Poverty Changes

£14,000 is quite a large amount of money. Enough for 70,000 Freddos, a decade’s worth of holidays, two new Nissan Pixo’s, several thousand potatoes or a gold standard racing pigeon. However, if you’re trying to live off just that amount in modern Britain, it quickly seems quite a lot smaller. Half of that could easily disappear on rent, whilst the average British family will spend a further £4,000 on food (significantly greater than the European average, for one reason or another). Then we must factor in tax, work-related expenses, various repair bills, a TV license, utility & heating bills, petrol money and other transport expenses, and it quickly becomes apparent that trying to live on this amount will require some careful budgeting. Still, not to worry too much though; it’s certainly possible to keep the body and soul of a medium sized family together on £14k a year, if not absolutely comfortably, and in any case 70% of British families have an annual income in excess of this amount. It might not be a vast amount to live on, but it should be about enough.

However, there’s a reason I quoted £14,000 specifically in the figure above, because I recently saw another statistic saying that if one’s income is above 14 grand a year, you are one of the top 4% richest people on planet Earth. Or, to put it another way, if you were on that income, and were then to select somebody totally at random from our species, then 24 times out of 25 you would be richer than them.

Now, this slightly shocking fact, as well as being a timely reminder as to the prevalence of poverty amongst fellow members of our species, to me raises an interesting question; if £14,000 is only just about enough to let one’s life operate properly in modern Britain, how on earth does the vast majority of the world manage to survive at all on significantly less than this? More than 70% of the Chinese population (in 2008, admittedly; the rate of Chinese poverty is decreasing at a staggering rate thanks to its booming economy) live on less than $5 a day, and 35 years ago more than 80% were considered to be in absolute poverty. How does this work? How does most of the rest of the world physically survive?

The obvious starting point is the one stating that much of it barely does. Despite the last few decades of massive improvement in the living standards and poverty levels in the world in general,  the World Bank estimates that some 20% of the world’s populace is living below the absolute poverty line of surviving on less than $1.50 per person per day, or £365 a year (down from around 45% in the early 1980s- Bob Geldof’s message has packed a powerful punch). This is the generally accepted marker for being less than what a person can physically keep body and soul together on, and having such a huge proportion of people living below this marker tends to drag down the global average. Poverty is something that the last quarter of the century has seen a definitive effort on the part of humanity to reduce, but it’s still a truly vast issue across the globe.

However, the main contributing factor to me behind how a seemingly meagre amount of money in the first world would be considered bountiful wealth in the third is simply down to how economics works. We in the west are currently enjoying the fruits of two centuries of free-market capitalism, which has fundamentally changed the way our civilisation functions. When we as a race first came up with the concept of civilisation, of pooling and exchanging skills and resources for the betterment of the collective, this was largely confined to the local community, or at least to the small-scale. Farmers provided for those living in the surrounding twenty miles or so, as did brewers, hunters, and all other such ‘small businessmen’, as they would be called today. The concept of a country provided security from invasion and legal support on a larger scale, but that was about it; any international trade was generally conducted between kings and noblemen, and was very much small scale.

However, since the days of the British Empire and the Industrial Revolution, business has got steadily bigger and bigger. It started out with international trade between the colonies, and the rich untapped resources the European imperial powers found there, moved on to the industrial scale manufacture of goods, and then the high-intensity sale of consumer products to the general population. Now we have vast multinational companies organising long, exhaustive chains of supply, manufacture and retail, and our society has become firmly rooted in this intense selling international economy. Without constantly selling vast quantities of stuff to one another, the western world as we know it simply would not exist.

This process causes many side effects, but one is of particular interest; everything becomes more expensive. To summarise very simply, the basic principle of capitalism involves workers putting in work and skill to increase the value of something; that something then gets sold, and the worker then gets some of the difference between cost of materials and cost of sale as a reward for their effort. For this to work, then one’s reward for putting in your effort must be enough to purchase the stuff needed to keep you alive; capitalism rests on the principle of our bodies being X% efficient at turning the food we eat into the energy we can use to work. If business is successful, then the workers of a company (here the term ‘workers’ covers everyone from factory floor to management) will gain money in the long term, enabling them to spend more money. This means that the market increases in size, and people can either sell more goods or start selling them for a higher price, so goods become worth more, so the people making those goods start getting more money, and so on.

The net result of this is that in an ‘expensive’ economy, everyone has a relatively high income and high expenditure, because all goods, taxes, land, utilities etc. cost quite a lot; but, for all practical purposes, this results in a remarkably similar situation to a ‘cheap’ economy, where the full force of western capitalism hasn’t quite taken hold yet- for, whilst the people residing there have less money, the stuff that is there costs less having not been through the corporation wringer. So, why would we find it tricky to live on less money than the top 4% of the world’s population? Blame the Industrial Revolution.

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Connections

History is a funny old business; an endless mix of overlapping threads, intermingling stories and repeating patterns that makes fascinating study for anyone who knows where to look. However, the part of it that I enjoy most involves taking the longitudinal view on things, linking two seemingly innocuous, or at least totally unrelated, events and following the trail of breadcrumbs that allow the two to connect. Things get even more interesting when the relationship is causal, so today I am going to follow the trail of one of my favourite little stories; how a single storm was, in the long run, responsible for the Industrial revolution. Especially surprising given that the storm in question occurred in 1064.

This particular storm occurred in the English Channel, and doubtless blew many ships off course, including one that had left from the English port of Bosham (opposite the Isle of Wight). Records don’t say why the ship was making its journey, but what was definitely significant was its passenger; Harold Godwinson, Earl of Wessex and possibly the most powerful person in the country after King Edward the Confessor. He landed (although that might be overstating the dignity and intention of the process) at Ponthieu, in northern France, and was captured by the local count, who subsequently turned him over to his liege when he, with his famed temper, heard of his visitor: the liege in question was Duke William of Normandy, or ‘William the Bastard’ as he was also known (he was the illegitimate son of the old duke and a tanner). Harold’s next move was (apparently) to accompany his captor to a battle just up the road in Brittany. He then tried to negotiate his freedom, which William accepted, on the condition that he swear an oath to him that, were the childless King Edward to die, he would support William’s claim to the throne (England at the time operated a sort of elective monarchy, where prospective candidates were chosen by a council of nobles known as the Witengamot). According to the Bayeux tapestry, Harold took this oath and left France; but two years later King Edward fell into a coma. With his last moment of consciousness before what was surely an unpleasant death, he apparently gestured to Harold, standing by his bedside. This was taken by Harold, and the Witengamot, as a sign of appointing a successor, and Harold accepted the throne. This understandably infuriated William, who considered this a violation of his oath, and subsequently invaded England. His timing of this coincided with another distant cousin, Harald Hardrada of Norway, deciding to push his claim to the throne, and in the resulting chaos William came to the fore. He became William the Conqueror, and the Normans controlled England for the next several hundred years.

One of the things that the Norman’s brought with them was a newfound view on religion; England was already Christian, but their respective Church’s views on certain subjects differed slightly. One such subject was serfdom, a form of slavery that was very popular among the feudal lords of the time. Serfs were basically slaves, in that they could be bought or sold as commodities; they were legally bound to the land they worked, and were thus traded and owned by the feudal lords who owned the land. In some countries, it was not unusual for one’s lord to change overnight after a drunken card game; Leo Tolstoy lost most of his land in just such an incident, but that’s another story. It was not a good existence for a serf, completely devoid of any form of freedom, but for a feudal lord it was great; cheap, guaranteed labour and thus income from one’s land, and no real risks concerned. However the Norman church’s interpretation of Christianity was morally opposed to the idea, and began to trade serfs for free peasants as a form of agricultural labour. A free peasant was not tied to the land but rented it from his liege, along with the right to use various pieces of land & equipment; the feudal lord still had income, but if he wanted goods from his land he had to pay for it from his peasants, and there were limits on the control he had over them. If a peasant so wished, he could pack up and move to London or wherever, or to join a ship; whatever he wanted in his quest to make his fortune. The vast majority were never faced with this choice as a reasonable idea, but the principle was important- a later Norman king, Henry I, also reorganised the legal system and introduced the role of sheriff, producing a society based around something almost resembling justice.

[It is worth noting that the very last serfs were not freed until the reign of Queen Elizabeth in the 1500s, and that subsequent British generations during the 18th century had absolutely no problem with trading in black slaves, but they justified that partly by never actually seeing the slaves and partly by taking the view that the black people weren’t proper humans anyway. We can be disgusting creatures]

A third Norman king further enhanced this concept of justice, even if completely by accident. King John was the younger brother of inexplicable national hero King Richard I, aka Richard the Lionheart or Couer-de-Lion (seriously, the dude was a Frenchman who visited England twice, both to raise money for his military campaigns, and later levied the largest ransom in history on his people when he had to be released by the Holy Roman Emperor- how he came to national prominence I will never know), and John was unpopular. He levied heavy taxes on his people to pay for costly and invariably unsuccessful military campaigns, and whilst various incarnations of Robin Hood have made him seem a lot more malevolent than he probably was, he was not a good King. He was also harsh to his people, and successfully pissed off peasant and noble alike; eventually the Norman Barons presented John with an ultimatum to limit his power, and restore some of theirs. However, the wording of the document also granted some basic and fundamental rights to the common people as well; this document was known as the Magna Carta; one of the most important legal documents in history, and arguably the cornerstone in the temple of western democracy.

The long-term ramifacations of this were huge; numerous wars were fought over the power it gave the nobility in the coming centuries, and Henry II (9 years old when he took over from father John) was eventually forced to call the first parliament; which, crucially, featured both barons (the noblemen, in what would soon become the House of Lords) and burghers (administrative leaders and representatives of the cities & commoners, in the House of Commons). The Black Death (which wiped out most of the peasant population and thus raised the value of the few who were left) greatly increased the value and importance of peasants across Europe for purely economic reasons for a few years, but over the next few centuries multiple generations of kings in several countries would slowly return things to the old ways, with them on top and their nobles kept subservient. In countries such as France, a nobleman got himself power, rank, influence and wealth by getting into bed with the king (in the cases of some ambitious noblewomen, quite literally); but in England the existence of a Parliament meant that no matter how much the king’s power increased through the reign of Plantagenets, Tudors and Stuarts, the gentry had some form of national power and community- and that the people were, to some nominal degree, represented as well. This in turn meant that it became not uncommon for the nobility and high-ranking (or at least rich) ordinary people to come into contact, and created a very fluid class system. Whilst in France a middle class businessman was looked on with disdain by the lords, in Britain he would be far more likely to be offered a peerage; nowadays the practice is considered undemocratic, but this was the cutting edge of societal advancement several hundred years ago. It was this ‘lower’ class of gentry, comprising the likes of John Hampden and Oliver Cromwell, who would precipitate the English Civil War as King Charles I tried to rule without Parliament altogether (as opposed to his predecessors  who merely chose to not listen to them a lot of the time); when the monarchy was restored (after several years of bloodshed and puritan brutality at the hands of Cromwell’s New Model Army, and a seemingly paradoxical few decades spent with Cromwell governing with only a token parliament, when he used them at all), parliament was the political force in Britain. When James II once again tried his dad’s tactic of proclaiming himself god-sent ruler whom all should respect unquestioningly, Parliament’s response was to invite the Dutch King William of Orange over to replace James and become William III, which he duly did. Throughout the reign of the remaining Stuarts and the Hanoverian monarchs (George I to Queen Victoria), the power of the monarch became steadily more and more ceremonial as the two key political factions of the day, the Whigs (later to become the Liberal, and subsequently Liberal Democrat, Party) and the Tories (as today’s Conservative Party is still known) slugged it out for control of Parliament, the newly created role of ‘First Lord of the Treasury’ (or Prime Minister- the job wasn’t regularly selected from among the commons for another century or so) and, eventually, the country. This brought political stability, and it brought about the foundations of modern democracy.

But I’m getting ahead of myself; what does this have to do with the Industrial Revolution? Well, we can partly blame the political and financial stability at the time, enabling corporations and big business to operate simply and effectively among ambitious individuals wishing to exploit potential; but I think that the key reason it occurred has to do with those ambitious people themselves. In Eastern Europe & Russia, in particular, there were two classes of people; nobility who were simply content to scheme and enjoy their power, and the masses of illiterate serfs. In most of Western Europe, there was a growing middle class, but the monarchy and nobility were united in keeping them under their thumb and preventing them from making any serious impact on the world. The French got a bloodthirsty revolution and political chaos as an added bonus, whilst the Russians waited for another century to finally get sufficiently pissed of at the Czar to precipitate a communist revolution. In Britain, however, there were no serfs, and corporations were built from the middle classes. These people’s primary concerns wasn’t rank or long-running feuds, disagreements over land or who was sleeping with the king; they wanted to make money, and would do so by every means at their disposal. This was an environment ripe for entrepreneurism, for an idea worth thousands to take the world by storm, and they did so with relish. The likes of Arkwright, Stephenson and Watt came from the middle classes and were backed by middle class industry, and the rest of Britain came along for the ride as Britain’s coincidentally vast coal resources were put to good use in powering the change. Per capita income, population and living standards all soared, and despite the horrors that an age of unregulated industry certainly wrought on its populace, it was this period of unprecedented change that was the vital step in the formation of the world as we know it today. And to think that all this can be traced, through centuries of political change, to the genes of uselessness that would later become King John crossing the channel after one unfortunate shipwreck…

And apologies, this post ended up being a lot longer than I intended it to be

Money- what the &*$!?

Money is a funny old thing- the cornerstone of our way of existence, the bedrock of modern-day life, and the cause of, and solution to, 99% of all life’s problems. But… well, why? When you think about it, money doesn’t actually mean anything- it is an arbitrary creation brought in for convenience’s sake, and yet it as an entity has spiralled into so much more than a mere tool. Now how on earth did that happen?

Before about two and a half thousand (ish) years ago, money just about not exist. To the best of my knowledge, coinage only became commonplace in Europe with the rise of the Roman Empire- indeed, when they left Britain in the 5th century AD, much of the country went back to simply bartering- trading goods and services for other goods and services. This began to change as time went on however, and by the time of William the Conqueror’s invasion, the monetary system was firmly established across Europe. Coins were a far more efficient system than bartering- trading stuff for one another is a highly subjective process, and it can be hard to get a sense of value and to what extent you were being ripped off. By giving everything a fixed, arbitrary value (ie a price), everything suddenly had a value relative to one another. More importantly, this allowed for goods and services to be traded for the potential to buy more goods and services of equal value in coin form, rather than the things themselves, which was both easier and more efficient (there was now no risk of carrying a lampshade to the supermarket to exchange for a pint of milk, because a wallet is far easier to carry). The idea of money representing the potential to buy things can be seen by anyone looking on a British note, where it reads “I promise to pay the bearer on demand the sum of…” however many pounds (this is in fact a callback to the days when banks stuck to the gold standard, when you could theoretically walk into the Bank of England and ask for five pound’s worth of gold for your fiver).

However, with coins representing potential to buy things, they instantly took on a value of their own, and here things start to get confusing. Because, when money itself takes on a value, it instantly becomes a commodity just like any other- just as people trade in gold bullion, oil and bits of companies, so people trade with money itself. And this… actually, I’ve got ahead of myself- let me take a step backward.

The input of human effort can be used to increase the value of various bits of the world we live in. For example- a heap of planks may be bought for £50 from a sawmill, but once you have gone home and spent 6 hours swearing at a hammer, you may now have a bench or something worth £500 or more. The materials themselves have not changed, but since a bench is more useful, better looking, and is better appreciated by people than a few planks, people set more value by it. Because more value is set by it, so it is worth more money.

This, at a base level, is how the economic system works- human effort is used to turn raw materials, which we don’t want, into products, which we do. Because people want these products, they pay money for them, and because they need this money to pay for them, they get a job. Because they are providing human effort to their boss (which itself has a value for its ability to raise the value of raw materials), their boss pays them the money they need. The boss gets the money he uses to pay his employees from selling things to people, which makes money because the human effort put in to make his final product raises the value of his final product above that of the raw materials he bought in order to make it- and thus we are back at the beginning of the cycle.

If we study this process, we can see that the only way the boss can make any money out of it is if the value of his final product (F) is greater than the value of its raw materials (M) plus however much he pays his employees for the effort they input (E)- ie, F>M+E. However, pretty much by definition, F should equal M+E- thereby the only way he can make money is by paying his workers less than their human effort is actually worth in the context of the product (A communist would seize on this as evidence of corporations exploiting the masses, but I refuse to go into this argument here- it is far too messy). This is the only way that any money actually gets produced in an economy, and the result is inflation. If inflation did not exist, then the only way anyone could make any money would be by spending less- but this automatically means that somebody else will not be getting your money, and so will be losing some. Thus inflation is vital to ensure that everybody in an economy gains money, and although this does lead to the gentle devaluation of currency, it allows the human race to stay one step ahead of a potential vicious cycle of decline- and inflation can only be generated by an economy manufacturing things.

But why do we need our level of money to continually rise? Well, imagine you have a steak worth £5 (It’s just an example, don’t judge me on my figures). When you eat that steak, something of value £5 has been turned into the contents of your gut, and ultimately into what comes out the other end- which is clearly worth a lot less than the steak. Thus, the human race consuming resources  reduces the overall value of planet earth, just as making stuff increases it. Nature in fact has an inbuilt system to prevent this from turning into a cycle of endless decline- reproduction. If the cow you ate your steak from had had a calf, then nature has ensured that your consumption of the steak has not, in the long run, decreased the overall steak value of the world due to the steak potential existing in the calf (I’ve just realised I’m making all these terms up on the fly- my apologies). I could go into the whole energy from calf <- energy from grass <- energy from sun <- universe in general etc. thing here, but this is extrapolating the economic problem somewhat. However, suffice it to say that ensuring our overall monetary value continues to rise via inflation is our version, from an economic perspective, of reproduction, balancing out our consumption of finite resources in terms of value.

Phew- this is getting longer than I anticipated. My apologies once again for it turning into a semi-coherent ramble, I only hope you could follow it. There is still quite a lot more to get through, so I think I’ll try to wind this all up on Wednesday (after another Six Nations post Monday- COME ON ENGLAND!). If you have been able to follow all of that then congratulations- you now understand core economics. If you haven’t then also congratulations- you are sufficiently normal to not understand my way of thinking.