Thursday, April 03, 2008
POVERTY AND THE MARGINAL UTILITY OF MONEY
Here's a VERY interesting article about the work of economic philosopher Charles Karelis. His thesis is that below a certain key level, money doesn't incentivize poor people to spend their money "rationally" to improve their condition, i.e. that they "blow" the money rather than spend it on incremental improvements in their lives in terms of pulling themselves out of poverty, and that they do this because, unless they can solve a sufficient number of the problems they face at a given time, there's little utility in fixing one or just a few of them. The analogy is made to dents in a car. If you already have many dents in your car, you're unlikely to spend money to fix just one, if that's all the money you have, but if you have only one dent, you'll fix the one dent if you have enough money to fix just the one.
The insight seems simple, but I think it's profoundly important. It comports with common sense experience. To look at it in terms of quantity and quality, what Karelis is saying is that below a key limit, units of money are something qualitatively different than they are above that limit. The classical notion of the marginal utility of money seems to offer this insight, but I think that, in fact, it does more to mask the truth than to reveal it. In fact, all the classical theory of the marginal utility of money does is substitute a curve for a line in terms of describing the value of money or wealth.
I've written about this before: here and here, for instance. In those posts, I was thinking mainly about the kind of person who seems to experience a POSITIVE marginal utility for money: The more they make, the more they want, even in instances where it doesn't seem to correlate to social value for the person. Thinking about Karelis' work, though, I think a mirror-image difference in the qualitative FUNCTION of money in the lives of the people under consideration comes to light.
The problem is that the reaction from those who accept the seeming truth of this insight appears to be to advocate simply providing a basic level of income to poor people. I remember a former acquaintance of mine -- who was a card-carrying member of the Communist Party of the USA -- used to say that the solution to poverty was simple: "Give them money," he used to say. This unfortunately reflects the same kind of "hedgehog" thinking that is condemned when it comes to the classical economic notion of the marginal utility of money: It's unidimensional and doesn't attack another key element of the problem, which is much more difficult to get a cognitive handle on: culture.
I actually agree -- and agree profoundly -- with Karelis, but I strongly disagree with those who respond to his insight by simply advocating a minimum income support for the poor. How does "structural poverty" happen in the first place? How do pockets of our society that seem utterly resistant to the American dream form and persist over time, when one can point to myriad examples of both individuals who rise above poverty and also social groups who do the same? Income support is only part of the solution. Addressing deep cultural maladaptions to the individual liberty that is the key element of the American formula for prosperity and happiness is just as, if not more, important. But it's more difficult and, unfortunately, it requires breaking out of the deep strain of anti-bourgeois sentiment that infects the left.
Returning to the notion that there is a truly qualitative difference in the value -- and function -- of money below (and, in some cases, above) certain limits, it shouldn't surprise us that this is the case. It's often true that in complex systems, quantitative thresholds mark the boundaries between qualitative state transitions. This is usually the case, it seems, when a complex system is part of and is interacting with a larger complex system. That may well be the case with money and culture.
GB, THHotA
posted by Greg 6:33 AM
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