Poverty Alleviation as an Economic Problem

Poverty Alleviation as an Economic Problem Abstract Economists distinguish between technological problems, in which variable means confront a given end, and economic problems, in which given means are allocated across competing ends. James Buchanan and F. A. Hayek each offer constructive criticisms of the standard definition of an economic problem, arguing that economists too easily slide into mechanistic and teleological thinking. Building on these accounts, we argue that there are three key dimensions to the economic problem: exchange, coordination and governance. We then make a case that poverty alleviation is more like an economic problem than a technological one, an economic problem with a small ‘e’. We survey empirical evidence from economics, anthropology and sociology indicating that poverty is not a simple lack of objectively identifiable resources but rather a multidimensional and socially embedded phenomenon. Understanding what poverty alleviation would even look like requires thinking through problems of exchange, coordination and governance. 1. Introduction Standard definitions of poverty compare individuals’ or households’ income to some conventionally accepted set of needs. Poverty is a lack of resources that, if possessed, would allow an individual to cover his or her basic needs—normally expressed in terms of food, shelter and clothing. Poverty alleviation, in turn, is defined as the attempt to remedy this situation, as far as possible (Smeeding, 2001). In this essay, we are concerned with systemic poverty alleviation. With its approximately $2.5 billion annual budget, the World Bank could lift a few thousand people out of poverty through massive transfers. But if it were to spread its budget out, each person living under the commonly cited threshold of severe poverty—$2 a day—would receive about $1. Our arguments do not rule out the first possibility, but that approach is not relevant to the stated goals of most government or international agencies that seek to alleviate poverty. Rather, their goals are typically defined in terms of broad-scale poverty relief. When we refer to ‘poverty alleviation’, this systemic project is what we mean. A technological problem involves achieving some particular goal—such as increasing the quantity of medicine provided—with the most effective means. The economic problem, by contrast, involves determining how to balance a multiplicity of ends in a world of scarcity. This essay argues that not only the social process of wealth creation but also the more modest aim of poverty alleviation is best understood as an economic problem.1 Poverty alleviation is not ‘The Economic Problem’ of wealth creation but ‘an economic problem’ (with a small ‘e’). That is, even where we distinguish the problem of alleviating poverty from the problem of producing wealth, individuals and groups still confront a problem of balancing a multiplicity of ends in a world of scarcity. Our argument proceeds as follows. Section 2 reviews the nature of the economic problem. We synthesize the views of Buchanan and Hayek, arguing that there are three important dimensions to an economic problem: exchange, coordination and governance. Section 3 extends these three categories to poverty alleviation. We cite a wide range of evidence from economics, anthropology and sociology indicating that poverty alleviation is subject to all three dimensions of the economic problem. In Section 4, we explore the implications of our framework for commonly proposed methods of achieving poverty alleviation.2 Many economists, while not explicitly referring to poverty alleviation as a technological problem, implicitly assume that this is the case by treating it as a unitary and distinct social goal (e.g. Barr, 2012, Section 1.3; Ravallion, 2008). Section 5 concludes. 2. The three dimensions of the economic problem Robbins (1932) furnishes the classic distinction between economic problems and technological problems. Whereas technological problems entail finding the most efficacious means of accomplishing a given end, economic problems entail allocating scarce means to multiple and competing ends. Grappling with an economic problem thus involves some criterion for selecting what ends will be served in light of the opportunity cost of doing so. Economists often express this distinction in the form of a limit case: a problem of selecting which among many means best serves a single end is technological, while a problem of allocating some particular means among many ends is economic. Nonetheless, it remains easy to conflate the two sorts of problems.3 This concern is voiced poignantly in James Buchanan’s presidential address to the Southern Economic Association, ‘What Should Economists Do?’ (Buchanan, 1964). Buchanan takes Robbins to task for a stark ambiguity in his definition of the economic problem: he fails to specify whose ends the problem refers to. Many textbooks present ‘The Economic Problem’ itself as one of ‘society’ allocating scarce resources. This ambiguity opens the door to conflating exercises in normative social planning with the social scientific endeavor of understanding how individuals with diverse ends interact with one another. Buchanan focuses his critique on public finance and welfare economics, whose modus operandi is to describe possible states of the world in terms of efficiency, a unified metric that aggregates competing values. Policy recommendations flow naturally from any deviations from efficiency. This sort of exercise may have its uses but effectively reintroduces a single telos into economic analysis by creating a given maximand. How is a social engineer trying to maximize economic efficiency really any different than an electrical engineer maximizing the energy efficiency of a given appliance? Buchanan’s goal is to reframe the economic problem in a way that averts this backsliding into technological thinking about satisfying given ends. Similarly, Hayek (1945) raises concerns about taking knowledge of means and ends as given. Buchanan and Hayek point toward three dimensions of the economic problem: exchange, coordination and governance. These three facets of social interaction are corollaries of the fact that scarce means confront multiple, competing ends, but they provide a fuller picture of what scarcity entails. Omitting any one tends to lead to the reductionism that Buchanan is worried about. Attentiveness to these three dimensions of the economic problem facilitates more consistent application of the economic way of thinking. Though the three are deeply interrelated, we consider each in turn. 2.1. Economics as an exchange problem The fundamental question that Buchanan asks of Robbins is: whose ends are being compared, and who is doing the comparing? Human purposes are several, heterogeneous and often incommensurable. Ends are several, in that they belong to distinct individuals and are not given by membership in a society or group. Ends are also heterogeneous: they differ from one individual to another. Buchanan’s position on economics as an exchange problem complements his commitment to methodological individualism and to radical subjectivism (1999, ch 3). Following this approach, Martin and Wagner (2009) distinguish between surface-level heterogeneity and deep heterogeneity. Surface-level heterogeneity means that ends differ in intensity but not fundamentally, as between two individuals who have differing views about the optimal rate of a sales tax. Deep heterogeneity, by contrast, means that individual ends can be incommensurable, such that there may be no meaningful dimension along which they vary. Incommensurable ends might include pro-life and pro-choice positions regarding abortion policy, deep religious or moral commitments, or combinations of opposing lexicographic preferences. Taking the multiplicity of ends seriously thus means taking the possibility of interpersonal conflict seriously. Competing ends held by different individuals might be truly irreconcilable. The phrase ‘economic problem’ should be read less like an applied math problem—‘maximize f(x)’—and more like a tense encounter with a mobster—‘are we going to have a problem?’ The possibility of conflict makes optimization an unsatisfying answer to the economic problem. But irreconcilable ends do not necessarily mean irreconcilable conflicts. Buchanan argues that economists should focus not on allocation so much as interpersonal exchange. Analyzing social phenomena as emerging from exchange does not impose common, homogeneous or even commensurable ends. Exchange, for Buchanan, is an expansive concept that includes both market and political activity (Buchanan, 1987). Individuals can have preferences, beliefs and values that are not amenable to any form of aggregation or averaging and still exchange with one another. Buchanan thus argues for a catallactic approach to understanding social phenomena—including political phenomena—rather than one focused on economizing with a given set of ends. Coping with the economic problem means adjudicating between several, heterogeneous and often incommensurable ends. Whose ends will be served, by whom and in return for what? In exchange relationships, individuals accomplish their own ends by serving the ends of others, sometimes even unknown others with unknown ends. Where individuals are pursuing different goals through quid pro quo relationships, they are responding to an economic problem. 2.2. Economics as a coordination problem Individuals can advance one another’s ends through exchange relationships. But their ability to do so—even when they are willing—is constrained by their knowledge of others’ ends and of available means. Potential gains from exchange must be discovered before they can be pursued. Hayek (1945) argues that dealing with dispersed knowledge is thus the essence of the economic problem. The knowledge relevant to satisfying our ends at least cost is not given to any one mind, but is rather dispersed throughout society. Knowledge about the relative scarcity of any resource never exists in concentrated form, and may include ephemeral knowledge of time and place as well as a tacit understanding of particular resources and the ends they might serve. Any form of economic organization will effectively cope with the economic problem to the extent that it successfully mobilizes this dispersed knowledge. Hayek’s project is to recast ‘economics as a coordination problem’ (cf. O’Driscoll, 1977). Since no one mind is capable of gathering and processing the information on which effective economization depends, dealing with the economic problem requires coordinating the actions of individuals who cannot know all the facts relevant even to achieving their own ends. Statistical and mathematical tools cannot adequately fulfill this function because, among other reasons, the conditions of relative scarcity are constantly changing. In Hayek’s words, ‘economic problems arise always and only in consequence of change’ (Hayek, 1945, p. 523). The ability of a social system to facilitate coordination depends on the feedback mechanisms available to participants. Due to the ‘knowledge problem’ that entrepreneurs confront about how to best realize the gains from exchange, they inevitably make errors concerning the least cost means of achieving ends. In markets, price signals allow for profit and loss calculations to minimize such errors ex ante, while realized profits and losses provide more direct feedback once an error has been made. Market competition thus acts as a discovery process: rather than entrepreneurs knowing the least cost methods of production ex ante, those means are discovered through the competitive process itself (Hayek, [1968] 2014; Kirzner, 1997).4 Coping with the economic problem means adapting to changing conditions by mobilizing dispersed knowledge, enabling innovative experiments and detecting and correcting entrepreneurial errors. How can ends be served at least cost, and who has the best ideas about how to do so? Individuals confront problems of ignorance as much as problems of scarcity. Where individuals are searching for lower cost means of accomplishing ends—especially the ends of others—they are responding to an economic problem. 2.3. Economics as a governance problem The economic problem does not confront ‘societies’ with unified hierarchies of ends, but rather individuals with several ends and unique knowledge. Buchanan enjoins economists to focus on exchange and the institutions—or rules—that govern different forms of exchange. In so doing, he seeks to drive another wedge between technological and economic problems. Technological problems have an underlying physical setting, while economic (exchange) problems have an underlying social setting: the rules within which various forms of interaction take place. Following Buchanan, economic problems have two stages. In the first stage, individuals establish the rules of the game, while in the second, they pursue their several ends within those rules. The first stage can be thought of as a governance problem, the second as an exchange and coordination problem.5 These rules take a variety of forms. O. E. Williamson (2000) distinguishes between informal cultural norms, formal legal rules and particular contracts and agreements. Rules intersect and affect one another in various ways: exchange behavior shaped by informal norms may lead to the emergence of formal legal norms, legal norms influence the types of contracts individuals are willing to sign, and exchange activity coordinated by contracts has the power (over the long run) to reshape cultural norms. All these levels of rules play a critical role in how individuals grapple with the fundamental economic problem of scarcity. In an important sense, the governance dimension of the economic problem is the meta-problem on which exchange and coordination hinge. Rules profoundly shape both knowledge and incentives. Institutions can incentivize productive or unproductive activities, can be more or less successful at mitigating conflict over scarce resources, and can be more or less successful at enabling realization of gains from exchange. Institutions can also provide (or fail to provide) crucial feedback mechanisms by which individuals can evaluate the success of their plans and identify new opportunities for realizing their ends. The nature and results of exchange relationships in both politics and markets are primarily the result of the rules that individuals follow. Institutions are also analytically important for good social science, both for positive and normative analysis. Emphasizing rules helps avoid the dangers of imposing a false teleology on social processes. Rules operate deontically, specifying what individuals are allowed to do, required to do or forbidden from doing (Crawford and Ostrom, 1995). They set boundaries and requirements on action rather than specifying ends. Positively, we do not need to impose a suspect homogeneity of ends on a population to understand patterns of behavior. Normatively, we can analyze the ability of different rules to incentivize and facilitate morally salutary types of interaction, without assuming that individuals subject to such rules will share certain values with one another or with the analyst. A focus on rules allows for the formulation of proposals that are both more sanguine about differing ends and limited knowledge of individuals, and creates wider scope for agreement among individuals whose ends might conflict. Coping with the economic problem means discovering and adopting rules that facilitate realizing the gains from cooperation and exchange while diminishing the gains from conflict. How do different rules shape exchange behavior? What feedback do they provide? Individuals with different ends facing both the possibility of conflict and stark limitations on their knowledge require rules to successfully coordinate their behavior in mutually beneficial ways. Where individuals rely on rules to mitigate conflict and enable cooperation, they are confronting an economic problem. 3. Poverty alleviation: an economic problem Building upon the framework laid out in the previous section, we now turn to the question of whether poverty alleviation is an economic or a technological problem. On one hand, poverty alleviation is an economic problem in a philosophically trivial sense. Overall levels of poverty obviously depend on how well society copes with ‘The Economic Problem’ (with a capital ‘E’). Societies flourish economically according to the ability of their institutions to incentivize cooperation and coordinate dispersed knowledge. But for the remainder of this essay, we set aside this connection and treat poverty relief as a distinct phenomenon from economic development. The two are strongly related, but not necessarily identical (Dollar et al., 2013). When considered as distinct from economic growth, poverty alleviation might appear to be a technological problem rather than an economic one. One might plausibly argue that, to the extent that we are asking how to best achieve poverty alleviation, it is a given end rather than a plurality of ends. Questions of efficacy would thus be questions of technical efficiency: what are the most appropriate means to this fixed end? We find this position unconvincing, for reasons explained in this section. Alleviating poverty involves balancing multiple competing ends. These ends are held by different individuals and may conflict, making poverty alleviation an exchange problem. The knowledge about achieving those ends is dispersed, making poverty alleviation a coordination problem. And the rules that govern interactions between the poor and their benefactors play a crucial role in shaping both the incentives for cooperation and the knowledge available to them, making poverty alleviation a governance problem. Put differently, there are many margins of poverty. Poverty is fundamentally a multidimensional phenomenon rather than a simple lack of some given basket of resources. Sheer want of income or wealth—in the narrow sense of highly liquid resources—is only one component of what it means to be poor. Sociologists and anthropologists have always emphasized the different dimensions of poverty. These dimensions include, but are not limited to, the relationship between poverty and social isolation, the lack of access to human and social capital, the way in which economic hardship might alter behavior, social norms and the aspirations of the poor, and the incentives provided by social policies aimed at helping the poor (classic studies include Harrington, 1962; Wilson, 1987; Piven and Cloward, 1993; Coleman, 1988). Defining poverty as having a low bank account balance misses what is morally troubling about poverty, and confuses a crude proxy for the thing itself. The multidimensionality of poverty exactly parallels the multiple ends that characterize the Economic Problem. Recent work in sociology and anthropology is consistent with these insights. Poverty is a multidimensional phenomenon because it is a socially embedded phenomenon associated with difficulties related to physical and mental health, social networks, cultural norms, access to legal services, political influence and public services (see, among others, Small and Newman, 2001; Newman and Massengill, 2006; Small et al., 2010; Allard and Small, 2013). Moreover, many of these factors have a complex relationship to poverty rather than a simple linear one (cf. Dominguez and Watkins, 2003; Small, 2004).6 The remainder of this section explores why this is the case, showing that the difficulties confronted by real-world poverty alleviation programs can be understood as exchange, coordination and governance problems. 3.1. Poverty alleviation as an exchange problem Imagine asking a large number of people the following question: ‘Is alleviating poverty a worthwhile goal?’ Such a question would likely garner nearly unanimous affirmative responses. Even those who might dissent would likely be thinking of the task as impossible or objecting to particular means they think the questioner might be implying. But if you were to ask a large number of people what alleviating poverty would actually entail—what would mean that the end had been (however partially) achieved—answers are likely to vary a great deal. Transfers of resources will feature heavily, but others will emphasize public services, health, political power or other dimensions of poverty. Recall the distinction mentioned above between surface-level heterogeneity and deep heterogeneity. Even if individuals are unanimous in their desire to end poverty in the abstract, their concrete ends can differ quite a bit. The sphere of activities aimed at alleviating poverty—philanthropic, religious, political, legal, educational—is more like a catallaxy than a household economy. It is an order comprising many distinctive enterprises, one that we have no reason to expect to cohere. Individuals pursue ends that are several, heterogeneous and potentially in conflict with one another. Even on an abstract philosophical level, academics dispute definitions of poverty, what alleviation would look like, and how to prioritize different forms of alleviation.7 The range for disagreement expands substantially when we consider the various players involved in any poverty alleviation game. Consider private philanthropic efforts. What is the donor’s intent, and how much should it count in evaluating the success of a project? Some donors may prefer to give in-kind rather than cash transfers, or bundle the delivery of a meal with a religious sermon. To what degree should the preferences of recipients count? Recipients may have preferences that tend to reinforce their poverty. Should these be overridden? Do professional non-profit workers possess expert knowledge that should override either the preferences of donors or of recipients? Matters are no less complicated when we involve the public sector. Should voters’ preferences count? When aid crosses borders, does the recipient government get a say in how the money is spent?8 Even among the poor, the definitions of poverty might be contestable. A good example comes from a qualitative study carried out by Rao and Sanyal (2010). They analyze public meetings in Indian villages where villagers themselves are empowered to make decisions regarding budgetary allocations and beneficiary selection for antipoverty programs. The purpose of these public meetings, according to the Seventy-Third Amendment to the Indian Constitution (1992), is to increase the role of village councils in rural governance. The authors show how the definition of poverty among villagers ‘is hardly obvious or unproblematic’, and how village council presidents and ward members ‘struggle over the definition of who is poor’ (2010, pp. 163–65). Although sometimes villagers can reach a consensus in defining who falls below the poverty line, consensus is not the normal outcome of these deliberative processes.9 Studies about the behavior of the poor likewise demonstrate this heterogeneity. There is significant variation in outcomes among the poor living in seemingly identical conditions (cf. Newman, 1999; Small et al., 2010). This variation is unsurprising if one takes into account how the poor develop very different strategies to cope with economic hardship, strategies that are consistent with a heterogeneity of ends among the poor themselves. In this regard, a review of recent ethnographic studies shows how similarly poor people who live in the same poor neighborhoods make substantially different decisions regarding things like pregnancy, studying, drug sales, community participation, and robbery, and how these decisions might constrain or enhance their ability to escape from poverty (Newman and Massengill, 2006). 3.2. Poverty alleviation as a coordination problem Many thinkers argue that alleviating poverty is largely, even primarily, a matter of will (cf. Pogge, 2005, 2008; Singer, 2010). If relatively wealthy individuals were simply more generous or just, the influx of resources could effectively cure poverty for many poor individuals. While we do not want to dismiss such a viewpoint as unreasonable—increased levels of donations or redistribution may have a large effect—we do wish to point out that this approach omits an important variable: the coordination of dispersed knowledge. In addition to the problem of adjudicating between competing ends, poverty alleviation also confronts a problem of coordinating dispersed knowledge about effective means. Knowledge about how to effectively alleviate poverty is presumably just as dispersed as any other knowledge about how to effectively utilize scarce resources. There is a wide array of poverty-alleviating ends, and limited means can be brought to bear in lower- or higher-cost ways of achieving those ends. The requisite knowledge depends not only on generally applicable and easily replicable technical knowledge, but also on knowledge of the particular circumstances of time and place. The sort of knowledge that is relevant for economic development is also relevant for poverty alleviation. Poverty is a socially embedded phenomenon, and thus there is a great deal of contingency in what constitutes effective poverty alleviation from one time and place to another. In economic terms, the ‘binding constraints’ on well-being will vary from one situation to the next. Harragin (2004) provides an example of how poverty alleviation confronts a problem of coordinating dispersed knowledge. He explores the role of local knowledge in the implementation of food relief policies directed to help the Dinka population during the 1998 famine that affected southern Sudan. Relief agencies implemented a focalized aid program, giving preference to one zone over others. In addition, the program considered giving aid only to those with signs of advanced malnutrition. However, this strategy overlooked the social norms that govern the life of the Dinka. Harragin documents that in times of economic hardship, the Dinka will rarely go to anyone outside their kinship to request help. This way of coping with hardship is influenced, among other things, by social norms associated with accepting food prepared by non-relatives. The program implemented by relief agencies caused tension between kinships, and between aid agencies and local authorities. Resources that were intended to go to vulnerable minorities in a given territorial area were reassembled by local authorities after the official distribution and redistributed to the general population along kinship lines. Aid agencies reacted against this practice and considered it evidence of diversion of resources and corruption. Sobel and Leeson (2007) similarly apply Hayekian concepts of dispersed knowledge in disaster relief. They argue that after Hurricane Katrina, FEMA was unable to effectively coordinate the dispersed knowledge of time and place necessary to effectively marshal relief. Those seeking to alleviate suffering following the disaster confronted the problem of finding out who needed what, where and in what quantities. Those organizations that responded most effectively tended to ignore the guidelines and policies laid down by FEMA itself and instead based their decisions on knowledge of local circumstances. A number of authors have drawn the connection between the problem of dispersed knowledge and the persistent shortcomings of foreign aid (e.g. Easterly, 2006; Williamson, 2010). Coyne (2013), building on Leeson and Skarbek (2009), argues that the most that humanitarian aid can do is eliminate suffering. But, owing to the difficulties of gathering knowledge about what concrete conditions are on the ground, aid often fails to achieve even this end, and sometimes results in unintended consequences. The problem of coordinating these activities exists on all sides: donors may lack knowledge about what potential recipients need, donors might adopt plans that clash with or duplicate the efforts of other donors and recipients may lack the knowledge to make effective use of transfers. In addition, if knowledge about how to effectively alleviate poverty is as dispersed as any other knowledge about how to effectively utilize scarce resources, this implies that the relevant conditions for poverty alleviation are constantly changing. In the poverty alleviation game, this not only includes the knowledge about effective means for aiding the poor, but also the apparently simple task of identifying the recipients of poverty alleviation programs. In other words, it is necessary to take into account the dynamic nature of the distribution of poor people in a particular polity. Both the economics and sociology literatures on poverty have long emphasized the dynamic nature of the distribution of poor people and the challenges this poses for the analysis of the effectiveness of poverty alleviation programs (cf. Bane and Ellwood, 1986; Sawhill, 1988; Stevens, 1994; Corcoran, 1995; Baulch and Hoddinott, 2000; Hoynes et al., 2006; Angeriz and Chakravarty, 2007). In claiming that poverty alleviation is subject to a coordination problem, we do not mean that particular policies or organizational forms are ineffective. All modes of organizing relief activities struggle with problems of dispersed knowledge. In one sense, poverty alleviation’s coordination problem is less severe than the ‘capital E’ problem of coordinating economic activity more generally. The range of activities to be coordinated is considerably less extensive, and relief activities can utilize prices generated by markets (cf. Auteri and Wagner, 2007). As Coyne (2013) points out, humanitarian aid can be successful even if often it is not. But in another sense, poverty alleviation faces a more difficult coordination problem in that philanthropic enterprises do not engage in economic calculation. This leads to the final dimension of poverty relief we wish to highlight, governance problems. 3.3. Poverty alleviation as a governance problem The players in the poverty alleviation game have different ends and incomplete knowledge. The ability of players to realize their several goals depends critically on the institutions that govern the game. As is common with questions of social policy more generally, the literature on poverty alleviation frequently focuses on evaluating particular proposals or forms of relief rather than examining the institutional framework within which relief efforts are embedded. The rules relevant to poverty alleviation vary tremendously. In the voluntary sector, the rules of private property and contract still form the core institutional framework. But these rules are modified by various regulations and provisions regarding taxation, fund-raising, and so on. Public sector activities aimed at poverty alleviation are likewise influenced by a mix of rules, including those characteristic of bureaucracy, legislative bodies and committees and electoral procedures. And of course the two sectors deeply affect one another in most countries, exemplifying what Wagner refers to as an ‘entangled political economy’ (Wagner 2010, ch. 8). Recipients’ actions are also constrained by rules, both formal and informal. When the poor receive transfers, either in cash or in kind, their ability to use them productively depends on a variety of institutional factors (Allard and Small, 2013). Take housing programs aimed at helping the poor as an illustration of some of the governance problems discussed above. DeLuca et al. (2013) analyzed the regulations and institutional context of the Housing Choice Voucher (HCV) program in Mobile, Alabama. The HCV program provides subsidies to eligible families to rent a property in the private market rather than being tied to public housing projects in a particular neighborhood. The rationale behind the program is that the voucher system would allow poor families to move to communities that will provide them with higher economic opportunities and improve their social capital. However, the program has not produced the intended results, as many voucher holders remain in poor and segregated communities. The authors emphasize the following problems. On one hand, there are problems with the rules under which the program operates: first, according to the federal guidelines, ‘families are given a maximum of 60 days to locate a unit with their housing voucher’ (p. 278); however, the actors involved in this study revealed that this time limit was quite unrealistic. Second, local public housing authorities with the longest queues ‘often close their lists to new applicants and abandon a first-come first-served policy, selecting families at random and making it difficult for families to plan for their housing search’ (p. 277). In addition, there are additional problems with the institutional context of the program itself: (a) the local housing authorities ‘are tasked with contradictory goals and given too few resources to carry them out’ (p. 286); (b) the same authorities don’t have the adequate incentives to send families to higher-income neighborhoods; (c) the institutional structure of local housing authorities limits interjurisdictional cooperation, which has important effects on voucher portability (p. 287); and (d) the bureaucratic nature of the process limits the potential impact of portability. The authors suggest that this institutional context often works ‘toward different goals than those of the families they are meant to help’ (p. 269). Rosenblatt and DeLuca (2012) obtained similar results in Baltimore. Governance problems can be so severe that they make poverty relief efforts downright counterproductive. Transfers do not cause poverty directly, but can undermine the institutions that enable both wealth creation and poverty alleviation. Easterly (2013, ch. 7) documents a number of cases in which funds supplied by foreign aid have been used to strengthen autocratic regimes rather than to provide poverty relief. He cites a Human Rights Watch report that Meles Zanawi used donor funds to blackmail citizens into supporting his regime (p. 157). Djankov et al. (2008) find that foreign aid tends to undermine democratic institutions, while Young and Sheehan (2014) find that it also weakens the economic institutions that tend to generate growth. With respect to institutions, there is one sense in which poverty alleviation typically confronts a more severe economic problem than that confronted by economic activity more generally: the lack of profit and loss calculation. To the extent that poverty alleviation can be treated as distinct from the ‘capital E’ economic problem at all, it must be the case that organizations aim at ends that are not within the normal ambit of profit-maximizing firms (Auteri and Wagner, 2007). Economists following von Mises (1944, ch. 2) and Hayek have often argued that non-profits of all sorts thus lack a crucial feedback mechanism for determining the success of their plans. Boettke and Prychitko (2004) explicate this difficulty in detail but argue that the competitive pursuit of donations provides at least some feedback for philanthropic endeavors, especially compared to public sector bureaucracies that rely on tax revenue. This feedback is not as fine grained as profit and loss, but it does help weed out some errors. In summary, poverty alleviation is an economic problem insofar as it involves exchange, coordination and governance problems. Poverty alleviation involves balancing multiple competing ends, which are held by different individuals and may conflict, making poverty alleviation an exchange problem. The knowledge about how to achieve those ends is constantly changing and is not given to a single mind, making poverty alleviation a coordination problem. Finally, interaction between the poor and their benefactors is governed by rules that play a crucial role in structuring both the incentives for cooperation and the knowledge available to the actors involved, making poverty alleviation a governance problem. 4. Approaches to poverty alleviation We have argued that attempts to alleviate poverty confront an economic problem because poverty is a multidimensional phenomenon. Detailed studies of poverty and of policies aimed at alleviating it are consistent with this claim. What relevance does this have for evaluating proposals for dealing with poverty? In order to draw out these implications, consider a typology of policy approaches to poverty alleviation, ranging from the most centralized to the least: Comprehensive Planning Piecemeal Engineering Policy Rule Bottom-Up Initiatives Comprehensive planning (i) involves a fairly complex set of policies designed to work in concert to address the multidimensional nature of poverty. Piecemeal engineering (ii) entails a series of policies that target specific aspects of poverty—such as housing, food security, women’s health, and so on—without a comprehensive plan to unify them all in a consistent fashion. A policy rule approach (iii) involves a single policy proposal, typically aimed at income support. In a bottom-up initiatives approach (iv), poverty alleviation initiatives—both private and public—are organized polycentrically. Most economists’ proposals for dealing with poverty fall squarely into approaches (ii) and (iii). Thinkers who support (ii) are often strictly pragmatic, in the sense of being willing to support interventions in which there is at least prima facie evidence that the benefits of such interventions outweigh their costs. These interventions usually include conditional transfers, unconditional subsidies, early childhood development programs, land-based targeting, poor-area development programs, incentives for poor children to invest in human capital (e.g. education and healthcare), microfinance and so on (cf. Ravallion, 2016, ch. 10; Banerjee and Duflo, 2011, pp. 243–46). Thinkers who promote (iii) tend to favor a more limited role for government. Buchanan and Hayek fall into this camp. This could involve a basic income scheme as a replacement of current welfare programs (Murray, 2006), a negative income tax (Friedman, 2002, pp. 192–94) or some form of safety net (Hayek, 1976, p. 87). Many thinkers who favor this approach find it appealing not only for its simplicity, but also for its generality. Buchanan (1997) goes so far as to imagine a constitutionally fixed policy, designed to provide income support while mitigating the possibility of opportunistic behavior. While Buchanan and Hayek take this approach to poverty alleviation, their proposals tend to abstract from the complex, multidimensional nature of poverty. Constitutional bargaining models do this quite explicitly: agents bargain only over income or wealth levels. We have argued, by contrast, that poverty alleviation is best understood as a complex array of related problems rather than as a unitary, distinct problem. Our aim is not to argue against the policies that fall into approaches (ii) and (iii), but rather to simply point out that they are not solutions to the problem of poverty alleviation, and that to treat them as such is to commit a category error. Such policies are no more a solution to the economic problem of poverty than a single business enterprise is a solution to the Economic Problem of wealth creation. These policies may well be one part of a broader array of solutions to poverty, but they are not freestanding solutions. Whether such efforts are helpful, harmful or simply irrelevant to poverty alleviation will depend in large measure on the institutions within which they are nested. None of the players in the poverty alleviation game are passive automata that will fall into line with any given plan. Donors, taxpayers, politicians, bureaucrats, nonprofit workers, for-profit suppliers, and most of all the poor themselves have their own goals that they pursue considering their own local knowledge. Consequently, the formal and informal rules that provide information and knowledge to participants will exercise a profound influence on the actual effects of any policy program. Buchanan’s move toward a constitutional approach to alleviating poverty is a step in the right direction, but it ignores both the multidimensionality of poverty and the role of informal and local institutions in generating institutional variation within a polity (cf. Bologna et al., 2016). Policies that focus on cash transfers may have advantages relative to those that focus on in-kind giving by requiring less local knowledge (cf. Blattman et al., 2014), but even this approach, decoupled from institutional reform, has limits. Obviously, such policies only work to the extent that market institutions are functional: giving the poor money does little if markets cannot deliver the goods. Moreover, it is a mistake to take transfers as given without thinking about the political institutions—both formal and informal—within which they exist.10 Private or public predation may turn cash transfers from a blessing to a curse, as it makes recipients into targets. Finally, we should not take funder incentives for granted. Boettke and Martin (2012) argue that even if they are normatively desirable, basic income policies are unlikely to be politically popular enough to maintain. The comprehensive planning and bottom-up initiatives approaches are, in one sense, opposites. But on a deeper level, they both take the economic problem of poverty alleviation more seriously than approaches (ii) and (iii). A good example of (i) can be the work of Jeffrey Sachs, who has proposed a basket of policies and a long-term, comprehensive strategy to solve the problem of extreme poverty (Sachs, 2005, pp. 280–84).11 In contrast, those who favor approach (iv) tend to be skeptical of such plans, partly for the reasons we have highlighted above. However, they tend to agree with those who favor (i) in the sense that both understand poverty alleviation as a complex array of related problems. Given their tendency to eschew centrally planned solutions, those who favor (iv) tend to rely on bottom-up initiatives, which may include both private charity and local government policies (Easterly, 2006, ch. 1). This may include institutional design aimed at encouraging such initiatives, but the emphasis of those who work within this framework tends to be on what kinds of broader social structures would promote those initiatives more successfully (cf. Pennington, 2011, ch. 6).12 Since the economic problem of poverty alleviation is far less extensive than the Economic Problem of wealth creation, it may be possible that a comprehensive approach to poverty alleviation could be successful. But there are good reasons for being skeptical of this approach, precisely because of the coordination and governance problems confronting planners (including governing the planners themselves). This is not to say that bottom-up initiatives are the winner by default. They have their own difficulties, including both incentivizing contributions and coordinating among diverse initiatives. But approach (iv) has advantages in terms of experimentation and adaptation to local conditions that may go unappreciated when we view poverty alleviation as a technological problem. Bottom-up initiatives may or may not be sufficient, but they deserve a fair hearing when one recognizes poverty alleviation as an economic problem. A holistic view of poverty need not go hand in hand with a top-down approach to dealing with it, just as a holistic view of the Economic Problem does not commend central planning. Advocates of (i) and (iv) are, in our view, asking the right sorts of questions. Which of these proposals is more likely to succeed is something we cannot answer without extensive treatment of some of the problems that each of these approaches face. Our argument does, however, cast doubt on the halfway approaches of piecemeal engineering and policy rules. We do not claim that our argument is decisive against ad hoc policies such as wealth transfers or public health initiatives. These policies may well be complements to a broader social process of poverty alleviation. However, our framework suggests that it is a mistake to think of these policies as being sufficient to alleviate poverty on any large scale. 5. Conclusion Poverty alleviation is at the forefront of philosophical and policy debates. In this paper, we have tried to show that poverty is not a simple lack of objectively identifiable resources but rather a multidimensional and socially embedded phenomenon. We have tried to show that the complex nature of poverty as a social phenomenon makes it an economic rather than a technological problem. We have then argued that there are three key dimensions to understanding how social systems cope with economic problems: exchange, coordination and governance. The exchange dimension of poverty alleviation involves the problem of balancing multiple and competing ends, which are held by different individuals. The knowledge about how to achieve those ends is constantly changing and is not given to a single mind, making poverty alleviation a coordination problem. Finally, the institutional dimension of poverty alleviation, whereby interaction between the poor and their benefactors is governed by rules that structure both the incentives for cooperation and the knowledge available to the actors involved, makes poverty alleviation a governance problem. In a nutshell, institutions matter a great deal for understanding poverty. Being inattentive to institutions, either in our theoretical efforts to understand poverty or in the design of different proposals to deal with it, can have unintended consequences. The sociological literature referred to above shows how this inattentiveness has been the rule rather than the exception. In Allard and Small’s words, ‘our ability to theorize and intervene with respect to the most disadvantaged members of the city has been undermined by our relative neglect of the role of organizations, systems, and institutions’ (2013, p. 16).13 Footnotes 1 Leeson and Skarbek (2009) and Coyne (2013) argue that economic development is an economic problem in this technical sense, and therefore that foreign aid cannot cause development since it cannot solve an economic problem. We take a more radical stance, that even the more modest aim of poverty alleviation is also an economic problem. 2 While we briefly discuss Buchanan and Hayek’s views on poverty alleviation in this section, we are not attempting to develop their positions on this topic. Rather, we are synthesizing their views on the economic problem to develop a fuller and more satisfactory account of poverty alleviation than either of them offers. 3 The language of a ‘problem’ is itself a potentially misleading metaphor. ‘Problems’ are often conceived in terms of obstacles to achieving given ends. In ordinary language, a problem confronts an agent, and agents are agents because they have purposes and plans. Speaking in terms of an economic problem can impose a false teleology onto the social world. 4 While we have focused on the discovery of means, it is no less true that individuals may discover new ends through this sort of process. 5 ‘Governance problem’ is our phrase, not Buchanan’s. Referring to the stages as ‘first’ and ‘second’ is not meant to denote any strict chronological order. Changes to rules often take place as a result of exchange activity. Rather, ‘first’ and ‘second’ refer to the fact that exchanges are always nested in some sort of rules; rules have logical (or ontological) priority. Moreover, the rules themselves are products of social interaction. So, the emergence of a set of rules can itself be analyzed as an exchange problem and a coordination problem in its own right. 6 It is important to distinguish the way in which the word ‘multidimensional’ is used in these studies from Amartya Sen’s (1993, 1999; see also Alkire, 2002) notion of multidimensional poverty. In Sen’s capability approach, being poor is related to the inability of leading a meaningful life, which cannot be reduced to meeting some monetary threshold. In other words, economic resources are necessary but not sufficient to lead a meaningful life. Therefore, notions such as ‘quality of life’ or ‘human development’ cannot be defined entirely in term of some monetary threshold. The two uses of the term are obviously related, but they are not identical. For a more recent application of Sen’s framework to the question of poverty alleviation, see Clark and Hulme (2010). 7 Even in the capability approach advocated by Amartya Sen, the list of capabilities that, if ‘fulfilled’, would allow us to claim that a particular person is no longer poor is open to many specifications. See Sen (1993) for a defense of the ‘open nature’ of the capability approach and Alkire (2002) for a review of how the operationalization of the capability approach varies according to the particular ‘list’ of capabilities used. 8 One might object on the following grounds: ‘Individuals disagree about what poverty alleviation entails, but everyone else is simply mistaken. There is a correct, normative theory of how to weight the different dimensions of poverty and how to alleviate them.’ But even if these statements are true, poverty alleviation is still an exchange problem. In any economic problem, it might be the case that some overall structure of production is morally required, but this does not change the fact that individuals in fact have differing preferences in reality. Implementing even an objectively identified solution involves finding some method of aligning incentives among individuals with distinct ends. 9 See also Olsen (2009) for an analysis of how different forms of moral reasoning are employed by those who intervene in the lives of the poor, for example social workers, researchers, and so on. 10 More generally, it is a mistake to ignore the political institutions within which any form of exchange operates. Barry Weingast (2016) refers to this mistake as ‘the neoclassical fallacy’. 11 Sachs’s plan is global and comprehensive, not only in the sense of trying to cover all aspects of poverty alleviation, but also in the sense of being geographically global. 12 For historical examples, see Beito (2000) and Green (1985). 13 For rich historical accounts of the complexities involved in poverty alleviation see Himmelfarb (1984) and O’Connor (2002). Bibliography Alkire , S . 2002 . Valuing Freedoms: Sen’s Capability Approach and Poverty Reduction , New York , Oxford University Press Google Scholar CrossRef Search ADS Allard , S. W. and Small , M. L . 2013 . Reconsidering the urban disadvantaged: the role of systems, institutions, and organizations , ANNALS of the American Academy of Political and Social Science , vol. 647 , no. 1 , 6 – 20 Google Scholar CrossRef Search ADS Angeriz , A. and Chakravarty , S. P . 2007 . 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The Tyranny of Experts , New York , Basic Books Friedman , M . 2002 . Capitalism and Freedom: Fortieth Anniversary Edition , Chicago , University of Chicago Press Google Scholar CrossRef Search ADS Green , D. G . 1985 . Working-Class Patients and the Medical Establishment: Self-Help in Britain From the Mid-Nineteenth Century to 1948 , London , Maurice Temple Smith Harragin , S . 2004 . Relief and an understanding of local knowledge: the case of southern Sudan , in Rao , V. and Walton , M . (eds), Culture and Public Action , Stanford , CA, Stanford University Press , 307 – 327 Harrington , M . 1962 . The Other America: Poverty in the United States , New York , Macmillan Hayek , F. A . 1945 . The use of knowledge in society , American Economic Review , vol. 35 , no. 4 , 519 – 30 Hayek , F. A . 1976 . Law, Legislation and Liberty, Volume 2, The Mirage of Social Justice , London , Routledge & Kegan Paul Hayek , F. A . 2014 . Competition as a discovery procedure , in Caldwell , B . (ed.), The Collected Works of F. A. Hayek, Vol. 15, The Market and Other Orders: Texts and Documents , Chicago , University of Chicago Press Himmelfarb , G . 1984 . The Idea of Poverty: England in the Early Industrial Age , New York , Faber & Faber Hoynes , H. W. , Page , M. E. and Stevens , A. H . 2006 . Poverty in America: trends and explanations , Journal of Economic Perspectives , vol. 20 , no. 1 , 47 – 68 Google Scholar CrossRef Search ADS Kirzner , I . 1997 . Entrepreneurial discovery and the competitive market process: an Austrian approach , Journal of Economic Literature , vol. 35 , no. 1 , 60 – 85 Leeson , P. T. and Skarbek , D . 2009 . What can aid do ?, Cato Journal , vol. 29 , no. 3 , 391 – 97 Martin , A. and Wagner , R. E . 2009 . Heterogeneity, voting, and public policy , Public Finance and Management , vol. 9 , no. 3 , 393 – 415 Murray , C . 2006 . In Our Hands: A Plan to Replace the Welfare State , Washington, DC , AEI Press Newman , K. S . 1999 . 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Regulating the Poor: The Functions of Public Welfare , New York , Vintage Books Pogge , T . 2005 . World poverty and human rights , Ethics & International Affairs , vol. 19 , no. 1 , 1 – 7 Google Scholar CrossRef Search ADS Pogge , T . 2008 . World Poverty and Human Rights , Cambridge , Polity Rao , V. and Sanyal , P . 2010 . Dignity through discourse: poverty and the culture of deliberation in Indian village democracies , Annals of the American Academy of Political and Social Science , vol. 629 , no. 1 , 146 – 72 Google Scholar CrossRef Search ADS Ravallion , M . 2008 . Poverty alleviation programmes , pp. 550 –5 6 in Durlauf , S. N. and Blume , L. E . (eds), The New Palgrave Dictionary of Economics , Basingstoke , Nature Publishing Group Ravallion , M . 2016 . The Economics of Poverty: History, Measurement, and Policy , Oxford , Oxford University Press Google Scholar CrossRef Search ADS Robbins , L . 1932 . 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Poverty Alleviation as an Economic Problem

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Oxford University Press
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© The Author(s) 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
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0309-166X
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1464-3545
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10.1093/cje/bey010
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Abstract

Abstract Economists distinguish between technological problems, in which variable means confront a given end, and economic problems, in which given means are allocated across competing ends. James Buchanan and F. A. Hayek each offer constructive criticisms of the standard definition of an economic problem, arguing that economists too easily slide into mechanistic and teleological thinking. Building on these accounts, we argue that there are three key dimensions to the economic problem: exchange, coordination and governance. We then make a case that poverty alleviation is more like an economic problem than a technological one, an economic problem with a small ‘e’. We survey empirical evidence from economics, anthropology and sociology indicating that poverty is not a simple lack of objectively identifiable resources but rather a multidimensional and socially embedded phenomenon. Understanding what poverty alleviation would even look like requires thinking through problems of exchange, coordination and governance. 1. Introduction Standard definitions of poverty compare individuals’ or households’ income to some conventionally accepted set of needs. Poverty is a lack of resources that, if possessed, would allow an individual to cover his or her basic needs—normally expressed in terms of food, shelter and clothing. Poverty alleviation, in turn, is defined as the attempt to remedy this situation, as far as possible (Smeeding, 2001). In this essay, we are concerned with systemic poverty alleviation. With its approximately $2.5 billion annual budget, the World Bank could lift a few thousand people out of poverty through massive transfers. But if it were to spread its budget out, each person living under the commonly cited threshold of severe poverty—$2 a day—would receive about $1. Our arguments do not rule out the first possibility, but that approach is not relevant to the stated goals of most government or international agencies that seek to alleviate poverty. Rather, their goals are typically defined in terms of broad-scale poverty relief. When we refer to ‘poverty alleviation’, this systemic project is what we mean. A technological problem involves achieving some particular goal—such as increasing the quantity of medicine provided—with the most effective means. The economic problem, by contrast, involves determining how to balance a multiplicity of ends in a world of scarcity. This essay argues that not only the social process of wealth creation but also the more modest aim of poverty alleviation is best understood as an economic problem.1 Poverty alleviation is not ‘The Economic Problem’ of wealth creation but ‘an economic problem’ (with a small ‘e’). That is, even where we distinguish the problem of alleviating poverty from the problem of producing wealth, individuals and groups still confront a problem of balancing a multiplicity of ends in a world of scarcity. Our argument proceeds as follows. Section 2 reviews the nature of the economic problem. We synthesize the views of Buchanan and Hayek, arguing that there are three important dimensions to an economic problem: exchange, coordination and governance. Section 3 extends these three categories to poverty alleviation. We cite a wide range of evidence from economics, anthropology and sociology indicating that poverty alleviation is subject to all three dimensions of the economic problem. In Section 4, we explore the implications of our framework for commonly proposed methods of achieving poverty alleviation.2 Many economists, while not explicitly referring to poverty alleviation as a technological problem, implicitly assume that this is the case by treating it as a unitary and distinct social goal (e.g. Barr, 2012, Section 1.3; Ravallion, 2008). Section 5 concludes. 2. The three dimensions of the economic problem Robbins (1932) furnishes the classic distinction between economic problems and technological problems. Whereas technological problems entail finding the most efficacious means of accomplishing a given end, economic problems entail allocating scarce means to multiple and competing ends. Grappling with an economic problem thus involves some criterion for selecting what ends will be served in light of the opportunity cost of doing so. Economists often express this distinction in the form of a limit case: a problem of selecting which among many means best serves a single end is technological, while a problem of allocating some particular means among many ends is economic. Nonetheless, it remains easy to conflate the two sorts of problems.3 This concern is voiced poignantly in James Buchanan’s presidential address to the Southern Economic Association, ‘What Should Economists Do?’ (Buchanan, 1964). Buchanan takes Robbins to task for a stark ambiguity in his definition of the economic problem: he fails to specify whose ends the problem refers to. Many textbooks present ‘The Economic Problem’ itself as one of ‘society’ allocating scarce resources. This ambiguity opens the door to conflating exercises in normative social planning with the social scientific endeavor of understanding how individuals with diverse ends interact with one another. Buchanan focuses his critique on public finance and welfare economics, whose modus operandi is to describe possible states of the world in terms of efficiency, a unified metric that aggregates competing values. Policy recommendations flow naturally from any deviations from efficiency. This sort of exercise may have its uses but effectively reintroduces a single telos into economic analysis by creating a given maximand. How is a social engineer trying to maximize economic efficiency really any different than an electrical engineer maximizing the energy efficiency of a given appliance? Buchanan’s goal is to reframe the economic problem in a way that averts this backsliding into technological thinking about satisfying given ends. Similarly, Hayek (1945) raises concerns about taking knowledge of means and ends as given. Buchanan and Hayek point toward three dimensions of the economic problem: exchange, coordination and governance. These three facets of social interaction are corollaries of the fact that scarce means confront multiple, competing ends, but they provide a fuller picture of what scarcity entails. Omitting any one tends to lead to the reductionism that Buchanan is worried about. Attentiveness to these three dimensions of the economic problem facilitates more consistent application of the economic way of thinking. Though the three are deeply interrelated, we consider each in turn. 2.1. Economics as an exchange problem The fundamental question that Buchanan asks of Robbins is: whose ends are being compared, and who is doing the comparing? Human purposes are several, heterogeneous and often incommensurable. Ends are several, in that they belong to distinct individuals and are not given by membership in a society or group. Ends are also heterogeneous: they differ from one individual to another. Buchanan’s position on economics as an exchange problem complements his commitment to methodological individualism and to radical subjectivism (1999, ch 3). Following this approach, Martin and Wagner (2009) distinguish between surface-level heterogeneity and deep heterogeneity. Surface-level heterogeneity means that ends differ in intensity but not fundamentally, as between two individuals who have differing views about the optimal rate of a sales tax. Deep heterogeneity, by contrast, means that individual ends can be incommensurable, such that there may be no meaningful dimension along which they vary. Incommensurable ends might include pro-life and pro-choice positions regarding abortion policy, deep religious or moral commitments, or combinations of opposing lexicographic preferences. Taking the multiplicity of ends seriously thus means taking the possibility of interpersonal conflict seriously. Competing ends held by different individuals might be truly irreconcilable. The phrase ‘economic problem’ should be read less like an applied math problem—‘maximize f(x)’—and more like a tense encounter with a mobster—‘are we going to have a problem?’ The possibility of conflict makes optimization an unsatisfying answer to the economic problem. But irreconcilable ends do not necessarily mean irreconcilable conflicts. Buchanan argues that economists should focus not on allocation so much as interpersonal exchange. Analyzing social phenomena as emerging from exchange does not impose common, homogeneous or even commensurable ends. Exchange, for Buchanan, is an expansive concept that includes both market and political activity (Buchanan, 1987). Individuals can have preferences, beliefs and values that are not amenable to any form of aggregation or averaging and still exchange with one another. Buchanan thus argues for a catallactic approach to understanding social phenomena—including political phenomena—rather than one focused on economizing with a given set of ends. Coping with the economic problem means adjudicating between several, heterogeneous and often incommensurable ends. Whose ends will be served, by whom and in return for what? In exchange relationships, individuals accomplish their own ends by serving the ends of others, sometimes even unknown others with unknown ends. Where individuals are pursuing different goals through quid pro quo relationships, they are responding to an economic problem. 2.2. Economics as a coordination problem Individuals can advance one another’s ends through exchange relationships. But their ability to do so—even when they are willing—is constrained by their knowledge of others’ ends and of available means. Potential gains from exchange must be discovered before they can be pursued. Hayek (1945) argues that dealing with dispersed knowledge is thus the essence of the economic problem. The knowledge relevant to satisfying our ends at least cost is not given to any one mind, but is rather dispersed throughout society. Knowledge about the relative scarcity of any resource never exists in concentrated form, and may include ephemeral knowledge of time and place as well as a tacit understanding of particular resources and the ends they might serve. Any form of economic organization will effectively cope with the economic problem to the extent that it successfully mobilizes this dispersed knowledge. Hayek’s project is to recast ‘economics as a coordination problem’ (cf. O’Driscoll, 1977). Since no one mind is capable of gathering and processing the information on which effective economization depends, dealing with the economic problem requires coordinating the actions of individuals who cannot know all the facts relevant even to achieving their own ends. Statistical and mathematical tools cannot adequately fulfill this function because, among other reasons, the conditions of relative scarcity are constantly changing. In Hayek’s words, ‘economic problems arise always and only in consequence of change’ (Hayek, 1945, p. 523). The ability of a social system to facilitate coordination depends on the feedback mechanisms available to participants. Due to the ‘knowledge problem’ that entrepreneurs confront about how to best realize the gains from exchange, they inevitably make errors concerning the least cost means of achieving ends. In markets, price signals allow for profit and loss calculations to minimize such errors ex ante, while realized profits and losses provide more direct feedback once an error has been made. Market competition thus acts as a discovery process: rather than entrepreneurs knowing the least cost methods of production ex ante, those means are discovered through the competitive process itself (Hayek, [1968] 2014; Kirzner, 1997).4 Coping with the economic problem means adapting to changing conditions by mobilizing dispersed knowledge, enabling innovative experiments and detecting and correcting entrepreneurial errors. How can ends be served at least cost, and who has the best ideas about how to do so? Individuals confront problems of ignorance as much as problems of scarcity. Where individuals are searching for lower cost means of accomplishing ends—especially the ends of others—they are responding to an economic problem. 2.3. Economics as a governance problem The economic problem does not confront ‘societies’ with unified hierarchies of ends, but rather individuals with several ends and unique knowledge. Buchanan enjoins economists to focus on exchange and the institutions—or rules—that govern different forms of exchange. In so doing, he seeks to drive another wedge between technological and economic problems. Technological problems have an underlying physical setting, while economic (exchange) problems have an underlying social setting: the rules within which various forms of interaction take place. Following Buchanan, economic problems have two stages. In the first stage, individuals establish the rules of the game, while in the second, they pursue their several ends within those rules. The first stage can be thought of as a governance problem, the second as an exchange and coordination problem.5 These rules take a variety of forms. O. E. Williamson (2000) distinguishes between informal cultural norms, formal legal rules and particular contracts and agreements. Rules intersect and affect one another in various ways: exchange behavior shaped by informal norms may lead to the emergence of formal legal norms, legal norms influence the types of contracts individuals are willing to sign, and exchange activity coordinated by contracts has the power (over the long run) to reshape cultural norms. All these levels of rules play a critical role in how individuals grapple with the fundamental economic problem of scarcity. In an important sense, the governance dimension of the economic problem is the meta-problem on which exchange and coordination hinge. Rules profoundly shape both knowledge and incentives. Institutions can incentivize productive or unproductive activities, can be more or less successful at mitigating conflict over scarce resources, and can be more or less successful at enabling realization of gains from exchange. Institutions can also provide (or fail to provide) crucial feedback mechanisms by which individuals can evaluate the success of their plans and identify new opportunities for realizing their ends. The nature and results of exchange relationships in both politics and markets are primarily the result of the rules that individuals follow. Institutions are also analytically important for good social science, both for positive and normative analysis. Emphasizing rules helps avoid the dangers of imposing a false teleology on social processes. Rules operate deontically, specifying what individuals are allowed to do, required to do or forbidden from doing (Crawford and Ostrom, 1995). They set boundaries and requirements on action rather than specifying ends. Positively, we do not need to impose a suspect homogeneity of ends on a population to understand patterns of behavior. Normatively, we can analyze the ability of different rules to incentivize and facilitate morally salutary types of interaction, without assuming that individuals subject to such rules will share certain values with one another or with the analyst. A focus on rules allows for the formulation of proposals that are both more sanguine about differing ends and limited knowledge of individuals, and creates wider scope for agreement among individuals whose ends might conflict. Coping with the economic problem means discovering and adopting rules that facilitate realizing the gains from cooperation and exchange while diminishing the gains from conflict. How do different rules shape exchange behavior? What feedback do they provide? Individuals with different ends facing both the possibility of conflict and stark limitations on their knowledge require rules to successfully coordinate their behavior in mutually beneficial ways. Where individuals rely on rules to mitigate conflict and enable cooperation, they are confronting an economic problem. 3. Poverty alleviation: an economic problem Building upon the framework laid out in the previous section, we now turn to the question of whether poverty alleviation is an economic or a technological problem. On one hand, poverty alleviation is an economic problem in a philosophically trivial sense. Overall levels of poverty obviously depend on how well society copes with ‘The Economic Problem’ (with a capital ‘E’). Societies flourish economically according to the ability of their institutions to incentivize cooperation and coordinate dispersed knowledge. But for the remainder of this essay, we set aside this connection and treat poverty relief as a distinct phenomenon from economic development. The two are strongly related, but not necessarily identical (Dollar et al., 2013). When considered as distinct from economic growth, poverty alleviation might appear to be a technological problem rather than an economic one. One might plausibly argue that, to the extent that we are asking how to best achieve poverty alleviation, it is a given end rather than a plurality of ends. Questions of efficacy would thus be questions of technical efficiency: what are the most appropriate means to this fixed end? We find this position unconvincing, for reasons explained in this section. Alleviating poverty involves balancing multiple competing ends. These ends are held by different individuals and may conflict, making poverty alleviation an exchange problem. The knowledge about achieving those ends is dispersed, making poverty alleviation a coordination problem. And the rules that govern interactions between the poor and their benefactors play a crucial role in shaping both the incentives for cooperation and the knowledge available to them, making poverty alleviation a governance problem. Put differently, there are many margins of poverty. Poverty is fundamentally a multidimensional phenomenon rather than a simple lack of some given basket of resources. Sheer want of income or wealth—in the narrow sense of highly liquid resources—is only one component of what it means to be poor. Sociologists and anthropologists have always emphasized the different dimensions of poverty. These dimensions include, but are not limited to, the relationship between poverty and social isolation, the lack of access to human and social capital, the way in which economic hardship might alter behavior, social norms and the aspirations of the poor, and the incentives provided by social policies aimed at helping the poor (classic studies include Harrington, 1962; Wilson, 1987; Piven and Cloward, 1993; Coleman, 1988). Defining poverty as having a low bank account balance misses what is morally troubling about poverty, and confuses a crude proxy for the thing itself. The multidimensionality of poverty exactly parallels the multiple ends that characterize the Economic Problem. Recent work in sociology and anthropology is consistent with these insights. Poverty is a multidimensional phenomenon because it is a socially embedded phenomenon associated with difficulties related to physical and mental health, social networks, cultural norms, access to legal services, political influence and public services (see, among others, Small and Newman, 2001; Newman and Massengill, 2006; Small et al., 2010; Allard and Small, 2013). Moreover, many of these factors have a complex relationship to poverty rather than a simple linear one (cf. Dominguez and Watkins, 2003; Small, 2004).6 The remainder of this section explores why this is the case, showing that the difficulties confronted by real-world poverty alleviation programs can be understood as exchange, coordination and governance problems. 3.1. Poverty alleviation as an exchange problem Imagine asking a large number of people the following question: ‘Is alleviating poverty a worthwhile goal?’ Such a question would likely garner nearly unanimous affirmative responses. Even those who might dissent would likely be thinking of the task as impossible or objecting to particular means they think the questioner might be implying. But if you were to ask a large number of people what alleviating poverty would actually entail—what would mean that the end had been (however partially) achieved—answers are likely to vary a great deal. Transfers of resources will feature heavily, but others will emphasize public services, health, political power or other dimensions of poverty. Recall the distinction mentioned above between surface-level heterogeneity and deep heterogeneity. Even if individuals are unanimous in their desire to end poverty in the abstract, their concrete ends can differ quite a bit. The sphere of activities aimed at alleviating poverty—philanthropic, religious, political, legal, educational—is more like a catallaxy than a household economy. It is an order comprising many distinctive enterprises, one that we have no reason to expect to cohere. Individuals pursue ends that are several, heterogeneous and potentially in conflict with one another. Even on an abstract philosophical level, academics dispute definitions of poverty, what alleviation would look like, and how to prioritize different forms of alleviation.7 The range for disagreement expands substantially when we consider the various players involved in any poverty alleviation game. Consider private philanthropic efforts. What is the donor’s intent, and how much should it count in evaluating the success of a project? Some donors may prefer to give in-kind rather than cash transfers, or bundle the delivery of a meal with a religious sermon. To what degree should the preferences of recipients count? Recipients may have preferences that tend to reinforce their poverty. Should these be overridden? Do professional non-profit workers possess expert knowledge that should override either the preferences of donors or of recipients? Matters are no less complicated when we involve the public sector. Should voters’ preferences count? When aid crosses borders, does the recipient government get a say in how the money is spent?8 Even among the poor, the definitions of poverty might be contestable. A good example comes from a qualitative study carried out by Rao and Sanyal (2010). They analyze public meetings in Indian villages where villagers themselves are empowered to make decisions regarding budgetary allocations and beneficiary selection for antipoverty programs. The purpose of these public meetings, according to the Seventy-Third Amendment to the Indian Constitution (1992), is to increase the role of village councils in rural governance. The authors show how the definition of poverty among villagers ‘is hardly obvious or unproblematic’, and how village council presidents and ward members ‘struggle over the definition of who is poor’ (2010, pp. 163–65). Although sometimes villagers can reach a consensus in defining who falls below the poverty line, consensus is not the normal outcome of these deliberative processes.9 Studies about the behavior of the poor likewise demonstrate this heterogeneity. There is significant variation in outcomes among the poor living in seemingly identical conditions (cf. Newman, 1999; Small et al., 2010). This variation is unsurprising if one takes into account how the poor develop very different strategies to cope with economic hardship, strategies that are consistent with a heterogeneity of ends among the poor themselves. In this regard, a review of recent ethnographic studies shows how similarly poor people who live in the same poor neighborhoods make substantially different decisions regarding things like pregnancy, studying, drug sales, community participation, and robbery, and how these decisions might constrain or enhance their ability to escape from poverty (Newman and Massengill, 2006). 3.2. Poverty alleviation as a coordination problem Many thinkers argue that alleviating poverty is largely, even primarily, a matter of will (cf. Pogge, 2005, 2008; Singer, 2010). If relatively wealthy individuals were simply more generous or just, the influx of resources could effectively cure poverty for many poor individuals. While we do not want to dismiss such a viewpoint as unreasonable—increased levels of donations or redistribution may have a large effect—we do wish to point out that this approach omits an important variable: the coordination of dispersed knowledge. In addition to the problem of adjudicating between competing ends, poverty alleviation also confronts a problem of coordinating dispersed knowledge about effective means. Knowledge about how to effectively alleviate poverty is presumably just as dispersed as any other knowledge about how to effectively utilize scarce resources. There is a wide array of poverty-alleviating ends, and limited means can be brought to bear in lower- or higher-cost ways of achieving those ends. The requisite knowledge depends not only on generally applicable and easily replicable technical knowledge, but also on knowledge of the particular circumstances of time and place. The sort of knowledge that is relevant for economic development is also relevant for poverty alleviation. Poverty is a socially embedded phenomenon, and thus there is a great deal of contingency in what constitutes effective poverty alleviation from one time and place to another. In economic terms, the ‘binding constraints’ on well-being will vary from one situation to the next. Harragin (2004) provides an example of how poverty alleviation confronts a problem of coordinating dispersed knowledge. He explores the role of local knowledge in the implementation of food relief policies directed to help the Dinka population during the 1998 famine that affected southern Sudan. Relief agencies implemented a focalized aid program, giving preference to one zone over others. In addition, the program considered giving aid only to those with signs of advanced malnutrition. However, this strategy overlooked the social norms that govern the life of the Dinka. Harragin documents that in times of economic hardship, the Dinka will rarely go to anyone outside their kinship to request help. This way of coping with hardship is influenced, among other things, by social norms associated with accepting food prepared by non-relatives. The program implemented by relief agencies caused tension between kinships, and between aid agencies and local authorities. Resources that were intended to go to vulnerable minorities in a given territorial area were reassembled by local authorities after the official distribution and redistributed to the general population along kinship lines. Aid agencies reacted against this practice and considered it evidence of diversion of resources and corruption. Sobel and Leeson (2007) similarly apply Hayekian concepts of dispersed knowledge in disaster relief. They argue that after Hurricane Katrina, FEMA was unable to effectively coordinate the dispersed knowledge of time and place necessary to effectively marshal relief. Those seeking to alleviate suffering following the disaster confronted the problem of finding out who needed what, where and in what quantities. Those organizations that responded most effectively tended to ignore the guidelines and policies laid down by FEMA itself and instead based their decisions on knowledge of local circumstances. A number of authors have drawn the connection between the problem of dispersed knowledge and the persistent shortcomings of foreign aid (e.g. Easterly, 2006; Williamson, 2010). Coyne (2013), building on Leeson and Skarbek (2009), argues that the most that humanitarian aid can do is eliminate suffering. But, owing to the difficulties of gathering knowledge about what concrete conditions are on the ground, aid often fails to achieve even this end, and sometimes results in unintended consequences. The problem of coordinating these activities exists on all sides: donors may lack knowledge about what potential recipients need, donors might adopt plans that clash with or duplicate the efforts of other donors and recipients may lack the knowledge to make effective use of transfers. In addition, if knowledge about how to effectively alleviate poverty is as dispersed as any other knowledge about how to effectively utilize scarce resources, this implies that the relevant conditions for poverty alleviation are constantly changing. In the poverty alleviation game, this not only includes the knowledge about effective means for aiding the poor, but also the apparently simple task of identifying the recipients of poverty alleviation programs. In other words, it is necessary to take into account the dynamic nature of the distribution of poor people in a particular polity. Both the economics and sociology literatures on poverty have long emphasized the dynamic nature of the distribution of poor people and the challenges this poses for the analysis of the effectiveness of poverty alleviation programs (cf. Bane and Ellwood, 1986; Sawhill, 1988; Stevens, 1994; Corcoran, 1995; Baulch and Hoddinott, 2000; Hoynes et al., 2006; Angeriz and Chakravarty, 2007). In claiming that poverty alleviation is subject to a coordination problem, we do not mean that particular policies or organizational forms are ineffective. All modes of organizing relief activities struggle with problems of dispersed knowledge. In one sense, poverty alleviation’s coordination problem is less severe than the ‘capital E’ problem of coordinating economic activity more generally. The range of activities to be coordinated is considerably less extensive, and relief activities can utilize prices generated by markets (cf. Auteri and Wagner, 2007). As Coyne (2013) points out, humanitarian aid can be successful even if often it is not. But in another sense, poverty alleviation faces a more difficult coordination problem in that philanthropic enterprises do not engage in economic calculation. This leads to the final dimension of poverty relief we wish to highlight, governance problems. 3.3. Poverty alleviation as a governance problem The players in the poverty alleviation game have different ends and incomplete knowledge. The ability of players to realize their several goals depends critically on the institutions that govern the game. As is common with questions of social policy more generally, the literature on poverty alleviation frequently focuses on evaluating particular proposals or forms of relief rather than examining the institutional framework within which relief efforts are embedded. The rules relevant to poverty alleviation vary tremendously. In the voluntary sector, the rules of private property and contract still form the core institutional framework. But these rules are modified by various regulations and provisions regarding taxation, fund-raising, and so on. Public sector activities aimed at poverty alleviation are likewise influenced by a mix of rules, including those characteristic of bureaucracy, legislative bodies and committees and electoral procedures. And of course the two sectors deeply affect one another in most countries, exemplifying what Wagner refers to as an ‘entangled political economy’ (Wagner 2010, ch. 8). Recipients’ actions are also constrained by rules, both formal and informal. When the poor receive transfers, either in cash or in kind, their ability to use them productively depends on a variety of institutional factors (Allard and Small, 2013). Take housing programs aimed at helping the poor as an illustration of some of the governance problems discussed above. DeLuca et al. (2013) analyzed the regulations and institutional context of the Housing Choice Voucher (HCV) program in Mobile, Alabama. The HCV program provides subsidies to eligible families to rent a property in the private market rather than being tied to public housing projects in a particular neighborhood. The rationale behind the program is that the voucher system would allow poor families to move to communities that will provide them with higher economic opportunities and improve their social capital. However, the program has not produced the intended results, as many voucher holders remain in poor and segregated communities. The authors emphasize the following problems. On one hand, there are problems with the rules under which the program operates: first, according to the federal guidelines, ‘families are given a maximum of 60 days to locate a unit with their housing voucher’ (p. 278); however, the actors involved in this study revealed that this time limit was quite unrealistic. Second, local public housing authorities with the longest queues ‘often close their lists to new applicants and abandon a first-come first-served policy, selecting families at random and making it difficult for families to plan for their housing search’ (p. 277). In addition, there are additional problems with the institutional context of the program itself: (a) the local housing authorities ‘are tasked with contradictory goals and given too few resources to carry them out’ (p. 286); (b) the same authorities don’t have the adequate incentives to send families to higher-income neighborhoods; (c) the institutional structure of local housing authorities limits interjurisdictional cooperation, which has important effects on voucher portability (p. 287); and (d) the bureaucratic nature of the process limits the potential impact of portability. The authors suggest that this institutional context often works ‘toward different goals than those of the families they are meant to help’ (p. 269). Rosenblatt and DeLuca (2012) obtained similar results in Baltimore. Governance problems can be so severe that they make poverty relief efforts downright counterproductive. Transfers do not cause poverty directly, but can undermine the institutions that enable both wealth creation and poverty alleviation. Easterly (2013, ch. 7) documents a number of cases in which funds supplied by foreign aid have been used to strengthen autocratic regimes rather than to provide poverty relief. He cites a Human Rights Watch report that Meles Zanawi used donor funds to blackmail citizens into supporting his regime (p. 157). Djankov et al. (2008) find that foreign aid tends to undermine democratic institutions, while Young and Sheehan (2014) find that it also weakens the economic institutions that tend to generate growth. With respect to institutions, there is one sense in which poverty alleviation typically confronts a more severe economic problem than that confronted by economic activity more generally: the lack of profit and loss calculation. To the extent that poverty alleviation can be treated as distinct from the ‘capital E’ economic problem at all, it must be the case that organizations aim at ends that are not within the normal ambit of profit-maximizing firms (Auteri and Wagner, 2007). Economists following von Mises (1944, ch. 2) and Hayek have often argued that non-profits of all sorts thus lack a crucial feedback mechanism for determining the success of their plans. Boettke and Prychitko (2004) explicate this difficulty in detail but argue that the competitive pursuit of donations provides at least some feedback for philanthropic endeavors, especially compared to public sector bureaucracies that rely on tax revenue. This feedback is not as fine grained as profit and loss, but it does help weed out some errors. In summary, poverty alleviation is an economic problem insofar as it involves exchange, coordination and governance problems. Poverty alleviation involves balancing multiple competing ends, which are held by different individuals and may conflict, making poverty alleviation an exchange problem. The knowledge about how to achieve those ends is constantly changing and is not given to a single mind, making poverty alleviation a coordination problem. Finally, interaction between the poor and their benefactors is governed by rules that play a crucial role in structuring both the incentives for cooperation and the knowledge available to the actors involved, making poverty alleviation a governance problem. 4. Approaches to poverty alleviation We have argued that attempts to alleviate poverty confront an economic problem because poverty is a multidimensional phenomenon. Detailed studies of poverty and of policies aimed at alleviating it are consistent with this claim. What relevance does this have for evaluating proposals for dealing with poverty? In order to draw out these implications, consider a typology of policy approaches to poverty alleviation, ranging from the most centralized to the least: Comprehensive Planning Piecemeal Engineering Policy Rule Bottom-Up Initiatives Comprehensive planning (i) involves a fairly complex set of policies designed to work in concert to address the multidimensional nature of poverty. Piecemeal engineering (ii) entails a series of policies that target specific aspects of poverty—such as housing, food security, women’s health, and so on—without a comprehensive plan to unify them all in a consistent fashion. A policy rule approach (iii) involves a single policy proposal, typically aimed at income support. In a bottom-up initiatives approach (iv), poverty alleviation initiatives—both private and public—are organized polycentrically. Most economists’ proposals for dealing with poverty fall squarely into approaches (ii) and (iii). Thinkers who support (ii) are often strictly pragmatic, in the sense of being willing to support interventions in which there is at least prima facie evidence that the benefits of such interventions outweigh their costs. These interventions usually include conditional transfers, unconditional subsidies, early childhood development programs, land-based targeting, poor-area development programs, incentives for poor children to invest in human capital (e.g. education and healthcare), microfinance and so on (cf. Ravallion, 2016, ch. 10; Banerjee and Duflo, 2011, pp. 243–46). Thinkers who promote (iii) tend to favor a more limited role for government. Buchanan and Hayek fall into this camp. This could involve a basic income scheme as a replacement of current welfare programs (Murray, 2006), a negative income tax (Friedman, 2002, pp. 192–94) or some form of safety net (Hayek, 1976, p. 87). Many thinkers who favor this approach find it appealing not only for its simplicity, but also for its generality. Buchanan (1997) goes so far as to imagine a constitutionally fixed policy, designed to provide income support while mitigating the possibility of opportunistic behavior. While Buchanan and Hayek take this approach to poverty alleviation, their proposals tend to abstract from the complex, multidimensional nature of poverty. Constitutional bargaining models do this quite explicitly: agents bargain only over income or wealth levels. We have argued, by contrast, that poverty alleviation is best understood as a complex array of related problems rather than as a unitary, distinct problem. Our aim is not to argue against the policies that fall into approaches (ii) and (iii), but rather to simply point out that they are not solutions to the problem of poverty alleviation, and that to treat them as such is to commit a category error. Such policies are no more a solution to the economic problem of poverty than a single business enterprise is a solution to the Economic Problem of wealth creation. These policies may well be one part of a broader array of solutions to poverty, but they are not freestanding solutions. Whether such efforts are helpful, harmful or simply irrelevant to poverty alleviation will depend in large measure on the institutions within which they are nested. None of the players in the poverty alleviation game are passive automata that will fall into line with any given plan. Donors, taxpayers, politicians, bureaucrats, nonprofit workers, for-profit suppliers, and most of all the poor themselves have their own goals that they pursue considering their own local knowledge. Consequently, the formal and informal rules that provide information and knowledge to participants will exercise a profound influence on the actual effects of any policy program. Buchanan’s move toward a constitutional approach to alleviating poverty is a step in the right direction, but it ignores both the multidimensionality of poverty and the role of informal and local institutions in generating institutional variation within a polity (cf. Bologna et al., 2016). Policies that focus on cash transfers may have advantages relative to those that focus on in-kind giving by requiring less local knowledge (cf. Blattman et al., 2014), but even this approach, decoupled from institutional reform, has limits. Obviously, such policies only work to the extent that market institutions are functional: giving the poor money does little if markets cannot deliver the goods. Moreover, it is a mistake to take transfers as given without thinking about the political institutions—both formal and informal—within which they exist.10 Private or public predation may turn cash transfers from a blessing to a curse, as it makes recipients into targets. Finally, we should not take funder incentives for granted. Boettke and Martin (2012) argue that even if they are normatively desirable, basic income policies are unlikely to be politically popular enough to maintain. The comprehensive planning and bottom-up initiatives approaches are, in one sense, opposites. But on a deeper level, they both take the economic problem of poverty alleviation more seriously than approaches (ii) and (iii). A good example of (i) can be the work of Jeffrey Sachs, who has proposed a basket of policies and a long-term, comprehensive strategy to solve the problem of extreme poverty (Sachs, 2005, pp. 280–84).11 In contrast, those who favor approach (iv) tend to be skeptical of such plans, partly for the reasons we have highlighted above. However, they tend to agree with those who favor (i) in the sense that both understand poverty alleviation as a complex array of related problems. Given their tendency to eschew centrally planned solutions, those who favor (iv) tend to rely on bottom-up initiatives, which may include both private charity and local government policies (Easterly, 2006, ch. 1). This may include institutional design aimed at encouraging such initiatives, but the emphasis of those who work within this framework tends to be on what kinds of broader social structures would promote those initiatives more successfully (cf. Pennington, 2011, ch. 6).12 Since the economic problem of poverty alleviation is far less extensive than the Economic Problem of wealth creation, it may be possible that a comprehensive approach to poverty alleviation could be successful. But there are good reasons for being skeptical of this approach, precisely because of the coordination and governance problems confronting planners (including governing the planners themselves). This is not to say that bottom-up initiatives are the winner by default. They have their own difficulties, including both incentivizing contributions and coordinating among diverse initiatives. But approach (iv) has advantages in terms of experimentation and adaptation to local conditions that may go unappreciated when we view poverty alleviation as a technological problem. Bottom-up initiatives may or may not be sufficient, but they deserve a fair hearing when one recognizes poverty alleviation as an economic problem. A holistic view of poverty need not go hand in hand with a top-down approach to dealing with it, just as a holistic view of the Economic Problem does not commend central planning. Advocates of (i) and (iv) are, in our view, asking the right sorts of questions. Which of these proposals is more likely to succeed is something we cannot answer without extensive treatment of some of the problems that each of these approaches face. Our argument does, however, cast doubt on the halfway approaches of piecemeal engineering and policy rules. We do not claim that our argument is decisive against ad hoc policies such as wealth transfers or public health initiatives. These policies may well be complements to a broader social process of poverty alleviation. However, our framework suggests that it is a mistake to think of these policies as being sufficient to alleviate poverty on any large scale. 5. Conclusion Poverty alleviation is at the forefront of philosophical and policy debates. In this paper, we have tried to show that poverty is not a simple lack of objectively identifiable resources but rather a multidimensional and socially embedded phenomenon. We have tried to show that the complex nature of poverty as a social phenomenon makes it an economic rather than a technological problem. We have then argued that there are three key dimensions to understanding how social systems cope with economic problems: exchange, coordination and governance. The exchange dimension of poverty alleviation involves the problem of balancing multiple and competing ends, which are held by different individuals. The knowledge about how to achieve those ends is constantly changing and is not given to a single mind, making poverty alleviation a coordination problem. Finally, the institutional dimension of poverty alleviation, whereby interaction between the poor and their benefactors is governed by rules that structure both the incentives for cooperation and the knowledge available to the actors involved, makes poverty alleviation a governance problem. In a nutshell, institutions matter a great deal for understanding poverty. Being inattentive to institutions, either in our theoretical efforts to understand poverty or in the design of different proposals to deal with it, can have unintended consequences. The sociological literature referred to above shows how this inattentiveness has been the rule rather than the exception. In Allard and Small’s words, ‘our ability to theorize and intervene with respect to the most disadvantaged members of the city has been undermined by our relative neglect of the role of organizations, systems, and institutions’ (2013, p. 16).13 Footnotes 1 Leeson and Skarbek (2009) and Coyne (2013) argue that economic development is an economic problem in this technical sense, and therefore that foreign aid cannot cause development since it cannot solve an economic problem. We take a more radical stance, that even the more modest aim of poverty alleviation is also an economic problem. 2 While we briefly discuss Buchanan and Hayek’s views on poverty alleviation in this section, we are not attempting to develop their positions on this topic. Rather, we are synthesizing their views on the economic problem to develop a fuller and more satisfactory account of poverty alleviation than either of them offers. 3 The language of a ‘problem’ is itself a potentially misleading metaphor. ‘Problems’ are often conceived in terms of obstacles to achieving given ends. In ordinary language, a problem confronts an agent, and agents are agents because they have purposes and plans. Speaking in terms of an economic problem can impose a false teleology onto the social world. 4 While we have focused on the discovery of means, it is no less true that individuals may discover new ends through this sort of process. 5 ‘Governance problem’ is our phrase, not Buchanan’s. Referring to the stages as ‘first’ and ‘second’ is not meant to denote any strict chronological order. Changes to rules often take place as a result of exchange activity. Rather, ‘first’ and ‘second’ refer to the fact that exchanges are always nested in some sort of rules; rules have logical (or ontological) priority. Moreover, the rules themselves are products of social interaction. So, the emergence of a set of rules can itself be analyzed as an exchange problem and a coordination problem in its own right. 6 It is important to distinguish the way in which the word ‘multidimensional’ is used in these studies from Amartya Sen’s (1993, 1999; see also Alkire, 2002) notion of multidimensional poverty. In Sen’s capability approach, being poor is related to the inability of leading a meaningful life, which cannot be reduced to meeting some monetary threshold. In other words, economic resources are necessary but not sufficient to lead a meaningful life. Therefore, notions such as ‘quality of life’ or ‘human development’ cannot be defined entirely in term of some monetary threshold. The two uses of the term are obviously related, but they are not identical. For a more recent application of Sen’s framework to the question of poverty alleviation, see Clark and Hulme (2010). 7 Even in the capability approach advocated by Amartya Sen, the list of capabilities that, if ‘fulfilled’, would allow us to claim that a particular person is no longer poor is open to many specifications. See Sen (1993) for a defense of the ‘open nature’ of the capability approach and Alkire (2002) for a review of how the operationalization of the capability approach varies according to the particular ‘list’ of capabilities used. 8 One might object on the following grounds: ‘Individuals disagree about what poverty alleviation entails, but everyone else is simply mistaken. There is a correct, normative theory of how to weight the different dimensions of poverty and how to alleviate them.’ But even if these statements are true, poverty alleviation is still an exchange problem. In any economic problem, it might be the case that some overall structure of production is morally required, but this does not change the fact that individuals in fact have differing preferences in reality. Implementing even an objectively identified solution involves finding some method of aligning incentives among individuals with distinct ends. 9 See also Olsen (2009) for an analysis of how different forms of moral reasoning are employed by those who intervene in the lives of the poor, for example social workers, researchers, and so on. 10 More generally, it is a mistake to ignore the political institutions within which any form of exchange operates. 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Cambridge Journal of EconomicsOxford University Press

Published: Apr 10, 2018

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