The economics of charity: should beggars be choosers?

In microeconomic theory, consumers and producers make up two halves of a productive economy. In such a model, even traditionally marginalised groups can be categorised as consumers or producers, or both.

Specifically, the homeless, who typically have very limited economic productivity and hence income flow, should be thought of as consumers with their own preferences and utilities. This perspective is essential for communities and NGOs when determining financial strategies to minimise homelessness. Using basic consumer theory, I will compare the results of cash and in-kind transfers given to the homeless.

Rough sleepers make up approximately 0.5% of the Australian population. Their income from panhandling mostly goes towards food, clothing and shelter, and is supplemented by services offered by charity, including meal vouchers, hostel accommodation and health and transport services.

Two sets of consumption goods can be differentiated: primary goods (necessities: food, shelter, clothing), and secondary goods (everything else: education, skills courses, luxury goods). We can assume that like everyone else, rough sleepers would want to consume these two sets of goods in fixed proportions, for example a bed (secondary) with each hostel room (primary), or a T.V. show with each meal. This makes primary and secondary goods perfect complements – the two must be consumed in fixed, but not necessarily equal proportions to give a consumer maximum benefit – or, as economics students would say! – maximum utility.

Let’s assume that all goods in the economy have to be paid for: either by their own income, or by charity vouchers. However, their limited income allows them to spend mostly on primary goods, which are cheaper (and more immediate to survival needs). Secondary goods are provided in the form of charity vouchers and cannot be increased.

A simplistic version of a homeless consumer’s consumption function is illustrated below:

cons1

The homeless consumer’s indifference curves are L-shaped as primary and secondary goods must be taken in fixed proportions. For this particular consumer, one secondary good gives the same level of satisfaction as two or more primary goods. Keeping consumption of secondary goods constant, this means that consuming more than two primary goods is unproductive, as utility does not keep increasing. For some primary goods such as food, that offers sustenance, he may choose to consume the maximum quantity available. For others, such as accommodation and clothing, he would be unable to utilize more than a certain amount anyway and may choose to consume at the corner.

And what are the utilities of each indifference curve? In this case, the utility values here are given as the ‘utility of living’: what each possible combination of primary and secondary goods could do to launch a homeless person from basic survival to slowly getting by with support, and from there to part-time employment and in time, even adult independence.

However, the diagram shows us that something is problematic. Under this system, the homeless are stuck on the same indifference curve no matter how many more primary goods they consume. In other words, their situation changes very little despite receiving extra food stamps from the Salvation Army, or collecting marginally more loose change from panhandling (which would likely go towards the cheaper primary goods anyway).

Homeless people simply do not have the resources to buy more of the secondary goods, which are necessary, together with primary goods, to aspire to greater standards of living. What could we do to extend, or ‘unflatten’ their budget line? One answer is simply to give them cash to spend on secondary goods.

Broadway, a charity in London dedicated to helping the homeless, did precisely this. It asked 21 Londoners who had been sleeping rough for 4-45 years what it would take to get them off the streets and turn their lives around. Staff members then worked with them to develop personalized budgets of up to £3000. One asked for a travellers’ caravan and another, a pair of shoes and a television set. The average outlay amounted to only £794. And it worked – 19 have since moved into secure accommodation.

Conditional cash transfers can stamp out the risk of spending the cash on more unproductive primary goods, or towards ‘bads’, such as drugs, alcohol and gambling.

cons2

Although a system of cash transfers would not be cheap, the Australian Government is already spending $6.2bn on homelessness prevention and housing assistance (from years 2009-13), and investing $11.4m in national homelessness research. This amounts to a cost of roughly $125,000 per homeless person every year.

Traditional policies targeting homelessness, such as hostel offers or detox programmes can be seen as paternalistic and have generally been poorly received. This criticism can likewise be leveled on donations of food and clothing from businesses. In-kind transfers deprive consumers of personal autonomy and carry the assumption that panhandlers can’t make their own consumption choices or be trusted with hard money.

When it comes to aphorisms, economic theory proves that ‘beggars can’t be choosers’ is wrongly condescending and above all, socially and economically inefficient. ‘Helping people help themselves’ might just work better.

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