A new theory of poverty?

From Charles Karelis's new book, The Persistance of Poverty, as summarized in The Chronicle of Higher Education.

There in a nutshell is the modern poverty debate, with its four familiar alternatives. But a fifth response to the puzzle seems to have been entirely overlooked. What if the economics books are wrong? In particular, what if the choices that truly benefit typical human beings when they're poor are working little and not saving?

Common experience suggests the appeal of this alternative. Consider the following scenarios:
In the first, a poor worker with no car or bus fare must walk six miles to work. And let's say this long walk results in six blisters, and six unwashed dishes in the sink at home, and workplace mistakes that bring six reprimands from the boss. Suppose too that getting a bus ride for part of the way would reduce the worker's troubles proportionately, so that each mile she didn't have to walk would mean one fewer blister, unwashed dish, and reprimand. What will the poor worker give up to get a one-mile ride, given that she still has five miles to walk? Probably not much. After all, the sixth blister, unwashed dish, and reprimand tends to be drowned out, like a shout in a riot, by the other five anyway.

But now imagine she has just been given a five-mile bus ride, free. She has only one mile left to walk. What will she give up to get a one-mile ride now? Probably much more than in the first scenario because the difference between the discomfort of one blister, unwashed dish, and reprimand and the discomfort of none is far greater than the difference in discomfort between six and five. If the effect of getting a one-mile bus ride in the first scenario is like that of quieting a shout in a riot, in this scenario the effect of the one-mile bus ride is like that of quieting a shout in an otherwise quiet street.

The psychological phenomenon at work here has long been recognized and studied. Human attention tends to diminish progressively the impression made by successive stimuli. Hence the lesson of the walk to work appears to be generalizable. What holds for miles on the bus, and for the dollars that buy those miles, holds broadly for goods that are serving to relieve misery: The benefit grows faster than the consumption. The least useful bit of the good is the first, and the most useful bit is the last. In economists' jargon, the marginal utility of goods that serve to relieve misery is increasing rather than diminishing.

This simple insight casts a strong light on the conduct of the poor, because poor people, by definition, typically consume at low levels, where goods serve to relieve unhappiness and not to bring positive satisfaction. That means that very poor people typically benefit less than moderately poor people from small increases in consumption — not more. Given this crucial fact, their underemployment should hardly be surprising. One mile's bus fare will be worth very little sweat to someone with five miles left to walk, and certainly less sweat than one mile's bus fare would be worth to someone with only a couple of miles to go. In a word, the nonwork of the poor may be rational because of poverty itself. For the very same reason, we should expect serious poverty to weaken theinvestment motive for saving, including the willingness to invest in education.

Poverty can be expected to depress saving for another reason too: Contrary to the classical model, it is smoothing consumption, not letting it vary, that wastes the benefit of resources when one has insufficient amounts. Go back to the worker and her six-mile walk. If she has six miles' worth of bus fare that has to last her for two days, she will get more relief over all by spending her bus fare on one day than by saving half the money overnight and riding three miles each day. For we know that the relief from riding three miles only on a given day will be less than half as great as the relief from riding all six miles at once.

Many people find this view obvious once they hear it and wonder why it is not conventional wisdom. One reason may be that earlier versions (one proposed by economists associated with the University of Leiden, another by Milton Friedman and L.J. Savage) failed to stress how well the view is supported by everyday experience. Whatever the roots of the mistake, the fact that the marginal utility of goods that relieve misery is increasing and not diminishing should change our approach to poverty.