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ISSUES-Poverty, Wealth, and Income Distribution

Poverty, Wealth, and Income Distribution

The first major work of economics, written in 1776 by Adam Smith, was entitled An Inquiry into the Nature and Causes of The Wealth of Nations. Smith realized that it was the existence of economic prosperity -- and not the longstanding, widespread persistence of poverty -- that required an explanation. Hence, economists and social scientists beginning with Smith have sought to identify the conditions necessary for wealth-creation. In the process of doing so, they have also pointed out the shortcomings of some common explanations for the existence of poverty:

1) Over-population: It is often asserted that countries with high population densities -- such as Bangladesh and India -- are impoverished because production cannot possibly be great enough to feed, clothe and house adequately the many millions of people living therein. But for every country of high population density that is poor, another country may be cited which is both populous and prosperous; some examples include Japan, South Korea, Taiwan, the Netherlands, Singapore and Belgium. Moreover, many of the world's poorest nations have relatively low population densities.

2) Lack of natural resources: Another reason why certain countries are poor, some analysts contend, is that they are not endowed with the necessary type, or the proper quantity, of natural resources. But many of the world's most resource-rich countries (particularly in Africa and South America) are poverty-stricken, while many wealthy nations (such as Taiwan, Japan, and most Western European countries) are less well-endowed with resources. Even the member nations of OPEC, rich in oil, are unable to build a strong industrial base and raise the standard of living for their people to above-average levels.

3) Unequal distribution of wealth: One of the most noteworthy sentiments that has gained widespread currency in modern America is that high incomes and high profits are largely unearned or undeserved, and that an ever-expanding welfare state is necessary for achieving “social justice.” According to this view, wealth is obtained chiefly through exploitation or luck and therefore is possessed, for the most part, unjustly. This sentiment is a myth that arguably has done more harm to the poor -- by breeding class envy and hatred -- than virtually any other idea to have surfaced in recent decades.

Adam Smith recognized the nature and causes of wealth. The market process is the source of new wealth. It does not redistribute wealth to the powerful at the expense of others, such as in a collectivized economy; rather, it enables new goods and services to come into the marketplace. A free market system is a positive-sum system. The standard of living can rise for all people, even though the population is increasing, because the total amount of wealth is not fixed.

The RESOURCES column located on the right side of this page contains links to articles, essays, books, and videos that explore such topics as:

  • the nature, causes, and extent of poverty in America;
  • how the breakdown of the black family in the U.S. has led to high rates of poverty among African Americans;
  • the prevalence and causes of poverty around the world;
  • the conditions necessary for the creation of wealth; and
  • how income statistics may be distorted and misrepresented for political purposes

Adapted from "What Causes Wealth," by Roger Ream (August 1981).




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