Stumbling and Mumbling

Author: chris dillow   |   Latest post: Fri, 22 Jun 2018, 01:40 PM


On Matthew effects

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Claer Barrett in the FT writes that "people with little cash to spare can nevertheless be hugely profitable for the financial services industry." This is true. People who are short of money are often desperate to borrow and so willing to pay high interest rates to loan-sharks, payday lenders or car finance companies. If you lack negotiating power, you'll get a bad deal.

This is an example of the Matthew effect:

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.

We see this effect in other contexts too:

- The struggle to get by on a low income steals cognitive bandwidth and so makes people more likely to make mistakes, such as borrowing at too high an interest rate. Eldar Shafir says: "if you live in poverty, you're more error prone and errors cost you more dearly - it's hard to find a way out."

- Youth unemployment has a scarring effect: it reduces incomes even years later. A temporary misfortune early in life can therefore be a longlasting handicap.

- The poor are often so desperate that they try to gamble their way out of poverty. Prospect theory tells us that people are risk-seeking when they've become short of cash. It's no accident that there are so many bookmakers in poor areas. As Father Michael said in the brilliant Broken: "If you've only got a fiver to last you the rest of the week, it makes eminent sense to gamble it". Bookies, he continued, are "feeding off our poverty."

- Rented property is means whereby cash is transferred from people who are capital- or credit-constrained and unable to get a mortgage towards people who are not so constrained.

- Thomas Piketty's famous r>g formula (that the return on wealth exceeds the growth rate) says that those that hath shall be given more, and so inequality will tend to increase, barring major disturbances.

- The rich pass on advantages to their children. This isn't simply because they pass on education and skills. Research by Paul Gregg and colleagues shows that intergenerational mobility in the UK and US is low even controlling for educational attainment.

All of this means there's some truth in the old cliché: the rich get richer, the poor stay poor." Although the ONS says that the UK has a relatively low rate of persistent poverty, I suspect this is the result of people shifting to just above the poverty line rather than into great fortune. Other ONS evidence (pdf) shows that half of those who were in the bottom income quintile in 2010 were still there in 2014, and that a further quarter were in the next quintile, implying that only a quarter made it into the top 60%.

You might think all this is trivial. Maybe. But there's another arena in which the Matthew effect operates: capital-labour relations. Exploitation, thought Marx, arises because the worker's poverty puts him in a weak bargaining position. He "has no other commodity for sale" than his labour-power and in "bringing his own hide to market...has nothing to expect but - a hiding." This is still, generally, true. Yes, there are some instances whereby labour can exploit capital (such as top-league footballers or chief executives) but these are rare exceptions. In most cases, it's capital that has bargaining power and labour that doesn't, and this gives us another Matthew effect.

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