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Cycle of poverty

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In economics and sociology, the cycle of poverty, or poverty cycle is a social phenomena whereby poverty-stricken individuals exhibit a tendency to remain poor throughout their lifespan and in many cases across generations. The cycle of poverty has been described as a catch-22 and a feedback loop, as it occurs because the financial resources necessary to get out of poverty, namely productive capital, which some critics believe can only be obtained if the individual has financial resources in the first place. Some critics assume that the poverty-stricken find it extremely difficult to get out of poverty because they do not possess enough resources to invest in their own economic development. The cycle of poverty has roots in ancient times and feudalism. Serfs and peasants on a landlord's land often had to pay most of their crops in tribute to their lord as rent or taxes, and were only allowed to keep enough for bare subsistence. Unable to maintain any savings to invest in human or physical capital to improve their own productivity and therefore income, peasant families would remain poor for generations. Applied to countries, the poverty cycle is often called the development trap.

Effect on economic growthEdit

With the poor unable to maintain savings and invest in their own development, the cycle of poverty can lead to significant underinvestment in an economy. Consequently, productivity from the impovershed is significantly reduced, and economic growth is reduced. This thus forms a component of growth theory. The cycle of poverty also reduces the potential for skills-based and knowledge-based development because the poor are unable to invest the time and money in the necessary education. This effect leads to a technology shortage, which in turn leads to low production, and thus, lower foreign direct investment (FDI). Additionally, the cycle of poverty leads to a cycle of social unrest; poverty causes social discontent and social strife, and social strife in turns hampers economic growth to a great degree. Unstable political and social climates also deter potential investors, both foreign and domestic, resulting in an even more complex negative feedback loop.

CausesEdit

There are two different and distinct political camps which give different reasons for the cycle of poverty's existence. The political Left argue that social injustice and social inequality. As such, those with existing wealth to create more wealth, and those with little wealth not being able to create enough wealth. Free market proponents and libertarians may argue that the a strong presence of the state in the economy erodes property rights and thus the incentive to create wealth.

Unbalanced distribution of wealthEdit

Lack of education, or human capital, is thought to be one of the biggest causes of the poverty cycle. Education in a modern knowledge-based economy is one of the conditions to achieving economic growth, as it increases skill. A maximised education would require devoted time and energy, or extra-curricular reading. Children who are from poor families and have to work cannot maximise their education, even if the education is free. It would also require a conducive and hygenic environment, which is often not available to the poverty-stricken. This is even worse in countries such as India where public education in many areas is not available for free due to budget constraints. Tertiary education is often not free. These theorists believe that children often will not be able to break out of poverty because their reduced skillset reduces their potential income. With no means to provide a conducive educational environment for their own children, the cycle begins again.

Excessive intervention by the stateEdit

Many neoliberals attribute certain cycles of poverty to insufficient protection or recognition of property rights. To be more exact, in an environment where one's property can be stolen at any time, such as countries with a weak rule of law, there is very little incentive to save and invest.

Others like the free market proponent Hernando De Soto argues that poverty is sustained by government overregulation that generates high costs to property ownership through bureaucracy and big government. He argues that many of the poor in the world economy are unable to develop their property or own property because this regulation is too costly to overcome. As a result, they argue they are unable to generate wealth in a legal market that is full of regulation and are forced to resort to operate in an extralegal market that hampers wealth creation, thus hampering their ability to be pulled out of poverty.

Economists such as Milton Friedman argue that tariffs, income taxes, payroll taxes, savings tax and tax on investments all provide perverse incentives toward wealth creation that hurt the poor the most. He further argues that some of these arrangements are also wealth transfers from poor to rich; such as tariffs and social security. He argues that these regressive tax burdens encourage low productivity and little savings and investment that would otherwise lift the poor out of poverty.

Others have argued that welfare perpetuates poverty by providing incentives counter to wealth creation. Proponents of the FairTax and economists such as Milton Friedman favor eliminating welfare programs that prevent benefits from those earning above a certain income. They believe that these income caps as eligibility to receive benefits provide an incentive for laborers to earn less than they actually could in order to gain free benefits from government programs.

SolutionsEdit

There are no complete solutions to the poverty cycle, and many proposed methods are undergoing experimentation.

Left-wing solutionsEdit

Those on the political Left emphasize the effects of economic repression through social inequality as causes, as well as a lack of resource flow downwards from the wealthy due to insufficient redistribution of wealth.

Universal public education and welfare are the most commonly used methods by modern governments. In many places the rule of law also needs to be strengthened, by creating efficient legal systems that protect the acquired capital of the poor. Mixed-income housing is being implemented in more and more cities as a possible solution to poverty issues. It is an attempt to bring middle and lower class families together in the same neighbourhoods. This interaction between low and middle-income families helps the low-income families.

The famous Hills v. Gautreaux case in Chicago provides a sort of case study of the potential of mixed-income housing. The cycle of poverty is often cited by opponents of capitalism, such as communists, anarchists, and others as an argument against the capitalist system. They often insist that there can be no effective solution to the cycle of poverty while capitalism remains in place, and that it would be necessary to overthrow capitalism and establish either a planned economy or a gift economy in order to eliminate the cycle.

Free market solutionsEdit

Free market economists argue that planned economies and welfare will not solve poverty problems but only make them worse. They believe that the only way to solve poverty is not by shuffling and sharing existing wealth through redistributing wealth but by creating new wealth. They believe that this is most efficiently achieved through low levels of government regulation and interference, free trade, equal property rights, money systems, wages, and tax reform and reduction, thus converting even the poor members of society into capitalists. Some further extend this criticism to any alternative to free market economies.

Implication and criticism of solutionsEdit

Revolutionary critique of progressive reformEdit

By implication, the only way to get out of the cycle of poverty is through an external intervention, from the outside. Left to themselves, the poor cannot get out of poverty; they are trapped in the cycle. Reformists argue that the well-off have a moral, religious, or human obligation to make that intervention.

Critics of this view, especially revolutionary socialists, argue that reformists forget that keeping people in poverty may be a deliberate policy of the ruling class or elite, and that "do-gooder" interventions aiming to improve the lot of the poor might actually have the effect of making their problems, or those of other people, worse, not better. It is argued that the poor must themselves show the will to revolt against poverty, and improve their lot, through becoming politically aware and taking charge of their own destiny.

Anarchists recognize the problem that public schools may not effectively resolve the poverty cycle due to issues with incentive and attitude to lifelong learning. The provision of free schools in the context of a gift economy might also preserve incentive as those unwilling to gain such skills would not be looked upon favourably.

Advocation of privatizationEdit

Some also contest the provision of public educations as a partial solution, and do not believe that public education is a right or a suitable public service. There is further contest whether or not provision of aid for tertiary education is a necessary condition to build wealth. Others argue that paying to gain skills merely represents how determined a person is to gain those skills, and is thus an incentive to work and study hard to turn those skills into income. Milton Friedman is one such critic and is outspoken against the government provision of free education, government aid and free career training on the grounds that it eliminates incentives to seriously gain skills and become a productive member of society.

Friedman also believes that public education, while a good intention, has failed society in properly educating children. He also believes it has been an inefficient use of resources as private schools have done a better job of educating children at a lower cost per capita. Friedman believes this educational failure is the result of public education not being subject to market forces so they remain inefficient and incompetitive and unaccountable to students and parents while severely hampered by central bureaucracies.

Some theorists believe that the poverty cycle is not a catch-22 as it is believed. Free market microeconomists such as Friedman believe that every individual owns at least one important factor that is capable of building wealth, which is their own labor or time. From their own unskilled labor, persons may spend or save as they wish and along the way build wealth. Whether or not they use this wealth to purchase an education and or build skills to improve income is their own business.

Alternative provision of public serviceEdit

Anarchists recognize the problem that public schools may not effectively resolve the poverty cycle due to issues with incentive and attitude to lifelong learning. The provision of free schools in the context of a gift economy might also preserve incentive as those unwilling to gain such skills would not be looked upon favourably.

Further readingEdit

A useful starter to the modern debates is:

  • Jeffrey D. Sachs, (2005). The end of poverty; how we can make it happen in our lifetime (with a foreword by Bono). Penguin Books.

See alsoEdit

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