Friday, October 1, 2010

Ending Poverty?

The war on poverty is an interesting and yet perplexing notion, not because the ideas behind eliminating poverty are foolish or ignoble, but because the mechanisms utilized by those attempting to accomplish this goal are inherently flawed. The principle ideal behind eliminating poverty involves opening the doors of capitalism, giving people the resources to develop opportunities in which to make money and pull themselves out of poverty. Those in favor of these methods, one of the most notable is the use of micro-loans in third world countries, cite numerous examples of success and support expansion of similar types of programs. While these successes cannot be debated, the concern is that individuals are missing the limitations of these techniques on a larger scale. The simple fact is that capitalism in its current form is unable to pull entire populations out of poverty despite its ability to positively influence small local environments.

The biggest problem with capitalism is that the rules change with respect to population growth. Using an analogy relative to a classroom grading curve best describes this characteristic. Suppose there is a Math class with 15 students and a relative-comparison grading curve that assigns letter grade quotas based on a certain accepted level of performance. For example there can only be 20 As, 20 Bs, 20 Cs and 20 Ds, but an unlimited number of Fs. The rational behind an unlimited number of Fs is that if an individual demonstrates an inability to understand the material that individual should not be rewarded simply for having a generally superior understanding relative to others in the class. Basically earning a 34% demonstrates an unacceptable understanding regardless of whether the class average is 15% or 81%. There has to be a minimum absolute level of understanding.

Now assume that the current class average is 36% with maybe 1 person actually passing the class. With all but one individual failing the class only 1 of the grade quotas is filled. Then suppose new math books are delivered to the school, new computers with educational software arrive and a new math teacher shows up. The combination of these three elements provide the resources necessary for the students, who now commit themselves to learning math, to raise the class average to 96%. What a turn around, now each student has a high enough grade percentage to warrant an A grade. This detail is why micro-loan programs in third-world countries work. A small number of individuals receive the loans (the additional resources) in an environment where there is vast level for improvement (the class average of 36%). However, what happens if the class population increases to 40?

At 40 students even if the class manages a class average of 96%, which is unlikely due to a lack of resources, the quotas demands that only half of the students receive As and the other half receive Bs. This distribution would be determined through the 20 students with the highest percentages receiving As and the 20 students with the lowest percentages receiving Bs. One may ask the valid question of ‘if everyone demonstrates 92%+ superiority why can’t everyone earn an A in the class?’ While intuitively this question makes perfect sense and the quota limitation doesn’t, one must remember that this analogy is representative of the capitalistic model and in any economic model money is a finite resources just like the number of As in the model. So just because everyone cannot get an A (be a millionaire/billionaire) does not mean everyone cannot pass the class right? Unfortunately this is not true because the class size is expanding faster than the grade quotas there will be individuals that do not receive the appropriate grade relative to their understanding (population and inflation are expanded faster than the ability to create wealth). Thus because the class population exceeds the total quotas and the class population is growing faster than inflation in the grade quotas, the quota system in this class (capitalistic system) has created a zero-sum game with winners and losers. Sadly the losers are those that are impoverished.

While the above analogy is helpful it is also too simplistic to fully describe why capitalism in its current form and practice is unable to end poverty through the true nature of its established zero-sum game. Overall while the grades demonstrate a level of success relative to other members of the class, the element that actually matters is the percentage of understanding that makes up that grade. Clearly all As in a class are not created equal in how they are earned. One student’s A could be described as a 94%, which in the proper circumstances would be an A, whereas another student’s A could be described as a 145%. Think of it this way in real life both individual A, who earns $300,000 a year, and individual B, who earns $20 million a year, can be viewed as successful, but clearly society will view individual B is significantly more successful.

However, in society just having a proper level of understanding is typically not enough to be successful. There are plenty of intelligent people that do not have a lot of wealth and plenty of stupid people that do. However, the perversion of what society views as important to its evolution and infrastructure is an issue for another time. Returning to the classroom example to add this criterion, the final percentage cannot be entirely comprised of how someone performs on homework, quizzes and tests, but now also includes performance on extra projects. Unfortunately the number of extra projects available for all of the students is limited. For example the following outline can be viewed as the weighted recipe comprising a grade for the student:

Homework – 15%
Quizzes – 5%
Tests – 40%
Extra Projects – 40%+

For the rules of the class/society while the total amount of projects are limited, the number of projects any single individual can undertake is not. If so desired a student can perform enough projects to earn a percentage in excess of 100%. This element is important because one of the major drivers for a student to acquire a percentage in excess of 100% is to further separate him/herself from the other students in the class to guarantee being awarded an A. However, in the battle against poverty/bad grades every student above 100% is taking opportunity for grade advancement away from other students. This relates back to the real world because money is a finite resource, this individual’s success comes at a cost to other individuals. For example revisit individual B from above and suppose he only makes $1 million a year. Now $19 million becomes available for distribution to other individuals in society most likely through investment, which will give more individuals an opportunity to raise their ‘grades’.

The above system can also demonstrate why tax cuts for the rich/super-rich (a.k.a. trickle-down economics) fail miserably in the real world. Suppose the teacher identifies a group of very smart and very ambitious students at the beginning of the year and through experience knows that those students would take a large percentage of the extra projects available to the class (100-150% each). So in effort to avoid that behavior the teacher offers each of these students a free 20% bonus in effort to stem this ambition in hopes that more extra projects will be available for the rest of the class (hopes that bonus will spur investment). Unfortunately for the teacher no conditions are applied to this 20% bonus, these particular students receive it whether or not they actually decide to undertake fewer extra projects than they would without the bonus. Knowing that there are no conditions, the students accept the 20% bonus, yet still do the same amount of extra projects they would have done without the 20% bonus. Thus two major catastrophic failures of trickle-down: one there are no conditions for the 20% bonus/tax cut and two the bonus/tax cut is not a large enough of a benefit to change behavior. The sad thing is that the teacher can never offer a large enough bonus to stop these particular students from doing all of the extra projects they already plan on doing, thus it is pointless of offer the bonus in the first place. There is a third reason why trickle-down will never work effectively, but it is irrelevant to this particular issue.

Now this is not to say that the world should all of a sudden become socialists or ‘insert your favorite economic theory here’ ists, but it needs to be understood that any goal striving to end world poverty under a pure or mercantile capitalistic flag is unlikely to succeed. Overall there are only two ways to end poverty. First, devalue the importance of relative superiority comparisons between individuals in favor of absolute superiority comparisons. Person A should not feel any sense of superiority because he got a 156% and person B only got a 100%, but instead a feeling of self-superiority should be derived from the fact that he (Person A) demonstrated mastery of the topic. Basically for person A there should be no psychological difference between getting a 156% or a 100% because both demonstrate full mastery of the topic.

Now one may argue that of course there is a difference because 156% is a bigger number than 100%, but the additional 56% is artificial, it has no meaning at an absolute level. Basically the additional 56% is only important if someone gives it importance, an importance that would, ironically, not be important. Under this mindset the important element in class would not be the letter grade received by individuals, but the grade percentage and since everybody would have a better opportunity to achieve 100% the letter grade evaluation method would eventually cease to be important and grade quotas would cease to exist, thus anyone receiving a 92%+ would receive an A regardless of how many people earned 92%+ in the class. Note that to achieve this outcome the better students need to give the other students more opportunities to undertake the extra projects rather than undertake them themselves as soon as possible. However, this adjustment in strategy should not be overplayed, while other students should get more opportunity, if they do not have the ability to succeed those extra projects must still be completed by those who can otherwise it creates unnecessary waste.

The second way to end poverty is for the teacher/government to put a hard cap on the number of extra projects that a student can undertake. Basically once a student has 100% that student cannot undertake any additional extra projects. In the real world this would simply amount to a 100% tax of all income above whatever value the government assigned to represent 100%. Clearly a significant and angry backlash to such an action could be expected limiting its overall effectiveness. Therefore, it seems like the best strategy for ending poverty is to eliminate relative superiority and continue to provide the necessary resources (in the analogy: math books, educational computers and teachers) to open opportunity for under-performing “students” to achieve a 100% of their own. Currently society tries to implement the second part of the strategy, but completely ignores the first. Such action doesn’t mean that some people can be pulled from grips of poverty, especially in the third-world, but without the first part the ideal of ending poverty is a fruitless and pointless endeavor.

No comments:

Post a Comment