About a year ago, I published an article [1] that blamed the government-sponsored speculation by the so-called under-served borrowers for the housing market crash. A reader signed as John questioned its plausibility and wrote:

“This article lacks validity. Author suggests that the poor caused the crash, which is totally absurd.”

Unfortunately, the claim that in an industrial or post-industrial society the primary source of the wealth of the rich is the exploitation of the poor has been a common myth for some 160 years now. It was a point of departure for Marx’s theory of capitalism and the basis of mandate that socialist revolutionaries gave themselves when they decided to break the law in the name of “social justice”. If taken for granted, it makes any thesis that these are the poor that drag the otherwise healthy economy into collapse must look absurd, indeed.

But how can anyone get rich by ripping off the poor who, supposedly, have nothing left (except, perhaps, for the welfare benefits and that sort of things that they get from the rich and the middle class) to be ripped off? You certainly can hire them to perform some low tech work for an even lower wage and then overcharge your customers and clients, but that would add up to no more than a blip in a 12 trillion plus American economy.

A recent book [2] (a highly recommended reading) by a renowned economist (and the chair of the Department of Economics at University of California, Davis), Gregory Clark, debunks the above mentioned myth both on theoretic and factual grounds. It explains what drives the technology-based free market economy down using the concept of “Malthusian trap”, first observed and described by Thomas Malthus around the turn of 18th century. Clark makes it clear that it is the poor who have been the main beneficiaries of the economic boom brought about by the Industrial Revolution, and that, historically, they had dragged (the majority of) the society into poverty. And this is exactly what they are doing now.

Here is a brief description how the Malthusian trap works.

When substantial technological progress in production of goods in a free market economy is made, the increase of demand of labor and supply of economic surplus that follow it drive the prevailing wages up. This, in turn, increases incomes of wage earners (the poor) and causes their rapid population growth, which, eventually, depresses the wages while placing unsatisfiable demand for additional economic output needed by the overgrown population. This kind of growth is economically unsustainable and inevitably leads to crises and more poverty. (The original Malthus’ observation was that any increase in handouts to the poor temporarily increased their living standards and translated, via their increased fertility, to their geometric population growth which, eventually, drove their living standards down back to the level of subsistence.)

Although since the Industrial Revolution begun, Western societies have managed to avoid falling into the Malthusian trap (so far), we are making good “progress” towards it.

Writes Clark ([2], page 1): “short-term gains in income through technological advances were inevitably lost through population growth.” And later (page 2): “the biggest beneficiaries of the Industrial Revolution [in 19th century England] has so far been the unskilled,” and also (page 236) “Wage earners and foreign customers, not entrepreneurs, were the overwhelming beneficiaries of innovation.” (So much for the theory of the exploitation of the poor as the source of wealth.)

That’s right. According to data collected by Clark, the wage earners (the poor) and, to some extent, foreign customers, and not the inventors, not even the entrepreneurs, were the main beneficiaries of the technological progress achieved by the Industrial Revolution. But that, of course, couldn’t last long. After pre-empting the lion share of material benefits resulting from a more efficient economy, the poor used them partially to perpetuate their excessive population growth and, later, showed a tendency to lose the remainder, with whatever edge they gained so far, to the competition with other wage earners (due to sharply increased supply of labor; a phenomenon that these days is typically delayed by labor unions, but this just exacerbates the problem rather than solving it). The latter phenomenon (labor competition) gave rise, at the end of the Malthus’ cycle, to exploitation of wage earners (temporarily mitigated by labor unions and pro-labor legislation) which added to the wealth of the most aggressive and surviving owners of means of production.

In simplistic terms, a class of inventors and entrepreneurs boosted economic output beyond the level of minimum subsistence. But the wealth they created was mostly transfered to the the poor (according to the evidence presented by Clark, most of the inventors, patent holders, entrepreneurs, etc., that engineered the Industrial Revolution died in poverty) and to foreign customers (sounds familiar?). There, part of it was used to fuel rapid population growth of the poor, while part of the remainder has been or is being lost to what is now referred to as exploitation, and has ended or will end up in the pockets of the surviving owners of means of production. When the vicious circle (Malthusian trap, if you will) closes, the main “gain” will be a larger population of the poor than before the economic improvement.

(From this perspective, current calls for “equitable redistribution of wealth” must sound like pure extortion!)

It must be obvious for an intelligent and knowledgeable observer that the current economic crisis is an instance of “progress” towards the Malthusian trap. The population of those who cannot subsist themselves and their progeny above the official level of poverty is growing to the point where the wealth that they demand to be redistributed to them via inflated wages, tax credits, welfare, unpaid loans (like those that caused the “subprime mortgage” meltdown), and similar redistributive instruments needed to maintain their decent living standards, as well as cost of the bureaucracies needed to administer these instruments, draws form the economy more than the economy can bear, never mind the fortunes that “foreign customers” (like, for instance, oil sheiks), domestic profiteers (including those who siphon national wealth overseas), speculators (like George Soros), and crooks (like Bernard Madoff) cashed out of the astonishingly progressing American and Western European economies.

This socio-economic arrangement is obviously unsustainable. Hence the inevitability of the meltdown from which most of us suffer these days. (And we haven’t landed in the Malthusian trap, yet.) The root cause of our misery is the bleeding-heart “Liberals”, (neo-)socialists, and other Leftist and Left-leaning maniacs’ conspiracy to help the poor, be it domestic or imported, multiply and drag us all into poverty. (Some call the latter an unintended consequence.) Once accomplished, it will be acclaimed as the ultimate “social justice” and “progress”, I suppose.

The most complete list of Mark Andrew Dwyer’s columns is available HERE

REFERENCES
[1] Government-sponsored speculation and the housing market crash

[2] Clark, G., “A Farewell to Alms; A Brief Economic History of the World”
Princeton University Press, 2007.

~ The Author ~
Mark Andrew Dwyer’s commentaries (updated frequently) can be found  here.

Mr. Dwyer has been an occasional contributor to the Federal Observer. See his archives here.