THE UTILITY OF POVERTY

For much of the sixteenth through eighteenth centuries, when Western Europe was mired in poverty, the dominant economic theory of the time, mercantilism, saw poverty as a natural state of affairs and, indeed, instrumentally good, as a means of encouraging work effort.

The idea of a negatively sloped labor supply curve is essentially what Furniss (1920, p. 117) later dubbed “the utility of poverty.” The basis for this idea appears to have been little more than casual anecdotes; Furniss (1920, Chapter 6) provides many examples from writings of the time, often with references to the attractions of the alehouse when workers got a wage increase. It was not the last time in the history of thought about pov­erty that casual incentive arguments resting on little or no good evidence would buttress strong policy positions.

A continuing future supply of cheap labor was also seen to be crucial. Large families were encouraged and good work habits were to be instilled from an early age. Like higher current wages, too much schooling would discourage both current and future work effort. Consistent with this model, few sustainable opportunities were expected to be available to any educated children from poor families. In de Mandeville’s (1732, pp. 288—311) mind, the only realistic future prospect for the children of laboring (and hence poor) parents was to be laboring and poor. Poor parents had little realistic hope that their children would be anything but poor; their low aspirations simply reflected and rationalized their lack of opportunity. Small amounts of schooling would have served little purpose. In this view of economic development, there was little or no prospect of reducing wealth poverty—including escaping the poverty trap demonstrated in Figure 22.1. There was little or no perceived scope for upward mobility of working class children. They were born poor and stayed poor.

Modern progressive thinkers may be shocked by de Mandeville’s views (and similar views still heard occasionally in modern times), but there may well be an element of cruel truth to them. His claim that a modest amount of extra schooling for working class chil­dren is wasted is consistent with the model in Figure 22.1. Suppose that the poor—the working class—are concentrated at the wealth poverty trap (point A in Figure 22.1). A small increase in their wealth, in the form of extra human capital only sufficient to get them to the threshold (say), will not bring any lasting benefit. In due course, the dynamics will push them back to point A. A large gain in schooling is needed.

And de Mandeville’s pessimism about schooling would not surprise many poor chil­dren in the developing world today. Katherine Boo’s (2012) vivid description of life in a Mumbai slum includes a discussion of the choices made by Sunil, a young scavenger who spends long hours collecting whatever he can find of any value in the trash deposits around Mumbai airport.

He'd sat in on [the English class taught in the slum] for a few days, mastering the English twinkle­star song, before deciding that his time was better spent working for food.

By interpretation, the modest amount of schooling that Sunil could afford would be insufficient for him to escape poverty. He is better off addressing his current hunger.

22.3.1 Early Social Protection Policies

Recall that the poverty trap in Figure 22.1 has people stuck at zero wealth but they still earn enough to survive (as Sunil does through scavenging). Higher wages or prices for their outputs increase their welfare, and uninsured shocks to their health (say) have the opposite effect. There is space here for social protection policies providing state­contingent income support. Such policies can exist and be seen as reasonably effective without changing the fact that poor people are stuck in the wealth poverty trap.

It has long been argued that governments have a role in social protection from shocks that threaten extreme poverty. For example, around 300 BC, the famous Indian aca­demic and advisor to royalty, Chanakya (also known as Kautilya), recommended that when famine looms a good king should “... institute the building of forts or water-works with the grant of food, or share [his] provisions [with the people], or entrust the country [to another king]” (quoted in Dreze, 1990a, p. 75). If one thinks of antipoverty policy primarily in terms of protection from adverse events, then the idea is very old indeed.

Even though mainstream economic thinking has for a long time encouraged a limited role for the state in social protection, more contentious has been the idea of promotion.

The sixteenth and seventeenth centuries saw the emergence of fledgling social pol­icies in Europe in response to rising “pauperism.” There were increasing numbers of dis­located and unemployed workers and beggars on city streets. Although the cause was widely seen to be the moral weaknesses of poor people, deeper explanations could be found in changes in the organization of production (including in agriculture with the breakup of feudalism) combined with greater mobility (also with implications for family support of the aged). Although unemployment was not commonly identified as a cause of poverty, work was widely seen as the solution. Publicly financed workhouses were intro­duced around 1600. Welfare recipients were incarcerated and obliged to work for their upkeep. From the outset, the idea was that the workhouses would be “self-targeting,” in that only the poorest would be willing to be so confined, thus providing a cost-effective means of poverty relief (Thane, 2000, p. 115). But the policy was also grounded in the prevailing view that poverty was caused by bad behaviors, which could be controlled and (hopefully) corrected by the workhouses.

There was a strong element of protection in the workhouse idea; anyone thrown into poverty by some shock could turn to the workhouse. Was it also a promotional policy?

There is not much discussion in the literature about the promotional value to poor people of the work done beyond the perceived moral value of actually doing work. Advocates might well argue that this was promotion through behavioral change. But it was clearly not promotion by relieving the constraints facing poor people.

22.3.2 England's Poor Laws

A major policy response to poverty emerged in Elizabethan England in the form of the Poor Laws.^[408] This was a system of publicly provided insurance against income poverty due to specific sources, notably old age, widowhood, disability, illness, or unemploy­ment. Essentially the central government instructed local parishes to deal with their poverty problem. As a system of protection, the Poor Laws were quite comprehensive and came to be reasonably generous in some places.^[409] Arguably the pinnacle of the Poor Laws was the Speenhamland System of 1795 introduced by the justices of Berkshire. This system aimed to ensure a guaranteed minimum income through a sliding scale of wage supplements indexed to the price of bread (Himmelfarb, 1984a; Montagu, 1971).

The antipoverty programs elsewhere in Europe around this time relied heavily on charitable giving and so faced free-rider problems; levels of church and private spending on transfers to poor people were low—well under 1% of national income in most coun­tries (Lindert, 2013). In contrast, the disbursements under the Poor Laws in England and Wales were largely financed by local property taxation. There was evidently some displacement of private charity, though the latter continued to exist (Hindle, 2004; Lin- dert, 2013). But there can be little doubt that the Poor Laws entailed a net gain in social protection.

Old Poor Laws did provide a degree of protection from risk, and it has been argued that they helped break the historical link between harvest failures and mortality (Kelly and Cormac, 2010; Smith, 2011).

The Poor Laws appear to have helped ensure a relatively docile and sustained work­ing class, with little threat to the steady-state distribution of wealth. Solar (1995) argues that the Old Poor Laws were crucial to England’s long-term social stability, including periods (such as the late eighteenth century) of concern about the possibility of the dra­matic instability in France spilling across the English Channel. Broad political support was ensured by the fact that anyone could get relief if needed. For example, widow­hood was a threat to many of those who would not normally expect to turn to the parish for relief.^[411] As novels of the time often pointed out, even the well-to-do upper middle class family could be vulnerable to poverty (a favorite theme of Charles Dickens).

Fleischacker’s (2004, p. 51) discussion of England’s Poor Laws argues that they were motivated by the.. virtue of charity rather than the virtue of justice,” and as such they did not constitute the beginnings of the modern role for public policy in assuring distributive justice. One can conjecture that the motivation for the Poor Laws was at least as much to do with maintaining social stability as charity or justice. However, whatever may have been the motives of policy makers, the Poor Laws constituted a legally enforceable state policy for limited relief from the specified events, financed by redistributive taxes. And parish residents (though not outsiders) had a legal recourse under the Poor Laws, which is why they could help ensure social stability over some 300 years (Solar, 1995). Against Fleischacker’s interpretation, it seems that the Poor Laws came very close to being a premodern example of policies to help ensure distrib­utive justice.

However, an aspect of the Poor Laws that should not be ignored is that they were clearly intended for protection rather than promotion. These laws were an early form of social insurance intended for a world in which the poor and the middle class faced many uninsured risks associated with uncertain employment, health crises, harvest failures, and simple bad luck (Hindle, 2004). Such risks may well have spilled over into production, with adverse long-term consequences. By assuring greater social sta­bility, this, too, may have brought long-term gains. However, it is clear that any longer-term promotional advantages were attained via the enhanced protection that was attained under the Poor Laws. Protection was clearly seen as the main aim of the Poor Laws.

Instead of focusing on whether the motivation was charity or justice, the more impor­tant reason why the Elizabethan Poor Laws, or Chanakya’s famine relief policy, did not constitute a comprehensive antipoverty policy is that these policies were unlikely to change the steady-state distribution of the levels of wealth. In terms of the model in Section 22.2, what these policies were doing was preventing the consumption levels of those either stuck in the wealth poverty trap or settled at some low steady-state level of wealth from falling too much. They provided a degree of protection but did little to help people permanently escape poverty. By the economic logic of the mercantilists, hunger was a good thing as it motivated poor people to work, with social protection playing a limited and well-defined role. After all, just like the slave owner, mercantilists believed that one must keep the workers alive.

By the late eighteenth century, a significant change in thinking was underway.

22.4.