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How Should We Think of Poverty?

"Do we have to resort to the paternalistic account that the poor are people with second-rate characteristics? Or must we accept the notion that the poor are those of us who just happen to have a different outlook on life?" (JG Photo/Yudhi Sukma Wijaya)

This article is a response to an earlier article by Cafe Salemba's Rizal Shidiq, "You Think You Know What the Poor Want?"

Two ideas are commonly used to explain why the poor are poor. The first says the poor are people with weak willpower who can't save their money for future purposes. The second says the poor are as financially thoughtful as the rich, they just have a spending taste that is present-oriented.

Rizal Shidiq is a champion of the second idea. Referring to the work of economists Esther Duflo and Abhijit Banerjee, he argues we should let the poor want what they want if our aim is to maximize their utility, for telling them what to want means we are wishing for them to maximize our utility instead.

Rizal is correct that the poor are the ones who ultimately know best what they want. But while the poor can be happy at times, being poor is not something one can be happy about. And when money is scarce, buying a fancy television set makes much less sense than consuming healthy food.

So how should we think of poverty? Do we have to resort to the paternalistic account that the poor are people with second-rate characteristics? Or must we accept the notion that the poor are those of us who just happen to have a different outlook on life?

Economist Sendhil Mullainathan and psychologist Eldar Shafir offer a third view. Their idea is to see poverty as neither a matter of personality nor preference, but as a problem of situation.

According to this idea, the reason why the poor are spending heavily on present needs is because continually living with little money pushes them to do so.

One can readily relate to this idea in the domain of time. Most of us often fall short of commitments and deadlines. The less time we have on our hands, the more we must attend to pressing events. As a result, we have less mental capacity to come up with plans for the future and we find ourselves behind schedule once again.

Our problem with time is comparable to the poor’s problem with money. The poor find themselves constantly lacking money, and this situation focuses their attention on present needs. In turn, this focus deprives them of the cognitive resources necessary for making financial decisions on behalf of their future selves. Hence the poverty trap.

This new idea on poverty allows for the novel insight that the problem of the poor is situational. If true, then one implication is that poverty eradication efforts should be directed toward removing the situational forces impacting the poor’s decision-making processes. Several field experiments are currently under way testing this hypothesis.

Rizal is correct that we may not know what the poor want. But we know they’re in a situation that is bad for generating future-oriented decisions. And this insight might be just what is needed to help get rid of poverty more effectively.

Tirta Susilo is a researcher in cognitive neuroscience with a background in psychology. He highly recommends Cafe Salemba for anyone who wants to have fun learning economics.

Cafe Salemba started as a blog in 2005 by University of Indonesia economics students Arianto Patunru, Ari Perdana, Rizal Shidiq, Firman Witoelar and Sjamsu Rahardja. After continuing their work and study in different schools on different continents, they remain committed to making economics and the logic behind it fun to read. We are pleased to host the new Cafe Salemba.