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Sunday, June 22, 2008

Adam Smith on Poverty

Gavin Kennedy finds Don Arthur at Club Troppo asking "What if Adam Smith was Right about Poverty?" This relates to the idea often heard in debates about poverty that since the material well-being of the poor has increased over time, there's no need to worry about inequality:

Adam Smith on Poverty, by Gavin Kennedy: A post by Don Arthur in the Australian Blog, Club Troppo, (here) which has been quoted on Lost Legacy in the past when I referred to articles by Nicholas Gruen, opens an interesting and important discussion on poverty in societies and Adam Smith’s expressed view on the issue. I only quote some parts of it, and I have deleted several excellent references and discussions of recent work by academics on related matters. Check the link and read them for yourself:

What if Adam Smith was right about poverty? Don Arthur,  June 22: Well-being isn’t just about our relationship with things, it’s also about our relationships with each other. Poverty hurts, not just because it can leave you feeling hungry, cold and sick, but because it can also leave you feeling ignored, excluded and ashamed. In The Theory of Moral Sentiments Adam Smith argued that all of us want others to pay attention to us and treat us with respect. And "it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty."

Recent research confirms Smith’s intuitions — social pain is every bit as aversive as physical pain. ...

So if Smith is right then what should we do about involuntary poverty? Is it enough to provide state subsidised goods such as housing and healthcare and to dole out money for necessities?

Adam Smith — Poverty as social exclusion
According to Adam Smith, human beings are by nature social creatures. In The Theory of Moral Sentiments, he wrote:

Nature, when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard. 

The reason poverty causes pain is not just because it can leave people feeling hungry, cold and sick, but because it is associated with unfavourable regard. As he explains:

'The poor man … is ashamed of his poverty. He feels that it either places him out of the sight of mankind, or, that if they take any notice of him, they have, however, scarce any fellow–feeling with the misery and distress which he suffers. He is mortified upon both accounts; for though to be overlooked, and to be disapproved of, are things entirely different, yet as obscurity covers us from the daylight of honour and approbation, to feel that we are taken no notice of, necessarily damps the most agreeable hope, and disappoints the most ardent desire, of human nature. The poor man goes out and comes in unheeded, and when in the midst of a crowd is in the same obscurity as if shut up in his own hovel.'

For Smith, a person’s possessions function as signals of underlying personal characteristics — characteristics that others regard either favourably or unfavourably. In the Wealth of Nations he wrote:

'A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct.'

As Mark Thoma notes, Adam Smith thought poverty was about much more than physical deprivation. The labourer’s linen shirt has value because it can be used to influence other people’s opinions. The labourer is using the shirt as a raw material in a production process — a process that affects other people’s mental states, changes their behaviour and, ultimately, improves the psychological well being of the wearer.

The ‘good’ that is being consumed here is not the shirt — it is the observer’s opinion. While it’s true that the observer’s opinion only affects the labourer’s well being via behavioural signaling, this is true of many consumer goods. ...

The social utility of wealth
According to Smith, the rich get far more attention and respect than the poor — even when they’ve done nothing to merit it. "In equal degrees of merit", he wrote, "there is scarce any man who does not respect more the rich and the great, than the poor and the humble." Material consumption acts a signal of underlying characteristics — characteristics that are able to provoke deference, approval and affection. ... There is growing body of evidence for this claim. ...

What if Adam Smith was right?
For Adam Smith poverty meant having visibly less than others. But it’s not obvious that Smith’s problem of poverty could be solved simply by handing out food, housing and health care to those at the bottom of the income distribution. Smith argued that people have social as well as physical needs. In our society, working-age adults meet many of these needs through paid employment. Work is not just a source of income, it can also be a source of status, belonging and approval from others.

This view of well-being helps explain why income redistribution on its own will never be enough to guarantee that the needs of the least advantaged are met. When income support payments are linked to tests of employability (as with disability payments) or job search effort (as with unemployment payments), eligibility for the payments is itself a signal (whether we like it or not).

If we’re committed to constantly improving well-being of the least advantaged, what policies should we support?”

Comment
I may come back to this later as I am about to leave for my wife’s birthday party and it would not be nice to delay proceedings at our daughter's house. Meanwhile read the whole posting by Don Arthur; it is an excellent use of your time.

As I've said before, poverty is not just about absolute income, i.e. about meeting physical needs. Poverty exists when a person cannot fully participate in society:

Giving people the things they need to be a full part of the society they live in is the decent and right thing to do. As our society elevates itself and the requirements for full participation increase, when things like computers are as necessary as a stove, our standards of decency - what we are willing to accept as a minimum standard of living - must also rise. Just meeting physical needs - food and clothing - is not enough to be a full part of the society we live in today. We can and should do better than that.

    Posted by on Sunday, June 22, 2008 at 11:16 AM in Economics, Income Distribution, Social Insurance | Permalink  TrackBack (0)  Comments (26)

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