Below is a summary of a new book out called The Persistence of Poverty by Charles Karelis. It’s an interesting read and I’d certainly recommend it. Even if you don’t buy the arguments he presents a novel way of thinking about the issue of ‘irrational’ behavior amongst the poor.
Views about the behavior of the poor traditionally fall into two camps: dysfunctionalism and non-dysfunctionalism. The former holds that the poor engage in poverty-worsening behavior as a result of psychological dysfunctions such as pathological apathy, a fragmented self, or a weak will. Non-dysfunctionalists believe, by contrast, that the poor remain poor not because of dysfunction but because of unduly limited opportunities or perhaps perverse incentives created by public policy.
Conventional economics argues that the poverty-worsening behavior exhibited by the poor (e.g., non-work, non-education, crime, alcohol abuse, non-savings) are irrational because of marginalism; the poor ought to exhibit ‘good’ behavior since the marginal benefit of, say, income or education is greater than it is for the non-poor. But Charles Karelis argues that the poverty-worsening behavior is actually rational behavior for the poor, although it is irrational for the non-poor. He claims that the poor face increasing marginal utility below levels of basic needs rather than decreasing marginal utility from the outset.
Karelis postulates that there are three different types of goods: relievers, pleasers, and goods that function as relievers at low levels of consumption and pleasers at high levels. Pleaser goods, such as a glass of fine wine or a rich dessert, always exhibit diminishing marginal utility. But reliever goods, such as basic food needs or salve for a bee sting, exhibit increasing marginal utility. Imagine that you’ve been stung six times by a bee. The salve that you put on the first sting won’t make as much of an impact as the salve that soothes the very last sting. Likewise, quieting a shout in an otherwise silent room will make a much greater impact than quieting a shout in a riot. Karelis argues that this is true for all goods that function as relievers.
When we ask, then, why the poor don’t work (the argument can be applied to other poverty-lessening behaviors), we see that their increasing marginal utility curves suggest that they have little to gain from working initially and the marginal income that they will receive. They will require larger incentives in order to jump into the work force. The poor don’t refrain from work because they are irrational, but rather because they are rational but face increasing marginal utility functions for all goods that can serve as relievers.
This, naturally, has strong implications for anti-poverty policy. Karelis, for example, thinks that conventional economics lead us to underestimate the positive effects of wage-supplements, such as the EITC, on incentives to work. If marginal utility of income rises amid true scarcity then supplementing income will encourage workers to work more. He diverges from the mainstream view on the positive effects of toughening welfare by arguing that those who cannot benefit from the EITC, those who are not in the formal labor force, will not be encouraged to work through “tough love” policies. Rather, it’s just the opposite. By providing no-strings assistance we increase the marginal utility of income and therefore make it more likely that they will work. Now, no-strings assistance is obviously politically unfeasible. But we should bear in mind the general point that poverty itself will not be a motivator to join the work force since marginal utility slopes upwards for the poor.
In conclusion, Karelis touches on issues of economic justice, of which there are two widely-held theories: the first claiming that people are entitled to whatever they produce or trade for and the second stating that an allocation is just only when it is proportional to an individual’s needs. Utilitarianism says that we should strike a balance between these two poles by finding out which system of redistribution maximizes total welfare. Karelis’ hypothesis regarding increasing marginal utility suggests two deviations from this utilitarian approach. In the first, according to traditional utilitarianism the moderately poor should give to the worst-off as that would maximize total welfare. Karelis argues that since both are under the threshold of basic needs, the worse-off won’t gain more. In fact, the opposite is true: the better-off poor would lose more than the worse-off would gain by giving it away under an increasing marginal utility curve. Second, utilitarianism suggests that redistribution will decrease the work incentives for both the rich and the poor—the rich because of smaller returns on their work due to taxation and the poor because they can get by without having to work. Karelis’ hypothesis suggests that redistribution will increase the work incentives for the poor. He concludes that this suggests that, at least in the U.S., we should favor a theory of economic justice that favors the second theory of justice, need-justice, more than is conventionally appreciated.