22 June 2012

Just Don't Call it Poverty

Writing in the FT earlier this week, economist John Kay discussed absolute and relative definitions of poverty.  On the absolute:
People who struggle to find enough food to eat are poor. The World Bank’s poverty line is an income of less than $1.25 a day. Financial Times readers, who spend more than that amount on their morning newspaper, are in no position to dispute that judgment. In the past two decades, economic growth in China and India has reduced global poverty by an unprecedented amount. That achievement is not diminished because some individuals in both these countries have become very rich. Fundamentally, poverty is about absolute deprivation.
Kay observes that there is also a relative definition of poverty:
That is clearly not the end of the story, however. On the World Bank standard no one in North America or western Europe is poor. And very few people in these continents do not have enough to eat. We might observe that obesity is a disease not of the rich but of the poor. In making such a statement, we endorse the notion that poverty is relative not absolute. That principle is enshrined in the UK definition, which rises with the general standard of living.

The median income is the level that equal numbers of people are above and below, so that a rise in Sir Martin Sorrell’s bonus does not lead anyone into poverty – that would confuse poverty and inequality. But the choice of median income as a reference level has a wider significance. It encapsulates the idea that in a rich society, poverty is an enforced inability to participate in the everyday activities of that society. You might therefore be poor if you lack access to antibiotics or Facebook, even though in this respect you are no worse off than the Sun King or John D. Rockefeller, and in other respects considerably better off than most people in the world.

However, to define poverty as social exclusion takes the definition far away from the assessment of income. It is not hard to imagine places in which few, if any, people experience a sense of exclusion. These might include both sophisticated societies with high incomes per head – towns in Scandinavia – and simple cultures without access to modern essentials – rural villages in the developing world. Poverty becomes a cultural and political phenomenon rather than an economic one.
Under the definition that I have proposed on this blog for wealth, poverty would simply be an absence of wealth, or a deficit of valued outcomes.

But once we define poverty in terms of outcomes beyond simple incomes as measured in currency units, we have indeed entered the territory of culture and politics, and ultimately, what constitutes a life worth living.

Just as GDP doesn't measure all that matters when it comes to wealth, I am deeply skeptical of efforts to define multi-dimensional metrics of "poverty" that integrate different valued outcomes. Statistics are indeed important inputs to policy, and I prefer mine simple and transparent.

So let's leave poverty defined in terms of absolute income, as defined by the World Bank and others. If we care about obesity, lack of access to antibiotics or even Facebook -- all perfectly legitimate valued outcomes -- then let's track these outcomes on their merits and based on transparent variables that measure these outcomes. Just don't label these issues "poverty" as it will conflate arguments about what it means to be wealthy with efforts to attain whatever valued outcomes we as a society decide to pursue.

18 comments:

MIKE MCHENRY said...

You might therefore be poor if you lack access to antibiotics or Facebook,....
Even this doesn't hold in America. We have medicaid and free public libraries with internet access. The whole argument in America has shifted to income inequality.

Brian said...

So already you're jettisoning your definition (for now) for being too broad? Doesn't that imply that your definition is just not well motivated? If poverty is not the opposite of wealth, then the words have lost all meaning.

It seems to me that Adam Smith's definition is much more specific without being strictly economic. Wealth, he says, is the quantity of human labor one can command or purchase. It follows immediately that wealth is relative to the culture, but also not much dependent on things like antibiotics and Facebook. It is certainly not as arbitrary as the talk of values. But I think his definition can be made close to yours:

Wealth is something like the accumulation of tradeable outcomes.

The tradeability condition is key to linking personal values to real wealth and poverty. It also points out that when tradeability is abandoned, such as politically when parties refuse to compromise, we are literally poorer as a society.

Jonathan Gilligan said...

Simple and transparent is good. Besides being easier to understand, it also makes it harder to fiddle the definition until it coerces data into pre-ordained conclusions.

I was reading Paul Collier's book, "The Bottom Billion" the other day. Collier writes that in his studies of the relationship between income and civil war, he used other people's definition of what constitutes "civil war" (at least 1000 deaths with each side suffering at least 5% of the deaths) because even though he found some faults with this definition, "one advantage of using criteria devised by another researcher is that your results cannot be contaminated by the temptation to bend definitions so as to get the results that you expect."

There's a huge difference between the kind of poverty suffered by people below $1.25 a day and that suffered by the poor in the first world. Collier's articulate about this, as are Abhijit Banerjee and Esther Duflo in "Poor Economics." Banerjee and Duflo give a good explanation of where a threshold such as $1.50 per day (or $0.99 PPP per day, which they use) comes from and what it means in practical terms for people who must live on that little. I'd strongly recommend both books, as well as William Easterly's "The White Man's Burden" to anyone reading up on desperate poverty.

Roger Pielke, Jr. said...

-2-Brian

Thanks, but I still like my definition. More concreteness to come, I promise, but a few more conceptual issues to get out on the table first.

Thanks!

eric144 said...

Time after time, studies show that people perceive wealth relative to others.

dhlii said...

Brian #2;

Trade is voluntary exchange between two people or completely free groups of people.

Government is force, not freedom.

If you and I have a dispute over whether you should be allowed to kill my child. The world is not poorer because I refuse to compromise.

Further free exchange MUST include the right to say no, otherwise it is not meaningful.

The value of something (even in the political sphere) is set when both side FREELY agree.
The agreement may represent compromise (or not),
but if it was not free - if there was not right to say no, if there were not instances where people freely did say no, then the exchange is not free and information - specifically information about the value - the wealth of the exchange is lost. And then we are all poorer.

This is also essentially why price controls never work.

The failure to exchange does not leave us poorer.
We have the same amount of wealth before and after any exchange - or non-exchange.
But when a free trade takes place (or does not) we gain knowledge about the value of the wealth we have.
A successful trade sets the value - atleast for the two people trading.
An unsuccessful trade establishes a range for the given traders. The value is above the offer, but below the ask

dhlii said...

Brain #2

Adam Smith teetered around a labor theory of value - but never entirely embraced it.
Regardless, Marx adopted it and his adherents have disproved it.

It took more than 100 years after Smith to work through and reject myriads of other value schemes.

I am not sure that modern economics universally adopts that value is subjective, but we are no longer debating objective theories of value.

Part of what is odd about Roger's efforts here, is that there are definitions of wealth - including the one I offered that have been subject to rigorous scrutiny for as much as a century. Roger's definition is at best an amalgam of rejected definitions.
It might be interesting if it brought something new. It is mildly interesting anyway. But many of the criticisms are valid.
As an example effort might be a requirement to create wealth, but it is not an attribute of wealth. The process of creating wealth goes to great trouble to reduce the effort, and in doing so increases the wealth. How do you have an atribute that acts inversely to its object ?

Kip Hansen said...

My wife and I recently spent 6 years or so doing humanitarian work in the Dominican Republic, where literally millions of the population are 'poor'- in that they don't have access to the basic necessities of life like clean safe water, adequate housing, enough food, dependable electricity, or basic life-saving health care. Many of these families would have been happy to have a family cash income of $1.50 per person per day.

Most of our friends, acquaintances and clients of our micro-enterprise loan program fell into this category. Our loan clients often managed to double their cash incomes as a result of the small businesses they started with help from us.

However, these people, poor as they were, knew that they were far better off than the illegal immigrant Haitians who had much much less.

Mark said...

Time after time, studies show that people perceive wealth relative to others.

Most people perceive themselves to be better than average drivers, and wiser than average, and more thoughtful. It doesn't make it true.

No-one really believes a person driving a car they own and living one family in a three bedroom house is poor by any objective standard. But to admit it would be to give away a useful lever in the political fight. I'm all for evening out of incomes, as it happens, but not at the expense of taking a word like "poverty" and stripping it of any real meaning.

eric144 said...

Mark

You can go into any American city and ask a resident where the poor people live and they will tell you. It means something to everyone. Even if they have TVs, mp3 players, guns and an account with KFC which no one in North Korea has.

In America of course they are MUCH more likely to be in jail than any other country in the world, especially if they are 'people of colour'.

eric144 said...

On Saturday, while my neighbours were being bored to death with Euro 2012, (well done Italy) I read a biography of Leo Tolstoy

As well as writing War and Peace, Anna Karenina The Kreutzer Sonata etc, keeping his wife permanently pregnant and managing a large estate, he wrote voluminously on politics and religion.

Tolstoy was a nobleman who underwent a moral transformation as a result of his compassion for the Russian serfs of his time. He railed against the unspeakable evil of the class system and its vast inequality of wealth and power which was comparable to American slavery. A power that was supported by the Orthodox Church teaching that the privilege was God given and immutable.

My answer to fundamentalists of any kind who want to go back to the past is that God created an evolving universe and you are getting in the way.

Tolstoy was incredibly influential and Tolstoyism was a precursor to Bolshevism, providing momentum to the 1905 and 1917 revolutions. Lenin praised Tolstoy but hated his religion. In fact Tolstoy created an atheistic Christianity, very similar to the creed of the Soviet Union.

I do not support either socialism or Tolstoyism in case anyone wants to argue with me. I do believe that Neo Liberalism and its subsequent inequality is primitive and barbaric.

P.S. The bizarre reason Tolstoy stayed out of jail is that his greatest supporter and friend Vladimir Grigoryevich Chertkov was thought to be an illegitimate nephew of the Tsar and had his ear. Two Tsars visited his parents' home.

Abdul Abulbul Amir said...

@6 dhlii

"The failure to exchange does not leave us poorer.
We have the same amount of wealth before and after any exchange - or non-exchange. "

Not true. If you are selling newspapers for a dollar each and I buy one from you, we have both become wealthier by that exchange.

At one time long past the labor and material consumed in in a factory making 500 buggy whips a day was an activity that net created wealth. At this point in history that activity would be one that was net wealth consumption.

While wealth is goods and services it is not raw quantity but value that is the appropriate measure.

.

Brian said...

dhlii (#6 and #7),

Thanks for your extended oration. It's interesting, though utterly irrelevant to my statement. Notice I said "tradeable outcomes," as in capable of being traded. This doesn't imply that one HAS to trade it. When something becomes INCAPABLE of being traded, then it loses all value.

Now, the failure to exchange CAN make us poorer and certainly makes us less wealthy than we could be. If I spend some of my tradeable resources (labor, etc.) to make a widget I don't personally need except to trade, and then I fail to trade it (by destroying it, say), I am indeed poorer. I gave away tradeable assets and now have nothing to show for it. It also leaves someone else poorer, because they were planning to trade something they don't need for my widget, but my refusal to trade leaves them with an untradeable asset.

You say "Adam Smith teetered around a labor theory of value - but never entirely embraced it. Regardless, Marx adopted it and his adherents have disproved it." Are you suggesting that Smith's definition of wealth has been disproved? If so, how exactly?

Brian said...

Roger,

You say "Thanks, but I still like my definition."

Of course you do. We all like our own things. I like my underwear. That doesn't make them better than yours. ;)

Brian said...

Mark (#9) and eric144 (#10),

You said "I'm all for evening out of incomes, as it happens, but not at the expense of taking a word like "poverty" and stripping it of any real meaning."

and "You can go into any American city and ask a resident where the poor people live and they will tell you. It means something to everyone. Even if they have TVs, mp3 players, guns and an account with KFC which no one in North Korea has."

I live in the poorest city in America. (Really. Look it up--Reading, PA) The population is growing, there are lots of cheap and available houses, there's little evidence of people living on the streets, no one is dying of hunger. The city and school system are bankrupt, but that's mostly the result of gross bureaucratic mismanagement.

Let me just say that if this is the "poorest" city in America, then poverty has lost all meaning.

Brian said...

eric144 (#11),

You said "I do believe that Neo Liberalism and its subsequent inequality is primitive and barbaric."

I'm curious--how do you reconcile your distaste for inequality with the reality that people come with different abilities and inclinations, and it's therefore inevitable that inequality exists. Obviously, some people by nature are smarter and more industrious than others. If they are true to themselves, they can't help but outproduce and achieve more than others. How is that barbaric? Please note that neoliberalism and its justification of free markets is little more than the formal acknowledgment of this reality.

media said...

i would disagree. even with higher incomes, people in developed societies (eg usa) may possibly be absolutely poorer due to additional stresses including things like pollution----i am used to riding public transit so often have to wait next to a very polluted road while i watch drivers in their suv's and bmw's drive by.

so one would have to add a normalization factor counting the cost of additional stesses. (some may be psychosocial---'relative deprivation', but even those can be real---eg if you end up with a bad job because all the good ones are taken (eg so you end up breathing pesticides picking fruit for the better off).

a normalization of this sort would be no different from noting that with an equal or even higher income if you live in a cold climate you will have more costs than one in a temperate climate to achieve 'purchasing power parity'.

John-in-Oz said...

Thanks for this post.
Respect.

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