Poor people waste their money away on takeaways, beauty salons, cafes and dog grooming.
The idea of feckless poor people frittering away their meagre incomes is well engrained in our culture. Normally accompanied by calls to make benefits less generous. or conditionality more stringent. Stupid, feckless, and untrustworthy.
Mostly it is Conservative politicians and similarly minded newspapers who make these claims, but they have become so embedded in our culture that they are part of the mindset of DWP regardless of which Government is in power.
I’m a bit suspicious of this view.
Imagine a neighbourhood, where the only businesses generating wealth are takeaways, beauty salons, the odd cafe or dog groomer. Any other independent businesses like a corner shop or greengrocer have been replaced by a giant supermarket a few miles down the road.
There are lots of places like that in the North East. Birtley, Peterlee, among others. This is 100 yards of Birtley Durham Road:
The people in that neighbourhood are most likely to work in takeaways, nail bars, cafes and hairdressers, and the places where they would spend their money locally would be … shock…. takeaways, nail bars and hairdressers. Maybe a local cafe.
Cutting back on takeaways, nail bars and hairdressers, would pretty quickly put all of the takeaways, nail bars and hairdressers out of business. Which in turn would quickly wipe out all of the remaining businesses and jobs, including their own.
Making people even more dependent on the welfare state, not less.
There is a reason why poor neighbourhoods have such a small range of businesses, and that is capital. It takes relatively little capital to set up a sandwich shop, or a hairdressers, or a dog groomers. They are low risk options for people who are ambitious and who want to get on in life. Rather than mock them we should celebrate them for their entrepreneurship.
On of the most influential ideas in modern economics is the efficient market hypothesis- in it’s broadest sense it is the belief that markets are the most efficient way to allocate capital and resources. If markets aren’t achieving that it is because something has interrupted the workings of the market, like Government regulation. Markets price in all relevant data, and are completely objective. You can’t buck the market.
It is however pretty obvious in the world around us that this isn’t taking place.
In the UK retail banks (who lend to individuals), and commercial banks (who lend to businesses) are mostly the same thing. I have my business and personal accounts with Nat West.
Banks have a pool of funds that they can loan out – credit cards, mortgages, business loans. Those banks have a big preference for mortgage lending which is seen as being safer, rather than lending to businesses, seen as being more risky.
As house prices have soared over the last 13 years the pool of funds available to businesses has shrivelled. Increasingly we have become a low wage, low productivity, low investment economy, with an overvalued housing market. Huge blows to business confidence from Brexit and political instability have made things worse. An economy of takeaways, dog groomers, beauty salons.
Where capital is available to businesses markets don’t seem to allocate it very efficiently. Uber’s cumulative losses have exceeded $23 billion, Snapchat have lost more than $8 billion, Airbnb $7 billion. Amazon made big losses for it’s first few years, before becoming massively profitable. Investors are hoping that Uber and AirBnB can do the same despite there being no realistic prospect of any of them making a profit any time soon.
The majority of stock market trades are speculative – they aren’t investing in companies to help them grow, but they are betting on fluctuations in share prices. This produces regular asset bubbles, which collapse losing people loads of money. People aren’t totally rational when money is concerned, more like gamblers losing more chasing losses than efficient investors.
If you really want to alleviate poverty then one of the best thing to do is to make it easier for people who want to run businesses to access capital, so they are able to invest in setting up a wider range of businesses. If banks lend more money to businesses that might mean that there is a bit less money to drive up house prices, but that’s not a bad thing either.
We can mock and snigger at Birtley high street, but in reality that mix of beauty salons and takeaways are the same everywhere. If your neighbourhood is a bit more affluent you get SuperDrug and Dominos, more affluent still Boots and Pret.
Capitalism doesn’t really work if markets don’t allocate capital in a sensible way to help the economy grow, and right now our capital markets are completely dysfunctional. We could give up on capitalism altogether but while I am left wing I am not ready to embrace state control of the economy – that leads inevitably to authoritarianism.
Those takeaways, dog groomers, and beauty salons are proof that people still want to be entrepreneurs, they want to run businesses, create a better life for themselves and their families. They work long hours and battle on.
If we can put that spirit to better use we could become the wealthy country we used to be.
Because right now free market economics is becoming flea market economics.