The prospect of long-term joblessness in Europe and the US should focus attention on a new type of economics that seems to work for helping the worst-off in poor countries.
In both America and Europe, people are pessimistic about the ability of politicians to spur job growth. Traditional economic theories – either left or right – are failing as millions of people face years of being without work or underemployed. And as the stress of daily living rises, the jobless often make poor choices, such as not reeducating themselves.
Is there a solution to this gloom?
Perhaps one lies in a hot new approach being tried in the world’s poorest countries, where people living under long-term poverty may have something to teach those in wealthy countries.
A group of behavioral economists at the Massachusetts Institute of Technology, Harvard, Yale, Princeton, and elsewhere are challenging traditional antipoverty policy by conducting experiments in slums and villages to show which competing ideas of development actually work, much like randomized testing in the pharmaceutical industry. They try to avoid generalizing their results, knowing that simplistic ideas are not always easy to replicate, even in the next village.
The history of antipoverty policy, state MIT economists Abhijit Banerjee and Esther Duflo, “is littered with the detritus of instant miracles that proved less than miraculous.”
Yet if they have one overarching conclusion, it is this: The poor often stay poor because of the stress of daily survival; but given enough hope of a better future, they respond like everyone else.
What gives them enough relief to start improving their lives by themselves? That’s not so easy.
Over the past decade, MIT’s Poverty Action Lab has field-tested dozens of small interventions at the community level to better understand how people actually react to attempts to improve their lives. Unlike traditional economics that treats people as rational people making rational choices based on incentives, these researchers find that people living with scarcity can act in seemingly irrational ways.