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...