to achieve economic recovery generally proceed on the widely-shared, tacit assumption that there is no substantial, first-order connection between the recession and the failure to address the problem of systemic poverty. Otherwise, the need to alleviate systemic poverty and needed solutions to promote economic recovery would be commonly addressed in the same discussions; and they are not. This widely-shared, tacit assumption is false. The failure to reverse systemic poverty is the fundamental cause of current economic crisis.
Recessions (and sub-optimal growth) occur when a critical mass of market participants come to believe that the distribution of future earning capacity is not sufficient to purchase what can be produced despite the physical and technological capacity to employ available labor and capital to produce more over the same period at lower unit cost. The essence of systemic poverty likewise is inadequate earning capacity. In periods of rising unemployment, the problem of inadequate earning capacity (which perennially plagues poor people even in good economic times) rises up through the middle class like rising flood waters. Thus, rather than view Wall Street as too big to fail, it is more accurate to recognize that the earning capacity of poor and middle class people is too important to fail.
The mainstream political/economic strategy for promoting economic recovery is (1) capital acquisition with the earnings of capital primarily for big corporations and for well-capitalized persons (generally in proportion to their existing wealth) along with considerable government redistribution, and (2) primarily jobs (but by no means the best or highest paying jobs) and various forms of welfare redistribution for poor and middle class people. Such policies fail to fully employ existing productive capacity because they do not distribute sufficient earning capacity to purchase what can be produced even at decreasing unit costs. The mainstream political/economic approach fails to recognize that a broader distribution of capital acquisition with the earnings of capital will provide greater incentives to profitably employ unutilized productive capacity (both labor and capital) than a narrower distribution of capital acquisition.
The missing element in mainstream strategy (which could easily be added to government and private corporate policy, without extra cost to anyone) is to open to poor and middle class people the same government supported institutions of corporate finance, banking, private insurance, government loans, guaranties, and reinsurance and favorable tax and monetary policy (presently relied upon by the Federal Government to stimulate the economy and to facilitate capital acquisition with the earnings of capital for people primarily in proportion to their existing wealth). In this way, poor and middle class people will also be able to enhance their earning capacity by acquiring capital with the earnings of capital. A fairer and more competitive market foundation for the systemic market-based enhancement of the earning capacity of poor and middle class people will thereby be established; and greatly enhanced prospects for greater and more broadly distributed economic opportunity, earning capacity, and sustainable growth can be reasonably expected and realized by all.
Keywords: Poverty, Recession, Growth, Property Rights, Keynes, Capital Acquisition, Wealth Concentration, Corporate Finance, Productiveness, Productivity, Neoclassical, Ownership
JEL Classification: A20, B29, E10, E12, F20, F43, I39, G30, I39, M14, O11, O20, P16, P19
Suggested Citation: Suggested Citation