Technology Alone Won't End Poverty. We Need Savings First

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According to some commentators such as economics Nobel Laureate Paul Romer, technical knowledge is key to economic growth. But if this is the case, why do third-world economies continue to experience poverty? After all, individuals in these economies have access to the same technical knowledge as the developed world.

Careful examination, however, shows that a key driver of economic growth is the pool of consumer goods or the subsistence fund.

Consumer Goods and Economic Growth

To maintain life and well-being, man must have at his disposal an adequate amount of final consumer goods. These goods, however, are not readily available—they have to be extracted from nature. Without tools at his disposal, man can only secure from nature minimum goods for his survival. This principle can be illustrated with a simple example.

For instance, take an individual, John, stranded in a forest. In order to stay alive, he must pick some apples from an apple tree. Apples are the only good available to him that can sustain him. Let us say that by working twenty hours a day John manages to secure twenty apples, which keep him alive. The twenty apples that John has secured from nature are his subsistence fund, which sustains him.

Being a sophisticated individual, John realizes that if he had a special stick he would become more productive. His daily production of apples could be forty (i.e., double his current production).

The problem, however, is that the stick is not available—it must be made. Two days of work are required to make the stick. If John were to decide to make the stick, he would have a problem. If he spent his time making the stick, he would not be able to pick the apples that he requires to stay alive.

The way out of this dilemma is for John to put aside an apple a day for the next forty days. By saving an apple out of his daily production and enduring hunger, after forty days he will have an adequate stock of apples that will sustain him while he is busy making the special stick. (We make the unrealistic assumption here that apples can be preserved in edible form for forty days to illustrate the importance of saving.)

Thus, after forty days, John’s subsistence fund will comprise forty apples, which will see him through while he is making the special stick. We can see here that the saved or unconsumed forty apples enable the making of the stick, which raises the future production of apples and lifts John’s living standard.

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