Poverty, the market and the state

Prospect Magazine  - 26.11.2013

Almost any thinking citizen, asked if we should seek to end poverty in our country, would answer yes. What political goal could be more clearly desirable? And yet, when asked to define what poverty consists in, or why, on some given definition, poverty is bad, many people find themselves stumped for an answer.

The word conjures images of Victor Hugo's Paris or Charles Dickens's London, in which poverty was a condition just this side of the grave. The 19th-century poor were fending off death with their last resources—by begging, crime, prostitution and the sale of their children. But people described as poor today are usually in no such straits—certainly not in the United Kingdom. Of course, there are people elsewhere who are less fortunate than the poorest Briton; but for poverty to be a serious matter of domestic policy it must be a condition that can be identified here, in the United Kingdom. And, looking at the condition of the poorest among us, we find little to compare with the absolute lack of resources that inspired the indignation of Hugo, Dickens, Mayhew, Marx, Dostoevsky or Proudhon in the 19th century.

This does not mean that no-one in Britain today is poor. For the standards against which poverty is measured depend upon the norms to which we aspire. Faced with the question, how many knights does a retired sovereign need, King Lear responded: "O reason not the need! Our basest beggars/ Are in the poorest things superfluous," thus setting out on the long, hard path by which he learned what real poverty is. How poor we are depends on how poor we feel; and while we could have been comfortable in Victorian England despite lacking a car, a properly equipped kitchen, a telephone and a source of information, such as a computer, it is unlikely that we could dispense with those resources today. What we need depends on the life that surrounds us. That life has been created by others, and by the powers, assets and luxuries that they take for granted.

For this reason, campaigners have tended to follow Peter Townshend in embracing a relative definition of poverty, without attempting to define a threshold in absolute terms. Thus the last Labour Government defined the "poverty line" as 60 per cent of the median income. Using a related measure, the Child Poverty Action Group (which Townshend created) tells us that 3.7m British children are now living in poverty. The choice of children as the test case reflects the assumption that they are the first victims of poverty, since the lack of resources will affect their prospects for the rest of their lives. On the other hand, when you take into consideration the purchasing power of the median income today, and calculate what can actually be obtained by someone who disposes of 60 per cent of it, you will recognise that all but the very wealthiest of 19th-century Britons lived below today's poverty line. By the standard adopted by the last government, I was brought up in poverty—in a household without a car or a refrigerator, with only the rare holiday in a B&B in Monmouth, and with a restricted diet of which baked beans were the most reliable component. And yet, by the standards of those days, we were comfortable and, thanks to our local grammar school and the system of government grants, I enjoyed the best available education, my parents not paying a penny for my schooling right up to the day when I received my doctorate, by which time I was a fellow of a Cambridge college. I look back on my childhood with gratitude—towards my parents, and also towards the benign welfare state of those days, which enabled them to offer their children opportunities that they themselves had not enjoyed. Illness, when it came, did not lead, as it so often led in the past, to destitution and bankruptcy. Thanks to the National Health Service, serious illness was a cost that our family could bear. I would say that, for my parents' generation, and also for mine, things were getting rapidly better and that whatever the policies were that produced this effect, they must have been the right ones.

But Peter Townshend's work Poverty in the United Kingdom, published in 1979, gave quite a different impression. Townshend shifted attention from poverty to something called "relative deprivation", meaning the comparative inability to enjoy the fruits of surrounding affluence. He concluded that 15m Britons (a quarter of the total) lived on or near the margins of poverty. Reading this in 1979, at a time when I was beginning to enjoy the fruits of my parents' sacrifices, I could not restrain a measure of indignation on their behalf. They would have fiercely rebutted the description of themselves as poor, and would have added a few non-conformist imprecations against those who measure the value of life in terms of gadgets and holidays.

It is true that standards of poverty must change to reflect changes in our way of life. But this does not mean that they are relative: it does not mean that to be poor is to be poor in comparison with others. Defining poverty in Townshend's way implies that poverty will never go away. When my neighbours have two cars each, expensive holidays in the Caribbean and mortgage-free homes in comfortable suburban locations, I am pretty likely to experience a twinge of "relative deprivation" at the sight of them. We might all get richer and richer, but my "relative deprivation" will stay just the same. It is as though nothing has improved since Dickens's day, and the whole effort of creating a welfare state, with social housing and guaranteed pensions, was wasted.

I don't think Townshend himself intended any such conclusion to be drawn. But in my view he greatly confused the issue by both defining poverty in a way that makes it inescapable, and at the same time suggesting that the reason why the poor are poor is because the rich are rich—a conclusion that in fact follows by logic from his definition. Townshend's analysis encourages what to me are the two greatest obstacles to thinking clearly about poverty: first, the zero-sum fallacy, which says that costs and benefits balance, so that one person's loss is caused by another person's gain, and secondly the use of that fallacy to stir up resentment towards the successful.

The zero-sum fallacy is a permanent temptation; so too is resentment towards those who are better off than we are. And the two temptations are connected. I might cope with the difference between me and my rich neighbour, if I think he has prospered at my expense. For then I might feel justified in expropriating him. Many political parties and movements exploit this feeling, notably the Communists and the Nazis in the years of crisis following the First World War. Of course, it is sometimes true that people are deprived of goods unfairly. It is all too often true that people enrich themselves at others' expense. But this should not prevent us from turning a critical eye on the beliefs that this is always so, and that inequality is the cause of poverty.

Defenders of the free economy will argue to the contrary, that market transactions are, in the normal case, positive sum games: transactions entered freely benefit both parties, since otherwise the parties would not agree to them. The result may be an unequal distribution of rewards. However, inequality is neither the aim nor the norm, but simply the unintended by-product of our free agreements.

This does not mean that inequality is simply to be accepted. For inequality breeds resentment, and resentment must be overcome if there is to be social harmony. Wealthy people may be aware of this and anxious to do something about it. They may give to charity, devote some part of their resources to helping others, and in general display an appropriate measure of sympathy for those less fortunate than themselves. In particular they may set up enterprises that offer employment, and so give to others a stake in their own success. That is how it has usually been in America, and it is one reason why, in my experience, Americans, however disadvantaged, are pleased by others' good fortune—believing that, in some way, they might have a share in it.

In European countries, however, it is not normal for people to be pleased by the good fortune of others. We are often afraid to reveal our wealth, our power or our success in worldly things, for fear of the aggression that this will attract. Nietzsche attributed ressentiment, as he called it, to a deep fault in our civilisation, manifested equally in the Christian religion, in democracy and in the socialist programmes of his day. Max Scheler, defending Christianity against Nietzsche's charge, was more eager to attribute resentment to bourgeois morality, which measures everything in terms of material possessions. Socialism, for Scheler, was just the latest form that this morality had taken. And there is no doubt that resentment has played an important role in the attitude to inequality that prevails today. To be honest, I see no solution to widespread resentment other than the traditional American one—to put your wealth to use, and to give as many people as possible an interest in your using it successfully.

However, things have changed in ways that threaten the old American model. There has been, both before and after the financial crisis of 2008, a sudden and escalating rise in the disparity between incomes at the top end of the scale and those at the bottom. This has happened all across the developed world, and in America in particular. Joseph Stiglitz has argued, in The Price of Inequality, that the top percentile of Americans has increased in wealth not only while those lower down the scale have either remained static or fallen into poverty, but more importantly that the wealth of those at the top has been increased at the cost of those beneath them. If this were true, then any policy to relieve poverty must also address the problem of inequality, achieving some redistribution of wealth at the expense of those who currently possess it. Whether this is so is a question that all policy-makers must address, and I return to it below.

From those thoughts I draw the following preliminary conclusions:

1. Absolute poverty is an evil, and any policy that alleviates or removes it should be promoted, even if the result of that policy is an unequal distribution of wealth.
2. Poverty can be defined in absolute terms, even if the standard changes. For human society evolves, and with it the needs of its members.
3. Poverty defined in comparative terms—relative poverty—is simply another name for inequality.
4. By confounding the two concepts of poverty, we run to gether two quite different political goals: the relief of poverty, on the one hand, and the creation of an equal society on the other, where equality is measured in terms of material assets. While the relief of poverty is a goal shared by all political factions, the creation of an equal society is a special concern of socialists, and is seldom seen as either possible or desirable by their opponents.

5. From this it follows that the relief of poverty, when poverty is defined in Townshend's way, looks like a uniquely socialist project. We conservatives are condemned outright, as the heartless people for whom the poor are of no account.

So how should conservatives respond? There may be good reasons for wanting an equal, or a more equal society. But the easiest way to produce an equal society is to deprive everyone of everything, as Pol Pot did in Cambodia—a triumph of the egalitarian idea, but no victory over poverty. Nor was Pol Pot an exception among communist leaders. The evidence from the 20th century is overwhelming, that the single-minded pursuit of equality leads to widespread immiseration, and the concentration of power and resources in the hands of the few. Conversely, a radically unequal society, such as some people believe is emerging today, may concentrate power and resources in the hands of the few, by creating rents on the social product—in other words, positions that permit people to extract wealth without producing it. This too could throw people into poverty, though there is no evidence that it has done so to the extent or on the scale of the communist experiments. But it raises the question of what kind of inequality, and what amount of it, is acceptable.

Now, it could be, as defenders of the market argue, that wealth creation depends upon the free use of private property, and it could also be that the result will be an increase in wealth for everybody, as well as substantial inequalities between those at the top and those at the bottom. And it could be that the resulting inequality is an evil, to be remedied by some form of redistribution. But if it is an evil, it is an evil of a different kind from that of poverty, and one that must be remedied in another way. And we should be careful, in our desire to create a more equal society, that we do not destroy the motives of the wealth-creators; for without them we shall all be poor. Even left-liberals recognise the dangers here. John Rawls, in his definition of the just society set out in A Theory of Justice, incorporates the "difference principle", according to which inequalities are permissible, provided they benefit the worst off. Conservatives would probably add that they are permissible anyway, and who are you to forbid them? But they would certainly agree with Rawls, that the egalitarian project may be just as great a threat to the poor as to the rich. Nor does history tell us otherwise.

Indeed, it seems to me that the most important lesson that we can learn from recent history is that putting equality at the top of the agenda does nothing to eliminate poverty, and may indeed make poverty more widespread. So long as we frame the question in Townshend's terms, using idioms like "relative deprivation", we obscure the fundamental fact, which is that, in developed countries, everybody has been getting richer, so that—until the recent downturn—absolute poverty was getting rarer. That is true, even by reasonable updated standards of what poverty consists in. And it is an achievement for which we should be grateful. The welfare state has made an important contribution to this achievement. But in the conservative view, it would not have been possible without rights of property and security of contract—the two institutions that enable us to engage in economic activity without the permission or the control of the state.

Like many people of conservative leanings I am therefore suspicious of laws that rewrite contracts for the benefit of the weaker party, since such laws violate both the right of property and freedom of contract. They also have unintended consequences that place burdens on the rest of us. Thus the UK Rent Act of 1968, which granted security of tenure to existing tenants at controlled rents, and which seemed at the time to be a measure that would rectify exploitation and grant security to the poorest of the poor, had the effect of killing the rental market, so that poor people who did not yet have a roof over their heads were no longer able to find one. This legislation substantially increased the burden on the poorer members of the community, by forcing them either to take out a mortgage, often at a rate that they could not afford, or to join the waiting list for social housing. Likewise more recent legislation imposing a minimum wage, which has benefited those already in employment, has also killed off the job market at the bottom of the scale. New employment is only offered at a rate that employers can afford, not at the rate that will be dictated to them afterwards by government. The existence of a minimum wage means that, necessarily, jobs are not available to the poorest—i.e., to those prepared to work for less. But employment, however poorly paid, is a fundamental step in the escape from poverty. For it enables you to exercise your skills and present yourself in the job market. It is the first rung on the upward ladder. Hence the minimum wage has created a new class of the poor.

In general I am suspicious of any policy that is based on the redistribution of existing assets. My reasons are
these: first such policies penalise economic success and therefore discourage those who have the gift for wealth creation. This can only depress the overall level of
wealth, and therefore reduce the funds to be distributed. Secondly, the assets are redistributed, as a rule, to the existing poor, as in the two examples that I have given, but do not alleviate poverty in the long run. On the contrary, they tend to destroy opportunities, create new burdens
of homelessness or unemployment, and deter the investments necessary for economic growth. A conservative policy for the relief of poverty would aim to relieve poverty as
it arises, not by creating a new class of poor to replace
the old one, but by ensuring, if possible, that those who
fall into poverty have the opportunities and the will to get out of it.

One encouraging initiative has been the Gramin bank, founded by Muhammad Yunus in Bangladesh and subsequently imitated around the globe. The policy of offering small loans, together with a potential share in the bank, in order to capitalise home-grown businesses, transformed the rural economy of Bangladesh and lifted many villagers out of poverty by putting their products on the wider market. Of course it was a private act of charity that capitalised the initiative; but the bank soon proved self-supporting and, while not insulated from fraud, continues to operate in its original setting with evident benefits to the poor. The model could surely be adapted and refined to become a template for policy here in Britain.

Moreover, it suggests a principle. We help the poor by freeing the channels through which opportunities come to them. Old fashioned banking was closed to those who could offer no security for a loan, and therefore it did nothing to support the economic activity of the truly impoverished. It was one part of the poverty trap, which prevented those who had fallen into penury from working themselves out of it. The welfare system would then step in to provide for them, so ensuring that they remained dependent on handouts from the state. This was the first step towards the culture of dependency, with all its well-known adverse social and psychological consequences.

Likewise, the mortgage market was in recent memory closed to the poor, who could give no security for a loan. The emergence of the sub-prime mortgage created opportunities for home ownership among people who would not previously have been able to enjoy such a thing. Sure, the sub-prime market played a part in the recent Wall Street crash. But that was because banks were trading in debts that they could not guarantee and treating speculative returns as solid assets. Again, it might be possible to work out a way of refining this particular financial instrument so as to make it available to the poor without jeopardising the goal of giving them the opportunity to acquire a secure capital asset. Indeed, in their original conception, the building societies and friendly societies of Victorian Britain aimed at just such a result: offering mortgages to poor people who thereby acquired an interest in a shared capital venture. Those charitable societies were built on the knowledge that people can raise themselves out of poverty, and that the best way to help them is to provide networks of mutual support.

We are all aware of the extent to which banks have exploited the loan market, risking capital that they did not possess for quick returns, and rewarding their directors and managers with vast bonuses while putting their shareholders at risk, often relying on the state to step in to save them when the crisis came. What is to be done in response to this—and it is only one part of a larger problem concerning how to regulate financial transactions without extinguishing them—is a difficult question. Because it has affected the bottom end of the mortgage market in America the sub-prime crisis has thrown many people into poverty and homelessness who were previously working their way up into the middle class. However, this does not imply that sub-prime mortgages are essentially precarious, or that the regulations could not be put in place that would once again make them available and reliable for those who cannot give collateral guarantees for a loan. Any reform of the financial system ought, in my view, to have this goal as a priority.

The labour market could be freed, were the penalties to be lifted from those who seek to offer employment. For example, there are many people who could make use of domestic help and whose earning capacity would be increased if they did not have the burden of managing their households. But the majority of such people cannot afford to pay a salary out of post-tax income. By allowing them to claim their employees' wages against tax, and by lifting the burden of national insurance, a vast area of employment opportunities at the bottom of the market would be opened. This would not reduce government revenues, since tax would be collected on the employees' wages and there would be a corresponding reduction in benefit payments. The result would, indeed, represent a fiscal saving, while again placing the feet of the beneficiaries on the upward ladder.

Moreover this policy would cause poor people to work side by side with members of the middle class, who are as likely to be caring and responsible as their employees. The employers would be motivated to help with such matters as the education of children, and the management of the legal and other burdens that lay such a heavy shadow across the lives of the poor. In general a conservative policy will be favourable to the rich, not because they are rich, but because they have the proven ability to create wealth. And it will aim to distribute that wealth without penalising the activities that create it. It will not, in the normal case, redistribute wealth directly. Instead it will attempt to create the opportunities that people need, in order to create wealth for themselves. That this is psychologically more beneficial than welfare dependency is, I think, one of the lessons to be learned from the work of Charles Murray (Losing Ground: American Social Policy 1950-1980) and James Q Wilson (The Moral Sense). It is also more economically efficient, since it encourages the poor to produce economic value and not just to receive it. Murray and Wilson present overwhelming evidence from the American case, that the poverty trap exists, that it locks its victims into failure and discouragement, and that it is accompanied by every kind of anti-social behaviour as its victims beat fruitlessly against the walls that contain them. Yet the policies that produce this trap continue to be espoused, wherever poverty is redefined as inequality. For then the only remedy proposed is forcible redistribution, the immediate effect of which is to depress the economy and to create new classes of the poor.

But this returns me to the question of inequality. As I suggested above, if inequalities, or extremes of inequality, are evils, then they are evils of another kind from poverty. Poverty is overcome when everyone has sufficient for a decent human life—and how much that is depends in part on the surrounding conditions. But inequality is overcome when everyone has the same. It is not because it produces poverty that inequality is an evil, for it does not do so. If it is an evil it is an evil of another kind—for example the evil of providing rents on the social product that place enormous power in the hands of people who have no motive to use that power responsibly, and who might use it in ways that threaten the prosperity and the savings of the rest of us. This we have seen in the corporate sector. But what is the remedy? Stiglitz opts for massive redistributive taxation, up to 70 per cent at the top income level, and a heavy estate tax. But there is no evidence from the European case that such measures do anything to overcome poverty, even if they make it more difficult to be rich. On the contrary, they penalise wealth creation, lead to a flight of capital and also make people less likely to save, opting to spend their money during their lifetime. My own view is that we should strive to limit the opportunities for rent-seeking by returning powers to shareholders and investors, and restricting the capacity of banks to trade in "unreal estate". The desire to punish the rich is understandable; but it is no part of a policy to help the poor.

There is one class of poor people, however, that it is increasingly difficult to help, not because the free economy cannot extend its benefits in their direction, but because social changes have removed the protection on which they depend. I am thinking of the elderly, and in particular of those who are too frail to work. The dissolution of the extended family and the increasing tendency to exhaust the equity of the family home before the death of its older residents, have led to more and more elderly people falling into a poverty trap from which they cannot emerge by their own devices, since they have none. Until now the focus of government policy, in response to the campaigns of the Child Poverty Action
Group, has been on children. In my view it would be better directed to the old, for many of whom there is no other source of help. Pension funds, as we know, are in crisis, on account of the unexpected longevity of their beneficiaries. State pensions too can provide funds only by borrowing
from an uncertain future. Stopgap measures, such as the winter fuel allowance, barely touch the surface of the problem. It is significant that, when Bismarck first introduced a welfare state into Germany, it was the situation of the elderly that most concerned him, with the right to a publicly funded
pension the first among the provisions that he introduced. And I cannot help feeling that this is the correct emphasis for a conservative. We should recognise that there is a collective duty on all of us, to help those who can no longer help themselves.

For the rest, however, policy should have a completely different focus —not to look after them, but to provide the opportunities that they need in order to escape from the poverty trap. For the majority of able-bodied people this trap has been enhanced by government policy and not cured by it, and the principal reason for this is the fallacious belief that equality, not wealth, is the thing that will rid us of the poor.