So I am listening to CBC radio today very briefly in the car and they have some speaker on Ontario Today who is advocating a whole series of social reforms from increasing the minimum wage to benefits for contract employees and a host of other social programs. On the right side of the fence we have PM Stephen Harper who, several days ago, was talking about extension of employment insurance benefits to entrepreneurs as a means of lowering the risk associated with starting a business and hence encouraging economic growth.

Both cases I feel exemplify a common issue in mindset which is pervasive among a lot of people around the world with a few notable exceptions. That concept is one where “if individuals only had enough resources behind them they could do …. {fill in the blank}.” It is an extension of the idea that the way to solve problems is to simply throw money at it.

Ya know – maybe it is just me BUT . . . I seem to recall this concept in economics of there being two sides to every supply and demand equation. So why do we insist on fighting issues of economic poverty by only focusing on the demand side of the equation? (Can you say “short sighted agendas”?)

Here is my problem with the current worldview of economics. Business, as a collective whole and over the past several generations, has moved from a model where supply was pulled based on market demand to a model where supply is pushed to create a market demand where no justified demand previously existed. This artificial inflation of the factors of supply, in order to be sustainable, means that the demand side – i.e. the consumer – needs to have a larger pool of disposable income in order to maintain an equilibrium in quality of living with those around them.

The result is a poverty gap which is growing rather than shrinking. As governments, unions, and workers demand higher wages in order to address this gap, the nature of economics and financial markets is to stimulate greater opportunities which in turn enlarge the supply of consumable products. The problem is exacerbated by the fact that we are also in the midst of a fundamental revolution of technological, product, and process innovation which has accelerated the development of niche markets way beyond what the consumer is reasonably capable of rationalizing.

In short, we’ve created a system which is ultimately self-defeating because the ultimate end will be that wealth will be concentrated in the hands of very few people while the masses are left struggling just in order to achieves the basics of subsistence.

The reality of social structures is that there will always be those at the top and those at the bottom. We can’t all be CEO. We can’t all be Wal-Mart. It is the nature of those in leadership positions that they achieve their power, and the effectiveness to make everyone’s lives better, through the collective believe that the right person is doing the right job at the right time at the top. However, the economics of poverty extends well beyond simply the gap between those we would consider rich verses poor.

Looking at Maslow’s hierarchy of needs as a baseline we see that what started off as a simple economic disparity is in reality slowly peeling away layers of the hierarch for those at the very bottom of the social ladder. Never mind that in first world countries those in ‘poverty’ are still far better off that those in third world counties. It is the perception that matters. And the perception is one which is pushing social communities towards a breaking point as their physiological needs are no longer capable of being fulfilled.

It is unfortunate but two things tend to happen at that point: mass migrations of those that can leave and uprisings against the establishment by those that can’t.

The solution is to bring the equation back into balance by focusing policy, education, and enforcement on the supply side of the equation. However three guesses where most of the wealth is consolidated and ultimately who has the largest share of voice when it comes to influencing governmental regulation and monetary policy (first two guesses don’t count btw).  Add to this bureaucracies that exist solely to perpetuate the status quo rather than enact real change and what we have is a recipe for disaster that becomes increasingly more likely which each increase in the widening poverty gap.

I will leave off with one example as food for thought. The speaker on Ontario Today was talking about two distinct ideas as if they were one. The first was to raise Ontario’s minimum wage from $8.75 to $11 by 2011. The second was ‘to ensure every Ontarian a sustainable liveable wage’. But the concept of ‘liveable wage’ is based on the package of goods that make up the consumer price index. So would raising the wages of people really achieve the second aim of sustainable living compared to if we managed to find better mechanisms to bring the cost of consumer goods down to within the reach of those people making $8.75? And which one would be more sustainable in the long term? 

Despite being one of those people in the ‘have’ category – I truly believe that benefits of restructuring government regulation and monetary policy towards lowering the cost of goods to within reach of all citizens would be more beneficial than constantly throwing money at those people in need as it perpetuates a broken system of economics that is only benefiting those at the very top of the economic ladder. Stable economies require stable populations having their fundamental needs met and broadens the size of the pie for everyone at the expense of a few percentage points off overall return on capital investment for those at the top and who are most capable of ‘enduring such financial hardship’. I’m thinking there really isn’t a downside here if we as a society decide it’s worth the emotional investment to change the way we think about economic systems and policies in general.