Helping The Poor

• Author: Daniel Hardy
• Position: Division Chief - IMF Monetary and Capital Markets Department
• Pages: 49

Page 49

Charles Karelis

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

Yale University Press, New Haven and London, 2007, 208 pp., $30 (cloth).

Even rich societies have many poor people. And while their situation may compare favorably with that of people in poor countries, they are much worse off than their peers. As a result, they feel excluded and powerless. Sometimes poverty is the result of a disability or a natural disaster, but many poor people seem trapped in a cycle of underemployment, inadequate education, substance abuse, and crime. They often do not make full use of the social services and other opportunities offered in many advanced economies.

Are the poor irrational?

The persistence of poverty is distressing both because we feel compassion for the poor and because poverty is associated with disruptive behaviors, such as crime. It is also puzzling, because conventional economic wisdom suggests that poor people have strong incentives to find employment, get educated, and, more generally, seek to better their lives. If your income is low, you ought to place an especially high value on extra dollars earned through longer work hours or on the future returns on education. It looks as if many poor people do not act rationally.

Charles Karelis, a professor of philosophy at The George Washington University, has provided us with a provocative book that challenges conventional wisdom on this vexed topic.

To explain the puzzling persistence of poverty, Karelis argues, we need to revise our assumption that the marginal utility of consumption generally declines with the level of consumption. Instead, when an individual is faced with poverty, the marginal utility of an extra unit of consumption increases, he says. If you are badly off, having a little more to consume is almost worthless, but having substantially more is disproportionately beneficial. Hence, the poor like to vary consumption and take risks for the sake of breaking out of poverty (at least for a while).

This line of argument has a certain intuitive plausibility. Consider the fact that poor people tend to be the most avid lottery players, even though the lottery offers a negative expected return. They play because of the very small chance of a life-transforming win. Indeed, very few people would play if the biggest prize was $100, even if the number of winners were multiplied many times over. Similarly, the...