Poverty is Solved by Creating Wealth

Note: This article was originally published in Spanish and has been machine-translated with the authors permission.

There is a strong correlation between a country's level of freedom and its economic growth. In fact, the poorest sectors in the most open economies earn eleven times more than the poorest sectors in the most protectionist and closed economies.

I like to use the example of Joe Gebbia and Brian Chesky, two American designers who, unable to pay the rent in San Francisco (USA) at the end of the month, came up with an idea that ended up starting a revolution in the hotel industry.

San Francisco is a city well known for its design fairs and meetings. One weekend the city's hotels were overflowing and these two young men, who couldn't make ends meet to pay the rent, came up with an idea that revolutionized the hotel industry.

Gebbia and Chesky saw in that demand a great opportunity and a need to satisfy: they created a digital platform for renting houses and apartments that forever changed the way we travel and stay. This was the birth of Airbnb.

My Name is Finance‍

The term airbnb comes from "Air Bed and Breakfast": the idea was to take advantage of the leftover space in the apartment they shared and put one of their rooms for rent to pay off debts. Like most inventions, Airbnb emerged as a need that the market demanded and was developed thanks to visionaries who were able to identify it in an environment favorable to free entrepreneurship.

Its co-founders went from not being able to pay the rent at the end of the month to being ranked 495th on the list of the world's wealthiest people: each has a net worth of $3 billion. They made their fortune from scratch, provided opportunities, created jobs and satisfied consumers with an innovative and useful service. Today the company is valued at more than $25 billion. They went from debt to fortune by creating value, stealing from no one, ripping no one off, simply creating value that the market appreciated and was willing (and still is) to pay for.

Today many continue to argue that the solution to poverty lies in a fairer redistribution of wealth. The reality is that we have to think about incentives. Wealth is like a cake: the idea is not to divide a cake into smaller and smaller pieces until there is no more cake left (because at some point no one will continue producing if the government takes away what you generate), but rather the idea is to enlarge the size of the cake and that each person, each worker, each trader, each entrepreneur has more opportunities instead of settling for the crumbs of a populist and paternalistic government that makes you believe that you need it to get ahead (while it makes you dependent, cuts your legs and tells you that if it were not for it you would not be able to walk).

In short, the tendency not to understand how wealth really works is what is known in economics as Montaigne's dogma. Michel de Montaigne, the 16th century philosopher, once wrote that "there is no profit for one without harm to another". In other words, for one person to benefit, another has to lose.

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That is the belief that exchange is a game without mutual gain or simply that the poor are poor because the rich are rich. Which is like saying that the sick are sick because the healthy are healthy, or that a Ferrari goes fast because an ordinary car that we usually see on the street goes slower.

Wealth creation in a free market is not a zero-sum game. In every voluntary transaction both parties win and this is why it is worth bearing in mind that redistribution of wealth has not reduced poverty anywhere in the world, but institutional frameworks that respect property rights, free markets and legal security have allowed wealth to be multiplied and spread so that the average worker can live much better than the kings of other eras.

So the question is not and never has been what causes poverty. The real question we should be asking is what causes prosperity.

Since 1820, GDP per capita in the Western world has increased more than fifteenfold. The private sector is steadily creating wealth: 50 percent of all the wealth that exists in humanity today was created in the last thirty years alone. Wealth has no limits or boundaries. Wealth is created and must be created. It is also no coincidence that there is a strong correlation between the level of freedom of a country and its economic growth, in fact the poorest sectors in the most open economies earn eleven times more than the poorest sectors in the most protectionist and closed economies.

We should stop demonizing wealth creation. The architect and hero of the novel The Fountainhead, written by author Ayn Rand in the last century, argued that "the great creators, thinkers, artists, scientists, inventors stood alone against the men of their time. Every new thought was rejected. Every new invention was rejected. Every great invention was condemned. The first engine was considered absurd. The airplane impossible. The power loom, an evil. Anesthesia was judged sinful. Nevertheless, the visionaries went ahead. They struggled, suffered and paid for their greatness. But they won.

As Matt Ridley says in his book How Innovation Works, innovation is "the most important fact of the modern world, but at the same time one of the least understood."

Innovation is a process of creating or improving goods, services or any other element that is also useful to the individual to live better and satisfy needs, and it is all achieved by an environment of freedom in which there are factors such as creativity, the free exchange of cultures and products, the free movement of people and a context in which the time of individuals who have good ideas and want to put them into practice is respected.

Poverty, Capitalism, and Class‍

Cornell University and the World Intellectual Property Organization (WIPO) produce the Global Innovation Index to gather information on which countries are the most innovative. Among them are Sweden, the Netherlands, the United States, Finland, Ireland, Denmark, Switzerland, Germany and the United Kingdom. It is no coincidence, again, that they are the most open countries in the world in terms of economic freedom, individual freedom and political freedom.

Technological progress is a result of innovation, and to achieve it requires a culture of innovation that thinks about the future and does not cling to nostalgic, protectionist or nationalistic ideas of the past. It is technological innovation developed by individuals that has improved the lives of millions of people, eradicated diseases, reduced infant mortality, increased life expectancy, improved human living conditions, connected individuals through new and rapid communications, created sanitation systems, improved food quality, illuminated our nights with lights and not candles, and so many other gadgets that we enjoy and generally do not realize that they are there because someone else invented them.

A government can foster an environment in which innovation reproduces itself at an accelerated rate when it lets people work quietly and peacefully. But a government can also destroy the environment and culture of innovation when it meddles in every minute of what people do, suffocating them with taxes, bureaucratic hurdles and other obstacles in the wheel.