NCPA - National Center for Policy Analysis

Explaining Poverty

April 25, 2011

We do not know fully what makes some societies richer than others.  However it is clear that those countries with greater economic liberty tend also to have stronger protections of human rights.  And their people are wealthier, says Walter Williams, the John M. Olin Distinguished Professor of Economics at George Mason University.

One way to gauge human-rights protection is to ask to what extent the State protects voluntary exchange and private property.  Private property produces systemically different incentives and results from collective property.  When property rights are held privately the costs and benefits of decisions are concentrated in the individual decision maker; with collectively held property rights they are dispersed across society.

  • For example, private property forces homeowners to take into account the effect of their current decisions on the future value of their homes, because that value depends, among other things, on how long the property will provide housing services.
  • Thus privately owned property holds one's personal wealth hostage to doing the socially responsible thing -- economizing scarce resources.
  • When the government owns the house, the individual has less incentive to take care of it simply because he does not capture the full benefit of his efforts. It is dispersed across society instead.
  • The costs of neglecting the house are similarly spread.

This argument applies to all activities, including work and investment.  Whatever lowers the return from or raises the cost of an investment reduces incentives to make that investment in the first place.  Proper identification of the causes of poverty is critical.  If it is seen, as is too often the case, as a result of exploitation, the policy recommendation that naturally emerges is income redistribution -- that is, government confiscation of some people's "ill-gotten" gains and "restoration" to their "rightful" owners.  If poverty is correctly seen because of the unwise government intervention and lack of productive capacity, more effective policy recommendations emerge, says Williams.

Source: Walter Williams, "Poverty Is Easy To Explain," Freeman Online, May 2011.

For text:

http://www.thefreemanonline.org/columns/pursuit-of-happiness/poverty-is-easy-to-explain/

 

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