The Curious Preferences of Poverty

Most popular non-fiction books on development economics, foreign aid, and extreme poverty can be grouped into three broad camps. The first camp targets its analysis on state formation and institutional development. This is very much a political-philosophic approach, with major figures being Francis Fukuyama, Samuel Huntington, Amartya Sen, and more recently Daron Acemoglu and James Robinson with their wonderful new book Why Nations Fail.

The second camp blames stagnant growth and instability on "development traps": negative feedback loops that keep poor countries poor. Under this paradigm, sufficiently large doses of well-coordinated foreign aid can jolt a country out of the trap and into a virtuous cycle of autonomous growth and institution-building. Jeffrey Sachs' The End of Poverty has the best articulation of this view, with Paul Collier's The Bottom Billion deepening the theory by cataloging more structural roadblocks to development.

The third camp, in direct opposition to this "big aid push"  idea, finds little evidence for entrenched poverty trap-stricken countries. According to this approach, development assistance is often counterproductive due to the misaligned incentives and limited information of foreign aid planners. William Easterly's The White Man's Burden is the best example of this perspective.  The disagreement between camps 2 and 3 is roughly analogous to the central planning-versus-free market cleavage in political philosophy.

Poor Economics, a new book by MIT economists Abhijit Banerjee and Esther Duflo, is an aggressive attempt to buck that well-trod dichotomy and identify a novel approach. They attempt this feat by going meta, grouping camps 2 and 3 together as "grand theory" approaches and balancing them against their own "no theory" approach. In their view, studying development should involve using rigorous data (especially from randomized trials) to make limited claims about which techniques work and which ones don't.  

Photo Credit: Jim Davis

The book is structured by topic, with chapters investigating various aspects of the economic lives of poor people. Many of the specific findings are incredibly interesting: poor people often choose fewer tastier calories over more cheaper calories; parents might not encourage education for their kids for fear of losing their assistance around the house. The limited conclusions at the end of the book are equally novel: the poor bear responsibility for too many aspects of their lives compared to rich people who have many "right" decisions made for them, like chlorinated water, fortified food, automatic savings, etc.

Poor Economics is an interesting and important book, but its conceptual framing is flawed. It's filled with tons of fascinating little nuggets of information, but that's pretty much it. The attempt to go all meta and establish a new "big theory vs. little theory" framework falls into a common fallacy. Camp 3 is more critical theory than anything else, and labeling it a "big theory" just like camp 2 is akin to calling atheism a religion and 'off' a television channel. Instead, Poor Economics is most accurately viewed as merely a superb implementation of the camp 3 approach. Banerjee and Duflo, whether they admit it or not, are dutiful and committed searchers.