2019 ‘Nobel prize’ reveals the poverty of economics

from Lars Syll

RCTs have delivered intriguing insights into how poor people think and act, but also into how behavioural economists do. For example, when a slew of high-profile RCTs failed to deliver the evidence that researchers expected on the ‘miracle of microfinance’, the researchers paid little heed to the implications of their insignificant and sometimes even negative findings. Instead, they focused attention onto some small (but statistically) significant behavioural changes in their data. These included microfinance services encouraging slightly higher propensities to engage in entrepreneurship and reduced purchasing of ‘temptation goods’ (a category in which Banerjee and Duflo included, for Indian slum-dwellers, tea and food on the street).

The problem is that these insights, far from shifting economic paradigms in a progressive way, and enabling greater realism and pluralism in economic thinking, have led to thinly-veiled efforts at behaviourally re-engineering the poor, which have gained traction in global development. The new behavioural paradigm, canonised in the World Bank’s 2015 World Development Report Mind, Society and Behavior, invokes targeted social norm-shifting, subliminal marketing through entertainment, ‘choice architecture’ and ‘nudge’, social pressures, and punitive conditionalities, to change poor people’s behaviours. The idea is to ‘help’ poor people overcome supposedly irrational ‘risk aversion’ in order to be more entrepreneurial, or more ‘time-consistent’ and save for a rainy day.

But these behavioural interventions can be too small and overly simplistic, disempowering and paternalistic, and stray into victim-blaming. The behaviourist paradigm interprets low incomes and precarious lives as a function of individual misbehaviours and cognitive biases, rather than a product of larger structural injustices of the economic and political system. Yet poverty traps are not just a function of individual cognitive insufficiencies: rich people make mistakes too – more often with other people’s money – but for them the consequences are far smaller. As fifteen leading development economists said in an open letter last year, RCTs and behaviourist approaches are practically designed to miss the bigger picture.

Philip Mader, Maren Duvendack, Richard Jolly,  Solene Morvant-Roux

Ideally controlled experiments tell us with certainty what causes what effects — but only given the right closures. Making appropriate extrapolations from (ideal, accidental, natural or quasi) experiments to different settings, populations or target systems, is not easy. “It works there” is no evidence for “it will work here”. Causes deduced in an experimental setting still have to show that they come with an export-warrant to the target population/system. The causal background assumptions made have to be justified, and without licenses to export, the value of ‘rigorous’ and ‘precise’ methods — and ‘on-average-knowledge’ — is despairingly small.

Apart from these kind methodological problems, I do think there is also a rather disturbing kind of scientific naïveté in the Duflo-Banerjee approach to combatting poverty. The way they present their whole endeavour smacks of not so little ‘scientism’ where fighting poverty becomes a question of applying ‘objective’ quantitative ‘techniques.’ But that can’t be the right way to fight poverty! Fighting poverty and inequality is basically a question of changing the structure and institutions of our economies and societies.