Essay31. On Poverty

Essay 31. On Poverty

I see absolute poverty as persistent prolonged suffering that could be alleviated by money if only it were in the pocket. Absolute poverty is, probably, more the lack of hope than the lack of money.

I never knew real poverty. My personal sufferings could not be cured by money. They were caused by conflicts, some of them internal, some with the environment. Looking back at some later periods of my adult life, I see that I certainly lived in a relative poverty by American standards, but not on the average Russian scale. As a consequence of my idealistic and bookish upbringing, I never had lust for money in Russia; besides, being rich was something to be ashamed of in the Soviet time, and not just because of Communist propaganda. All my book heroes, mostly explorers and scientists, were selfless and idealistic. Only the crooks and thieves could be rich because being rich was against the correct Soviet order of things. The ruling class did mot need much money: it bartered power.

I could do with little, I could be occasionally wasteful, but it never occurred to me that making money could be my personal life goal. Nevertheless, I was always afraid of poverty as if it were a painful a debilitating disease, which, I still suspect, it is. To be poor in the absolute sense seems like a terrible fate. Money seems to be the only working remedy against a buildup of spiritual entropy and personal decay caused by poverty, but this is a shallow statement: a tautology. There are many other ways to decay. Yet the power of money reaches far along all of them.

From the position of active humanism (which is the work toward decreasing human suffering, see Essay 29. On Goil and Evod), as much as poverty is real and painful, it should be fought against. This poverty is really a disease, even if the poor people do not see it this way because everybody around is poor. To raise people from poverty is like to cure the sick. This is why, in my personal opinion, treating poverty does not need any philosophical justification.

This point of view can backfire, however. It seems that poverty has always been regarded as natural as accidental death, sudden illness, and aging.

"For you always have the poor with you, and whenever you will, you can do good to them; but you will not always have me." (Mark, 14:7)

While the poor could still sing and dance, it was an acceptable form of social life. At the opposite end of the scale has been the idea that the poor deserved their poverty, with which I find difficult to argue because the term deserve, as well as justice in general, have nothing to do with principles of nature or logic.

Humanism is an idea, and as any idea, if given a primacy over basic human needs, it can lose its moral authority. A basic human need is to feel good, and one can feel good by watching people who have not a single reason to feel good. I do not see a contradiction, however, between the millennia long glorification of violent victory over the enemy and not so clearly long lasting and very diverse stock of ideas spanning from the religious duty of compassion to modern liberal ideas and humanism.

But is poverty natural? This touchy question is open to investigation because we have observable measures of wealth. Moreover, wealth itself is the only human quality quantifiable with high accuracy. As I believe, this is why it has been so popular as the ultimate personal goal in modern number-crunching society where nobody can dispute wealth but glory for one is shame for another.

As for any quantifiable property, the bell curves of income and wealth distribution should have two wings: a small number of people would be very poor, a small number would be on the other side, and the majority would crowd around the average (see Essay 16, On Somebody Else). I reproduce it here:

Figure 31.1

This is what happens with height, physical strength, intelligence, health, and other human qualities. Same, probably, applies to the ability of people to work, earn money, and stay away from poverty. But this is not so with income and wealth.

Somehow I got interested in the problem of reducing world poverty, especially, in the United Nations program. I became very skeptical after I had found some arguments for the natural origin of poverty. I also found myself in a good company of sceptics.

Suppose, 20% of the world population possess 80% of world wealth, which is more or less close to the actual state of things. The ratio 20-80 is known as Pareto's law and was formulated in 1896 by Vilfredo Pareto. It follows from his simple equation (see APPENDIX A) for distribution of wealth or income in society. In its simplest and strictly qualitative form, it was described in the New Testament:

For to every one who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away ( Matthew, 25: 29).

Pareto's law fascinated me since my youth, when I had first learned about it. Pareto's law describes a very general and yet mysterious principle of human society. There are various manifestations of this principle, not at all related to money. Thus, according to Zipf's law, a very small number of words constitute a very large proportion of texts (In English, the, of, and to are the winners). There are other formulations and applications of this general principle of uneven (logarithmic) distribution, so different from the normal bell curve distribution of physical properties in nature where most property carriers are in the middle range. In a society, most owners are in the lower range and a few can own more than all the rest combined.

Gini coefficient is a widely used measure of income inequality.

Figure 31.2.

The square chart is a cumulative distribution of a resource known as Lorenz curve. The horizontal axis is percentage of population and the vertical axis is the percentage of total wealth/income it possesses. If it was distributed equally between all members of society, then 10 % of people would have 10% of property, 80% would have 80%, etc., and the distribution would look exactly as the diagonal. The actual unequal distribution, for example, along Pareto's law, would look like the curve that allocates 20% of the resource to 80% of owners, and, therefore, 80% of the resource to 20% of owners .

The Gini coefficient is the ratio (fraction or percentage) of the area A between the curve and diagonal to the area below the diagonal, i.e., half the square. It is a measure of deviation from the perfectly egalitarian diagonal distribution with 80% of people having 80% of wealth and 20% having 20% of it.

While Pareto's curve is calculated along an equation with an only approximately defined constant (see APPENDIX A), the Lorentz curve is empirical. It is difficult to compare them. Nevertheless, the 20-80 rule corresponds to Gini coefficient between 65 and 75. All such measures, however, terribly simplify reality. There is also a big difference between income and wealth. With big wealth (cattle, bank account) one may have no need of any income. On the other hand, inflation and debt may annihilate big wealth and income.

Therefore, highly hypothetically speaking,

in order to double the income of 80% population, the benefactor should find a source of income equal to five times the amount of the current wealth: one part for the poor and four parts for the rich.

If not, the rich would gradually take away most of the surplus given to the poor, not necessarily because of their ill will but because of the Pareto's pressure.

This, of course, is a gross simplification. The condition of people can be improved through infrastructure, institutions, education, temporary subsidies, vaccination, and one-time investments that could not be appropriated by a small fraction of the population. Education, for example, is something that cannot be taken away (it can by discrimination, however). This is what the UN anti-poverty projects intend. They are institutionalized as banks (World Bank and IMF) and I find it hard to believe that any bank can be an institution of philanthropy. But this is all politics (i.e., the realm of who deserves what) while I am interested in the nature of things.

All I can say is that to loan money to poor countries to fight poverty seems both immoral and irrational.

Source of information on world debt. http://www.worlddebt.com/

This Essay may be an ignorant speculation, but it is based on some available knowledge. My conclusion is that in order to give more to the poor without giving more to the rich, one has to spend significant additional money for keeping the society from following the Pareto's curve. In other words, the benefactor has to enslave (control is a milder term) the beneficiaries. The one who pays orders the music.

This experiment has been conducted on a truly global scale in Communist countries. The Russian Gini jumped from 25 to 40-45 after the dismantling of Communism. It plunged in Cuba after the advent of Castro:

Gini of Cuba:

1953 57.13

1962 28.11

1973 28

1978 27

One can find if not a wealth of money than wealth of data in the truly amazing database of World Institute for Development Economic Research (WIDER) that evaluates world income inequality in terms of Gini coefficient, country by country. The data were collected in different ways and from different segments of population, and they are often contradictory.

Before I quote the database, I would like to refer to a short but highly eloquent web page of Goetz Kluge on world income inequality, from which I borrow the following data.

Year 1960 1970 1980 1989 1998

Gini 54 57 60 65 70

Pareto 77/23 78/22 79/21 82/18 85/15

It is obvious that the world inequality of income is growing. But how does it map onto geography?

The WIDER database (1.6 MB in Excel format) contains 5068 entries. The maximal Gini coefficient per household is 79.5 for Zambia in 1970 and the minimal Gini was 12.1 for urban China in 1982. It may seem that Zambia was the epitome of capitalist exploitation and China a paramount of egalitarian democracy.

Note, that the data are about income, not wealth.

Many Communist countries had Gini below 20 at various times: Hungary in 1996 and 1997, China for many years, Slovak Republic around 1990, Romania in 1989. Many had Gini slightly over 20 before the collapse of Communism. The pool of egalitarian societies included also Sweden in 1980-1983 and rural Pakistan in 1970, although no two countries seemed to be farther apart in all aspects. Overall, Pakistan had Gini around 35, as if it were a West European country. Finland in 1988-1991 had Gini in the lower 20's, but, with a different methodology, between 40 and 50 in 1992-96.

Most developed countries were in the lower 30's: France, Canada, Italy, Japan, Norway, Spain. So was Germany, but according to one source, its Gini was between 18 an 20 in 1990-91.

Greece had Gini of 40, and USA, with its Gini of 35-45, was in the same fortyish category.

Most inequality could be found in poor countries, and this is where metodologies agree:

Gini over 50: Mexico and Philippines in 1960's, Malaysia in 1973, Kenya in the 90's, Costa Rica in 1989-95. Gabon in 1960, Sierra Leone in 1968, and Brazil in 1995 had Gini around 60. Gini of 70 (for one exception) was not observed and Gini over 60 is extremely rare.

I am forced to come to the conclusion that:

If Pareto's law is in the nature of things, then there seems to be a disturbing problem in the UN projects of decreasing poverty.

In order to decrease inequality, the existing social order has to be changed.

And that was exactly the idea of Marx and the entire tree of thought that grew from it, from Communism to the West European Socialism. From what I know about Karl Marx, he and his family knew poverty well. It is the power of government, not necessarily, oppressive, that alleviates the Pareto pressure.

In an attempt to improve the fate of the poor, without taking anything from anybody and without changing the social order, most of the expenses will go to the rich and the rest to the poor, not to mention the money to maintain the staff for all that.

The first ("rich") component of the expenses can be decreased if the social order is changed, but the change would cost, probably, the same money as should be otherwise given to the rich.

The choice between poverty and better conditions coming from a benefactor involves the choice between freedom and dependence. Only the free, however, can face this choice.

The best anti-poverty investment, therefore, seems to be the investment in democratic socialism. With democracy, however, we are getting into a giant swamp of politics, which is today the art of buying and selling democracy, see newspapers and TV. Democracy is an expensive luxury.

As we saw from examples of Sweden and rural Pakistan, the equality of income does not necessarily prevent poverty.

I think that it is not inequality and not even poverty by Western standards that should be fought, but suffering, regardless of its origin.

Throughout history, the way I see it, constructive efforts have always been driven by concentrated wealth, not by the divided one. The government can govern because it taxes the masses. It is because of the concentration of wealth in the hands of the rich that society can make general progress, develop new institutions, services, and art, and become more liberal. It is crucial for the technological progress even if we frown upon it.

Vilfredo Pareto was an arch-enemy of Marxism. No wonder: his law has been the strongest argument against expropriation of expropriators. Concentration of property is as natural as relative poverty. There is nothing natural, however, in absolute poverty in modern society. To accept absolute poverty is as shameful as accept public execution and torture (see Essay 32: On the Split).

Wealth is not immoral but poverty is.
Loss of freedom is a side effect of loss of poverty.

APPENDIX

A. From : http://cepa.newschool.edu/het/profiles/pareto.htm

In the Course, his [Pareto's] main economic contributions was his exposition of "Pareto's Law" of income distribution. He argued that in all countries and times, the distribution of income and wealth follows a regular logarithmic pattern that can be captured by the formula:
log N = log A + m log x

B. I could not find an established explanation of Pareto's principle. Any explanation should at least consider two distant examples: language and society.

I explain it for myself in the following non-professional manner.

1. Biological life is competition for limited resource. Human society creates surplus resource that can be stashed away from immediate consumption and used for production and maintaining social order. The material surplus can be as much a carrier of social work as electricity a carrier of mechanical one. An animal uses brute force for dominating other animals. A human uses food, Things, other humans, and money as an equivalent of all of the above, for the same purpose. This seems to be a Marxist view of society: the driving force of social mechanics is surplus that cannot be eaten on the spot.

Society is never in equilibrium: this is why history happens.

2. Pareto's distribution can be perceived as a grossly deformed normal distribution. If normal distribution exemplifies chaos, Pareto's distribution points to a strong order. The deformation is possible because concentration of money in one hand provides enough energy to take money—one by one—from those who have little and cannot resist. This "one by one" is very important: energy can be invested, returned, and reinvested, which is in a sharp contrast with its deterioration and dissipation in the physical world. It happens until an equilibrium establishes. In other words, the rich can hire and army and the poor cannot. Moreover, the rich can hire a government or simply be it.

3. The resistance of the majority to the inequality is decreased because they have a kind of reward from the rich who offer protection, stability, and other benefits, real or fictional. In other words, the inequality is a social contract: you can grow bloody rich, but give me a job.

4. In the end, Pareto distribution is the result of clustering: like modifiers cluster around meaningful words, which results in the Zipf's distribution, members of society are not independent and cluster around the leaders and employers of all kinds. There is a small number of large cities because people gravitate to large cities. There is a small number of large fortunes because money sticks to money and people to stability. There is a small number of large companies because small companies are eager to sell themselves to large companies. The Pareto pressure is a result of hierarchy of domination. Or, to put it differently, it is the result of dependence, so different from the physical world with the statistics based on independent events. The total of wealth and income is more or less constant over short periods of time and individual values depend on each other: a case of competition for a limited resource. On the contrary, IQ and height of a man do not depend on IQ and height of any other unrelated man.

5. If we consider just the general shape, not exactly the plot of a mathematical function, we can see that Pareto distribution looks like a cutout from a wing of normal distribution, which means that there is anything but a random process behind the former.

A beautiful animated comparison of both can be found at the StatSoft site.

In Figure 2 I compare them as four graphs. Probability density shows the chances (vertical axis) that a random sample will have the property value on the horizontal axis. Property can be, for example, height, wealth, income, number of publications, total number of sexual partners (a few Casanovas and Don Giovannis have most victories), etc. Samples are humans selected at random. Probability distribution shows the chances (vertical axis) that a random sample will have the value between zero and the value on the horizontal axis.

NOTE: Probability density is a derivative of probability distribution. Curves 1-4 reproduce only the general shape. They are not the plots of the actual functions. See on the Web the plots of both density and distribution functions for normal and Pareto distributions.

Figure 31.3

This is what the plots tell us when we move along the curve from left to right.

Curve 1. Very few samples have the property very much below the average, most have the property close to average.

Curve 2. The number of samples with a very low property is very low, the same true about high values; the

middle, however, is very egalitarian, it is almost straight, like the egalitarian diagonal in Figure 2. Note, that the high end cutout from Curve 1 starts from the lowest values in Curve 2.

Curve 3. The number of samples with low values of property is very large, but all the large values belong to very few samples.

Curve 4. The number of samples quickly grows when the value is low, but only a small fraction of samples falls into the region of high values. This curve looks different form the cumulative curve in Figure 31.2 (it is Figure 31.2 flipped over the diagonal) , but has the same meaning. Curve 4 reads: the probability that somebody selected at random will be in the lower value range grows fast, but slows down in the high range.
Note, that the high end "cutout" form Curve 3 starts from the lowest values in Curve 4.

There were a lot of debates around Pareto distribution. Its shape does not look completely realistic because it suggests an exaggerated ultimate poverty in its left wing. It is realistic, however, over most of its range. See APPENDIX G.

C. From: http://cepa.newschool.edu/het/essays/paretian/paretoptimal.htm
(there is an interesting discussion)

A situation is not Pareto-optimal, then, if you can make someone better off without making anyone else worse off.

My view is that the world philanthropists, probably, want distribution to be ethical, and, therefore, not Pareto-optimal. This is possible, however, only if a certain order of material distribution (i.e., of wealth and income) is imposed on a country. An example of an efficient, internal, and Pareto-optimal imposition of this kind is land reform.

D. from : http://www.worldwatch.org/pubs/paper/155facts_myths.html

Myth: The World Bank and the IMF exercise absolute power over the economic policies of developing countries.
Fact: In general, governments of poor countries, like governments of rich countries, only adopt policies to which they are committed as a result of domestic politics and circumstances. The World Bank and the IMF have required dozens of poor-country governments to make “structural adjustments” such as privatizing state companies and cutting spending, in return for loans. Yet borrowers have for the most part only implemented measures they would have taken anyway, such as cutting spending in order to repay debt. A new World Bank survey of ten African nations found that only two, Ghana and Uganda, had made and stuck to the reforms demanded of them. (pp. 38–39)

Therefore, the creditors want social changes but do not have armies and budget to enforce them.

"Most of the poverty and misery in the world today is due to bad government— repressive or corrupt or simply incompetent regimes and failed states," George Soros.

This is something one does not need any mathematics to notice. What Soros actually criticized was the use of foreign aid by the US Government for geopolitical reasons. The UN World Bank argues that poverty should be fought across the national borders in order to prevent the hostility and revolt of the poor against the rich—a typical geopolitical reason.
Much more on Business Week site.

F. After this page had been published, I found a reference to the book by William Easterly: The Elusive Quest for Growth: Economist's Adventures and Misadventures in the Tropics. The MIT Press, 2001. Judging by the review in The New Yorker, March 18, 2001, it confirms my conclusions, which are, most probably, not new.

G. An extremely interesting econophysical analysis of money as analog of energy gives a non-Pareto (Boltzmann-Gibbs) distribution of probability of owned money with the same general shape, plus other interesting for a specialist ideas. Exchange of money is regarded as similar to exchange of energy in molecular collisions. The closest analogy is a society of gamblers.

This model does not take to account the ability of money to grow on the flow of energy and dissipate, as it would be in life-like non-equilibrium models, but the results are very realistic. The autors acknowledge the limitations of equilibrium models but justly regard them as valid approximation.
In fact, the actual distribution of income (A. Dragulescu, V.M. Yakovenko. Evidence for the exponential distribution of income in the USA. The European Physical Journal B, 20, 585-589 (2001); can be found at: Yakovenko) is just the normal shape very much skewed to the left (Figure 31.4).

Figure 31.4

This seems to confirm my thesis that social order is measured by the distortion of the normal distribution. Egalitarian and Pareto distributions are two extreme examples. It would be interesting to find data on the food consumption of feeding animals in a groop. It might be represented by the weight distribution of grazing animals, for example. I bet it is normal: animals do not have either capitalism or communism. The quantitative economics of tribal societies is also interesting.