#OARES Ask the Editors Panel—Submit your Questions

Along with my co-organizer, Marc Bellemare, I am very excited to announce a special Ask the Editors Panel session in the Online Agricultural and Resource Economics Seminar (OARES). This special session will be held on Wednesday, September 16—at the usual time and place—11:00 am CST, online.

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COVID-19 in Low- and Middle-Income Countries—An (incomplete) Round Up

Simeon Djankov and Ugo Panizza, in partnership with the Center for Economic Policy Research (CEPR) and the International Development Policy Journal, have an edited volume on “COVID-19 in Developing Economies.” Aside from a questionable (at best) cover image, this seems to be a valuable resource. The included essays are short and will likely be helpful for many involved in policy-making or research in low- and middle-income countries. I will highlight a few chapters that I found particularly insightful.

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[Book Review] Cents and Sensibility – Forthcoming in F&E

Over winter break this year I had time to read… books… not just journal articles for a change. It was nice. One book I read was, Cents and Sensibility: What Economics Can Learn from the Humanities by Gary Saul Morson and Morton Schapiro. As someone who doesn’t spend enough time reading literary classics (or much fiction at all), this book challenged me to change my behavior.

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[Book Review] Economics Rules: The Rights and Wrongs of the Dismal Science

Over this past Christmas break and while doing some traveling over the past several months, I’ve been able to squeeze in some unassigned reading. One of the books I’ve read was Dani Rodrik’s newest book Economics Rules: The Rights and Wrongs of the Dismal Science. I enjoyed this book greatly and have written a review of it to be published in the forthcoming issue of Faith & Economics – a peer-reviewed journal of the Association of Christian Economists.  

Here is the accepted (but still working) draft:

Book Review Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

The key “take-home” points of this book are:

  • Never confuse a model with the model. There exist a lot of theories about human behavior. Most of them are true at some time and in some location. Choose carefully!
  • “When models are selected judiciously, they are a source of illumination. When used dogmatically, they lead to hubris and errors in policy” (p. 11).
  • “At best, we can talk in terms of tendencies, context-specific regularities, and likely consequences” (p.45).
  • Mistakes are when we become overconfident in one popular paradigm or when we disregard important characteristics of the specific context in which a model is being applied.

Top Posts from 2015

Another year has gone by and I’m still blogging. Here are a list of the top posts from the past year, listed in order of popularity.

1. 7 Thoughts on Syrian Refugees

2. Poor Behavior: 3 Myths about Behavioral Economics

3. [Book Review] Africa: Why Economists Get it Wrong

4. The Economics of Climate Change and Water in Kenya

5. Scarcity, Hope, and the Psychology of Poverty

The Effect of Income on Religiousness

A majority of the world’s population claim adherence to a religion. But while there is a growing literature on the effects of religiousness on economic behaviour, we know very little about how economic factors affect religiousness. How income affects religious behaviour and affiliation is an especially important question for developing countries experiencing a rise in the average incomes of poor and lower middle class households. Whether these families will become more or less religious (or even change their religion) as they grow richer will have an impact on the way their societies develop.

That’s the opening paragraph of a new paper recently published in the July edition of the American Economic Journal: Applied Economics. Interestingly they found “significant effects of income on religiousness. Households that earn more go to church more often. Households that earn more are also more likely to be members of an evangelical community rather than of the mainstream catholic church.”

This outcome is contrary to my priors. My experience has made me think that the less money people have the more religious they tend to be. The explanation (in my mind) is that the less money you have the less capable you are to do things on your own. You need constant help from others and you are giving constant help to others. This sort of behavior breeds humility and orients an individual well towards a healthy spiritual relationship with God. On the flip side, more money breads a certain kind of hubris a “I can do it on my own” kind of attitude. 

The study uses a regression discontinuity design to establish a causal relationship between income and several measures of religiosity. For those unfamiliar with regression discontinuity, let me briefly explain (as it is quite a neat tool). In Ecuador there is a cash transfer program that gives poor households a monthly transfer of $35. What a regression discontinuity empirical strategy does is exploits the cut-off point where eligibility for the cash transfer program is determined. The purpose is quite intuitive: households on either side of the cut-off point are quite similar save for eligibility in the cash transfer program. Therefore any difference between households, on average, can be interpreted as an average treatment effect. See the figure below for the results of this study.

Screen Shot 2015-06-29 at 4.17.28 PM

Of course, the usual caveats exist: This experiment was carried out in Ecuador, and the results may not hold everywhere. The results are likely very sensitive to definitions of “religiousness”. It’s not clear these effects will persist (in magnitude or direction) at higher levels of income. Nevertheless, here’s the last paragraph of this interesting paper:

Sociologists have long adhered to the so-called secularisation theory which posits that societies become less religious as they develop. This theory has come up for criticism, not least because of the continuing importance of religion in the US. Our results show that it is far from clear that higher income leads to lower religious participation. We should therefore not automatically expect other societies to follow the European example and become more secular as they grow richer. Rather, church membership and attendance seem to be similar to membership and participation in social clubs. They are costly in terms of time and money and, for the households in our sample, have a positive income elasticity.

HT: Bruce Wydick

Clinical Economics or Differential Diagnostics

Jeff Sachs and Tyler Cowen had a conversation at the Mercatus Center (perhaps you’ve heard about it). (My brother actually got to attend this in person! The rest of us had to settle for the video. I’m still jealous!) It is a fascinating video and no matter what you think about Jeff Sach’s ideas, it is difficult to watch this video and not realize he is brilliant. The best part (in my opinion) of this conversation is when Sach’s compares how the economics profession acts compared to his wife’s profession (pediatrics). Start listening at about the 20 minute mark for the differential diagnostics discussion.

Transcript

Jeff Sachs: I should explain this idea of clinical economics, as I’ve called it, or differential diagnosis. When you’re married to a pediatrician, as I have been for 35 wonderful years, you get up in the middle of the night a lot when patients call with a very sick child.

I’ve listened to my wife take an oral history a thousand — thousands of times, perhaps. It’s a wonderful art, first of all, because a mother calls with a crisis of a baby or a young child — usually a high fever. The first thing that is important to know is that there are a thousand possible etiologies of that fever. My wife doesn’t say institutions. She says . . .

[laughter]

Jeff Sachs: . . . “It depends. Let’s hear your problem. Oh, you’re in a desert, you’re here, you’re this . . .” No, when it comes to the child, it could be something as normal as a common cold or a something as devastating as meningitis.

The purpose of a differential diagnosis is two things. First, it is of course to try to get to the core reasons so that you can make a proper prescription based on a proper diagnosis. Second, it’s done in a way that you’re minimizing serious risk.

The first question always that my wife asks is, “Is the baby’s neck stiff, or do you notice that?” Because that’s one of the symptoms of meningitis. If the mother answers that way, the next point is “I’ll meet you at the emergency room. Don’t stop. Just go.” Because it could be something that is fulminant and life-threatening immediately.

If it’s not that, then it can go on for an hour.

But by the way, it’s not just an hour of questions. It’s an hour of sequenced questions down a decision tree, and it’s fascinating to watch. I wish as economists we had those basic skills inbred. I certainly didn’t learn them, and it took me a long time of seeing lots of “patients” to see that one needs that same kind of approach.

That’s what I mean by differential diagnosis. Why it’s so annoying to me, the one explanation fits all viewpoints. Because now I’ve seen a lot of places, a lot of crises, a lot of challenges. One of the things that I discovered was how poor our profession is at times in having that sense that the problem that you saw over there is not the same as the problem that you’re seeing here.

Tyler Cowen: Let me push on this a bit and see if you can convert me into being more of a Sachsian. One of my worries is that the doctors are not actually in charge. It may be the lawyers, which is . . . We’re in a law school, but still, if I may say, in some ways a step down.

To some extent you have people voting on the baby, not all of whom even know who the baby is or what the baby’s symptoms are. The differential diagnostics may exist in a kind of platonic realm, but you are more optimistic about them than I am.

What would you tell me to address my skepticism and make me more of a Sachsian, given that I have this reluctance to embrace your view the way you hold it?

Jeff Sachs: I think I get what you’re driving at and I do have a fundamental view of at least how I want to proceed professionally. But it’s also based a bit on a theory of change.

Tyler Cowen: Tell us the theory.

Jeff Sachs: I believe that knowledge matters and that the more clarity, the more evidence, the more appropriate an analysis, the more likely we can find a good outcome to things. Many people are cynical. I tend not to be. I’m sometimes accused of being gullible as a result, or being too soft in the face of whatever. But I believe that there’s a way to reach an agreement, typically, among pretty conflictual and often pretty antagonistic actors.

I think its a good point and one that needs to be made. (It is the sort of something that goes without saying, yet often goes unsaid.) We can quibble over the practical and technical differences between the specifics of pediatrics and economic development, but I think the broader point holds. Those working in development are often motivated by the vast challenges, the vast human suffering, and the vast needs. Perhaps because of this we want to fix it all. We want to create the panacea for global development. This goal or notion is misguided. Surely doctors go into medicine for similar reasons; the vast challenges, the vast human suffering, and the vast needs. No doctor, however, starts their career with the goal of trying to develop a cure for all human diseases. 

The Economics of Hope

Two years ago I was a senior in college and sitting in a professor’s office discussing several topics I could focus on for a senior thesis. At the time the economics of happiness was gaining a lot of momentum as a research topic. I asked my professor if I could think about the concept of hope from an economic perspective. We did some searching for relevant literature and didn’t really find much. I moved on to a different topic.

Fast forward to now. The economics of hope has a growing and promising literature. I have plans to travel to Myanmar to try and collect data to better understand this topic. As I begin to dig into the literature, I thought it would be nice to record a roadmap of sorts.

Two summary resources provide a great starting point, and much of the insights in this blog post:

What does hope have to do with economics?

At first it may seem like there is not much connecting a light and fluffy topic like hope with cold and calculating economics. Generally economists have a lot to say about a lot of things. But hope is a topic that has historically belonged to theologians, philosophers, poets, and signer-song-writers. At second thought, however, hope is fundamental to any economic activity. Consider the words of Martin Luther:

Everything that is done in the world is done by hope. No husbandman would sow one grain of corn, if he hoped not it would grow up and become seed; no bachelor would marry a wife, if he hoped not to have children; no merchant or tradesman would set himself to work, if he did not hope to reap benefit thereby. How much more, then, does hope urge us on to everlasting life and salvation?

And John Stuart Mill:

A hopeful disposition gives a spur to the faculties and keeps all the working energies in good working order.

What we talk about when we talk about hope

There are a couple ways the word hope is used in english language and the difference between the two is subtle. Consider the difference between two sentences: “I hope it is sunny tomorrow.” and “I hope to go for a run tomorrow.” Both use the term hope but in different ways. Both terms indicate some sort of uncertainty but the second usage implies human agency. I may hope it is sunny tomorrow, but there is nothing I can do to make it sunny. I also may hope to go for a run tomorrow and I certainly can do things to make that happen. Lybbert and Wydick create a helpful figure to represent the differences between “Hope 1”, “Hope 2”, “Hopeless 1”, and “Hopeless 2”.

Screen shot 2015-04-10 at 8.56.51 PMHopelessness 1 is experienced by someone with both low agency over the future and low optimism about the future. This is a person who is feeling both hopeless and helpless. For example a victim of a famine who has no food availability in the future and no way to get it either. Hopelessness 2 is experienced by someone with high agency over the future but low optimism about the future. This is a person who is feeling hopeless but not helpless. For example someone who works very hard to survive but doesn’t see a future of any other way of life. Hope 1 is experienced by someone with low agency over the future but high optimism about the future. This is someone who hopes it will be sunny tomorrow. Hope 2 is experience by someone with both high agency over the future and high optimism about the future. This is someone who hopes to go for a run tomorrow.

As Lybbert and Wydick explain:

Distinguishing between these types of hope is useful, but individuals often experience hope as a combination of Hope 1 and Hope 2. Both types of hope, for example, are manifest in the case of a famine victim, or someone who is trapped, lost, or stranded, where a person may have to take painful but proactive steps to survive (internal agency) while awaiting relief or rescue (external to agency). Consider similarly the plight of someone suffering from a potentially terminal disease, in which there is some probability that a breakthrough in treating the disease may occur in the future. Survival thus depends on two events: (i) that the breakthrough occurs by time t; and (ii) that the patient is able to survive until time t. Hope for the patient thus consists of Hope 1 (hope that the breakthrough will occur) and Hope 2 (hoping to remain as healthy as is possible until the breakthrough arrives), which implies some degree of agency that may involve costs. (We might call this type of hope “Hope 1.5.”) In contrast, a person beset by hopelessness has concluded that the joint probability of these events is sufficiently dwarfed by the agency costs of survival, ensuring the unfortunate outcome.

 

Hope seems to matter (some evidence) 

Abhijit Banerjee, Esther Duflo, Raghabendra Chattopadhyay, and Jeremy Shapiro have a (2011) working paper entitled Targeting the Hard-Core Poor: An Impact Assessment. In it they evaluate a program designed to provide development services to people who don’t (for whatever reason) take up microfinance when it is offered to them. The program transferred assets (cow, goat, chickens) worth about $100 to the ultra-poor in Murshidabad, India. The results of the program were huge! 21% increase in earned income. 15% increase in consumption. An hour more work per day. Large psychological health effects. These effects are surprising given the amount of the asset transfer. What could be happening? Why are the benefits of giving an extremely poor person in India $100 WAY more than $100? What is making this return so large? Several things could be happening:

Perhaps the asset freed up a “nutrition based poverty trap”. In such a trap wages are so low that by working all day an you would only make, say, 800 calories, far lower than the necessary 1200, or so, calories needed per day. In this type of situation you will not be able to work or work very little and you will be very unproductive and stay very poor. So perhaps an asset transfer allows you to earn a small return on the asset (i.e. the cow gives milk, the chickens lay eggs etc.) and this pushes you above the necessary 1200 calories per day. Now the return on a $100 asset transfer is magnified by the workings of the labor market that you are now able to take advantage of because you are now able to put in a full day of work. Even if the labor market wages are still very low the return from the ultra-poor asset transfer will be quite large.

This nutrition based poverty trap isn’t what seems to be happening in Murshidabad. If the people were so poor that they didn’t have enough food to eat to work for enough hours every day then by giving an asset (such as a cow), all of the extra consumption should be in the form of food. Because feeding yourself adequately is the most productive thing to do. But in this impact assessment the authors find similar increases in overall consumption (15%) and food consumption (17%). People seem to be increasing expenditures in everything, not just food. Moreover, within food consumption the ultra-poor seem to be substituting for higher priced food that is not necessarily the most calories. For example less grains, more meat. Basically if these people were starving they would have maximized the calories available with their resources.

Another possibility is a so-called “credit trap”. In other words the ultra-poor do not have the ability to gain credit (due to a lack of durable assets to use as collateral, or lack of access to a provider, etc.). This again doesn’t seem to be the case because the program in Murshidabad, India was implemented by a microcredit organization explicitly targeting these people because they couldn’t get them to borrow money. So there was a organization in the area providing credit without a restriction of having collateral.

Still another possibility is mental health or psychological health. The beneficiaries of the program recognized fewer symptoms of depression, fewer symptoms of stress, and feeling much happier. This perhaps (as hypothesized by Duflo) could be the mechanism that leads to the large returns on the $100 asset transfer to the ultra poor. The question is whether there is such thing as a “hopelessness trap” (or as Dalton, Ghosal, and Mani (2013) call an “aspirations failure”). Said differently the expectation of future poverty exacerbates current poverty.

Take for example a seamstress. There is a huge difference between the productivity between sewing by hand and having a sewing machine. Additionally there is a big difference between having a mechanical sewing machine and a manual sewing machine. Additionally, there is a difference between having one mechanical sewing machine and two mechanical sewing machines. And so on and so on. In economist speak, the production function for a seamstress has discrete steps. An investment has a threshold before it becomes profitable. The problem is you can’t buy one tenth of a machine. You have to buy the whole thing. If someone is so poor and “hopeless” that they think they will never be able to cross the critical threshold for profitability, there is little incentive to be as productive and rational as possible. Perhaps you should spend more time buying toys for your child rather than save for a sewing machine if you never think you’ll be able to save enough for a sewing machine.

Hope then is a capability (a la Amartya Sen). Hope is a fuel that makes us capable of achieving things. And it also provides motivation to invest in business, education, health, etc.

So, how do we make people hopeful?

There could be many ways, several that have been recorded in the literature so far include:

For a long time those working in development have been focusing on external constraints to economic outcomes. We always think of the obvious things like credit, or agricultural inputs, or business skills training, or health, or nutrition, etc. Perhaps it is time to think about the internal constraints to economic outcomes. Things like aspirations, beliefs, or attitudes. All things that make up what we call hope.

(There is also a theological perspective of all this. Undoubtably, there will be more on that later.)

Why I “Do Development”

A common discussion topic between my classmates and I (between studying, of course) is why we each have chosen our areas of interest in applied economics. In a department as diverse as MSU’s Agriculture, Food, and Resource Economics Department, this discussion often is quite interesting. Some of us are interested in environmental resources (water quality, non-point pollution, energy) some are interested in producing food efficiently and some of us are interested in the field (which is ever growing in popularity) of development economics.

My standard answer to the question, why work on international development issues when there are areas of the United States that need help too (i.e. Detroit) is: “There are entire countries like Detroit”. That’s really just part of my full answer. But here’s a map to back up this idea:

USmap.0 (1)

 

HT Vox.com