David Warsh: Global poverty and 'when necessity replaces desire'

U.S.. Depression-era photo by Dorothea Lang. She took pictures for the federal Resettlement Administration and Farm Security Administration.

SOMERVILLE, Mass.

When Anthony Atkinson was 17 and finished with boarding school, in 1962, he quit his job at IBM in London to spend nine months working at a hospital for the poor in Hamburg, Germany, as a kind of British Peace Corps volunteer. Working for IBM had been interesting, he told his friend Nicholas Stern in an interview: “there were still valves in computers in those days.”  But the effect of the demanding work in the hospital was more profound. . .

Returning to his studies, he joined the Child Poverty Action Group. The Poor and the Poorest, by Brian Abel-Smith and Peter Townsend (1965), came out that Christmas Eve and made it clear that dire poverty still existed in post-war Britain. Three years before, Michael Harrington had published The Other America, the first broadside in what eventually became the “war on poverty.”

Strongly influenced by James Meade’s austere little monograph "Efficiency, Equality, and the Ownership of Property,'' Atkinson switched from mathematics to economics at Churchill College, Cambridge University.  In 1970, in the Journal of Economic Theory, then just beginning its transformative run, he published “The Measurement of Inequality.” Thereafter came a book and half a dozen articles almost every year for nearly half a century.

Atkinson died  on New Year’s Day 2017 a deeply beloved figure among applied economists.  Among many other things, he was the scholar more responsible than any other for the first of the Sustainable Development Goals adopted by the United Nations in 2016: “Goal 1.1: by 2030, eradicate extreme poverty, for all people, everywhere, currently measured as people living on $1.25 a day.” An autobiographical interview conducted by Stern appeared in the lead position of 2017's Annual Review of Economics, an honor previously accorded only Kenneth Arrow and Paul Samuelson.

More or less the last thing that Atkinson wrote was as head of "Monitoring Global Poverty: Report of the Commission on Global Poverty''  for the World Bank, which appeared earlier this year. The original $1 a day figure (in local currency equivalents), which had risen to $1.25 in 2005 dollars, was by now $1.90 a day.  Atkinson was well aware of the deficiencies of the methods by which that figure was arrived at, but, from a practical standpoint, he reasoned that it was better to stick with the original yardstick than to try change it midstream.  “The $1.90 line has acquired an independent political status,” he wrote.

Perhaps not. In "Absolute Poverty: When Necessity Replaces Desire,''  the lead article in the December 2017 American Economic Review, Robert C. Allen, a distinguished economic historian, takes up the question.  Originally conceived for developing countries, the World Bank poverty line can be profoundly misleading, he says.

For one thing, because of an accident of history, it is “not valid outside of the tropics,” he says. For another, it makes no attempt to assess the difference between “food” and “non-food” spending. Neither varies with climate.  How far would a tropical allowance for fuel and clothing go in surviving a Russian winter?

Allen’s approach implies much more “absolute poverty” than the World Bank measure, especially in Asia.  It has the added virtue of revealing that millions of persons are living in that condition in rich countries around the world – especially the U.S. and the U.K.

It was in 1991 that a trio of World Bank economists collected poverty lines that had been established in 33 countries, ranging from poor to rich, converted them to dollars using purchasing power parity exchange rates, and plotted the results against per capita consumption. The minimum standard of living in the six poorest countries clustered around a $1 a day. That became the measure of absolute poverty, especially after their finding was buttressed by a second study of 15 poor countries in 2009.

Problems with the method were pointed out over the years.  For example, Angus Deaton, of Princeton University, noted in 2010 that, while India had been in the original sample of poor countries, it had grown so much in 15 years that it was no longer included when the second study was made in 2005.  The Indian poverty line was very low in 1991, so leaving it out of the new sample raised the average World Bank poverty level. That meant that measured poverty in India increased dramatically in the second survey, despite all the growth that had occurred.

A historian of the British industrial revolution, Allen, 70, came to the problem of poverty measurement from historians’ longstanding tradition of assembling basic baskets of necessary goods with which to measure the purchasing power of workers’ wages.  In ''Poverty Lines in History, Theory, and Current International  Practice,''  a discussion paper at Oxford, where Allen taught at Nuffield College for many years, he compared historians’ straightforward practices in comparing wages in widely differing countries and climate with the World Bank’s statistical approach. He concluded:

"Perhaps the World Bank can learn a lesson from historians and settle on an explicit definition of poverty that can be applied across space and over time. Historical research indicates that this is practical. The benefits in terms of transparency and intelligibility would be large.''

In the new article, Allen shows how.  Using the mathematics of linear programming, techniques discovered during World War II, Allen calculates a “food security line,” the cheapest possible diet required to keep an adult alive, with certain small allowances permitted for local substitutions and preferences. Economist George Stigler, of the University of Chicago, had reasoned his way to a close approximation of the same during the war, using trial and error.

The truly poor do the same out of experience. Absolute poverty means that your life is governed by linear programing, says Allen, not by standard consumer theory.  You eat to live.  Necessity displaces desire. Inevitably there is a little “wiggle-room” in the diets of the absolute poor: a small amount of sugar, a favorite spice, food prepared for festivals.  But for those on the margin of survival, linear programming pretty much describes the choices made.

He augments his “Basic Needs” measure with two other headings – nonfood goods, and rented housing – and, by the end of the exercise, has described a method much more clearly related, not just to survival but to well-being. Many conceptual problems with the World Bank dollar-denominated yardstick disappear as well. Atkinson recognized as much, Allen says; he just didn’t think it was a good idea to move the goalposts in the middle of the match.

It’s a long road ahead. Allen, today Global Distinguished Professor of New York University Abu Dhabi as well as at Nuffield College, doesn’t have as much time to proselytize the historians’ approach as Atkinson did his. But the two are brothers under the skin.  Measurement economists will take up Allen’s methods. The picture of poverty around the world will come into sharper focus.  Safety nets will be improved.

And on a day (Dec. 24) on which Ron Lieber, of The New York Times, reported on yet another little-noticed provision of the new U.S. tax act – the one that allows families to use tax-exempt savings accounts to pay private school tuitions from elementary school instead of just college bills – Atkinson surely would have welcomed Allen’s diversion from the ordinary on another Christmas Eve.

David Warsh, an economic historian and veteran business journalist, is proprietor of economicprincipals.com, where this essay first ran.

What to do about capitalism in the 21st Century

  By DAVID WARSH

BOSTON

"Economist Receives Rock Star Treatment": That was the recent  headline  on Jennifer Schuessler’s story in The New York Times. The facts bear her out. Thomas Piketty, 42, of the Paris School of Economics, seemed to be everywhere last week. Publication of his 685-page Capital in the Twenty-First Century had been moved up by two months, sales were soaring (46,000 copies so far), a triumphant tour of Washington (meeting with Treasury Secretary Jack Lew) and New York (appearing at the United Nations) has been completed. Encomiums were pouring in. “Pikettty has transformed our economic discourse,” wrote Paul Krugman in the current New York Review of Books. “We’ll never talk about wealth and inequality the way we used to.”

Not bad for an economist who traded an appointment at the Massachusetts Institute of Technology for a job as a researcher for the French government in 1996, when he was 25.  “I did not find the work of US economists entirely convincing,” he writes in the introduction to Capital in the Twenty-First Century:

" I was only too aware  that I knew nothing at all about the world’s economic problems.  My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since [Simon] Kuznets [in the 1950s and ’60s], yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained.''

He went home to collect some of the missing facts.

Piketty wanted to teach at the Ecole des Hautes Etudes en Sciences Sociales, the elite institute whose faculty had included many of the foremost figures in the Annales school, including Lucien Febvre and Fernand Braudel – a group of scholars, most  of them quantitative historians, that achieved enormous influence around the world publishing in the journal Annales. Economies, sociétés, civilisations (or Annales. Histoire, Sciences Sociales as it is called today).

Piketty got that job, along with time to do the research he wanted, first producing a book in 2001 on high incomes in France since 1901, then enlisting Anthony Atkinson, of Oxford University, in a similar investigation of Great Britain and several other countries.  His friend and countryman Emmanuel Saez, of the University of California at Berkeley, produced similar data for the US. The World Top Incomes Database (WTID) is the result.  Data on wealth, following the methods of Robert Lampman, of the University of Wisconsin, came next. Starting in 2003, Piketty began setting up the new Paris School of Economics; in 2006, he was named its first head.  He resumed teaching and writing the next year.

Piketty’s thesis is set out succinctly on the first page of his introduction:

"When the rate of return on capital exceeds the rate of growth of output, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.  There are ways nevertheless democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.''

What are those measures?  Four chapters in the fourth section of the book draw a variety of policy lessons from the first three parts for a “social state:”

The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.

Piketty says he’s left Paris only a few times on short trips since returning nearly 20  years ago.  My hunch is that, after last week, it will be a long time before he takes another. He’s left behind a beautiful book, one that will receive a great deal of attention around the world in the years to come.  He’s gone home to work on others.

            xxx

Michael C. Janeway, a former editor of The Boston Globe, died last week.  He was 73. It was he who, as managing editor, permitted Economic Principals to begin in 1983 as a column in the Sunday business pages. I have always been grateful to him, and to Lincoln Millstein, still very much alive, who led the blocking.

David Warsh is a long-time financial journalist and economic historian and proprietor of www.economicprincipals.com