The recent restoration of capitalism in the United States, and elsewhere, has renewed interest in a century-old theoretical conflict about the analysis of poverty in a capitalist system. One of the defining characteristics of the difference between institutional economics and neoclassicism is the treatment of the lower income classes and charitable institutions. The modern neoclassical paradigm provides a very narrow economic analysis of poverty. Institutional economics has a more comprehensive and coherent analysis of poverty within capitalism. Both of these theoretical views can be traced to their intellectual origins.
In the late nineteenth and early twentieth centuries, leading theorists from the emerging schools of economic thought attempted to analyze poverty and charitable institutions in the capitalism of that era. In fact, Alfred Marshall, the leading neoclassical thinker, claimed the ultimate goal of the economics profession was to create the tools and find the policies to solve the problem of human poverty. He referred to the poor as the Residuum: those left out of the market system. Marshall used analytical metaphors from biology to explain the development of "altruistic institutions" in a capitalist society. His proposed solutions to the problems of the lower economic classes ranged from greater economic growth through freer markets to the emulation of the German paternalistic policy approach.
Institutional economics, in the work of Thorstein Veblen and others, approached poverty and charitable institutions from a very different perspective. Veblen's use of biological metaphors in economic analysis was more sensitive to their application in economic systems. As a result, his analysis of poverty was a more integral part of his overall theory of capitalism. His keen analysis of charitable institutions within capitalism identified them as a function of the leisure class.
This paper will review the early conceptualization of poverty and charity in neoclassical and institutional literature. The paper will provide a historical analysis of how the early differences in approach led to the divergent treatment of poverty and charity in current institutionalism and neoclassical economics.
Marshall and Poverty
If one read only the first few pages of Marshall's Principles of Economics, it would appear that the primary concern of economics was the reduction or elimination of poverty. Marshall reflected at the impoverished quality of life for the poor:
But the conditions which surround extreme poverty, especially in densely crowded places, tend to deaden the higher faculties. Those who have been called the Residuum . . . have little opportunity for friendship; they know nothing of the decencies and the quiet, and very little even of the unity of family life; and religion often fails to reach them. No doubt their physical, mental and moral ill-health is partly due to other causes then poverty: but this is the chief cause [Marshall 1961, 2].
Marshall focused his goals for the field of economics at the issue of the elimination of poverty. Was it necessary for there to be a lower income class in a capitalist economy? Did the market system require a large group of people "doomed" to hard work, drudgery, and poverty in order for others to be wealthy? Marshall pondered whether or not the wealthy, cultured, upper-class existence depended on market-generated economic inequality. He saw economics as the science that could answer these questions, and he hoped that from the advance of economic science would come the end of poverty:
The hope that poverty and ignorance may gradually be extinguished, derives indeed much support from the steady progress of the working classes during the nineteenth century [Marshall 1961, 3].
Marshall asserted that the answer to this issue was, at least in part, within the province of economics. In fact, this gave economists "their chief and their higher interest" [1961, 3]. He speculated why with this as the ultimate goal of economics (the elimination of poverty) more of the ablest minds had not been attracted to the study of economics.
Marshall's concern with the less fortunate was found early in his writings: "If we would rightly examine whether the amelioration of the working classes has limits beyond which it cannot pass" [Marshall 1873, 102]. This ultimate purpose in his analysis was to determine whether a system of greater equal opportunity would evolve naturally. Marshall never suggested there would or should be economic equality. This concern was simply the notion that economic growth should allow everyone a chance to develop their minds and to experience a better quality of life [Marshall 1873, 102].
Marshall found the conclusions of his own marginal productivity theory of distribution disturbing:
The existence of our present lowest class is an almost unmixed evil; nothing should be done to promote the increase in its numbers and children, once born into it, should be helped to rise out of it [Marshall 1961, 719].
And how to help without interfering with the market's efficiency? His answer was premised on his own theory of human capital: state expenditure on education. Equally important to this was what he referred to as the economic chivalry of the wealthiest capitalists. He hoped the market would be assisted by a new sense of devotion to public well-being by the wealthiest of society toward the poorest [Marshall 1961, 720].
Veblen on Poverty
Thorstein Veblen analyzed the capitalist system in terms of the interaction between economic classes. He found orthodox economics, as espoused by Marshall, to be biased toward the entrenched class interests of the capitalist class [Tilman 1985, 882].
Veblen's analysis of poverty was intertwined with his theory of consumption. In his analysis of consumption, the emulation of one economic class by lower economic classes was an integral part of capitalist society. As Warren Samuels [1995, 917] has noted, "Veblen juxtaposed the homely practices of his rural Minnesota life to the practices of an increasingly urban, industrial, consumerist capitalism."
Veblen observed that the standard of living of the lower income classes was directly linked to the established social standard. This "conventional" standard was created by the upper income classes and emulated by those below them in income and wealth. For Veblen, the standard of living was socially defined:
For the great body of the people in any modern community, the proximate ground of expenditure in excess of what is required for physical comfort is not a conscious effort to excel in the expensiveness of their visible consumption, so much as it is a desire to live up to the conventional standard of decency in the amount and grade of goods consumed. This desire is not guided by a rigidly invariable standard which must be lived up to, and beyond which there is no incentive to go [Veblen 1899, 102].
Conspicuous consumption by the upper classes may have required an adequate expenditure, but it created limits on expenditures as well. "Status defines what is adequate expenditure not visa versa" [Hamilton 1988, 124].
Of course, we can never forget that Veblen was a critic of this system dominated by capitalists [Samuels 1995, 417]. The ideal of consumption beyond the reach of the average income family was clearly beyond the attainment of the lower income classes [Veblen 1899, 102]. The leisure class is what the community could accept as decent or "honorific" [Veblen 1899, 104]. This community standard served as a constraint to economic behavior:
A standard of living is of the nature of habit. It is an habitual scale and method of responding to given stimuli . . . the relative facility with which an advance in the standard is made means that the life process is a process of unfolding activity and that it will readily unfold in a new direction whenever and wherever the resistance to self expression decreases [Veblen 1899, 106].
Marshall and Charity
Charitable institutions were a necessary part of Marshall's analysis of the capitalist system. At a personal level, both Marshall and his wife were active in prominent charitable institutions: the Charity Organization Society, the University Settlement, the Society for Promoting Industrial Villages, to name a few [Groenewegen 1995, 295]. Marshall's concern for the poor was lifelong:
I have devoted myself for the last twenty-five years to the problem of poverty and . . . very little of my work has been devoted to any inquiry which does not bear on that . . . [Groenewegen 1995, 354].
The primary hope to end poverty for Marshall was economic growth: economic progress. With sufficient economic growth came the spirit of generosity: charity towards those less fortunate. Economic motivation was supplemented by this less selfish motivation during periods of economic growth. This generosity was the product of past growth, but it also represented the social duty characteristic of Marshall's own era.
Generosity of the human spirit and charity toward others was not some happenstance occurrence, but a natural part of human evolution.
No doubt men, even now, are capable of much more unselfish service than they generally render; and the supreme aim of the economist is to discover how this latent social asset can be developed more quickly, and turned to account most wisely [Marshall 1961, 9; emphasis added].
Although Marshall explicitly acknowledged Darwinian evolutionary thinking in his Principles, his real source of evolutionary analysis was Herbert Spencer. He was not alone in finding Spencer's approach to evolution useful to economics. Spencer had developed an evolutionary theory prior to Darwin and published it in 1852 (seven years before the Origin of Species). He was one of the most influential social philosophers of the nineteenth century. It was Spencer who popularized the term evolution and coined the phrase "survival of the fittest."
One of the problems Marshall and other economists faced with Darwinian evolution was simple: evolution did not connote progress. Above all things, Marshall needed to believe in economic progress, as it was the only possible salvation for the Residuum, the poor of society. Spencer's evolution was grounded on progress in development, in science, and in society. "Darwin's theory should not be seen as the central theme in nineteenth-century evolutionism but as a catalyst that helped bring about the transition to an evolutionary viewpoint within an essentially non-Darwinian conceptual framework" [Bowler 1988, 5; quoted in Niman 1991, 21]. Marshall was looking for a framework for economic progress that intertwined it with moral advancement. This meant that biology, and the Darwinian revolution, gave Marshall a scientific foundation for social ethics [Niman 1991, 22].
In Marshall, the economic environment had the evolutionary law of the "survival of the fittest." Economic competition had positive social dimensions. Marshall acknowledged that this struggle for survival had harsh features, "but some of its harshest features are softened down by the fact that those races, whose members render services to one another without exacting direct recompensense, are not only the most likely to flourish for the time, but most likely to rear a large number of descendants who inherit their beneficial habits" [Marshall 1961, 242].
Veblen on Charity
In Veblen's analysis of market capitalism, charitable institutions played a significant economic and social function. The leisure class used charitable activities as one of the ultimate benchmarks of the highest standard of living. Veblen noted that a major sign of affluence was the status of a non-working wife. The women of the leisure class needed unpaid activities that allowed society to observe the wealth of the family. Charity was one of the best of these activities because not only was it nonproductive, it had a high profile for all levels of society to witness:
In all this latter-day range of leisure-class activities that proceed on the basis of a non-invidious and non-religious interest, it is to be noted that the women participate more actively and more persistently than the men [Veblen 1899, 341].
The charity work of leisure-class women brought them into contact with the clergy. Veblen saw a unique role for the clergy in charity work. This role helped highlight the charity work of the upper-class women and placed a special glow to the charity work itself.
The everyday life of well-to-do women and the clergy contains a larger element of status than that of the average of men . . . Hence, an appreciable share of the energy which seeks expression in a non-lucrative employment among these members of the vicarious leisure classes may be expected to eventuate in devout observances and works of piety [Veblen 1899, 343].
Veblen's analysis of charitable institutions is useful for modern-day nonprofit community organizations. Upper-class women influenced charitable institutions through their strong sense of propriety and their attention to the fine points of etiquette. Veblen said that this infused the charitable activities toward the poor with a conspicuous waste of time and goods [1899, 344]. Help to the poor came in the form of "right" living, as defined by the manners and niceties of the leisure class. Charitable institutions had to be purged of the vulgarities of poverty, something the wealthy ladies needed to avoid [Veblen 1899, 344].
Ironically, the clergy and women of the upper classes knew little of the economics of the leisure class, so even their charitable activities allowed no practical assistance to the poor. These groups were in no position to provide it:
By tradition and by the prevalent sense of the proprieties, both the clergy and the women of the well-to-do classes are placed in the position of a vicarious leisure class . . . both classes are so inhibited by the canons of decency from the ceremonially unclean processes of the lucrative or productive occupations as to make participation in the individual life process of today a moral impossibility [Veblen 1899, 342].
Institutional economics and neoclassical economics were founded on the acknowledgment of poverty in the market systems. The fundamental analysis of poverty in the late nineteenth century and the role of organized charity in that era can be found in the major works of both Marshall and Veblen. Each had had a theoretical legacy that would be part of their followers' views on poverty and charity into the twentieth century.
Alfred Marshall, as a liberal reformer (even though a gradualist), saw charity as a necessity to solve the problems of the poor. He implied that the human spirit of helping others, through charitable activities or personal generosity to others, was based on an evolutionary-driven altruism gene. We know from previous work that Marshall was uncomfortable with the work in genetics in the early twentieth century [Hodgson 1993; Niman 1991]. Consequently, he left his biological metaphors hanging. Charity was left as an antidote to the natural, yet undesirable, uneven distribution of wealth and income from the market system. Charity combined with education and economic growth were the policy tools to help the Residuum.
Veblen also saw poverty as the outcome of the market system but also a very necessary part of the capitalist economy. The generation of income and wealth for the upper-income groups depended on this very inequitable arrangement. Charity in the Veblenian analysis was a natural outgrowth of the system. However, there was no altruistic motivation; the leisure class needed charitable institutions to demonstrate their own splendid status. This was particularly true for upper-class women, and the wealthiest families benefitted directly from female participation in charity work, because it highlighted their own success.
Veblen's depiction of charitable institutions was deeper than Marshall's: these organizations could never help the poor because they were guided and operated by the social values and manners of the leisure class. Etiquette, not improvement in the material status of the poor, was often at the forefront of charitable activities. The upper-class women involved with charities for the poor needed protection from the vulgarities found in the day-to-day lives of the poor. Charitable organizations were constructed and operated to provide this protection. Furthermore, these organizations internalized the values of the rich: conspicuous consumption (ornate, costly buildings), waste (operational inefficiencies), and decorum over substance (the poor should improve their manners, not their material well-being). In all, charity was a perfect outlet for the rich with no chance of upsetting the economic status of the poor.
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William T. Ganley is Professor of Economics and Finance, State University College at Buffalo. This paper was presented at the annual meeting of the Association for Evolutionary Economics, Chicago, Illinois, January 3-5, 1998. The author would like to thank Anne Mayhew for her editorial comments and suggestions.…