Welfare: The Cheapest Country

In the early pages of any elementary economics textbook, the beginning student sees a rudimentary plumbing-like diagram that illustrates the “circular flow” in every capitalist market economy. There is a business sector and a household sector, connected by two pipes. Business firms employ workers; and these businesses arrange to use the accumulated wealth of households to finance plant, equipment, inventories, and other productive assets. Through one of the pipes passes a flow of purchasing power from firms to households, in the form of wages, rent, interest, and dividends, payments for factors of production. Households buy the goods and services produced by the business sector; so a return flow of purchasing power goes from households to firms through the other pipe. Later on, the student learns how financial intermediaries, governments, and foreigners can be included in this picture.

The flow from business sector to households represents income, of course. In a schematic picture of the whole economy, it is natural to classify incomes by their functional types, as I just did. (There are borderline cases, often created deliberately to avoid taxes, but they are analytically insignificant.) Within the household sector, however, individual families can have income from several sources, and in widely varying amounts. For some purposes, like the study of poverty, one is more interested in annual family income arrayed from the smallest to the largest amounts.

You can make a “frequency distribution” of family incomes by size, just as you can make one of heights, or weights, or SAT scores. This is a curve or bar graph showing the proportion of families whose yearly income falls between $1,000 and $5,000, between $5,000 and $7,500, and so on. There is a characteristic difference, however. Heights and weights and test scores tend to fall along a symmetrical curve, the “bell curve” of song and story. The proportion of families whose income falls into successive size classes is almost always described by a curve whose bulk and peak lie over to the left (i.e., most incomes, including the commonest, are fairly small), with a long tail stretching far to the right, describing a relatively small number of very high incomes. (See Table A for an example from the US, adapted from the excellent and authoritative book by Frank Levy, The New Dollars and Dreams. )

TableA

Just about every capitalist market economy we know generates some very low, often inhumanely low, individual and family incomes. They are at the extreme left of the frequency distribution just described. We say that they fall below the “poverty line.” It is not a logical, or even an economic, necessity that the market process should generate a class of people with very low incomes, but it is a fact.

Obviously, in any year in any society, except in the improbable case of universal equality, someone must have the lowest income, and someone else the next lowest. That says nothing about poverty. The lowest observed income could be fairly high. In the …

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