Banerjee and Duflo on poor economics
In their book `poor economics, a radical rethinking of the way to fight global poverty’ Banerjee and Duflo (BD) attack two theoretical positions. The first is the shock-therapy of Sachs, and the second the free market-solution of Easterly. Sachs assumes that the very poor (income less than $1 a day) are trapped in a so-called poverty trap. Their income is too low to maintain their physical and cognitive capital. It means that consumption is declining over time, making their situation worse. The economy must have a spending impulse, which increases all incomes. That makes it possible for the poor to save and invest. Easterly considers the government as the cause of poverty. Its intervention frustrates the functioning of local markets, at the cost of local suppliers. The same holds for foreign aid – it does not lead to structural improvement.
According to BD it makes no sense to pose universal statements about the key factor that produces structural poverty. Examples of key factors: lack of free markets, governments, conflicts, laziness of poor people, etc. It is better to analyse the complex dynamics in how the poor make their decisions. We must search for evidence, showing how poor react on a particular measure rather than continue fighting by means of sweeping statements. The best way to find empirical evidence is the method of the Randomly Controlled Trials (RCT).
Form two groups of poor people randomly. Offer the children of the poor of group A a voucher for primary education, for instance. The children of the people of group B are not offered such a voucher. After a particular period we can compare the difference in behaviour of the two groups. If there is a significant difference, we can conclude that the measure makes sense. If we do many experiments with many randomly formed groups, we might formulate statements of a more general nature.
In chapter 4 (‘Top of the Class’) BD describe the results with respect to education. There are four types of primary schools: elitist, private, public and community-driven schools. The attitudes of parents and teachers differ, dependent on the type of school. The first two types focus on the best and the brightest, the public schools teach the lower part of society, while public teachers are, generally speaking, not very motivated. Community-driven schools, however, are able to attract very motivated teachers, among them many volunteers, who are doing activities, such as remedial teaching.
BD stress the importance of an democratic ideology: education is relevant for all children, not only for a happy few. So, schools and teachers must not maximize their own status. In a democracy each child must be offered opportunities to develop his own talents and capabilities.
The book pretends to offer an alternative to universal statements about the functioning of an economy. However, experiments are designed without any theoretical foundation. The RCT’s suggest that the test group and the control group are homogeneous at the beginning of the test. The test group is confronted with the obligation to send their children to school, or they receive a voucher, or are offered education, free of charge. After a particular period the school performance of the two groups are compared. If the difference in educational results has grown with 26% for instance, what conclusions can the researcher draw from this test? Why not 80% or -20%? (Maybe other children in the village are jealous with the laboratory rabbits, and start bullying them). There are many possible explanations – just doing empirical research, followed by a random search for explanations has no meaning. We need a theoretical foundation, which makes it possible to make observations. The ontological and epistemological hard core of philosophy of science is about this statement. Popper, who is quite popular among empirical scientists, has extensively clarified the “theoretical primacy in the establishment of facts” (Popper, 1957). Without theory no facts! Lakatos has developed his theory of a scientific research programme on the basis of this statement (Lakatos, 1970). Every programme has its hard core, which is the paradigm of the programme. In human science the paradigm is about the nature of a human (economic, or social, or psychic or a mix of the three), and the nature of his situation (scarcity of resources, immorality, irrationality). The analysis based on the paradigm must explain the mechanism, which determines the results in terms of economic, or social or psychic performance.
The conclusions drawn by BD – ideology and motivation are very important – come out of the blue. There is no macro-view, such as Sachs’ theory, no micro-view, such as Easterley’s theory. When BD are going on with their RCT’s, in the end we have an endless variety of constantly changing results.
Both Sachs and Easterley are monodisciplinary economists. It means that they offer an analysis, which assumes that human behaviour is only economically motivated. Their world is an isolated abstraction. The other two primary motivations, namely the social and the psychic aspect of human behaviour do not take part in the analysis (Keizer, 2015, 2018, 2019). In other words, the hard core of sociology and psychology are ignored. Notwithstanding the partial character of their analysis are they prepared to use it as the theoretical foundation of their empirical research. Actually they suggest that the economic motivation is the only one relevant in all situations.
BD criticize their analyses being universal rather than context-bound, and not based on empirical evidence. But their groups are only homogeneous in the sense of all parents being very poor. But all participants are economically, socially and psychically motivated and operate in a particular economic, social and psychic environment. Some people need less resources, or are surrounded by caring family members or are mentally stronger than others. These three types of factors are constantly interacting with each other, and can make a difference. As long as their income is still lower than $1 a day, they stay member of the group. They might wait for a Sachsian shock, or for less government regulation of local markets. But then, a voucher is offered. Some poor know exactly what to do with this opportunity; others are inert, however. It is very important to find out why some react positively, while others appear inert.
The chapter on education is primarily applied to India. In some parts Muslims dominate, while other parts are ruled by Hindu or Buddhist culture. In some regions there is ongoing social conflict, making it difficult for parents to have a long-term view of the future of their children. In some areas private initiative and ‘entrepreneurship’ is considered as something positive. In other areas individualism is interpreted as ‘alien’ and ‘foreign’.
Keizer (2015, 2018, 2019) shows that orthodox economics is about the economic aspectsystem of society; it is not modelling the real world. Walras and Pareto are very clear about this: it is a partial analysis. Also sociology is discussed at length, and a social aspectsystem is formulated. Stimulated by big sociologists, such as Parsons and Bauman, the social world is about the socially motivated drive inside persons to group together, and to form a generally accepted hierarchy of groups. Group cohesion results from inner solidarity and outer rivalry. If members are deviating too much from the core values, they are discriminated, or even exorcised. This process is presented by the famous scapegoat mechanism.
Also psychology is extensively discussed, and a psychic aspectsystem is formulated. Stimulated by big psychologists, such as Jung and Kahneman, the psychic world shows the operation of the psychic motivation to maximize self-respect. Two mechanisms play a role here. Kahneman’s system 1 is about the immediate, affective reaction, serving the short-term interests (Kahneman, 2011). Kahneman’s system 2 is about the elaborate, energy and time consuming cognitive reaction, which might correct or prevent the first reaction. The ratio of a person is his capacity to logically think about the consequences of a particular choice, and his capacity to use his will-power to serve the long-term interest of the person. Kahneman’s system 1 is constantly trying to seduce the decision-maker to strive for comfort here and now. It is able to let the decision-maker deny inconvenient information – the so-called ostrich-mechanism. System 2, however, is trying to persuade the decision-maker that well-functioning in the bigger whole is more respectful.
Heterodox economics rejects the use of (economic) logic, since it interprets reality as a closed system. But we cannot throw the motivations away – then there is no mover anymore. After we have analysed the universal logic, being a combination of economic, social and psychic logic, we can make the analysis more sophisticated by assuming reality being an open system. Then we allow thast decision-makers are uncertain and develop, mostly group-wise, institutions, which make the world more stable and predictable. History enters the stage, showing that the empirical surface reflects an enormous variety of actions, which changes evolutionary and sometimes revolutionary.
In the analysis of Keizer (2015) a distinction is made between several stages of personal growth. In the first stage a person is inclined to seek a maximum of comfort, economically, socially and psychically. By means of a process of intensive communication of the person with his Self and with others, including his rivals, a person can find his self-respect on a higher level. Irrational interpretations of the own performance can keep the self-respect of the low order on an acceptable level. Live-long communication in power-free environments leads to more rational and moral persons, who have the mental power to function well in their environment (Habermas, 1986). The education system in India would profit significantly from this type of rational and moral growth.
Lack of rationality and morality as defined and analysed by Keizer (2015, 2018, 2019) must be seen as a severe barrier for the development of the capabilities of all people. On the basis of this theoretical foundation tests can be designed to improve these characteristics, and see whether they improve the functioning of persons and systems of persons.
Habermas, J. (1987), Theory of Communicative Action, vol.2, Cambridge: Cambridge Polity Press.
Kahneman, D. (2011), Thinking Fast and Slow, London: Penguin Books.
Keizer, Piet (2015), Multidisciplinary Economics, A Methodological Account, Oxford: Oxford University Press.
Keizer, Piet (2017), A Multidisciplinary-economic Framework of Analysis, Journal of Philosophical Economics, X:1.
Keizer, Piet (2018), A Multidisciplinary-economic Approach to Inclusive Institutions Analysis, Theoretical Economics Letters (34), 6.
Lakatos, Imre (1970), Falsification and the Methodology of Scientific Research Programmes, in: I. Lakatos, R.A. Musgrave (eds.), Criticism and the Growth of Knowledge, Cambridge: Cambridge University Press.
Popper, K. (1968), The Logic of Scientific Discovery, London: Hutchinson.
Sen, A. (2002), Development as Freedom, Oxford: Oxford University Press.
Piet Keizer – 20-09-2019; Associate Professor of Economic Methodology; Utrecht University School of Economics. email@example.com; www.pietkeizer.nl.