Circular and cumulative causation is a theory developed by an institutional economist named Gunnar Myrdal. The idea behind it is that a change in one form of an institution will lead to successive changes in other institutions. These changes are circular in that they continue in a cycle, usually vicious, in which there is no end, and cumulative in that they persist in each round. The change doesn’t occur all at once but in small changes because that would lead to chaos, at least from an evolutionary and institutional point of view. Perhaps an easier way to look at this theory is from Myrdal himself, “poverty creates poverty.”
A paper by Antoniya Ganeva, a student at Mount Holyoke College, about the movie Roger and Me provides a perfect example of this theory. The movie is by film maker Michael Moore (Bowling for Columbine, Fahrenheit 911, Sicko) who is in pursuit of Roger Smith, chairman of General Motors. Moore wants to ask Smith about General Motors’ recent closing of 11 of its plants in Flint, Michigan during times of high profits for General Motors. The closing of the plants leads to the layoffs of 30,000 workers. As a result of these layoffs, many people leave Flint and “the rat population has ‘surpassed’ that of humans.” As a result of there being more rats than humans, “this on its parts, leads to the spread of physical illness, and is a symbol widely associated with poverty.” Due to such a high increase in unemployment, the market is suddenly flooded with a surplus of highly skilled workers in which there aren’t jobs that pay as equally well or jobs that pay much lower wages. As a result, more and more people become poor and cannot pay their mortgages or rents and are evicted from their homes. The crime rate in Flint also increases, but “there are not enough prison cells for the criminals anymore.”
A current event that is happening today, which is similar to the series of events in Flint, is also germane to the circular and cumulative causation theory. The housing “crisis” began when many people were being approved for loans that they could not pay back. As a result of too many defaults, many homes were either abandoned, because people couldn’t afford the payments anymore, or they were repossessed by the banks. These defaults led to a surplus of homes in the market across the country.
The demand for new homes decreased due to the sudden influx of so many homes on the market and so few people who could be either approved for loans or who had the capital to buy a home, which lead to many new home construction businesses cutting back on building new properties. Suddenly, partners with new home businesses such as interior design companies felt the affects, and as a result, both types of businesses began scaling back production, leading to many layoffs. There were also effects on companies that provided materials to the new homes such as lumber mills and home furnishing companies, both of which experienced decrease in demand.
Small mortgage companies folded as a result, leaving only the ones that could afford to stay in business or the ones that best adapted to the situation. Many banks defaulted because their loans were not being paid back. With the unemployment rate increasing, the labor sector saw an increase in the supply of workers to a market that saw small demand for labor.
This uncertainty has led to a cutback in the consumption of superior goods which affected the business sector. This cycle continues on and it appears that we are in for the long haul.
Although the above case isn’t exactly poverty creating poverty, many people have been adversely affected by this catastrophe. Some people have lost their life’s savings by buying a home they thought they could afford. It seems like this vicious cycle will continue on for a while with no end in sight; at least not in the very near future.