Consider these two seemingly disconnected pieces.
1. This is from Steve Landsburg’s blog:
The EPA announced yesterday that new regulations mandating fuel efficiency standards for heavy trucks will cost vehicle buyers $8 billion, but that will be paid for in fuel savings over a year or two. Oh. Sounds like the mandate is quite unnecessary then, no? With numbers like that, consumers will demand high efficiency vehicles with or without the EPA. Unless, of course, the EPA is, umm….lying.
2. These bits are from an article by Abhijit Banerjee and Esther Duflo that appeared in Foreign Policy sometime back:
If the gains are so obvious, why don't the poor eat better? Eating well doesn't have to be prohibitively expensive....why did anaemic Indonesian workers not buy iron-fortified fish sauce on their own? One answer is that they don't believe it will matter -- their employers may not realize that they are more productive now. (In fact, in Indonesia, earnings improved only for the self-employed workers.) But this does not explain why all pregnant women in India aren't using only iodine-fortified salt, which is now available in every village. Another possibility is that people may not realize the value of feeding themselves and their children better -- not everyone has the right information, even in the United States. Moreover, people tend to be suspicious of outsiders who tell them that they should change their diet. When rice prices went up sharply in 1966 and 1967, the chief minister of West Bengal suggested that eating less rice and more vegetables would be both good for people's health and easier on their budgets. This set off a flurry of outrage, and the chief minister was greeted by protesters bearing garlands of vegetables wherever he went... We often see the world of the poor as a land of missed opportunities and wonder why they don't invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. (emphasis added)
The idea that connects them is simple. If there are intertemporal arbitrage possibilities or a possibility of investing a small amount today to reap substantially higher returns in the future, when liquidity (or the availability of money to spend) is not a binding constraint, why are such opportunities not made use of? The standard economic justification would be the high discount rates that make the future look much less attractive to people involved in decision making today. However, high discount rates are not a typical feature of consumers in developed countries. Even in case of poorer consumers, the discount rate effect is likely to be nullified if the gains are relatively larger. As Banerjee and Duflo report- “in another study, in Indonesia, researchers tested the effects of boosting people's intake of iron, a key nutrient that prevents anaemia. They found that iron supplements made men able to work harder and significantly boosted income. A year's supply of iron-fortified fish sauce cost the equivalent of $6, and for a self-employed male, the yearly gain in earnings was nearly $40 -- an excellent investment.” Then the constraining factor evidently is the lack of information. People are unable to forsee into the future and cleverly calculate all the trade-offs to be made. This is not surprising, though I feel that it an important point to be appreciated. Perhaps, this is like saying that present self of the consumer imposes an externality on her future selves. In Coasean spirit, then, this points to the existence of transaction costs in the bargaining process between the selves in different time periods. The transaction costs arise as there are hindrances, psychological or physical, in accessing and processing the required information. In general, it is similar to the market failure argument. (I am aware, though, that with the last statement I am stepping on risky ground owing to large literature in economics debating the definition of ‘externality’, a part of which has been criticised for confusing externalities with market failure in general.) It is then a natural corrective to provide relevant information to those who display a seeming lack of it.
This brings me to two related issues. It is possible to dismiss such an approach as excessively paternalistic towards the poor, considering them incapable of deciding for themselves, a sort of ‘policy maker’s burden’. It is a valid point, especially when economists in their positive outfits are more than willing to treat preferences as exogenous. But I have three objections against this. One, as first piece tells us, it is not only the excessively poor who might suffer from informational constraints of this sort but also the relatively better educated and wealthier middle class consumers in the United States. Two, this sort of humanistic chauvinism that puts excessive emphasis on the individual might well be self defeating. After all, humanism is about all of us being humans, with our talents and rationality, but also with our failings. And three, this again appears to be classic problem of putting means before the ends. We must not let a basic value (letting a poor person uplift herself out of poverty/ a car owner make gains that she’s ready to forgo because she’s not aware that they can be had) be overridden by a less fundamental one (of imposing on her a mask of individual dignity). The problem of not being able to lead dignified lives in society is not solved by anointing the ‘underprivileged’ by facile notions of dignity, but by letting them realise a dignified living for themselves.
Also, it underlines the importance of situating policy prescriptions well within the institutional setting, or the policy makers will always come away with vast amounts of resources wasted, if not garlands of vegetables. Dr. Amirullah Khan, , pointed out during a guest lecture that even though under sanitation programs the government has spent a lot of money constructing proper toilets, they aren’t being used because people traditionally prefer to defecating in the open. Similarly, to gut information down people’s throats would be useless. Perhaps they won’t even care for it. This is surely the case with some of the environmental awareness programs which do not help people see any stake in conserving the environment, making a mockery of the entire thing instead. So, while education might be the best solution, it might not mean education in a conventional sense. It is important to make people believe in the information, which they may be unwilling to do in some cases. Thus, it is about credibility of the authorities in some sense. And such credibility tends to be institutional, in the sense that it is a self perpetuating 'rule of the game'. Obviously, this is not to deny that the information must actually be true. Otherwise believing in wrong things will end up doing more harm than good. The feedback is apparent here: If we do not believe our governments to be saying the right thing, we will not want to believe them, even if they say the right thing.
And in this way the entire system falls apart. To a large extent, isn't this what is happening in our country?
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