Abhijit Banerjee: 'The poor, probably rightly, see that their chances of getting somewhere different are minimal'

Guardian: Abhijit Banerjee: 'The poor, probably rightly, see that their chances of getting somewhere different are minimal'

The author of Poor Economics on why aid that assumes the poor will do the right thing is misguided – and why political corruption does not necessarily mean economic stagnation.

... Until Poor Economics appeared last year, the debate about aid had been broadly polarised into two positions. On the left was Jeffrey Sachs, arguing that the single biggest factor keeping poor people poor is poverty. If foreign aid can lift them out of the poverty trap long enough to free them from the disease, ignorance and debt that thwart their potential, then pretty soon they will be able to solve their own problems for themselves. On the right, William Easterly argued that the real problem isn't a poverty trap but aid itself, which creates a dependency culture that keeps the poor poor, and distorts their only real roadmap to prosperity – the free market.

As Banerjee saw it, both positions owed more to polemic and conjecture than empirical evidence. Aid budgets run into billions, yet very little work had been done to analyse their outcomes. He and Duflo, both economists at the Massachusetts Institute of Technology, thought a better approach would be to appropriate the methodology of the pharmaceutical industry, and subject different types of aid to randomised controlled trials. In 2003 they established a Poverty Action Lab, and by 2010 its researchers had conducted more than 240 experiments in 40 countries, in a Herculean attempt to find out what actually works.

The results are fascinating. Recipients of free or subsidised mosquito nets, say, or water chlorination tablets, or schooling, or contraception, often prove bafflingly disinclined to use them. Such apparent indifference to life-saving gifts seems puzzling to the point of perverse. Even microcredit, widely lauded as the panacea to world poverty, turns out to be less revolutionary than previously thought. But Poor Economics doesn't vindicate Easterly, because the authors discovered that tiny adjustments to the delivery mechanism of aid can radically transform its efficacy. For example, offering Kenyan farmers half-price fertiliser at sowing time didn't work, because they hadn't saved enough money from harvest time to buy it. But selling farmers a full-price voucher directly after the harvest, when they could afford it, to be exchanged for fertiliser at sowing time when they needed it, increased fertiliser use by 50%. When aid is carefully designed to navigate the specific socio-cultural landscape of its recipients' lives, it begins to deliver the sort of results Sachs claims.

"This book will not tell you whether aid is good or bad," its authors write, "but it will say whether particular instances of aid did some good or not." Their overwhelming message is that there is no Big Idea or golden bullet, so we should stop thinking about "Aid", and start thinking about "aid". Poor Economics makes this case so persuasively that I can't honestly see how anyone could disagree after reading it. The surprise for me was the book's striking parallels between poverty in the developing world and in the UK, and its relevance to our attempts to help the poor in Hartlepool or Glasgow. When studied closely, it becomes clear that people who live on less than a dollar a day are not uniquely mysterious, but subject to the very same psychological and behavioural patterns as the rest of us. ...

I've been working my way through the book. It is a fascinating read and there is much to digest. This article does a great job of summarizing the central points of the book.

Comments

[D Walton]

Interesting post. As for the subject of overcoming poverty, much can be learned from the development of our early colonies, particularly Massachussetts and Virginia. Both colonies after failing miserably at the start, were forced to acknowledge the connection between ownership and productivity, and as a result took pains to widely distribute productive land.

[Michael W. Kruse]

Yes. And this points to a major challenge when theologians and the church begin addressing economic issues. Production, or productivity specifically, is not in view. Despite the fact that virtually everything we use requires the transformation of matter, energy, and data from less useful forms to more useful forms, theological reflection takes its starting point as everything existing in abundance. Out our only economic question is how to distribute it all.

Until the past couple of centuries or so, Christianity has been embedded in advance agrarian societies. Productivity was thoroughly tied to the land and to manual labor. The productivity of one acre of land or one person performing manual labor is not significantly alterable. Productivity is largely fixed. That makes the economy a zero-sum game. My gain is some else’s loss. Clearly distribution is paramount in such a context.

But we have now figured out ways to radically alter productivity. Technology has been a big piece of this but so have some societal changes. Property rights, allowing owners to reap the rewards of the long-term and on-going investments without fear of confiscation by strongmen or governments, has created the incentive for people to make such productive investments. Yet our theology is still deeply rooted in the rhythms and framings of advanced agrarian society. By and large, we still don’t have a theology that incorporates the revolution in productivity. The default becomes radical egalitarian distribution whether in the form of the 17th Century Puritans or modern day Liberationists.

[D Walton]

You are right on target! It is my belief that Limited Liability law is at the root of the problem. When we examine the wisdom of God's legislation for Israel, specifically the Jubilee Laws, and realize that these laws were expected to extend into the future and ultimately be imitated by the nations, we can see that our Creater has in mind what Hilaire Belloc described as a Distributed Economy. Limited Liabilty law broke the inherent size-limiting connection that accompanies personal responsibilty and risk, and as a result began facilitating and stimulating large-scale operations. This was purposeful. The net effect has been to eradicate the individual liberty and innovation that accompanies individual production, and contrary to popular belief, stifle technological development.

[Michael W. Kruse]

Without giving blanket endorsement to our current circumstances, I don't think limited liability is an unequivocal negative. We've had corporations going back at least as far as the 17th Century with the Dutch East India Company. As technological innovation accelerated in the 19th Century, economies of scale became feasible in several industries, radically driving down the cost of production (i.e. increased productivity). But achieving those ends required amassing massive amounts of capital to create the productive capacity to achieve economies of scale. Achieving such economies of scale has been central to our rise in prosperity. Some industries would be very unproductive, if not impossible, without large firms. People would be unwilling to partner in such enterprises if their entire stock of wealth was put at risk with each investment they made in such ventures. I think limited liability, in some form, is essential.

[D Walton]

Good points.  I make a distinction between corporations and limited liability.  Corporations existed long before the introduction of limited liability and can exist apart from it.  You also point out the important fact that many would not venture their capital were it not for limited liability.  This aversion to risk and responsibility is the God-ordained wall purposefully designed to channel human production into widespread, diverse, and therefore liberty-enhancing avenues - small-scale enterprises exceptionally suited for a world of constant and frequent change: 

"Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth."-Ecclesiastes 11:2 (NASB)

We would know a much more technologically diverse and technologically advanced world were it not for the widespread acceptance of limited liability law and it's large-scale diversion of human activity.

Also, I would like to suggest that the perceived benefits of large-scale enterprise is largely a myth.  All large-scale production has tended to do is amass large-scale profits to a relatively small group of individuals, while shifting the costs on the public at large, kind of a sleight of hand.  Charles Perrow does an excellent job of pointing this out in his excellent book, Organizing America: Wealth, Power, and the Origins of Corporate Capitalism.

[Michael W. Kruse]

Interesting points. I think I read you to be describing a form of distributism. While I'm not enamored with the oligarchical capitalism of our day I remain unpersuaded that distributism is the answer either.

As a concrete example, I don't think you could have an overnight delivery service (FedEx or UPS) without a large corporation. The fleets of jets, distribution centers, staff, etc, would not be possible. Such a corporation is going to require many people to invest significant sums of capital.

Now thousands of investors can't be involved in the day to day operations of a firm to know what is happening, yet without limited liability, not only must they answer for the capital they invested in the company but creditors may take their homes, their savings, the very clothes on their back, and have them thrown into prison. This was the case before limited liability.

To me, distributism is viable only if everything can truly be done by smaller firms. My experience in competitive analysis in a previous work life tells me that this is not the case. And you can not have large firms without some type of limited liability.

Maybe we will just have to agree to disagree but my sense is that the absence of large firms, with their inherent need for some since of limited liability, would be to the detriment to human flourishing.

[D Walton]

Your objections are valid. Regrettably this is an area I am still studying and don't have an answer. Thanks for challenging me to go back to the drawing board. :)

[Michael W. Kruse]

Well, when you get all figured out please don't forget to clue me in. ;-) I'm still learning as well.

Thanks for a good discussion.

[D Walton]

After further thought... it seems to me your objections are based on the assumptions that 1) there are no feasible alternatives to the mega-package delivery services of FedEx and UPS, and 2) such services as we know them are absolutely essential.  As for the first assumption, I would argue that a more feasible alternative could consist of highly networked local, regional, and global carriers, with overnight and global deliveries handled primarily by fuel efficient mini-jets such as those now being built by Honda.  Such a system would no doubt require precise coordination, but promoting collaboration is the beauty of a widespread network of "owners".  When governments foster ownership of property and focus on enforcing and protecting property rights, instead of supporting and promoting theft in all its various forms, men made in the image of their Creator will tend to be hyper-creative.  As for the second objective, one only has to look to the past to see that societies functioned well without overnight delivery.  Overnight delivery would still be possible in a small-scale world, but even if not, its absence would primarily be recognized as an inconvenience, and then only to those who had previously relied on the service.  It must be kept in mind that a small-scale environment would produce a plethora of technology, the likes of which we have never seen.  Needless to say, a small-scale business environment would go far in promoting widespread employment in productive activities, something large-scale business is not geared to do.  That said, it would take a book to spell out the full implications.  I'll let you know if I'm ever able to pop one out.  Thanks for stimulating the discussion with your site!

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[Michael W. Kruse]

One of the biggest strengths about market economies is also their biggest weakness. The coordination of activity that happens within and between firms due to price mechanisms and industry organization, is so efficient, seamless, and removed from our sight that we don't see the massive complexity that brings something like a #2 wooden pencil to our desk.

Thomas Thwaites gave a presentation at TEDS in 2010 about his attempts to make a toaster. His efforts were inspired by the "Hitch Hikers Guide to the Galaxy." The main character finds himself on a primitive planet believing that he will be able to assume a godlike status because of his superior knowledge of technology. But he quickly realizes he doesn't know how to make any of the technology that makes him "superior." His superiority exists only so long as he is in community and interdependent with others who are technologically advanced. He can't even make a toaster. Thwaites tries to build a toaster from scratch. His experience illustrates the incredible complexity and range of specialties that must be coordinated in order to render a simple toaster. I encourage you to check it out here.

http://www.ted.com/talks/thomas_thwaites_how_i_built_a_toaster_from_scratch.html

What has led to the economic growth of the past two centuries has been a combination of labor specialization, expanded trade, and technology. Take a firm of 10 people two hundred years ago with each person making wooden chairs from raw wood to finished product. Say each person can make one chair per day. You have ten chairs a day.

What happened was that labor began to specialize. One person specialized in making legs. Another the seat. Another the chair back. Still another, specialized in the sanding process. Yet another the varnishing process. By simplifying and standardizing the process, each worker becomes more proficient. Now the firm is turning out fifty chairs a day.

Then someone figures out how to create machines with engines that can do the various process in a fraction of the time. Now the firm is turning out 500 chairs a day.

But how much demand is their for 500 chairs within a given community of the 18th or 19th Century? Not enough. So the firm begins to market the chairs to other cities, regions, and countries. Communities in other areas go through this same process with other goods they create. They ship their goods to the town where the chair-making firm is. Multiply this specialization, technology, and trade buy countless firms and you have the industrial age.

So back to the overnight delivery world. The industry is a model of this on steroids. It requires the coordination of thousands of workers with thousands of niche specialties, most of which are useless except in coordination with all the other niche specialists. There is no way for a small firm, or a community of small firms, to bring about overnight delivery.

"Such a system would no doubt require precise coordination, but promoting collaboration is the beauty of a widespread network of "owners".

This reminds of the joke about the guy who is told to imagine he is in a 15' hole and needs to get out. What would he do? His response is. "Well, first we assume a ladder ..."

The whole point is that large firms coordinate thousands of specialists with a thousand different specialties toward the accomplishment of particular ends. Some industries have economies of scale where the large firm is much more efficient and cost effective then having many small firms. Some industries can ONLY be done by large firms. Your alternate overnight delivery firm still uses small jets. Where do these jets come from and who keeps them running? A loose network of thousands of specialists all spontaneously organizing? I'm saying that large firms are needed (in some, not all) industries to coordinate production and service. You want only small firms. But what I hear you saying when it comes to how we coordinate the work that was done by large firms is, "Well, first we assume coordination ..." ;-)

Now as for the second assumption, for millennia human beings were hunters and gathers. They lived only on what was "absolutely essential" for personal survival and propagating the species. If the measure of whether or not something should be valid is absolute necessity, then we must return to hunting and gathering. ;-)

We are more than animals propagating the species. We are image bearers with self-awareness, reason, imagination and creativity. In the image of God we reshape the world in ways that enhance and bring to fulness that which makes us distinct from all else in creation. We do not need art to survive but we do in order to be human. We do not need technology to survive but we do if we want to see true human flourishing.

You wrote:

"Overnight delivery would still be possible in a small-scale world, but even if not, its absence would primarily be recognized as an inconvenience, and then only to those who had previously relied on the service."

I reject that overnight would be possible in a small-scale world for the reasons above. And the absence of overnight would be more than an inconvenience but let's go with that premise that the world got along fine with out it. It also got along fine without the iPad you wrote you comment on. Before that it got along without cellphones. Before that it got along without digitized music. Before that it got along without VCRs. Before that, without TVs. Before that without, cars or planes. Before that, without electricity. How far back should we go with this?

My bottom line is this. You can't have the modern world, or anything remotely approaching it without large firms and you can't get multitudes of people to invest their money in a large firm without having some form of limited liability. Opposition to large firms and limited liability is de facto a decision to live in a pre-19th Century world.

[D Walton]

Well said.  I don't intend to come across as one that despises technology or longs for a former day.  My contention is that we are technology deprived due to Limited Liability and the long-term debt to which it is inseparably linked.  I would dare guess that most technological advances as we would call them, were developed in the garage or basement, rather than in a corporate lab.  Once these small-scale advances are captured by the large-scale system, that system in turn seeks to suppress technological development - unless that development is able to be exploited by the large capital investments of which they have bound themselves to through long-term debt.  For example, a memory chip manufacturer has invested billions in specialized, inflexible capital equipment to make their product.  The pay back on this investment in specialized equipment will take 15 - 20 years to recoup.  All research and development that can utilize the equipment is supported in full.  However, alternative technologies that are discovered that can provide a better means to the same end are rejected.  These technologies are seen as a threat.  This happens unceasingly in the large-scale world.  Likewise, would it not stand to reason that if this is the case, a flexible small-scale system limited to relatively short-term debt (7 years), would provide a much greater level of human flourishing?

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