Customer Reviews

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

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In the late seventies serious attempts were made to distinguish "absolute" from "relative" poverty. In 1972 the annual speech of the President of the World Bank, then Mr Robert McNamarra, a speech delivered in Nairobi, was entirely focused on the fight on poverty.
Twenty five years later there are tons of WB reports written about world poverty as well as progress reports how poverty has been reduced in a at least a few countries. Nevertheless a vast number of people in the world keep living with $2 (or less) per day.
Charles Karelis' book does not concentrate on world poverty (although what he wrote could very well be applied), but on poverty in the US. He comes up with some revolutionary new ideas that economists as well as politicians should take seriously.
His main argument is that at levels below the meeting of basic needs, the marginal utility of extra dollars or resources is not decreasing, but increasing. Hence, the tendency of poor people not to work, not to stay in school, to over consume drugs or alcohol and/or get in trouble with the law.
This relatively short book, contains a wealth of interesting insights and examples that explain why traditional economic thinking about decreasing marginal utility of transfers to the poor is just wrong.
In the last chapter of his book Professor Karelis discusses economic justice and the challenge of balancing between market driven, free market forces and a society based on transfers to the needy. How much should the rich really be taxed to help the poor, without shrinking the incentives to work or the overall economic "pie"? Without explicitly talking about the US and Europe, Karelis clearly demonstrates the different choices made between the more free-market oriented US and the European zeal for more leisure, fixed working hours per week (e.g. France), higher taxes and more welfare programs for the poor in Europe. Karelis provides some specific policy advice at least for the US as to how to keep more poor people on the job, in school, away from crime or drugs. A lot of what he wrote would however also be applicable to Europe or the rest of the world. This book provides very refreshing thinking about poverty and the reasons why old economic thinking and policies have not worked in the past.

Karelis has exactly one idea to contribute in this book---the idea that perhaps marginal utility increases rather than decreases with income down at the low end of the income vs utility curve. This may be true, but could have been presented in 20 pages just as easily. Frustratingly little quantitative data is presented to support this argument, which instead relies mostly on introspection (aka anecdotes). While Karelis presents an interesting idea, he fails to support it adequately, then perversely creates a strawman argument that blames Epicurus of all people for misleading economists on the shape of the marginal utility function. This strawman is based on a complete misunderstanding of what Epicurus actually taught, and borders on slander. The basic idea of this book is important and should be followed up with actual research, but this book offers no more insight than you'd hear in a short comment at a conference.

As intriguing as the premise is, I gave up reading this book halfway through and only skimmed the rest after discovering that the author is a philosophy professor who seems to base his conception of economic theory on a combination of freshman economics textbooks and the great economists of 100 years ago (e.g. Edgeworth and Marshall). While there is much to be appreciated in the work of the classical economists, economic theory has come a long way since then!

Thus, Karelis repeatedly, but erroneously, claims that the kind of "indifference curve" analysis taught in a standard intermediate microeconomics course rests on the assumption that the marginal utility of a good declines as more is consumed. Not only is such an assumption unnecessary, it is insufficient--as he would have discovered had he consulted even such a "classic" text as George Stigler's Theory of Price (c. 1960s).

His presentation of economic theory is also wrong, or at best muddled, in other respects. He seems to conflate issues of consumption smoothing that would apply under certainty with decision-making under uncertainty. He also seems to assume that diminishing marginal utility of income implies that those with less income will be more risk averse than those with more income. Leaving aside the issues of interpersonal utility comparisons, this is not even true for the same individual at different levels of income: whether risk aversion increases or decreases with wealth will depend on the particular utility function assumed. In general, it's not even clear to me whether Karelis understands that, though economists still use the word "utility", this term now refers to a somewhat different concept than when folks like Bentham used it.

It's a shame that his presentation of economic theory is such a mess, because he does seem to have interesting intuitions about poverty and some original ideas about policy. I would respectfully suggest that he team up with an actual economist and work out his ideas in a way that is informed by modern economics, rather than classical writers or conventional wisdom.

I agree that Karelis is brilliant. I am not an economists, so I found some of his theory cumbersome to get through... nonetheless, I think I understand the main concepts that he presents. However, throughout the book, I was frustrated by "false assumptions" that were not backed up by data or further explained. For example, "Like many poor people in modern times,it seems that the famine-oppressed Lydians did little work." (p. 66). I can't argue about teh Lydians - but is it fair to compare the poor of the day to Lydians who were "playing games all day long"? According to my studies, over 40 percent of those who are currently homeless in the United States work. The percentage is even higher for those who are living in the US below the poverty line. Over 6 million Americans are considered the "working poor" (according to the 2000 Census). Again, a similar idea is stated, "poverty itself lowers motivation to work and smooth consumption" (p. 132). Where does Karelis get that information? Has it been studied? I have done extensive reading on domestic and global poverty - and I don't know that such blanket statements are accurate. Perhaps he is guilty of starting with false assumptions - just as he suggests policy makers start with false understandings of marginalism.