August
19
2010

- Compiled and written by Entrepreneurial Business School -

RICH OR POOR – WHY?

“Rich” or “Poor”, however relative statements, are normally used to describe the financial status or buying power people have. In this article we are going to explore the fundamental reason or reasons why some people are “rich” and others “poor”. In order to make this discussion more meaningful it could be important to clarify some basic economic fundamentals as a starting point.

Let’s therefore start the discussion by exploring the development of some historic economic fundamentals. Historically economic activity started to happen when people began to barter. Two knives, were for example exchanged for a pair of shoes. The aim of these bartering processes (exchanged transaction) was to improve the standard of living of both parties. The person getting the shoes would for example now be able to walk without hurting his/her feet, and the other person would gain two knives for self defence, or for better food provision. The supplier of the shoes surely had more than one pair, and the supplier of the knives, probably had some spare artefacts (more knives) in stock. The logic behind the reason why this bartering transaction happened was therefore to achieve a win-win outcome. These two people were in fact solving problems for one another. It is also fair to argue that the knife supplier as well as the shoe supplier had different “talents” and abilities which they utilized to develop these artefacts. The one person had the natural ability as well as the “passion/ intent / drive” to make knives and the other to make shoes. In fact all humans have unique talents and abilities, like the unique fingerprints, we posses. We are therefore created to be able to trade with one another by utilizing our unique and differentiated talents. The aim of this trading process is to help one another to enjoy a better standard of living.

The objective of these economic activities are therefore to improve the general standard of living of all those who are willing to participate in this process.

The ancient “bartering process” had a serious built in restriction in the sense that, person A could need the shoes, but person B not the knives. The bartering process could therefore in this instance not happen. To overcome this problem the concept of money was invented. With money the trading process became much easier, because A could now obtain the shoes in exchange for money, which A earned by selling knives to C and D. Before this could happen, yet another, stumbling block had to be removed. This stumbling block was in the form of determining the relative values of the knives and the shoes. In the pure batering transaction the values of the shoes and knives were determined by consensus between A and B. Both parties were happy that two knives have the same value as a pair of shoes. In order to overcome this problem the values of various products or services were determined by a process where values (prices) were determined by “mass” consensus. Auctions were then created, where the highest bidders determined the various values (prices) of products or services to be traded. In this process a transaction could only take place if there was consensus between the buyer and the seller. In these auctions, (markets) values were never fixed but varied from auction to auction, and became a function of demand and supply. If the demand was high and a limited supply was experienced, prices were very high. On the other hand, suppliers of products or services which were in abundance, received lower prices, or no price at all.

The values of labour (personal services) are determined by the same mechanism. If there is an over supply or a weak demand, values (salaries) will be small. The suppliers of labour (personal services) which are in short supply, and suppoted by a strong demand, will be able to negotiate very high salaries (values for their services).

The relative amount of money a person “makes”, is partly a function of the value of the specific products or services supplied in the market, but also partly a result of the volume a person or business can offer to the market. A person/business could therefore also supply products or services with low unit values, but to a great number of willing buyers, he/she could also earn big money.

The above statement will obviously only be valid if the suppliers of the various products or services are able to make a profit from selling these solutions (product/services). The market prices therefore, have to be higher than the costs of producing them, if not, why bother to waste energy, labour and innovations.

With these basic economic fundamentals as background let’s continue our search for the reasons why some people are “poor” and some are “rich”. It seems as if “rich” people have managed to provided products or services (including scarce skills) to the market, which are in high demand, but also in short supply, and where the market prices (values) are much higher that the costs of producing them.

We should also keep in mind that the primary reason to buy, is to solve a problem. People don’t buy products or services they buy solutions, all good salespeople will verify the statement.

We can now argue that relative “rich” people are offering more and or better solutions to the market than “relative” poor people. It is also fair to state that very “poor” people do not have the “understanding” or “intent” to offer any worth while solution to the market. We don’t believe the “being poor” problem, is an “ability” factor. All human beings are blessed with ample “abilities” and we are only utilising a very small percentage of our brains. The more obvious reason for being “poor” is to be found in the “intent” or “attitude” domain.

The following research done by Thomas Sowell which was published in his book; “Ethnic America, Economics and Race”, supports the statement, that being “poor” is largely a function of “intent/attitude” or “understanding” and definitely not “ability”.

THE JEWS

“When eastern European Jews arrived in America in the late nineteenth century, they flooded into the lower east side of Manhattan. By the turn of the century it had become one of the most crowded communities on the face of the earth, with more than 700 people per acre – a higher density than the worst contemporary slums in Bombay, and three times the population of this same ghetto today. In 1894, 50 toilets served 4000 tenants, and hundreds died in heat waves. Officially sanctioned anti-semitism had excluded them from land ownership and numerous economic endeavours.”

“About half the eastern European Jews were illiterate when they arrived in America and most began in manual occupations. Today, American Jews have the highest average incomes of any large ethnic group in the USA, 72% above the national average. What qualities enabled them to move so rapidly from rags to riches? About two-thirds brought with them skills and experience in commerce. They had a passion for learning, and when they arrived in New York, adults and children alike seized on the opportunities for self-improvement offered by the free public libraries.”

“The Jews were also part of an ancient culture which had participated in commerce and revered learning for centuries. Sowell believes that this basic understanding of economic fundamentals is what enabled them to rise of poverty so rapidly. Their upward movement in American society has not been equalled by any other group.”

THE IRISH

“The Irish were the first great ethnic minority in American cities. Four-fifths of the Irish population at that time were rural peasants living in mud huts under worse conditions, and with a shorter life expectancy, than slaves in the American South.”

“When they arrived in America, they were destitute, with no skills and little knowledge of urban life. The only thing they knew how to do well was to organise politically, and they had a sense of identity and cohesion as a people oppressed by foreigners in their native land.”

“Over the generations the socio-economic gains of the Irish have been painfully slow. Their greatest achievements were in municipal politics – by the end of the nineteenth century, the Irish dominated the big political “machines” of Boston, New York and other cities in the north-east. But these successes did not improve the economic conditions of most Irish Americans. In the 1890s the majority of men were still labourers and most women were domestic servants.”

“In contrast to the spectacular socio-economic advancements achieved by Jews, Japanese, Chinese and Poles, the Irish have risen only to the level of average American incomes.” (Quoted from; “Let the people Govern” by Frances Kendal & Leon Louw)

When the case studies regarding the Jews and the Irish, are evaluated against the background of basic fundamentals, it is easy to realise that being “poor” or being “rich” is a function of “intents/attitudes”, as well as an understanding and the practical application of basic economic fundamentals.


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One Response

  1. Jim says:

    Thanks for this wonderful series. I will def be back for the rest!

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