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Posted at: Jul 22, 2016, 12:23 AM; last updated: Jul 22, 2016, 12:23 AM (IST)

The economics of poverty

S Subramanian
Understanding inequality and welfare; and the factors at play
The economics of poverty
AFRIEND of this columnist is a deeply dedicated teacher of economics in a Southern University. For years he has been trying to make the discipline accessible to students. Recently, he arranged for students to address questions to economists which the latter would answer. I received a set of six questions which are very representative of the sorts of concerns which students and laypersons often display in my area of work. I thought it would be useful to share the questions and answers with my readers. 

Q. Physicists, physicians and other scientists are agreed on how to measure the phenomena they study, like the speed of light, the age of matter, temperature, and blood pressure. How is it that economists, with the powerful quantitative tools at their disposal, are unable to arrive at a consensus on how poverty is to be measured? Is it because measuring poverty is more an ideological issue? 

A. A cardinal principle of measurement revolves around the requirement that the ‘norm’ or ‘standard’ of measurement should be unvarying across contexts. For example, if we are measuring length, then we should use a measuring rod of the same length across contexts; preserving a measuring rod of the same weight would be meaningless. 

Similarly, when we measure and compare poverty across temporal or spatial contexts, the question arises: in what ‘space’ should we preserve constancy of the measuring standard? Some have said: ‘In the space of real incomes, or commodity bundles, or resources in general.’ Others have said: ‘In the space of human functionings.’  

Poverty, unlike temperature, is a social, not a natural, phenomenon; and economics, unlike physics, is a social, not a natural, science. Insisting that economics is a discipline akin to physics is a recipe for comedic confusion. 

The distinction between length and weight is more direct, and requires rather less deliberation, than the distinction between resources and functionings. We should therefore be  unsurprised that achieving consensus on how to measure poverty is inherently more problematic than achieving consensus on how to measure temperature. 

And yes, a good deal of what makes the problem complex is the fact that ideology does indeed inform our understanding of concepts such as ‘poverty’.  

Q. As long as poverty is reduced, why should we bother about inequality? Cannot we have an economy with no destitution and yet with some earning far more than others? 

A. This is a point of view that has been expressed by many including, in particular, the moral philosopher Harry Frankfurt. In a paper titled ‘Equality as a Moral Ideal’, Frankfurt has advanced the distributional ethic of ‘sufficientarianism’ which — crudely put — finds inequality objectionable only to the extent and in the sense that it co-exists with poverty: inequality, in this view, should be relatively unproblematic in a situation wherein all citizens have a sufficiency of the resources needed to avoid poverty; objecting to inequality even in such a circumstance could simply be a symptom of envy.  

A somewhat more complex view of the matter would suggest that there are intrinsic moral objections (based on criteria of fairness and impartiality) to inequality beyond a point, and also instrumental political objections that have to do with the implications of inequality for efficiency, conflict, perceptions of fairness, and the status of public health outcomes. (On the subject of inequality and health, the reader is referred to the Marmot Review: Fair Society, Healthy Lives by the eminent British physician Michael Marmot.)  

Q. Inequality of income is often due to differences in talent and market demand for particular kinds of skills. That is why AR Rehman earns fabulously more than musicians who either a) have lesser talent or b) perform the kind of music with very low demand in the music market compared to his music. What is wrong with inequality derived from one's superior talents or skills with more demand in the market? 

A. I suppose one cannot object to ‘superior talent’ earning a differential reward when such superior talent is ascribable entirely and only to ‘inherent’ effort, and not to blind chance or to social arrangements and institutional practices. This is a useful distinction in principle, but one which it is hard to determine in fact, not least because of ideological predilections and presuppositions which mediate the judgement. Finally, why on earth should one credit the market with the ability to make such a nuanced judgement?!   

Q. Ethics is a subjective issue, a matter of opinion and social convention. Economics is based on objective facts.  How can something subjective like ethics be related to a science like economics? Does not [the distinguished economist] Lionel Robbins clearly say that economists should stay away form ethical questions? 

A. We are not obliged to accept Lionel Robbins’ views on the subject! Economics is not concerned exclusively with an ‘explanation’ of how the world works, least of all of a world which is held to be ‘natural’ rather than ‘social’ in its construction. 

How one believes the ‘economic world’ works also has implications for what one believes should be done in order for that world to be ‘better’ than it is. This is why economics is interested in questions of ‘policy’ (narrowly conceived) and of ‘philosophy’ (broadly conceived). 

Economics, that is, is not only about ‘is’ propositions, but about ‘ought’ propositions. It is the task of an economist to interpret ‘objective facts’ in terms of the ethical categories of both the ‘right’ and the ‘good’. To deny a normative component to economics is a matter of shockingly bad social theory (and even worse social practice): economics as a wholly ‘positive’ science is a somewhat silly conceit, and a dishonest one at that.  

Q. I get the impression that social choice is about what people in society prefer. But people differ in their preferences so how can there be something called “social preference”? 

A. The question of aggregating individual preferences into a social preference would scarcely be interesting, would it, if perfect unanimity always prevailed?! What makes the problem of ‘social choice’ based on individual preferences interesting and exciting is the fact of the diversity of preferences and conflict of interests. The normative axiomatic foundations of social choice mechanisms would otherwise be seriously uninteresting!

Q. Do you agree with the argument that government failure is more harmful than market failure because the state can correct the market but there is no institution to correct the state, and so, as far as possible, the private sector should dominate economic life? 

A. No, I do not agree. The conditions required to prevent market failure are unrealistically demanding, and they do not obtain in the idealised form in which they are required to exist for ensuring ‘corrections’ to market failure. On the other hand, a properly functioning democracy is a good cure for government failure. 

It would also help — to keep governments on the straight and narrow path of virtue — for professional economists to display some ordinary sense of moral responsibility in the discharge of their professional obligations, by which I mean that there could be more to being an economist than doing whatever is required in order to be nominated to the next Government Commission or Public Office!  

— The writer is a retired Professor of economics 

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