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Behavioral economics and poverty
The "libertarian paternalism" movement (and, for that matter, the non-libertarian paternalist movement) tells us that more choices can make people worse off. Many of these same people also agitate for greater redistribution of wealth to the poor. Have you noticed the resulting tension? Beaulier and Caplan (yes, Bryan Caplan) have a whole paper on that issue. Here is one excerpt:
Looking at the welfare state from a behavioral standpoint lays the groundwork for a stronger claim: Potential welfare recipients' deviations from neoclassical assumptions tend to be especially pronounced. If the average American falls short of the neoclassical ideal, the average recipient of government assistance does not even come close.
To justify this generalization, we draw on the large literature on "pathological" behavior among the poor. Many pathologies can be readily understood as extreme versions of the anomalies emphasized in the behavioral literature. The experimental literature finds, for example, that the average experimental subject underestimates future costs of immediate satisfaction; and even when they recognize these costs, self-control problems may keep them from changing their behavior (Thaler, 1992). But the average experimental subject's deviations seem mild compared to those typical of the poor. Many activities — from over-eating, drinking, smoking, and drug abuse to crime and unprotected sex — combine immediate gratification with delayed costs. We argue that it is no coincidence that the poor are much more prone to engage in such activities than the rest of the population.
One question is whether these the unfortunate still need transfers to stay above starvation or simply to engage their (possibly irrationally motivated) support of the status quo and make democracy more stable. In any case I found this to be one of the more interesting papers I've read in the last few years. It suggests that behavioral economics in fact provides microfoundations for the conservative critique of the welfare state.
And if there is any doubt as to just how smart Bryan Caplan is, this should dispel it.
Posted by Tyler Cowen on June 20, 2007 at 07:24 AM in Economics | Permalink
Comments
Couldn't help noticing the word 'pathological', and its implication that if people behave different than the neo-classical model, they are wrong, not the model. Reminds me of Brecht's poem that after some riots suggested that the DDR government might wish to depose of their people and choose a new one.
Posted by: Marius at Jun 20, 2007 8:22:35 AM
"Couldn't help noticing the word 'pathological', and its implication that if people behave different than the neo-classical model, they are wrong, not the model"
BINGO!
Posted by: Ralph at Jun 20, 2007 8:58:01 AM
In fairness to "the model," the more educated and intelligent people are, the closer they come to being "right."
Posted by: Steve Miller at Jun 20, 2007 9:02:15 AM
"Couldn't help noticing the word 'pathological', and its implication that if people behave different than the neo-classical model, they are wrong, not the model"
Completely True!
A big problem with neoclassical economists is that it seems that once the
model is done, they don't care about its predictive power in "real" life.
Sendhil Mullainathan and Richard Thaler in a paper on behavioral economics below shows, in two areas (finance and savings) where the neoclassical models don't explain whats going on.
http://www.economics.harvard.edu/faculty/mullainathan/papers/Encyclopedia.pdf
Posted by: Jack Sparrow at Jun 20, 2007 9:49:05 AM
From the economist (Caplan link):
"Putting the fuel filler doors on different sides of different cars thus means that some cars can access pumps from the left. And this makes it less likely that drivers will have to wait in line for gas."
Looks like a nice try at explaining why gas caps are on both sides, but the example is poor. I've never seen a gas station with only one entrance. If one passes the first entrance, and enters the second, you are able to use the other sides of the pump.
If all the caps were on the driver side, you would at least have the benefit of not circling you car to fill up.
Posted by: Tom at Jun 20, 2007 10:11:54 AM
Wow, three of the first five comments don't make any sense.
"Couldn't help noticing the word 'pathological', and its implication that if people behave different than the neo-classical model, they are wrong, not the model"
It is put in scare quotes in the original. Three of the first four people who commented seem to be badly misdirecting their ire at neoclassical economists, and I really don't understand their comments. Neoclassical economists argue that however people behave, they are expressing their true preferences. However people behave, they are right, according to the neoclassical economists. Any behavior that differs from stated assumptions of what is right is really showing some sort of revealed preference, demonstrating that the person herself has some different standard of what is best for herself than the supposed experts.
It is the paternalists and the behavioral economists who argue that people are "wrong" in their choices. It is the paternalist and the behavioral economists and the busybodies who "wish to depose of their people and choose a new one," deciding for them because they are "irrational" and make the "wrong" choices. It is the paternalists and the behavioral economists and others who believe that people are irrational who think that people must be protected from their wrong decisions, who should have others decide.
Hence Professor Cowen's comments pointing out that people who specifically reject the neoclassical modal and thus think that people make "wrong" "irrational" decisions according to certain criteria should face the idea that the poor are more likely to make those decisions that they deem wrong. However, I think that the objection is then answered by the paternalists and such favoring transfers in kind of the goods that they believe that the poor ought to be consuming, and would consume if they were rational. A neoclassical economist does not care; he favors giving the poor money to spend on what they wish. A neoclassical economist believes that transfers of money always leaves the poor at least as well off and often better off than transfers in kind, but the others disagree.
In short, three of the first four comments seem to be exactly the wrong way around to me. They charge neoclassical economics with *exactly* the sort of sort of arrogance that neoclassical economics opposes and that the opposing forces of paternalism and behavioral economics say is necessary. Now, neoclassical economics may be flawed, and you may believe that people do not behave rationally. But in that case, it is you who wish to decide for people, who wish to "dissolve the people and elect another," not the neoclassical economists.
Posted by: John Thacker at Jun 20, 2007 10:23:18 AM
I've never seen a gas station with only one entrance.
Strange, there's three like that right by where I live in Centreville, VA, one in the Centreville Square shopping center, another (a Shell station) where Union Mill Rd intersects Lee Highway, and a third off of Lee Highway between Union Mill and Centreville Road that can only be entered while traveling south on 29. I frequently am forced to circle precisely because all the cars pumping have their gas caps on the same side, and there is no way to enter the station from the other side.
It happens all the time that gas stations have only one entrance that can be entered when traveling a particular direction, particularly when one road that the gas station faces is a one-way street or has a median or when the gas station is on a corner. I have seen several gas stations with a single entrance and a single exit, where one is forced to turn right out of the exit (and turn right to enter), and the curb is designed in such a way that makes it impossible to enter via the exit.
Posted by: John Thacker at Jun 20, 2007 10:32:29 AM
Non-libertarians might argue that it is instead the semi-permanent impoverished state of the poor (perhaps combined with their proximity to abundant examples of luxury) that leads to their "poor choices."
Posted by: martin at Jun 20, 2007 10:40:29 AM
Might the gas cap thing be the result of unintelligent, non-design? Are we really to believe that auto manufacturers considered the fueling up problem faced by consumers? And on the Florida Turnpike they solve this circling problem by making hoses long enough to reach either side of the car.
Posted by: AZ at Jun 20, 2007 10:40:51 AM
Frank doesnt claim that this is the actual answer. his goal is to ask students interesting questions and have them respond with plausible answers (using economic reasoning).
Posted by: re at Jun 20, 2007 10:52:48 AM
"Neoclassical economists argue that however people behave, they are expressing their true preferences."
This assumption is the problem, because this leads to the argument that people always behave rationally. Nobel prize winner Rober Aumann gave this definition of rationally in his nobel lecture.
"What do I mean by “rationality”? It is this:
A person’s behavior is rational if it is in his best interests, given his information."
http://nobelprize.org/nobel_prizes/economics/laureates/2005/aumann-lecture.pdf
And behavioral economics shows that people DON'T behave consistently in this way. Read the
Mullainathan article in the link above. So neoclassical models do fall short in explaining
human behavior because we are unable to "optimize" in every situation.
So Thacker, the first three out of five comments actually do make pretty darn good sense!
Posted by: Jack Sparrow at Jun 20, 2007 11:32:23 AM
I meant three out of five, not the first three.
Posted by: Jack Sparrow at Jun 20, 2007 11:34:17 AM
This piece by Caplan just demonstrates that he is great at taking a little knowledge and making up a great story about it that has little or nothing to do with reality. I challenge anyone to come up with any evidence to support Caplan's "theory" that the auto manufactures try to balance the number of cars with fuel tank caps on opposite sides. I am willing to bet that the location of the fuel cap -- and don't forget there are cars with caps in the middle of the back side -- is strictly driven by engineering and cost considerations and for all practical purposes is random.
Interestingly, I now see rental cars with a tag on the dashboard controls indicating which side the gas cap is on.
This story seems to demonstrate that Caplan had lots of "book learning" but not a bit of common sense.
Posted by: spencer at Jun 20, 2007 12:14:22 PM
Money quote: "On a homework problem in intermediate micro, you can eliminate poverty with lump-sum transfers. In the real world, matters are not so simple."
I'm a libertarian with a few econ classes under my belt that sometimes thinks I know the simple solution. That is, I'm the guy that (foolishly) thought the "homework problem" explained it all quite nicely. Beaulier/Caplan is good for somebody like me, in that it provides yet another example of the potential unintended consequences of a well-meaning and seemingly straight-forward policy. Maybe the answer's not so simple after all.
Posted by: Whit Stevens at Jun 20, 2007 1:38:40 PM
I agree with John Thacker.
Posted by: Paul at Jun 20, 2007 2:01:51 PM
"Now, neoclassical economics may be flawed, and you may believe that people do not behave rationally. But in that case, it is you who wish to decide for people, who wish to "dissolve the people and elect another," not the neoclassical economists."
Fair enough, instead of "you" if you insert "government" (which could include me), it makes sense to me. And the fact that you acknowledge that neoclassical economics has limitations (not necessarily flawed) in explaining human behavior, ........actually, nevermind, I am starting to get what Thacker is saying and finding myself in agrement with him....I'll get back to it.
Posted by: Jack Sparrow at Jun 20, 2007 2:19:05 PM
>"On a homework problem in intermediate micro, you can eliminate poverty with lump-sum transfers. In the real world, matters are not so simple."
I am reading the poverty and discrimination book that tyler recommended. The naive view of the elimination of poverty by government payouts is not unsupported. In the 60's the poverty rate was cut in half to a large extent by government payouts. Since 1970 the poverty rate has fluctuated around about 10% and there has been no major increase in per capita transfers to the poor. There hasn't been much political will to increase per capita transfers, largely because concerns over social pathologies.
Liberals now promote policies such as single payer health care, payments through the income tax system and in-kind transfers that are less efficient in reducing poverty but are believed to not to have as much of perverse incentive on the poor.
Posted by: joeo at Jun 20, 2007 2:22:25 PM
I was inspired by the book "Off the Books" (study of how people on Southside Chicago hustle to survive)to muse about the possible logic of some "pathologies". (Assume the environment is risky and unstable, and the coping measures feature short term quid pro quos, which is the picture the author draws.) For example, multiple children by multiple men could create bonds to multiple sets of grandparents. That's like buying multiple tickets in the lottery, maybe you'll hit one grandparent who has both the love and resources to care for your kids.
Posted by: Bill Harshaw at Jun 20, 2007 3:02:06 PM
Posted by: Yancey Ward at Jun 20, 2007 3:12:51 PM
Any psychologist or social worker critique this paper as a behavioral psych document?
Posted by: Dan at Jun 20, 2007 4:41:05 PM
Someone left the italics tag on.
martin: If you read Caplan's work on irrationality, he shows that it is education/intelligence that makes the difference, not wealth. Perhaps society should attempt to improve the condition of the poor, but that is a different problem than "poor choices". Trying to shove everything into a morality tale can get you wrong answers.
spencer: It is not Caplan who came up with the gas-tank story but Robert Frank in The Economic Naturalist.
Bill Harshaw: I thought the grandmothers that took care of the kids were usually the maternal grandmother, of which there is only one no matter how many kids the mother has. It would certainly seem odd if it were the paternal grandmothers, but on the other hand I haven't read the book which you refer to.
Tyler: What do you mean by "support the status quo"? Not start a revolution? That doesn't seem plausible to me in modern America. Do you mean how they vote? The poor and uneducated are among the least likely to vote, and they are limited to the two main candidates selected in the primaries, which they are even less likely to vote in. Is there any evidence that they vote differently with transfers vs without? I don't know of it, but maybe you could point some out.
Posted by: TGGP at Jun 20, 2007 5:14:21 PM
Economists are only noticing in _2007_ that poor people on average are less rational and have shorter time horizons than non-poor people? Economists really need to read famous books by non-economist social scientists such as "The Unheavenly City" by Edward Banfield in 1968, Charles Murray's "Losing Ground" in 1984, and Murray and Herrnstein's "Bell Curve" in 1994. The neoconservative revolution in the social sciences is such old news that even the neoconservatives got bored with it, but I guess economists are a generation behind the news.
Posted by: Steve Sailer at Jun 20, 2007 7:07:50 PM
Thacker writes: "Now, neoclassical economics may be flawed, and you may believe that people do not behave rationally. But in that case, it is you who wish to decide for people, who wish to "dissolve the people and elect another," not the neoclassical economists."
But doesn't that presuppose that economics boils down to policy fights? In the midst of it, what about the pursuit of knowledge?
For instance: Isn't it possible to 1) acknowledge that people routinely act in all kinds of bizarre ways that neoclassical economics has a hard time accounting for, yet 2) not be a big fan (for a variety of reasons) of hugely-coercive government?
Posted by: Michael Blowhard at Jun 20, 2007 7:58:34 PM
closing the italics
Posted by: fustercluck at Jun 20, 2007 10:05:33 PM
That didn't work!
Perhaps this will?
Posted by: fustercluck at Jun 20, 2007 10:06:12 PM
