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Tuesday, 15 October 2019

Poor Economics and the Nobel Prize
It’s great news that the husband and wife team of Abhijit Bannerjee and Esther Duflo (along with Michael Kremer) have just been awarded the Economics Nobel Prize. Not just because it’s only the second time that a woman has won, or because Esther Duflo is young compared with the 60+ norm for Nobel Prize winners. But because the work of all three focuses on poverty, and uses an experimental rather than a theoretical approach – what works, rather than what presents as a neat and elegant solution. 

And following Daniel Kahneman in 2002 and Richard Thaler in 2017, this is the third time that a behavioural approach has featured in the economics Nobel prize.

The work of Bannerjee and Duflo featured in their book ‘Poor Economics,’ where they set out their focus: the lives and choices of poor people. As the authors state, the debates on poverty are usually framed by looking at the big questions – what is the ultimate cause of poverty? How much faith should we place in free markets? Is democracy good for the poor? Does foreign aid have a role to play?  Whereas as Bannerjee and Duflo note in the book, "the studies we use have in common a high level of scientific rigour, openness to accepting the verdict of the data, and a focus on specific, concrete questions of relevance to the lives of the poor."

They invite us to turn away from the feeling that the fight against poverty is too overwhelming and to start thinking of the challenge as a set of concrete problems that, once properly identified and understood, can be solved, one at a time. There’s a lot of behavioural economics in their approach, not because the psychology of poor people is different, but because it’s the same: poor people can be trapped by the same kinds of problems that afflict the rest of us, like lack of information, weak beliefs, and procrastination.

What We Take For Granted

Our real advantage comes from the many things that we take as given: we live in houses where clean water gets piped to us - we do not need to remember to add chlorine to the water supply every morning. The sewage goes away on its own - we do not actually know how. We can mostly trust our doctors to do the best they can - and can trust the public health system to figure out what we should and should not do. We get our children immunized (mostly!). Our health insurers reward us for joining the gym - because they are concerned that we will not do it otherwise. And perhaps most important, most of us do not have to worry where and our next meal will come from. In other words, we rarely need to draw upon our limited endowment of self-control and decisiveness, while the poor are constantly being required to do so.

Make It Easy

The authors invoke the spirit of Nudge to ensure that policies and practices are designed to make it as easy as possible for poor people to make the choices that are best for them. But a lot of the cheap gains are in prevention, and prevention has traditionally been the area where the government is the main player. The trouble is that governments have a way of making easy things much less easy than they should be – eg, government health centres are often closed when they are supposed to be open.

If people in the west, with all the insights of the best scientists in the world at their disposal, find it hard to make basic choices on hard evidence, how hard it must be for the poor, who have much less access to information?  And even the most well intended and well thought out policies may not have an impact if they are not implemented properly. Unfortunately, the gap between intention and implementation can be quite wide

B&D remind us that we need to resist the kind of lazy, formulaic thinking that reduces every problem to the same set of general principles. We should listen to poor people themselves and understand the logic of their choices. We must accept the possibility of error and subject every idea, including the most apparently common-sensical ones, to rigorous empirical testing. Doing all of this means we will be able not only to construct a toolbox of effective policies but also to better understand why the poor live the way they do.

In summary: attend to the details, understand how people decide, and be willing to experiment. All economists should take note!

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