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The economics of charity: should beggars be choosers?


Christine Li

By

March 24th, 2013


How consumer theory can help those among us who consume the least.


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.

Sources:

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Keith

    Great article Christine! Clearly, applying microeconomic theories in real-world applications.

    Keep up the great work!

    Keith

  • http://purple-parasol.blogspot.com Fergus

    This is really unimpressive… The result you show, that adding primary goods won’t increase utility for a homeless person, would be interesting. Except that you literally assume it’s true at the beginning. You assume primary and secondary goods are perfect complements. Why? Of course if you assume that more primary goods aren’t helpful, you’ll end up with the result that more primary goods aren’t helpful. But you can’t just assume whatever you like!

  • Christian

    Relax.

    In economics, the more unreasonable your assumptions, the more illustrious your career.

    Think Gary Becker.

  • Christine Li

    Thank guys.

    Fergus,

    You raise a very good point in that perfect complements, by definition, already means that more primary goods will be unhelpful.

    After beginning with this assumption (giving a few sentences by way of explanation), the point of this article was to prove it. In reality, when we talk about aspiring to different tiers of living standards, I don’t think it’s too big of a stretch to assume that basic necessities and luxury goods are complementary goods. However of course the method I chose is not the only approach to go about proving this.

    By contrast, if we were to set primary and secondary goods as neither perfect substitutes nor complements, we would have U-shaped indifference curves. I could depict the truncated budget line on such a curve too, and then show how extending it brings us to a higher indifference curve. And after some explanation and a few more graphs, the end result would still be primary and secondary goods having to be consumed in some combination of both. It is much easier to make the point that secondary goods are vital to a healthy lifestyle if they are shown to be complementary to primary goods – and to show that an excess amount of primary goods is unproductive using this model.

    I look forward to hearing more of your opinions in the future!

    Christine

  • http://www.linkedin.com/pub/dean-pagonis/1b/117/319 Dean Pagonis

    Great article Christine, looking forward to your next one!

    • Christine Li

      Thanks Dean!

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