The Persistence of Poverty:

Why the Economics of the Well-Off Can't Help the Poor

Charles H. Karelis
Yale University Press, 2007. Persistence of Poverty cover

This slim volume presents a radical re-thinking of the economics of poverty. It's written by a philosopher which to me suggests two things. First, it may not be easy reading since philosophers are trained to say exactly what they mean in concise fashion and I have found that even popular treatises by philosophers are often rather dense with concepts. Second, it may be more radical in its economic analysis since it comes from an outsider. The book does not disappoint in either of these expectations. I can't recommend it for everyone, but if you have an economics background or a stake in the poverty question, the 163 small pages of the main text are well worth reading. Regardless of your decision on the book, please stay tuned for the review. Karelis' basic ideas are accessible, and I'll briefly outline them.

The question of whether we can ever erradicate poverty is addressed in the Bible by Jesus in Matt. 26, "The poor you will always have with you, but you will not always have me." This verse is well-known to economists and quoted by Karelis, but of course Jesus' conclusion is not that we should not help the poor. There are numerous other verses commanding giving to the poor. This book sheds light on the question of how we can best help the poor escape poverty (or help the largest possible fraction of the poor escape it). The results are applicable both to state welfare programs and those of charitable organizations.

The economic theory of diminishing marginal utility states that as one obtains more money, a dollar is not worth as much to us. An earner of $100K annually does not value an additional dollar as highly as would an earner of $40K annually. It follows that saving and leveling consumption produces more satisfaction for the dollar, and so is more rational. If you knew that one year you'd make $100K and the next only $40K, and you inherited $20K, it would make sense to spend that in the lean year rather than in the fat year. You'd benefit more from that money in that year according to the theory of diminishing marginal utility, as well as to common sense.

These are the kind of numbers on which economists have typically based their analysis, and also the kind of numbers they have personally experienced. Karelis' insight is that with the poor, things are drastically different. An available extra sum of money will function as a "pleaser" delivering additional pleasure to the non-poor consumer, but as a "reliever" of pain for the poor. The book is full of interesting illustrations of the difference. For example, if you had six bee stings hurting you, and only enough money for salve to stop the pain from one, that money wouldn't be extremely valuable to you. But if you somehow scraped up the money to deal with five of the stings, the equivalent money needed to alleviate the final sting would be much more valuable.

Karelis' conclusion is that for the poor, there is an increasing marginal utility of money as the one moves from abject poverty toward the poverty line. It follows that the poorest of the poor have less incentive to work than the barely-poor, unless they were able to earn a relatively high salary which would bring them close to escaping poverty. Of course that is not often possible. If a single illustration of bee stings does not convince you of this argument, you need to read the book. It is packed with additional illustrations of this principle from history as well as from economic analysis.

Another fascinating consequence of this new theory is that the rationality of income leveling disappears. Where it is rational for the middle class to level its income, it makes sense for the poor to bunch up their spending so at certain times they spend relatively more and at other times virtually nothing. It's like relieving your six bee stings for a day or two, and then going back to suffering from all of them for several days. Compare this to the prospect of relieving two every day and suffering from four continuously. In the former case, at least you have one or two good days! Karelis makes a convincing argument that the problems of the poor are so pervasive that small amounts of money aren't enough to really make a difference.

This effect is also seen in the behavior of the poor. It is often observed that while living in substandard housing, the poor will often drive as luxurious a car as possible. At least while driving they are king of the road and can forget their leaky roof or obnoxious landlord. The available money is not enough to really make a difference in their housing, so it is (rationally) accumulated where it may do the most good.

Economists identify five patterns which contribute to poverty:

  1. not working much for pay
  2. not getting much education
  3. not saving for a rainy day
  4. abusing alcohol
  5. taking risks with the law
Within conventional economic theory the behavior of the poor is inconsistent with the logic of the theory, and hence (to an economist who believes the theory) irrational.

There are current theories of why these behaviors are seen, and many of them are not kind to the poor, to put it mildly. Qualities such as apathy, laziness, and weakness of the will are invoked to explain the observed behavior. This seems to me eerily similar to cases in which medical professionals, unable to explain certain illnesses, resorted to claims of mental illness to explain the patients' reports. Later medical advances often supported the sanity and rationality of the patients.

If we apply Karelis' theory of increasing marginal utility, the poor receive a significant boost in sanity and rationality when it comes to explaining their economic behavior. This is certainly attractive to advocates for the poor, as well as to anyone who doesn't perceive much moral difference between the poor and the rich. Politically, it is conceivable that widespread acceptance of this assessment would result in greater support for welfare programs. I don't expect Karelis' book to have that much impact!

In the hard sciences, a new scientific theory is considered more important and generates more excitement if others successfully apply it to other areas than the specific area which gave rise to the theory originally. I like to try that same approach in the soft sciences. One obvious area to apply Karelis' new theory is to gambling. It is well known that state lottery revenues are disproportionately raised on the backs of the poor, effectively a regressive tax. A small lottery purchase day after day to the poor is spending a few dollars in search of that big payoff. But this is the ultimate in non-uniform spending, and a direct consequence of the law of increasing utility!

Microfinance is an exciting area of economic opportunity for the poor, but it hasn't often been successfully applied to the very poorest of the poor. There are various reasons why this might be the case, including that the loan recipients need certain skills to run a business which the poorest may not possess. Of course the application of the theory of increasing marginal utility would suggest that there is less incentive to work at this economic level. But it is important to note, as Karelis does, that his work applies to the U.S., and most likely to similar economies, but not necessarily to very different economies such as poor agrarian societies. So this kind of application to microfinance is pure speculation. But it's a good book that inspires the reader to speculation about related issues, and I highly recommend the book.

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