What causes poverty? Nothing. Nothing causes poverty; poverty is the natural state of man. Naked and in the dark – that is how nature birthed us. But just as we figured out how to take the fibers from banana plant leaves and weave them into garments to cover ourselves, leading to the growing of cotton and the sheering of sheep and the professionalization of tailoring in a direct line to Sachs Fifth Avenue; so too prosperity. So that makes the real question “What causes prosperity??” Because prosperity is a delicate thing; just like destruction is much easier than creation (any brute with a sledge hammer can destroy a wristwatch, but who of us can make one?) – the same is true for our national economies. They are complicated, balanced, nuanced and fragile endeavors built not upon coercion and violence and planning but upon each person in that society deciding what his or her strengths are and adding value to that society with the full expectation of reaping the rewards; rewards (at least in theory – absent overactive government manipulating the markets) directly related to the value that he or she gives to that society. Somebody who cures cancer will become a billionaire, somebody who is a security guard at a mall never will. This is not a criticism of the guards, for we need them (and if those were my two options, I too would be a guard) but a free market acknowledges the fact that so few people can cure cancer and so many of us can stand watch and assigns value correspondingly. Scarcity, another concept modern economists have trouble with.
All these interactions are governed by money, with profit as the signal to the economy as to where to invest our scarce resources (interest itself on loans is profit charged for the use of money, so floating interest rates in theory should tell us which loans are more valuable to our national economies; instead of the government pushing cheap borrowed money into the housing sector, which they are still doing incidentally). Dr. Judy Shelton, one of the U.S.’s great monetary theorists (Co-Director of the Sound Money Project at the Atlas Network and economic adviser to the White House) in her concise and extremely readable little book, “Fixing the Dollar Now” goes into the real role of money. As part of the “sound money” discipline, she explains that the true purpose of money is to serve as a unit of measure and a store of value for society; money itself which is a historical technology product of innovation by people seeking to exchange freely through the markets.
There are these days, of course, counterarguments. They have been congealing into “Modern Monetary Theory” (MMT), a sort of super-Keynsianism advanced by Krugman and his socialist politician minions arising as perhaps a nouveau-chartalist macro-economic monetary theory. This theory states that money was invented by states to maneuver their economies and serve as a mechanism to codify wealth for the purpose of taxation. But if money serves as a tool of the state to manipulate people, what keeps it from being mis-used; and for exactly that purpose?
Loose monetary policy (encouraged by isolated theorists who have never started a business, and enthusiastically embraced by politicians looking for cash to advance their pet projects) leads to loose fiscal policy which leads to irresponsible government’s malinvestment, sucking liquidity out of the market for ideas such as “cash for clunkers” and other such nonsense. Have you ever driven around an African capital city and seen unfinished highways, half-built buildings and shiny new airports unused while the Air France airplane sits on the tarmac a ways from a decrepit old terminal which still has bullet holes from the latest coup d’etat, while passengers are shuttled to and from the shiny airplane in little buses? This is all malinvestment. “Bridges to nowhere” in American political discourse.
Socialist governments are particularly guilty of all this (though there is certainly enough blame to go around), because the onrushing torrent of liquidity covers a multitude of sins and drowns out the perverse incentives created by a massive intrusive government seeking to be not an arbiter but an active player in the game. Green technology comes to mind, where government takes money from productive, profitable energy sectors of society (frackers, large oil firms) in order to drive up prices and raise money, and then funnels that cash to their competitors (Solyndra anyone?) who then use it to compete against them at the artificially low rates. Until the subsidies dry up and the ebbing of liquidity reveal that underneath the shiny new technologies was only shifting sands. Not only does this harm the fellow who pays at the pump, for he is paying twice or three times for the same thing, but it stifles innovation necessary to arrive at technological solutions to our energy problems (breeder reactors anyone??).
The biggest problem is, of course, the deficit and the debt. $22,000,000,000,000,000 owed and growing every minute of every day. “But why does the debt matter?” a friend of mine once asked; “We seem to be doing fine…” Even that question is a result of the Keynsians and the immediacy, the constant emergency which does not allow them to look at economies in a long term way. MMT, quite simplistically, believes unemployment is a result of lack of liquidity and it is government’s job then to create that liquidity. This itself isn’t true (money doesn’t create jobs just as cash doesn’t create wealth – the definition of wealth is ‘the guarantee of future income’). But if this liquidity is derived from debt (and not built upon savings and real growth), when do we reach a tipping point? Very specifically, we are currently spending $400,000,000,000 a year on servicing our debt. Enough to build a million walls and have enough left over for a more responsible health safety net. Enough for a great war – should we be attacked, or to send rockets to mars and beyond. Instead, it is wasted on interest for cash given to a housing glut which almost brought down the world. Malinvestment. But what happens when that number grows? We all watched Argentina’s collapse, or the Asian collapse, or the Mexican or the Venezuelan. But what happens when its us? Nobody knows…
In my 2nd novel “The Burning of San Porfirio” I address this. The Burning, long I have been told and a little involved perhaps, is interesting because it goes into the self-organization of a society (in the novel it’s Venezuela, for obvious reasons) whose citizens are trying to find a way forward in the face of state failure; and as such explores many self-governed villages and creative approaches to ward off the devastation of projects and industries captured by the state and destroyed:
“To satisfy the diverse wants of our people, labor was divided—the farmer, the chemist who produces insecticide, the scientist who studies the result of the insecticide on the environment and the food, the transport driver, the mechanic who fixes the transport, the builder who builds the stall, the salesman who sells. For the clothes, we need the agronomist who studies how to rear sheep, the shepherd who watches the flocks by night, the machinist who creates more efficient looms, the tailor who cuts the suit, the vendor who sells the cloth. All of these people are part in the chain of production and consumption. The farmer buys clothes; the tailor must eat. To facilitate this division, money was invented. For everybody has their livelihood based upon a career path that they chose, emerging from their interests and their belief that through their free exchange they will achieve a higher standard of living for their families.”