Scarcity: Why Having Too Little Means So Much

One of the biggest questions in addressing poverty is the question of why people remain poor despite the many public and private resources available to them. Among those who make the case against charity, the theory is often that something is wrong with the person who is poor: they are dependent, they are entitled, they lack a strong work ethic. The solutions proposed follow naturally from the diagnosis: limit charitable giving to emergencies, develop an entrepreneurial spirit, teach people the hidden rules of the middle-class.

In Scarcity: Why Having Too Little Means So Much, economist Sendhil Mullainathan and behavioral scientist Eldar Shafir present an alternative idea: perhaps poverty is the reason that people remain poor.

Of course, Mullainathan and Shafir’s argument is deeper than that. Throughout the book, they look at a variety of kinds of scarcity – poverty (scarcity of money), busyness (scarcity of time), loneliness (scarcity of social connection), and so on – and discover that these very different forms of scarcity share an underlying psychology of scarcity. The person who is busy behaves the same way towards time that the person who is poor behaves towards money. Scarcity – “having less than you feel you need” – has “a common logic… that operates across diverse backdrops.”1Sendhil Mullainathan and Eldar Shafir, Scarcity: Why Having Too Little Means So Much, Kindle Edition (New York: Henry Holt, 2013), 4-5

Through detailed and varied experiments and observations, Mullainathan and Shafir give us a picture of that psychology of scarcity. It’s a very different picture than that painted by advocates of welfare and charity reform.

Tunneling

There are three key concepts in Mullainathan and Shafir’s theory that I want to take a look at here: tunneling, bandwidth, and slack. Together, these three ideas create a portrait of the psychology of scarcity and help explain why people facing scarcity make the decisions that they do.

When people face scarcity – regardless of the kind of scarcity they face – they become intensely focused on making the most of what they have: they tunnel. This can have immense benefits. Many or us know the power that a looming deadline has to increase productivity. In the face of a deadline, we’re able to focus on the task at hand to the exclusion of all else and complete projects that had been languishing in the wilderness of ample time. Scarcity captures and focuses the mind in a way that is “unavoidable and beyond our control.”2Mullainathan and Shafir, Scarcity, 26

While this can be beneficial – a sort of focus dividend – it can also be tremendously damaging: “Focusing on one thing means neglecting other things.”3Mullainathan and Shafir, Scarcity, 29 Things inside the tunnel come into sharper focus while things outside the tunnel become invisible. The effect is that we make choices that are good in relation to the things we’re focused on even if they are bad in relation for things we’re not focused on.

A perfect example of this is payday loans. Mullainathan and Shafir use the example of Sandra Harris, an otherwise successful radio host who began taking payday loans after her husband lost his job. Each month, she would roll the loan over to make ends meet. She bounced checks, her car was repossessed, and she ended up deep in debt.4Mullainathan and Shafir, Scarcity, 105-107 The scarcity that Harris faced now created a tunnel that maintained that scarcity in the future:

That initial bill she could not pay created scarcity. She then tunneled on making ends meet that month. Within that tunnel, the payday loan proved eminently attractive. Its benefits fell inside that tunnel: it helped her make it through the month. The costs of the loan— the repayment and the fees— all fell outside this tunnel. The loan seemed to offer a solution to the problem she was fixated on.5Mullainathan and Shafir, Scarcity, 108-109

Tunneling leads us to see only the consequences of our choices that are inside the tunnel and to ignore the consequences that are outside the tunnel. We’ve all made choices that had immediate benefits and distant – even invisible – disadvantages: skipping the long-term benefits of a visit to the gym in favor of getting a project done before a pressing deadline, for example. This is a result of scarcity.

Bandwidth

Scarcity causes us to tunnel, focusing on the challenges of our scarcity to the exclusion of other things. It captures our attention.

The result of that capture is that it limits our bandwidth. Mullainathan and Shafir use the idea of bandwidth as a shorthand for a variety of psychological constructs.6Mullainathan and Shafir, Scarcity, 47 Among these are cognitive capacity (the ability to solve problems, engage in logical reasoning, etc.) and executive control (the ability plan, control impulses, and so on).7Mullainathan and Shafir, Scarcity, 47 Scarcity, according to Mullainathan and Shafir, “directly reduces bandwidth.”8Mullainathan and Shafir, Scarcity, 47 People facing scarcity aren’t inherently less able to solve problems, retain information, or control impulses. They simply have fewer resources available to actually do those things.9Mullainathan and Shafir, Scarcity, 47

This last point is especially important. Mullainathan and Shafir’s research showed that test subjects suffered a 13 to 14 point drop in IQ when preoccupied by scarcity. But that effect exists only when preoccupied with scarcity. People facing scarcity aren’t any more or less intelligent than people not facing scarcity, but they appear to have lower intelligence because some of their bandwidth is being used elsewhere.10Mullainathan and Shafir, Scarcity, 52 Similarly, people who are facing scarcity show less self-control, but only when they are facing scarcity. They don’t have less self-control, but they appear to have less because their bandwidth is being taxed.11Mullainathan and Shafir, Scarcity, 55-56

All of this leads to a fascinating bottom line, a narrative that counters a lot of popular opinion about the capacities of the poor: “Poverty itself taxes the mind…  We would argue that the poor do have lower effective capacity than those who are well off. This is not because they are less capable, but rather because part of their mind is captured by scarcity.”12Mullainathan and Shafir, Scarcity, 60 I’ll return to this idea shortly, since it has huge implications for how we address poverty. First, though, I want to look at a third key concept from Mullainathan and Shafir’s work.

Slack

Scarcity forces us to think in terms of trade-offs. Mullainathan and Shafir use the example of ordering a $10 cocktail while out at a restaurant with friends. When we think about it, we know that any $10 purchase means that we don’t have that $10 to spend elsewhere. When we’re not facing scarcity, however, we behave as though there is no trade-off. Because the cost is low, we act as though there are an infinite number of $10 purchases in our budget. If we’re on a diet, though, that drink suddenly has a trade-off: having that many calories now really does mean giving up dessert after dinner. Scarcity means we must account for everything.13Mullainathan and Shafir, Scarcity, 70-71

Scarcity creates trade-off thinking. But a lack of scarcity provides slack. We experience slack when we have a light week with holes in our schedule or when we have enough money that we don’t need track our spending. Importantly, this isn’t the time or money that we purposefully put aside for unforeseen circumstances; it’s not the forty-five minutes we schedule for a twenty-five minute drive or the money we have in an emergency account. Instead, slack is the by-product of abundance. It’s the result of not having to budget every dollar or hour.14Mullainathan and Shafir, Scarcity, 74-75

Here’s the important point: slack provides room to fail.

When we have slack, we can make poor choices. When we have a large financial cushion, we can make a seemingly infinite number of dumb $10 purchases without having to worry about the trade-offs we’re making. Someone who is poor, however, does have to think about those trade-offs; a bad $10 purchase has consequences for her that it doesn’t for someone who enjoys financial slack. And that leads to a vicious feedback loop. Because of bandwidth usage, people facing scarcity are more likely to make those poor decisions and less likely to have the slack necessary to avoid them.

Rethinking Poverty

If the arguments that Mullainathan and Shafir make are true and their theories accurate, they have huge implications for how we address poverty. As Mullainathan and Shafir write, we often assume that the cause of poverty is at least partially internal. Even if we admit that accidents of birth contribute to poverty, “one prevailing view explains the strong correlation between poverty and failure by saying failure causes poverty.”15Mullainathan and Shafir, Scarcity, 115

Mullainathan and Shafir, however, suggest that “causality runs at least as strongly in the other direction: that poverty— the scarcity mindset— causes failure.”16Mullainathan and Shafir, Scarcity, 115 The problem is that the poor aren’t just short on money. They’re also short on bandwidth. And those two problems are, of course, interrelated: being poor results in having less bandwidth available to address the roots of that poverty, and having less bandwidth available leads to making choices that keep a person poor.

This suggests that we might be able to address poverty by, well, addressing poverty. It’s a common idea among those making the case against charity that we need to address the mindset of poverty before (or alongside) addressing the material facts of poverty. But this understanding suggests that addressing the material facts of poverty also addresses the mindset. Reducing material scarcity helps us leave the scarcity mindset behind and behave in ways that will keep us out of poverty!

Mullainathan and Shafir provide an interesting example of this. Street vendors in Koyambedu market in Chennai, India, are often caught in significant debt: they borrow 1,000 rupees each day to buy stock, sell the stock for 1,100 rupees (a 100 rupee profit), and pay 1,050 rupees back to the vendor at the end of the day (the 1,000 rupee principal plus an astonishing 5% interest). The amazing thing is that each vendor has a small amount of slack that they use for tea, a snack, and so on. Let’s assume they spend about 5 rupees of slack each day. If a vendor spent that slack on inventory instead, she would be debt free in 30 days – thanks to the power of compounding – and effectively double her profit for the rest of her working days.17Mullainathan and Shafir, Scarcity, 123-124

As an experiment, Mullainathan and Shafir bought the debt of hundreds of vendors, letting them out of the debt trap.18As an aside, I should point out that 1,000 rupees is about $15. The direct cost of buying hundreds of vendors out of their debt isn’t huge. They then tracked the now debt-free vendors – and others – for a year. For several months, the vendors didn’t fall back into debt. They did exactly as we would hope. But one by one, they did fall back into debt. By the end of the year, they were back where they had started.19Mullainathan and Shafir, Scarcity, 133-134

But what caused them to fall back into debt?

“The core of the problem,” according to Mullainathan and Shafir, “is a lack of slack.”20Mullainathan and Shafir, Scarcity, 135 When the vendor encountered a shock bigger than the slack she had available – even if it was a foreseeable shock – she used her savings to cover it… and tunneling meant that she wouldn’t think about the future consequences of raiding those savings.21Mullainathan and Shafir, Scarcity, 135-136 Escaping debt – or scarcity more broadly – means more than being debt free, it also means having the tools necessary to deal with shocks.

Mullainathan and Shafir are clear that this doesn’t mean “that the only way to avoid scarcity traps is to have wealth large enough to weather all shocks… that the only way to solve the vendor’s problem is to give her even more money.”22Mullainathan and Shafir, Scarcity, 137, emphasis original But there’s no reason to suppose that this couldn’t be a solution. If the vendors had not only had their debt forgiven, but had also been provided with a cushion they could use until they had built up savings, would that have helped them avoid falling back into debt?

The more important point is that the vendors didn’t immediately fall back into debt; they didn’t waste what was to them a huge amount of money. Instead, they fell back into debt when they encountered a bump in the road. And that suggests that we really can help people by providing them with material or financial resources. Poor vendors in Chennai aren’t irresponsible, they’re consistently caught in situations where their attention is captured by the reality of scarcity. When we help them overcome scarcity, we also help them overcome the mindset that keeps them in poverty.

Conclusion

The understanding of poverty – and scarcity more broadly – provided by Mullainathan and Shafir runs counter to the narrative we’ve become used to. The poor aren’t dependent, entitled, or lacking a work ethic. They aren’t caught in a culture of poverty.

What Mullainathan and Shafir are proposing is a different direction of causation. It isn’t that irresponsible behaviors cause material poverty (though they may contribute). It’s that material poverty causes irresponsible behaviors. If we accept this direction of causation, we can accept that material assistance – contra those making the case against charity – really might be an effective way of helping the poor.

This counterintuitive narrative makes Scarcity a powerful book. But if that’s all that it offered, it would be easy to dismiss. Fortunately, Mullainathan and Shafir do offer something else. Scarcity doesn’t just provide a counter-narrative. It isn’t assertions and anecdotes, though it does contain both. It’s claims are backed up by real research in the forms of deep background reading, interactions with people facing scarcity, and numerous experiments.

They are embarking on a true science of scarcity. And in an era of opinions and assertions, that science is desperately needed.

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