The question of why the poor make seemingly poor decisions—such as borrowing more, saving less, smoking more, exercising less, drinking more, and eating less healthfully—has traditionally been attributed to personality defects or a lack of personal responsibility. This view suggests that if the poor simply made better choices or were better educated on managing their lives, their circumstances would improve.
However, a groundbreaking study by two American psychologists, Eldar Shafir and Sendhil Mullainathan, offers a different perspective. They conducted research with sugarcane farmers in India who receive a significant portion of their income once a year, leading to a cycle where they are relatively wealthy post-harvest but poor before the next harvest. The study revealed that these farmers performed significantly worse on IQ tests before the harvest compared to after, effectively losing about 14 points of IQ due to the stress and scarcity of their financial situation. This cognitive deficit is akin to losing a night's sleep or the impairments caused by alcoholism.
This phenomenon is explained by the concept of "scarcity mentality." When people perceive a shortage—whether it’s time, money, or food—their focus narrows to immediate concerns, leading to poor decision-making. This intense focus on urgent needs diminishes their ability to think long-term, akin to how a computer slows down and makes errors when overloaded with tasks.
Solution
Shafir’s research challenges the effectiveness of many anti-poverty strategies that focus on education and training in money management. A comprehensive analysis of over 200 studies on the subject showed that these programs have minimal impact. The issue isn’t a lack of knowledge; rather, the cognitive load of poverty impairs decision-making. Even George Orwell noted the dehumanizing effects of poverty, which diminish one's ability to consider the future.
Given this understanding, the solution might not lie in training or advising the poor, but in altering their circumstances. One proposed solution is a basic income guarantee (BIG), a concept that dates back to Thomas More’s "Utopia" and has been supported by thinkers across the political spectrum, including Martin Luther King Jr. and Milton Friedman. A basic income would provide a regular, unconditional sum of money sufficient to cover basic needs like food, shelter, and education.
Experiments with basic income, such as the one conducted in Dauphin, Manitoba, in the 1970s, have shown promising results. During the Dauphin experiment, poverty was virtually eliminated, and significant improvements were observed in health, education, and overall well-being. Other similar experiments worldwide have reported consistent benefits.
Implementing a basic income could be seen as an investment in people, much like venture capital, providing them with the financial stability needed to make better decisions and break the cycle of poverty. The cost of poverty, including social services and lost productivity, is substantial, and a basic income might be a more effective and efficient solution.
How can we afford it?
The cost of poverty is already high, with estimates putting child poverty in the US at a staggering $500 billion annually. Surprisingly, BIG might be cheaper than you think. Economists estimate that for a fraction of current spending (think a quarter of US military spending!), we could lift all Americans out of poverty.
BIG could transform our society. Instead of valuing people based solely on their income, we could focus on well-being and meaningful contributions. By guaranteeing financial security, we unlock individual potential and create a more equitable and prosperous future for all.
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