When I was a teenager I was plagued with guilt. I could not come to terms with the fact that I lived in comparative luxury whilst some people in the world were starving to death. So I used to give half of my pocket money each week to charity.
In recent times I have dedicated much of my time to studying economics. I am particularly interested in how to help people rise out of poverty. What I have discovered has startled me.
I have come to believe that giving money does not usually help resolve the core problems. In most instances it makes the situation far worse.
In this article I will explain how it is that western countries have managed to rise out of poverty over the last 200 years. I will also explain why poor countries are unable to overturn their fortunes and begin to experience prosperity. And I will explain how other poor countries are beginning to make the first steps towards economic prosperity.
How do poor people become more wealthy?
Before we can think about helping poor people become better off we need to understand a key concept. We need to understand the basics of how wealth is created. First of all, lets introduce a couple of core ideas.
- Forget money for a moment. It’s a massive complication and in our basic model it doesn’t really exist.
In our basic model there is no money. People simply make things and then swop them with other people for other things they want. There’s no money involved. And of course, in primitive societies, this is exactly how trade would have occurred.
In very poor economies, people make most of the goods they need themselves. And this takes up all of their working time. For example, in many tribal societies tribeswomen and men spend their days hunting and foraging for food (picking plant food and hunting animals).
In our ancient evolutionary past, all of our time would have been taken up by hunting and gathering food. Importantly, there would be no time left over for making more luxury items that might improve living standards. So how does a tribal community improve its situation?
Time is money
In 1776, Adam Smith wrote the first and probably the most influential economics work ever published. Adam proposed that specialisation is one of the primary ways in which wealth is created. He gives the following example in order to explain how specialisation operates.
Adam asks the reader to imagine a country weaver who owns and runs a small farm. Adam points out that:
- 1) The weaver must waste time moving from the field to the loom
- 2) When people begin a new job they often take time to get started. When we begin something we are typically not particularly ‘keen and hearty’ at first. We may be somewhat distracted. (i.e. we procrastinate). The weaver may lose time since he has to alternate between tasks.
If someone has to change their work and tools every half an hour, they are likely to loose a lot of productive time in the process.
In contrast, a person who specialises in one task alone, becomes more proficient at that task. One of Adam’s best examples of this process is in relation to making nails. Adam says the following:
- 1) Image that a common smith was asked to make nails for a whole day. Adam says that she would be able to make around 2-300 nails in a day. And these nails would not look very good either.
- 2) Now imagine a smith who has been accustomed to making nails. However this smith’s business involves making many other items besides nails. Adam Smith says that this smith ‘with the utmost diligence’, would still only be able to produce around 800-1000 nails per day.
- 3)However, Adam Smith said that he had observed several boys, under the age of 20, who had spent their whole working life making nails. Each of these boys could make more than 2 or 3000 nails per day!
How people become wealthier
The previous example amply demonstrates the key principle of this article. This is the principle:
Increase in output: Imagine that 100 people are able to produce 10 times more this year than they did last year. In this case the overall ‘produce’ of this group has increased. The group is now 10 times richer than is was last year.
But imagine that June has dedicated all her time to making nails. This will not help her eat and feed her family. However, imagine her friend Sarah makes bread. Sarah has no nails, but is willing to swop some bread for some of June’s nails.
Let’s say that our population of 100 people all live together in a small town. In our imaginary population of 100 people each person can specialise in making one specific item. Then on Saturdays, each person can set up a market stall on the town square and swop their produce for other items they need.
In this way, each of the people in this town will be 10 times richer than they were last year. Each person has produced 10 times as much as last year, and then the inhabitants of our imaginary town have simply swopped their produce in order to obtain all the items they require.
In this example, we see that our small town has become 10 times wealthier. And the only way to increase the wealth of this town is to increase the overall output.
How cars became affordable
I will end this article by describing how cars became affordable to a vast proportion of the US population in the early 1900s. This is a good example of how people’s living standards were improved through an item become more affordable. This was achieved in the same way as increased output occurred in our imaginary town above. The produce of each worker (who helped make a car) was increased.
Frank and Charles Duryea began installing gasoline-powered engines into old horse carts in the early 1890s. Carl Benz sold one of the first commercial cars in 1887. By 1903 11 thousand cars were on the road of America.
However, only the rich could afford cars at this time. In 1900, Ransom Olds’ sold for $1200. This was more than 2 years wages for the average factory worker.
How to make more cars per day
Henry Ford explains how his workers initially d carseekly wage of an average factory worker. early 1890s. s increased output made cars. Henry explains that his cars were initially made like a house. The car would be build in one place on the factory floor. The workers would make each component at a separate location. They would then each bring the finished component to the car which was situated at a specific location.
Henry decided this was a highly inefficient procedure. He therefore decided to change the procedure. His aim was to take the work to the workers instead of having the workers taking their work to the car.
Henry developed 2 principles.
- A worker should never take more than one step from his workstation, if possible,
- No worker should have to stoop over.
Based on these principles Henry derived 3 assembly principles. These were:
Place the tools and workers in the sequence of operation. This was in order to minimise the movement of each component being made as it was passed between workers.
‘Work slides’ were used to carry each component from one worker to the next. A worker would drop her component into the same place each time she finishes preparing it. This place would be as close to her hand as possible. And if possible gravity would carry the completed part to the next worker in the line of operation.
Sliding assembly lines were used to deliver each completed part to the next person. The component should be brought as close to the next worker as possible.
Ford tried to ensure that each worker would have to make as few movements as possible. He also wanted to ensure that each worker would not have to think about what she was doing, but could work on autopilot. Henry’s aim was to try to ensure a worker would only have to make one movement – or as close to one movement as possible.
A good example of this process was its application to the production of the flywheel magneto, a component of the engine. The component had initially been built by one worker. However, Henry split the job into a production line consisting of 29 operations (and 29 workers to carry out these operations).
The creation of this production line initially resulted in a significant reduction in the time taken to produce the magneto. It was reduced from around 20 mins to 13 minutes and 10 seconds.
Initially the Model T Ford car had taken over 12 hours to make. Within months after the creation of the assembly line, the Model T car could be produced in less than 2 hours. As a result of the introduction of these processes, the price of a model T car was significantly produced. Within 20 years of the first Model T car being produced, the price of purchase was reduced to one third of its original price.
How to make the poor wealthier
By the year 2000, in Western Europe output per person was around 16 times higher than it was in 1820. But does this mean the poor have become better off?
As our wealth increases, our health and life choices also increase. By 1955 80% of American households had running water, central heating, electric light and washing machines. Almost no households had these things in 1900. Today, of those Americans officially designated ‘poor’ in the US, 99% have electricity, running water, flush toilets and a refrigerator. Further, 95% of those designated ‘poor’ have a television, 88% have a telephone, 71% have a car and 70% have air conditioning.
In the UK, in 1957, the average worker could buy less with his wages, than someone unemployed with 3 children will obtain on benefits today.
However, in 2000, output per person in India and Africa was only 3 times what it was in 1920. However India is now one of the fastest growing economies in the world. So why have African countries failed to increase their output per head?
In her book Dead Aid, Dambisa Moyo argues that the sending of aid (i.e. money sent from more wealthy countries) has been one of the primary causes for lack of economic growth in Africa. This is a complicated issue and I will dedicate a future article to address it.
However, in brief, it is hard to build a business if people are undermining your work by sending free alternatives. Imagine if you borrowed a large sum of money to build a shoe factor in your town. Then imagine that a rich country began to send truck loads of free shoes and distribute them to the inhabitants of your local town. You would go bust, because no-one would buy your shoes.
In effect, Dambisa argues that this is the unintentioned effect of much of the aid that is sent to Africa. Often, we think that if people are poor, then the best way to help them is to send them money or free items. However, this is a misunderstanding of how people move from poverty to prosperity.
Countries have become more wealthy and prosperous because they have increased their output per head – which has been the subject of this article. If this is true, then the key question we need to ask is, ‘How can we help countries to increase their output per head’ i.e. their economic output.
Does this mean we can’t do anything to help support African populations? One way we can help is to provide loans to medium sized business enterprises, in order to help them invest into growing their businesses. Banks often refuse to help these businesses in Africa, since they are considered ‘too risky’. A number of organisations therefore focus their efforts in supporting medium sized enterprises in Africa. This kind of work can help to enhance economic prosperity instead of undermining it.
In future articles I will attempt to look at unpack the complex issues surrounding why African countries have struggled to become economically prosperous.