A Perspective on Economics, Poverty, and Policy

By Peake, Charles F. | National Forum, Summer 1996 | Go to article overview

A Perspective on Economics, Poverty, and Policy


Peake, Charles F., National Forum


CLASSICAL ECONOMICS AND POVERTY

Two centuries ago Thomas Malthus (Essay on Population, 1798) and David Ricardo (Principles of Political Economy, 1817) articulated Classical Economics. Two leading policy issues in their time continue today: poverty (then, Poor Laws) and free trade versus protectionism (then, Corn Laws). Classical theory began with Malthus' doctrine that population, if unchecked, grows about 3 percent annually. Ricardo added the concept of diminishing returns. Limited land supply implies that as additional farmland is put into production, the marginal unit is less productive than land already in use. The less productive land makes it increasingly difficult to sustain the growing population. Ricardo transformed this theory into his "iron law of wages": population growth incessantly pushes wages to subsistence. This law constituted a major element in his comprehensive economic theory that explained the production of goods and the distribution of the resulting income in a market economy.

Classical economics concluded that poverty among the masses is inevitable, although Ricardo's subsistence wage was not absolute. Improvements could occur over time through cheaper food brought about by free trade, more productive machinery (capital) associated with technological progress, stable prices under a gold standard, and a balanced budget. These outcomes for the economy were by no means inevitable, however.

WAS I POOR?

In 1933, the year I was born in Tennessee's high Appalachia, my two older brothers were in the first and second grades. Economic depression compelled the county to hire one teacher for these grades, in morning and afternoon shifts. This arrangement was good for my family because we could not afford two sets of school clothes and shoes. The younger brother wore the wardrobe to morning first grade; the older, to afternoon second grade. Five brothers slept in an unheated bedroom with two beds (and winters in those mountains can be cold!). There was no electricity, no indoor plumbing, no running water, and no major appliances.

Were we impoverished? By contemporary quantitative standards the obvious answer is yes. Adjusted for inflation, our family income in 1933 was about half of today's official poverty level. Yet we never perceived ourselves as poor. We ate well, thanks to the vegetables, chickens, hogs, and cattle that we raised, and the rabbits and squirrels that we trapped and hunted. The mountains provided boundless activities to enjoy - hiking, swimming, and camping, to name a few. Thanks to insistent parents who had very little formal schooling, we believed that knowledge gained through education could improve our economic status. Consequently, six children earned five Bachelor's degrees, two Master's degrees, one doctorate, two CPAs, a CFA, and a gunsmith certificate. Doing so helped us move into the middle-income class (although I felt poorer when I was in graduate school than as a child!).

NEW ECONOMIC GROWTH THEORY

On an individual level, my family's experience is consistent with "new" or "endogenous" economic growth theory articulated a decade ago by Berkeley economist David Romer. According to this theory, accumulation of knowledge as investment (referred to as human capital) is the fundamental source of economic growth. If incentives exist to accumulate knowledge and apply it to economic activity, as occurs in market economies, economic growth is likely. Increased well-being of the average person accompanies this growth, but this says nothing about how income is distributed.

Casual observation and empirical studies support the knowledge-based endogenous growth theory. Ample evidence exists of great strides in knowledge in thriving ancient economies: written communication and medicine of the Egyptians; mathematics, politics, and literature of the Greeks; and engineering and art of the Romans. In eighteenth-century Ireland, cultivation of the potato and application of knowledge to improve it promoted steady economic growth. …

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A Perspective on Economics, Poverty, and Policy
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