Dismal science

Aside from the rise in meat consumption and agricultural competition between food and biofuel cash-crops causing grain prices to rise far beyond what billions of people across the world can afford, I have other dismal thoughts...

I believe there is a fundamental conflict between economic reality and economic idealism. Assume the ideal is to have a progressively growing world economy with lower and lower rates of poverty. My apoptosis idea here is that poverty is a necessary result of economic growth.

Simply put, absolute wealth grows but relative wealth, for a select few, grows faster than absolute wealth. A relative increase in the wealth of one region necessitates a relative decrease in wealth in other regions.

What is the difference between absolute and relative wealth? Absolute wealth comes from increases in productivity or technology which creates more or better quality goods and services. Relative wealth is the difference, or disparity, in absolute wealth between regions or individuals.

Increases in absolute wealth require improvements in productivity or technology. These improvements do not occur simultaneously all across the world. They occur regionally. The result is that the regions with the improvements get richer and all the rest get poorer.

According to standard economic theories this is not so bad – it creates impetus for the poorer regions to make improvements or to move to other sectors of the economy. But the problem is, as relative wealth increases for one region, the relative advantage of that region to create more wealth also increases. This sets up an unstable condition in which the first region to get a step ahead runs away with the lions share of the worlds wealth. This process continues on smaller and smaller scales, concentrating the worlds wealth into the hands of fewer and fewer people. This is not a conspiracy theory. This is, I believe, a natural result of economic reality.

Allow me to illustrate.
Assume a starting point in which all regions of the earth are perfectly equal in wealth and resources.
Assume there is an equal, yet random probability of increasing productivity in some sector of the economy for each region.
Assume an increase in wealth increases the probability of increased productivity. (This is a key point. Wealth allows for capital investment, for better tools, for better resources, more insurance, better training, etc.)

If region X randomly increases its productivity of something such as corn, the price of corn in region X would typically go down, assuming demand stays the same. If there is some degree of free trade, other regions will buy from X and the global price of corn will also go down. Corn producers in region Y must now sell their corn for less and/or have a lower market share. Region Y will become poorer.

The increased wealth of region X allows an increase in the probability of greater increases in productivity. Every gain in region X results in region Y becoming even poorer. If region Y cannot increase productivity, it must give up corn production because it will eventually cost more to produce than they can sell it for.

With the comparative advantage theory, region Y would switch from corn to some other market sector in which they are less disadvantaged. Unfortunately region Y may not have this flexibility.

Compound this with the following facts:
wealth creates demand (our economy requires expansion – supply and demand must be more or less equal, increased productivity increases supply, so demand must also increase)
Supply-Demand increases causes inflation – makes poor poorer
Wealth requires specialization, education, time, etc – leads to lower birth rates
Higher birth rates in poor countries from reduced infant mortality due to better medicine -> more people -> lower productivity (units output per person)
Real-world economics leads naturally to situations where regions fall so far behind the rest of the world that they can not catch up through normal economic means.