Wednesday, June 4, 2014

Economies of Scale

There's a simple economic principle that affects all of us in our day-to-day lives, though we might not realize it at the time.  It's called "economies of scale," and it's one of the mechanisms that helps the poor stay poor while the rich get richer.

First, a basic definition, courtesy of Wikipedia:
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, throughput, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.
 This is why, for example, a huge factory is able to secure greater profits than a mom & pop handmade crafting venture.  Despite the high operating cost of the factory, its capacity for sheer volume ultimately gives it an advantage -- and the reason for that is that some costs are fixed.

The same principle applies to wealth inequality and the fixed costs of living.

Take grocery shopping.  Regardless of how much money you make, an apple still costs the same price.  To make things easy, we'll say the apple costs $1.  If you have $10 to spend on groceries to get you through the week, that $1 apple represents 1/10th, or 10%, of your grocery budget.  If you have $100 to spend, that same $1 is only 1% of your budget.

This works the same for a number of other commodities -- things like gasoline, electricity, and (until the advent of health subsidies under the ACA, anyway), healthcare.

Here, you can take a peek at a spiffy chart on this very topic, courtesy of NPR.  

And speaking of that chart, do you notice what the biggest difference is between the upper classes and lower classes?  Upper classes have a substantially higher percentage of their money allocated toward retirement, because they have enough disposable income to invest.  And because investment income is the fastest and most efficient way to grow your wealth (just ask Warren Buffet), and because investments are taxed differently from other types of income, rich people are afforded the opportunity to become richer simply by virtue of having extra money.

Okay...So What's the Point?

I mention all of this not to incite you to moral outrage about the vagaries of our tax code (although, if you'd like to be outraged, you're certainly welcome), but because that pesky economy of scale issue just keeps cropping up.

Economies of scale are, by and large, part of the reason why people living in poverty (or near the poverty line) make so many "bad" (or, I should say, short-sighted) financial choices.  When you have a limited amount of money, you have to spend that money as best you can -- and since you can't very well put your basic needs on hold until you can afford them, sometimes "the best you can" isn't so great.

So: If you're hungry and have $1, it's easier to buy a McDouble than it is to buy the fixings for a nutritious meal.  So you spend your $1 so you can eat, then go hungry for a while, then spend your next $1 the same way.  If you get $1 every day for 30 days, you won't have the same options as someone who gets $30 all at once at the beginning of the month.

Similarly, if you don't have money the day that your bills are due, you're going to either pay the bill late (incurring a fee and possible disconnection), or you're going to borrow money (which you undoubtedly cannot afford to pay back). 

The examples go on and on.

But this is just one of those things that people with money can never seem to fully grasp about people without money.  There's a substantial difference between "not always being able to afford what you want" and "having to make short-sighted financial choices because you are literally starving."  And since pretty much nobody who's in position to make policy has ever been in that latter position, it's no surprise that the policymakers clearly don't understand. 

1 comment:

  1. Yes! I love your blogs! As someone who has been on both sides of the fence, I can admit that one honestly does not understand the strugglesof the underprivileged until walking in their shoes. Well done.