Volume 2, Number 61
28 December 2002


Dear Friends,

How can so much misinformation be believed by so many people? Get ready to have your beliefs shaken.

Misinformation: The rich are getting richer and the poor are getting poorer.

Hundreds of studies have been done, of varying quality and differing results. Overwhelmingly, the studies show that the world income gap is increasing. Most end at that point. Those that study why the gap is increasing find — overwhelmingly — that the rich get richer because they invented technology (computers and software, etc.) The poor — mainly in Africa, rural China, and rural India — did not become poorer, but were still left behind.

Among the poorer countries, those that opened their doors to globalization increased the incomes of the poor (as well as the rich). Those that kept those doors closed caused their poor to lose.

Here are just a few of the many studies in my files.

Studies of the archives in individual cities in Europe from the 14th to the 18th centuries show enormous inequalities, which had narrowed by the 19th. From the mid-19th century (the earliest period for which data may be considered "fairly" reliable) until about 1970, wages in the United States regularly rose by a greater percentage than profits. The same for Europe. One may presume this means the poor gaining on the rich. From about 1970 on, however, the gap has been increasing, probably because technological improvements bring great rewards to inventors and entrepreneurs. With the burst of the dot-com bubble, the inequality is probably decreasing (but we do not yet have hard data).

"Using a careful collection of data and a masterly use of statistics, [Economist Kevin Murphy of the University of Chicago] has shown that the reason [for the widening gap] is growth in demand for skilled labor, as opposed to the rise in supply or decline in demand for unskilled labor" (New York Times, 3/14/97). This and other studies lead me to believe that both poor and rich are increasing their wealth, but because the rich are gaining faster than the poor, the gap is widening.

Comparisons by deciles (lowest tenth, highest tenth, etc.) at two different years ignore that persons move from one decile to another. A California study followed a large, random sample of persons in the every decile (lowest to top) in 1988. Result: those in every decile had increased their incomes significantly by 2000.

But gross domestic product and national income are poor indicators. The gap narrows significantly when consumption, quality of goods consumed, and quality of life are taken into account.

"Economic historian Robert W. Fogel marshals data not just on income but on spending, time use, calorie consumption and health measures like life expectancy and height. He finds a century of stunning material progress and improved physical well-being in the United States and the rest of the industrialized world" (New York Times, 8/10/00).

While United Nations data show the gap among nations (as measured by exchange rates) widening, other studies that compare purchasing power find a considerably narrower gap than does the U.N. (because the cost of living is less in poor countries). Other data on consumption (rather than income or wealth) show that in poor countries, the poor are probably much better off than they were fifty years ago. (I say "probably" because the quality of 50-year-old data is poor.)

"A new paper by David Dollar and Aart Kraay of the World Bank could hardly be clearer. Growth really does help the poor; in fact, it raises their incomes by about as much as it raises the incomes of everybody else. The authors look at data on growth, income, and a variety of other variables for a sample of 80 countries over four decades. On average, incomes of the poor rise one-for-one with incomes overall. There is very little variation around that average" (The Economist, 5/27/2000).

"Between 1987 and 1998, the share of the world's population living on less than a dollar a day fell from 28 per cent to 23 per cent." (Legrain,* pp. 73-4).

Finally, to me it seems almost irrelevant to consider whether "the rich are getting richer and the poor poorer" in the aggregate. What is important is that in countries with sound economic policies, that open themselves to trade (see below), the poor are advancing greatly. It is in those with unsound policies and closed economies that the poor are losing.

Misinformation: International trade harms the poor.

A study by Jeffrey Sachs and Andrew Warner of Harvard finds "that poor countries that were opened to international trade grew over six times faster in the 1970s and 1980s than those that shut themselves off from it." (Legrain, p. 50)

The same studies by Dollar and Kraay find that in eighty countries over four decades "openness to international trade helps the poor by boosting economic growth... Whereas in developing countries that are globalising, GDP per person rose 5 per cent in the 1990s, it rose only 1.4 per cent a year in non-globalising ones." (Legrain, pp. 50-1).

Misinformation: We help the poor by boycotting sweatshops.

"The worst factories are generally local ones producing for the domestic market. That is what two independent studies find. The International Labour Organisation found that most child labour takes place in the domestic, not the export, agricultural sector" (Legrain, p. 64). Legrain also cites a number of companies that supply Nike as having clean and safe environments. A study by Oxfam shows that boycotting sweatshops in Bangladesh caused their workers to be sacked, and the only other occupations available were worse (prostitution, sex slavery, or companies with even less savory practices).

Misinformation: Multinational corporations are often more powerful than governments.

"Relative to the economy as a whole, [large companies] are still pretty small. Exxon Mobil's profits are a mere 0.3 per cent of US national income and 0.09 per cent of world income. GE's market capitalization was only 2.7 per cent of the total value . . . of companies quoted on American stockmarkets and 1.4 per cent of the world total." (Legrain, p. 139). He goes on to cite similar data.

But relative power does not depend on relative size. Governments have sovereignty, and corporations do not. Power depends on who can bend the other to his will. Latin American governments bent the oil companies to their will by nationalizing all of them, as they did to electricity, international banks, and others in Mexico. Who is to say whether Shell and Chevron kowtow to the Government of Nigeria, or whether the government bullies Shell and Chevron, threatening to bring in another company if Shell does not do as the government says? In fact, Chevron pays 60% of its income to the government and has also paid local bosses to build schools and hospitals, which they usually have not done. I presume Shell is similar, but I do not have data. However, Shell set up a community fund for similar purposes.

Before visiting Chile in 1970, I called on Harold Geneen, CEO of International Telephone and Telegraph. He was dreadfully afraid that Chile would nationalize his company if the Popular Unity candidate Salvador Allende should be elected, and stockholders would lose. He did not tell me this, but shortly thereafter ITT connived with the CIA to prevent Allende's election. They failed to do so, however, and ITT was nationalized. Even with the U.S. Government support, it did not have the power.

During the nationalization of Esso in Peru, I called on the Under Secretary of State for Latin America to ask about US policy. "There's nothing we can do," he replied, "except try to persuade the Peruvians to pay full value." Neither the U.S. Government nor the oil company had the power to stop the Government of Peru.

Once, as economic advisor in Kenya, I sat in at a meeting where the Permanent Secretary (my Kenyan "boss") was spelling out to oil company executives the conditions on which they might operate in Kenya. They were very demanding. After he had spoken, he left the room without entertaining questions. Rather, he left me to explain to the executives that he meant what he said, and they had better comply or not do business in Kenya.

It was not always this way. In the days of caudillo governments of Latin America, brutal dictators cozied up to foreign businesses. About 1920, dictator Juan Vicente Gomez of Venezuela invited the oil companies to write the petroleum laws. All this began to change with President Roosevelt's Good Neighbor Policy. When the Government of Mexico was threatening to nationalize the oil companies, company executives appealed to Roosevelt to intervene. He refused, saying the U.S. needed Mexico's help in its own defense (thinking of World War II, yet to come). The last exercise of corporate power in Latin America occurred when United Fruit — fearful of agrarian reform — persuaded the U.S. Government to overthrow President Arbenz in Guatemala, who was receiving military supplies from the Soviet Union. But, those days are over.

Misinformation: Multinational corporations exploit their workers and damage the environment.

Studies by the Organization for Economic Cooperation and Development and the International Labor Organization have shown that in every country in the world (both more and less developed) multinational corporations pay higher wages than domestic corporations, and in the less developed they supply health care, education, and housing of higher quality than their workers could find elsewhere. Other studies have shown that multinational corporations obey environmental laws more than do local companies, and tend less to bribery than do local companies.

Misinformation: The Enron and other scandals reflect a secular decline in business ethics.

Quaker businesses established trust as a business ethic. As soon as it was discovered that businesses could do well by doing good, the idea spread. "Historian Richard Tilly has shown in his study of business practices in Britain and Germany, it was during the 1800s that businessmen started to see that honesty might actually be profitable. . . At the heart of this shift was a far greater emphasis on the accumulation of capital over the long run as opposed to merely short-term profit. Haskell, whom I quoted in TQE #60, reported the same. "Being good capitalists made the Quakers more able to think about the long-term and long-distance consequences of their actions." (Surowiecki*).

How, then, could the scandals of Enron, World.com and others have happened? Surowiecki has an answer: "the short-term gains from self-interested and corrupt behavior were so immense — because they had so many stock options and because the boards of directors turned a blind eye — that any long-term considerations must have paled by comparison."

If such scandals were integral to the system, why were they concentrated in the 1990s, and not earlier? Possible answer (by Surowiecki*): The 1990s were an unusual period, the top of a business cycle that promotes greed in its upswing. Traditional checks were set aside. Nor was greed confined to CEOs. Employees of Enron, who complained bitterly of their losses, were shouting for joy as the stock went up.

But please note: Enron was brought down, and the perpetrators will probably be punished. "A former director of Tyco International has pleaded guilty to securities fraud, becoming the first board member to be charged with a crime in the recent wave of corporate scandals" (New York Times, 12/18/02). If we measure by a cycle of (say) twenty years, capitalism still punishes its evil-doers.

Here is an informed opinion that recognizes both sides of an issue. In an article entitled, "Compensation of CEOs of large corporations is outrageously high," The New York Times (12/18/02) reports:

"An examination of almost 2,000 corporations finds that at hundreds of them, members of the compensation committee work for or do business with the company or its chief executive. In some cases, they even belong to the executive's family."

So it's a "buddy" system. But two questions arise:

  1. Is the CEO worth his pay (for example, can he "turn an unprofitable company around")?
  2. Would he accept another offer if his payat the first were decreased?

In many cases the answer to both is Yes. On the other hand, it might be No. Through friends who "take care of" each other, he may be milking the corporation just the way the employee-owners of United Airlines milked their company. Or he may not.

Why are misinterpretations held by so many?

In an unpublished paper on ideology (2002), Professor Tyler Cowan of George Mason University offers this perception:

"Individuals tend to stick to the views they start with, and they look for evidence to support those views. Individuals are born into particular races, religions, and regional and family attachments. Family background is a good predictor of political ideology. In other cases, individuals will have a single formative "conversion," and then lock into their new worldview. Individuals develop an emotional connection to their own opinions, much as they would root for a sports team or for their nation's army in a war."

Envisage the Parthenon, with its beautiful roof structure. Call that superstructure your ideology. It is held up by pillars, which are the supporting reasons. Suppose someone shoots down all the pillars (i.e., proves them wrong). Often the ideology stays up there, floating in the air, and new pillars are sought to hold it there.

Much of the analysis in this Letter is the interpretation of various authors (including me). Unlike ideological writings, however. it is grounded on research done by the rules of scholarship. The authors started their investigations not to prove that "the poor are getting poorer," etc. but to study whether or not this is so.

Ideological opinions and "facts" from the grapevine usually do not rest on similar hard ground.

Your friend,


* The two sources frequently cited here are "A Virtuous Cycle," by James Surowiecki in Forbes, 12/23/02, and Philippe Legrain, Open World (Abacus, 2002). Their findings generally support what I had earlier learned from the literature of authors who set aside their ideologies as they undertake their studies. These authors start with no foregone conclusion but search whether a hypothesis is true.

Quakers? Surowiecki builds his case around the truth and honesty of early Quakers, and how these qualities spread to the rest of the population when they were discovered to be profitable.

Readers' Comments

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

I just stumbled across The Quaker Economist site and what a breath of fresh air! I thank you for having the courage to stick up for what you believe in, and for trying to debunk a lot of "liberal" myths out there. My Meeting, like most others, seems to perpetuate a lot of them. I think many Friends forget that many historical Quakers owned "big businesses" of their time and were just as capitalist as the multinational corporations that many love to hate these days.

— Deb Fuller.

On the relative power of corporations and governments. Can they be compared? In a bargaining situation, it appears that they can, as in your example of the behavior of your Kenyan boss. But when we talk of "power" in a bargaining situation, it's a bad metaphor, because they can't be weighed on the same scale. Basically there is a potential gain from trade, and which side gets the greater share will depend on competitive conditions and bargaining skill.

— Steve Williams, Bethesda (MD) Meeting.

Carolyn and I look forward to each issue of your TQE just as you intend it to be: as a stimulating, eloquent, refreshing source of thought and discussion.

— Tom Selldorff, Weston (MA).

The 1998 Nobel Laureate in Economics, Amartya Sen, agrees that growth has helped the poor, and that the poor may be getting a little further ahead. Also, that market economies and globalization are essential. To him, the issues to be addressed are the amount of inequality (staggering), and whether the current institutions exacerbate inequalities by their very structure. The example he gave: It is true that in most societies a sexist family gives a woman a better deal than if she were an old maid. But, is this the best possible arrangement? All parties must have fair treatment.

— Trudy Reagan, Palo Alto (CA) Friends Meeting.

Thank you for another interesting newsletter. De-bunking these myths is essential if we are to identify policies that are effective in addressing global poverty.

I take minor issue with one of your points, however. You say that "Overwhelmingly, the studies show that the world income gap is increasing." But while most studies show the gap between rich and poor countries increasing, some have shown the average gap between rich and poor people may have been decreasing in recent decades, for the first time since the industrial revolution. The main reason is that China and (to a lesser degree) India have recorded rapid improvements in living standards in recent years, ahead (in percentage growth terms) of those recorded in industrialized countries. These represent just two of approximately 200 countries worldwide, so their improved economic records barely influence comparisons of growth in rich and poor countries not weighted for population size. But they do contain over a third of the world's people, and so the implications of their improving living standards for overall welfare are substantial.

— Nicky Cusworth, Perth, Western Australia.

I know globalization is going to continue; but I have some problems with the loss of jobs that will happen as a result of closing of USA: manufacturing and moving to Mexico. For example, Black and Decker is closing the facility at Easton MD and moving to Mexico because of labor costs. Where can a worker in Easton go to find a job that will pay a wage that is even close to the wages at B&D? If you are young and single and educated, you can. What about the others? Will globalization be as disruptive as the Industrial revolution? What's the end game to globalization? I don't think that our young people are ready for this change.

— Herb Clark; Homewood Friends Meeting, Baltimore, MD.

Where does the Mexican worker find a job if Black and Decker doesn't move there? Unemployment in Mexico is far greater than in the US. — Jack

Some years ago, about 1970 perhaps, the late English writer Kingsley Amis wrote a romping novel entitled The Anti-Death League. The thoughtful underpinning of the novel was that left liberal Labor, by which he meant Maoists, Trotskyites, and run-of-the-mill Stalinists, were growing a totalitarian government based on the unrecognized self-deception that a "humanistic" state could with catholic benefits and scientific research create paradise on earth and end death. He goes further to note that in doing this, by denying death, denying God and eliminating Free Will, that the Anti-Death Leaguers had ceased to be sentient. And that in doing so, had ceased to be human.

The idea that the foreknowledge of death, an awareness of God and free will is what constitutes sentience and is what distinguishes man from animal is very ancient. Through thirty years in Washington, I found that few bureaucrats or Hill denizens picked up my, meaning when I accused them of membership in the Anti-Death League.

— Ron Jones, Episcopalian, Washington (DC).

Every one who proposes repealing the tax on dividends says the tax is disproportionately good for the rich because they invest more. But double taxes are the reason companies often do not pay dividends. The company is encouraged artificially to increase shareholder value by investing excess cash flow into the business. With the elimination of the double tax, companies will be encouraged to distribute profits, unless they can invest them at a better rate than the shareholder.

Bottom line: I see repeal as a good move that removes an artificial barrier for companies to pay dividends. It should encourage companies to make better investments, which in the long run should be better for the shareholder and society.

— Kruskal Hewitt, Media Monthly Meeting (Pa.) Sojourning Tokyo MM.


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