How can one better their lot in life? How does one born into a certain economic class rise to a higher one? This is the question of economic mobility. In the past 30 years in the US there has been one dominant answer to this question — pulling yourself up by your own bootstraps. The bootstraps ideology is the belief that one can pull themselves out of any situation without the help of others. In the US, it has been the driving force for stymieing or cutting back basic social safety nets granted by almost all developed nations, such as equal access to education, affordable child-care, healthcare, housing, and much more. However, proponents of the bootstraps ideology are not limited to just the US. In every corner of the world you can find believers arguing that the woes of the have-nots are a result of a lack of effort.

It goes without saying that pulling oneself up by their bootstraps is an intellectually lazy and even insulting response to the question of economic mobility. With that being said, I’d like to explore other options which allow people to better their situation in life.

Capital, Information Nexus, & Effort: The Three Predictors of Success

What are the predictors of success as measured by economic mobility, educational opportunity, and the ability to live better than one’s parents? I argue that there are three main determinants of success — financial capital, information nexus, and effort. The provision of capital is the most direct way to increase your position in life. Information nexus refers to our proximity and access to information, and effort means out ability to perform physically, and more importantly, cognitively effortful tasks.

In discussing effort, we must not discount the strong role that it plays in success out of a knee-jerk reaction against the bootstraps ideology. In discussing information nexus, we should think of the value of proximity and access to information in a more thoughtful manner. Information nexus is not provided by merely telling a person of a given opportunity. It is instead fulfilled by the myriad of daily interactions that lead a person to have more than just a passing awareness of certain opportunities, but to have lived, witnessed and understood from beginning to end, step-by-step, the presence of any given opportunity and how to take advantage of it. Lastly, in regards to capital, this is the most complex and difficult challenge to solve, especially in countries where political means of changing economic systems are, for practical purposes, non-existent.

Capital

There is a growing acceptance that the biggest predictor of life outcomes is merely how much capital one starts out with. Without a proper social safety net and equal access to education, a person born into poverty might never accumulate the capital required to invest in themselves and get out of poverty. By and large, people are poor not because they do not have proper work ethic, but because they do not have money. It takes capital to make capital. In many countries it takes capital to get an education. And it takes capital to make investments with the skills and knowledge acquired from any such education. Some believe that the financing of capital is an answer. However, there lies an inherent unfairness and exploitative nature to such a solution. Putting aside the risk factor for a moment, most forms of capital that is loaned to an individual will certainly provide a higher rate of return to the capital provider than to the person who created the wealth and value that brought them out of poverty.

The Moral Issue of Making Money from Money

In many cultures, religions, and societies, this revelation has led to concepts of morality based finance. While the specifics of morality based finance differ across various cultures, the main theme is a critique that conventional finance insures that one can make money solely due to the virtue of having had money in the first place. In other words, one can profit merely due to the fact of being a prior owner of capital and not as a result of enriching society by providing skill, labor, or innovation. Modern finance is largely based on insuring that the risks of an investment gone wrong are borne by the capital seekers, innovators, and laborers (if paid solely with equity), whereas the capital providers, or as they are reverently called, “liquidity providers”, can recoup or protect against losses through the requirement of collateral, well placed hedging strategies, and other means. Therefore, although the biggest gains go to the capital providers (and not to the innovators, the laborers, or the capital seekers), they also share the least amount of risk. Whereas the individual receiving the capital bears tremendous risk in the form of loss of potential income, labor, and often assets.

A system which wishes to increase economic mobility must first and foremost address this basic aspect of modern economic systems and finance which guarantee that those who are born into money will always have more money. In the past such realities about the inequitable advantages of capital have not been of great concern in discussions of how to better people’s situations. But with economic growth slowing, we are reaching the magical and very dangerous point where the rate of return of capital is greater than the rate of economic growth, which will inevitably lead to greater inequality.

Government as a Solution and the Problem of Vested Interests

But what are the solutions to this problem? The traditionally employed solution has mostly been in government. One means is taxation of those with great wealth and redistribution of such wealth into public investments like education, healthcare, transportation, and other basics aspects of life most essential to the ability to improve one’s economic situation. However, this solution has obvious vested interests fighting it and other roadblocks. For one, many people live in countries where government cannot effectively provide the capital resources such as education, healthcare, and transportation that allow those who otherwise are without capital to nevertheless have a fighting chance. For instance, corruption in some nations often causes resources meant for public investments to land in the pockets of government officials before it can actually be spent as intended.

Even countries with relatively low corruption and a transparent, democratic political process have their difficulties. In the United States, starting with the greatly influential Powell Memorandum, vested interest groups realized that they can reap great returns by investing their tremendous wealth in public advocacy in order to persuade the voting public to vote against their interest. Ronald Reagan and Lee Atwater crafted Welfare Queenism, the view that some place some where was an out-group wasting your tax dollars to exploit government services while driving a luxurious Cadillac. Welfare Queenism was one part of Reagan and Atwater’s larger “Southern Strategy”, a political strategy that preyed on the racial prejudices of southern whites. Since then, the voting public has been tricked into voting for politicians who cut taxes on the wealthy and give preferential tax treatment to capital as opposed to labor income, promising that if the wealthy are given tax cuts, they will use that extra capital to invest and grow the economy and the wealth will trickle down.

Dismantling of Infrastructure Necessary to Acquire Capital

In the era after the signing of the Civil Rights Act and the implementation of desegregation the vested interests exploited racial animosity to weaken the institution most likely to raise an individual out of poverty — education. During this period, the United States turned against the great American success story of the 20th century, the centralized funding of education, and instead opted for local funding through property taxes. This decentralization ushered a new era of “neighbourhood schools” so as to ensure that one’s tax dollars were spent on those within their neighbourhood as opposed to wasted on educating “others” who lived in different neighbourhoods. As a result, students in wealthy neighbourhoods had incredibly funded schools, while students in impoverished neighbourhoods had underfunded schools. Federal funding of higher education was also cut leaving states to pick up the tab, many of which have failed to meet the burden. From the period starting with the Powell Memorandum to the present era in the United States, greater wealth has allowed vested interests to purchase even greater speech, poisoning the well of public discourse, and leaving Americans bitterly divided and unable to properly discern which policies are in their favor and which policies are meant to enrich the already wealthy.

Looking For Alternatives: Information Nexus & Effort

Whether it’s the corruption that plagues nations, or the use of money to taint political discourse, attempting to increase capital as a means of increasing economic mobility will always be inevitably resisted by powerful vested interests. While maintaining the importance of capital should not be abandoned, it is a difficult fight to win. Other avenues must be concurrently explored in trying to solve the puzzle of economic mobility, and more specifically how any given individual might better their situation in life. Therefore, while not abandoning the fight of providing financial capital to the have-nots, we must also focus our attention on what is most within our control and amenable to change, increasing information nexus and individual effort.

In part II of this four-part series I discuss Information Nexus and its relation with economic mobility.