If there is substantial inequality it may still be beneficial on balance to give the poorest people money which they spend on purely-positional school fees.
I feel like this misses the point of positional goods—suppose that only half of the population gets a badge that says they’re in the top half of the population, whose price is set by auction. A cash transfer from some people to other people can’t increase the number of badges, and can only change which people get the badges.
Right. But I’m saying that such a cash transfer may still be utility-positive even though rearranging the badges doesn’t change the number of badges. (Which is not to say it’s the most utility-positive thing that could be done with the cash, of course.)
Forget the badges for a moment. Transferring cash from richer people to poorer people is always utility-increasing. (In Econ-101-land where we ignore the value-destroying things the richer people may do to avoid having their cash transferred to others, the motivation-destroying effects of knowing that money you earn will be transferred to others, etc.) That’s because the marginal utility of money decreases with how much money you have, because you buy the better-value utility sources first.
What about the badges? Well, they’re just another good that people can buy. Their positionality has the exact same effect as any other kind of scarcity (e.g., imagine that the badges are magical artefacts that confer health and happiness, and their number happens to be restricted to half the population because that’s how many badges were made by the ancient wizards).
But: It seems to me that if the badges are priced by a market mechanism, and valuable enough that they would be the first things the poor half of the population bought if they had the money, and scarce in the way described here—why, then, they would be more expensive, enough so that they would not after all be the first thing (rationally self-interested Homo Economicus) poor people would buy on getting more money, unless that money was sufficient to make them as rich as the rich people who are currently buying the badges.
(Because the badges will go to whoever’s willing to pay most for them, and if the badges are the first things poor people buy on getting more money then they are better utility-for-money value than the things the rich are buying, so the rich will be willing to pay more for them, and the prices will increase until this is no longer true.)
So there is a problem with this picture, but in so far as school fees are a purely positional good—and in so far as we’re in Econ-101-land—the problem isn’t “giving poor people money that they spend on school fees fails to raise net utility”, it’s “even if we give them money that we might expect them to spend on school fees, the price of those will rise and they’ll end up spending it on something else”. The “something else” will be a good that isn’t purely positional (else it too would increase in price until the poor people can’t buy it) and giving poor people money to spend on that will be a clear utility gain.
Now, apparently what’s actually happening is that some poor people are spending the money they get from cash transfers on school fees but (I guess) most aren’t. What then? Staying in Econ-101-land, what this indicates is that different people have different values and the poor people who get most utility from having educated kids will do that. And that’s an excellent, utility-maximizing thing—what’s happening is that we replace a rich person who doesn’t care so much about education with a poor person who cares a lot more, and net utility goes up.
The real world, of course, is not Econ-101-land. Is it non-Econ-101-ish in ways that invalidate the above? It might be—e.g., if those poor people are tragically misinformed about the good that education will do to their children. I don’t see any particular reason to assume that’s so, though.
(In the real world, education in the developing world is probably also not a purely positional good.)
So there is a problem with this picture, but in so far as school fees are a purely positional good—and in so far as we’re in Econ-101-land—the problem isn’t “giving poor people money that they spend on school fees fails to raise net utility”, it’s “even if we give them money that we might expect them to spend on school fees, the price of those will rise and they’ll end up spending it on something else”. The “something else” will be a good that isn’t purely positional (else it too would increase in price until the poor people can’t buy it) and giving poor people money to spend on that will be a clear utility gain.
There’s the additional problem of reallocating more resources from wherever they’d have gone before to a zero-sum signaling game. If you shift more poor people into the rentier class, maybe the rest of the poor people have to work even harder to support the rentiers.
If you give poor people money to spend on positional goods, the market will eventually respond, but it doesn’t respond instantly. They may actually be able to be able to purchase the positional goods in the time it takes for the market to respond. Furthermore, if you give the money to only a relatively small number of poor people, the effect of your money may not be enough for the market to respond much.
Now, apparently what’s actually happening is that some poor people are spending the money they get from cash transfers on school fees but (I guess) most aren’t. What then? Staying in Econ-101-land, what this indicates is that different people have different values and the poor people who get most utility from having educated kids will do that.
But you’re interested in making the donations effective. If only a small portion of the recipients will spend them in utility-increasing ways, you have to discount the effectiveness accordingly.
From the downvotes I infer that at least one person reading the above finds it unsatisfactory. I would love to know why, so that if I’m thinking badly or writing badly I can try to improve.
I’m not claiming that they are. I’m saying that even if we assume they are—i.e., in the worst case for cash transfers as far as this issue goes—giving money to the poorest people which they spend on those school fees may do good overall.
If there is substantial inequality it may still be beneficial on balance to give the poorest people money which they spend on purely-positional school fees.
I feel like this misses the point of positional goods—suppose that only half of the population gets a badge that says they’re in the top half of the population, whose price is set by auction. A cash transfer from some people to other people can’t increase the number of badges, and can only change which people get the badges.
Right. But I’m saying that such a cash transfer may still be utility-positive even though rearranging the badges doesn’t change the number of badges. (Which is not to say it’s the most utility-positive thing that could be done with the cash, of course.)
Forget the badges for a moment. Transferring cash from richer people to poorer people is always utility-increasing. (In Econ-101-land where we ignore the value-destroying things the richer people may do to avoid having their cash transferred to others, the motivation-destroying effects of knowing that money you earn will be transferred to others, etc.) That’s because the marginal utility of money decreases with how much money you have, because you buy the better-value utility sources first.
What about the badges? Well, they’re just another good that people can buy. Their positionality has the exact same effect as any other kind of scarcity (e.g., imagine that the badges are magical artefacts that confer health and happiness, and their number happens to be restricted to half the population because that’s how many badges were made by the ancient wizards).
But: It seems to me that if the badges are priced by a market mechanism, and valuable enough that they would be the first things the poor half of the population bought if they had the money, and scarce in the way described here—why, then, they would be more expensive, enough so that they would not after all be the first thing (rationally self-interested Homo Economicus) poor people would buy on getting more money, unless that money was sufficient to make them as rich as the rich people who are currently buying the badges.
(Because the badges will go to whoever’s willing to pay most for them, and if the badges are the first things poor people buy on getting more money then they are better utility-for-money value than the things the rich are buying, so the rich will be willing to pay more for them, and the prices will increase until this is no longer true.)
So there is a problem with this picture, but in so far as school fees are a purely positional good—and in so far as we’re in Econ-101-land—the problem isn’t “giving poor people money that they spend on school fees fails to raise net utility”, it’s “even if we give them money that we might expect them to spend on school fees, the price of those will rise and they’ll end up spending it on something else”. The “something else” will be a good that isn’t purely positional (else it too would increase in price until the poor people can’t buy it) and giving poor people money to spend on that will be a clear utility gain.
Now, apparently what’s actually happening is that some poor people are spending the money they get from cash transfers on school fees but (I guess) most aren’t. What then? Staying in Econ-101-land, what this indicates is that different people have different values and the poor people who get most utility from having educated kids will do that. And that’s an excellent, utility-maximizing thing—what’s happening is that we replace a rich person who doesn’t care so much about education with a poor person who cares a lot more, and net utility goes up.
The real world, of course, is not Econ-101-land. Is it non-Econ-101-ish in ways that invalidate the above? It might be—e.g., if those poor people are tragically misinformed about the good that education will do to their children. I don’t see any particular reason to assume that’s so, though.
(In the real world, education in the developing world is probably also not a purely positional good.)
There’s the additional problem of reallocating more resources from wherever they’d have gone before to a zero-sum signaling game. If you shift more poor people into the rentier class, maybe the rest of the poor people have to work even harder to support the rentiers.
If you give poor people money to spend on positional goods, the market will eventually respond, but it doesn’t respond instantly. They may actually be able to be able to purchase the positional goods in the time it takes for the market to respond. Furthermore, if you give the money to only a relatively small number of poor people, the effect of your money may not be enough for the market to respond much.
But you’re interested in making the donations effective. If only a small portion of the recipients will spend them in utility-increasing ways, you have to discount the effectiveness accordingly.
From the downvotes I infer that at least one person reading the above finds it unsatisfactory. I would love to know why, so that if I’m thinking badly or writing badly I can try to improve.
Well, that’s a bad analogy for schools fees. They usually result in skills transfer.
School fees aren’t purely positional.
I’m not claiming that they are. I’m saying that even if we assume they are—i.e., in the worst case for cash transfers as far as this issue goes—giving money to the poorest people which they spend on those school fees may do good overall.
Agreed.