Where the rich get richer and the poor get richer faster

Many South Africans believe that the country is divided between rich whites and poor blacks. In addition, they believe the old story of the rich getting richer and the poor getting poorer which was repeated in an article in the May 30 issue of Business Report. It said: “The sad fact is that the rich are getting richer and the poor are getting poorer. That is an economic fact that is unassailable and globally applicable...” The author declared that even in the United States this has been true for almost three decades. These statements imply that nothing is changing in South Africa, that nothing is likely to change, and that there is a chasm between rich and poor that cannot be crossed – either way. The facts tell a more optimistic story.

Wage differentials between the races in South Africa have been declining for decades. Merle Lipton, in Capitalism and Apartheid (1985) wrote that “from 1970-82, real wages for Africans in manufacturing and construction rose by over 60 per cent, compared with 18 per cent for whites; on gold mines real wages for Africans quadrupled, while those for white miners rose by 3 per cent; on white farms real wages of Africans doubled between 1968/9 and 1976. As a result, the white share of personal income declined from over 70 to under 60 per cent, while the African share rose from 19 to 29 per cent.”

The Institute of Race Relations indicates that this trend has continued. Their South African Survey 1999-2000 reported that, “annual real earnings in the manufacturing sector rose significantly between 1975 and 1997 for Africans, coloured people, and Indians (by 49%, 31%, and 65% respectively), but declined marginally for whites.” The main problem for the poor in South Africa is not a gap between the races but the widening gap between employed and unemployed – a problem exacerbated by the labour laws. If freedom of contract were allowed to prevail – which it is not – racial disparities would disappear rapidly.

What does it mean to say that even in America the rich are getting richer while the poor are getting poorer? On the surface it appears to be a profound statement. The author of the newspaper article is convinced that the problem is created by capitalism but that, at least, in Europe trade unions and the welfare state soften these blows. So what blows are the “poor” of America suffering?

The first question to be asked is: exactly who are the poor? That may seem a simple question but in reality it is far more complex than one may imagine. Some “poverty advocates” argue that the poor are those whose incomes fall in the bottom 20 per cent range of all incomes. The rich are those in the upper 20 per cent range. The obvious problem with this is that there is always a bottom 20 per cent regardless of how rich people become. This may be what is meant by “the poor you will have with you always”. If poverty means falling in the bottom 20 per cent then poverty will never, and can never, be eradicated. Even in a village of millionaires there will always be a bottom 20 per cent.

Poverty is difficult to categorise and the statistics are very misleading. This is shown by the fact that the upmarket Palo Alto community in the San Francisco Bay area has a high poverty rate. The reason is simple. Palo Alto is home to Stanford University, one of America’s most prestigious universities and one of the most expensive. Students at Stanford are either on scholarships, have been granted loans, or come from wealthy families that can afford the tuition. But such students tend to have low-income, often part-time, jobs while studying. They may share an off-campus flat with several friends or, if graduate students, live in subsidised housing. On paper they are poor but are investing in the future. By foregoing higher income in the present they obtain a sought-after degree that will probably mean much higher income in the future.

The other problem is that the people who are in the bottom 20 per cent today are unlikely to stay there. The population of the “poor” is constantly changing. A study of income tax returns filed in the United States showed that four-fifths of those who were in the bottom 20 percent in 1979 were no longer there by 1988. In fact more of them moved to the top 20 per cent than remained at the bottom. And one obvious reason is that these people are now a decade older. Workers with an extra decade of experience are likely to be paid more than their counterparts who lack the experience. Another reason is that students will be categorised as poor, but their incomes will increase rapidly when they start working and many of them will end their careers with top incomes.

Worldwide the trend is not merely that the rich are getting richer but that most people are getting richer, with the exception of those still living in countries that follow antiquated Marxist policies. People today, everywhere, are living longer, healthier lives than did their parents and grandparents. They are better fed, better housed and better educated. If poverty were becoming more widespread as wealth concentrates in the hands of the few this wouldn’t be happening. The reason for the improved conditions is that the people have greater economic freedom as more and more countries liberate their citizens from the oppression of autocratic and dictatorial interference in voluntary economic exchanges. Economic freedom allows people to use their innate talents to best advantage. It allows the rich to get richer and the poor to get richer faster.

Source: Jim Peron is President at Laissez Faire Books. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF policy Bulletin / 03 November 2009