Why do poor people stay poor?
It’s a question everyone already seems to have an answer for. “The poor are lazy.” “The poor can’t manage money.” “The poor don’t have the right mindset.”
Those theories are anecdotal at best and downright insulting at worst. The problem with those arguments is that they are based on small sample sizes rather than empirical data. While I agree that some people are poor because of those things, there has been little experimental research done on this topic — until now.
Earlier this year researchers at the London School of Economics released a paper titled “Why Do People Stay Poor?” which illustrated how the lack of initial wealth (and not motivation or talent) is what keeps people in poverty. The researchers tested this by randomly allocating wealth (i.e. livestock) to female villagers in Bangladesh and then waited to see how that wealth transfer would affect their future finances. As the paper explains:
“[We] find that, if the program pushes individuals above a threshold level of initial assets, then they escape poverty, but, if it does not, they slide back into poverty. … Our findings imply that large one-off transfers that enable people to take on more productive occupations can help alleviate persistent poverty.”
The paper clearly illustrates that many poor people stay poor not because of their talent or motivation, but because they are in low-paying jobs that they must work in to survive.
They are, in essence, in a poverty trap. A lack of money prevents them from ever getting training or capital to work in higher-paying jobs. You might be skeptical of those findings, but similar things have been found by experimental researchers doing random cash transfers in Kenya as well.
The fact is that money begets money. In investing we all know this to be true, but empirical studies suggest that this is also true in the labor market. Without financial resources, people find it incredibly difficult to get the skills and training to get ahead. I know this all too well as a first-generation college student who was fortunate enough to have his tuition paid for by a need-based scholarship.
A personal story
And I can tell you that without that financial support, there is almost no way I’d be writing this today. I know this because in the spring quarter of my junior year, I didn’t have an internship lined up for that summer. I had been rejected from every one I had applied to. Luckily, my aunt was nice enough to offer me a job working in the warehouse she ran back home. If I had taken it, I would’ve been paid minimum wage to move boxes while many of my peers were working at Fortune 500 companies.
However, late in the spring quarter, one of my professors asked me what I was doing for the summer. I told him the unfortunate truth about the warehouse job, and he immediately replied, “You are not doing that.” He then basically forced me to send my resume to a health-care consulting firm that was run by another professor at our university. I did as he said, got the job and spent my summer learning computer programming. It was amazing.
When I think back on it now, it was probably the most pivotal moment in my career. Without that initial nudge into a corporate role, a role that taught me my first technical skills, nothing in my career would exist. I likely would have interned at my aunt’s warehouse and probably worked there full-time at a fraction of what I got paid in my first actual job out of college. But even that result would have been incredibly fortunate because I would have had a guaranteed job coming out of college no matter what.
I tell this story because it illustrates the immense amount of wealth and resources that were needed to change my career trajectory from one of low income to one of high income. The financial capital provided by my university, the social capital provided by my professor, and the career capital provided by my aunt were all things that most other first-generation college students wouldn’t have had access to. I am lucky to know the transformative power of wealth and how it can affect someone’s life.
Chadwick Boseman’s experience
I was reminded of this truth after hearing about the recent passing of actor Chadwick Boseman, most well-known for his role in “Black Panther.” Boseman, who didn’t come from money, had his time at Oxford’s School of Drama paid for by a secret benefactor who later turned out to be Denzel Washington.
Rather than summarize the power of Washington’s gift on Boseman, I’ll let Boseman’s words to Washington speak for themselves:
“An offering from a sage and a king is more than silver and gold. It is a seed of hope. A bud of faith. There is no Black Panther without Denzel Washington. And not just because of me, but my cast, that whole generation, stands on your shoulders. The daily battles won. The thousand territories gained. The many sacrifices you made for the culture on film sets through your career. The things you refused to compromise along the way, laid the blueprint for us to follow.”
That is the power of wealth. Not the fancy cars. Not the private planes. Not the mansions. But the ability to change someone’s life. Think about the compounded effects of Washington’s gift on Boseman’s career and, eventually, on the world. Think about the number of young black children who will forever be inspired by “Black Panther” because of that gift long ago.
This is why wealth can be so powerful. Because it gives people the ability to change their world in meaningful ways. Whether that means getting a cow in Bangladesh or getting funds to pursue an acting scholarship in a foreign country, wealth is the change agent.