Does Behavioral Economics Undermine the Welfare State?

By James Kwak

That’s the title of a post by Mike Konczal, who answers it in the negative. The question comes from Karl Smith and is based on a paper by Bryan Caplan and Scott Beaulier. The paper argues that welfare programs expand the set of choices available to people; while that is all good according to traditional economics, if we think that people are inclined to make bad choices (“behavioral economics”), then welfare programs give people more opportunity to make bad choices and hurt themselves. This is particularly a problem because, they claim, “there are good empirical reasons to think that behavioral economics better describes the poor than it does the rest of the population” (p. 4). In other words, if poor people are more irrational, then giving them more choices will hurt them more than other people.

Let’s start with that last claim. What could it even mean that “[some academic subfield] better describes [one group of people] than it does the rest of the population”? It seems to me there’s a category error here. Behavioral economics describes human beings, and the major population used in most experiments is undergraduates at prestigious universities. If the findings of the research are biased in any way, that’s the bias.

But what Caplan and Beaulier really mean to say is this: “Existing literature provides good reasons to think that the deviations of the poor from the standard neoclassical model are especially pronounced.  Their judgmental biases are more extreme, and their self-control problems more severe, than those of the rest of the population” (p. 12). So basically they boil down all of behavioral economics to the proposition that people behave irrationally (admittedly, this is what is most prominent in the popular literature), and then they say that the poor are more irrational than “normal” people. (The normative standpoint is theirs, not mine. Check out this clause: “deviant behavior is much more pronounced among the poor.”)

OK, this is offensive. But still, is there something to it? Not much, I would say. This is their evidence:

  • Poor people are more likely to exhibit heavy alcohol use.
  • Poor people are more likely to be obese.
  • Poor people are more like to smoke and use illegal drugs.
  • Poor people are more likely to have sex earlier and have children while in their teens.
  • Poor people are more likely to commit crimes.

Since all of these behaviors involve (they claim) an inability to make rational judgments about the tradeoffs between present benefits and future costs, this means that the poor are more prone to the judgment problems that are often cited in popular accounts of behavioral economics.

There is so much nonsense here it’s hard to figure out where to start. First of all, some of the factual claims aren’t even supported. For example, on obesity, they cite a study finding that obesity declines with educational level. Then they assert: “Given the strong correlation between education and income, there is little doubt that the poor have more trouble maintaining a healthy body weight.” Yes, given the above, it is likely that there is a negative correlation between obesity and income; but it is also likely that that negative correlation is explained by education, not by poverty. Couldn’t they have made the effort to find a study with the facts they need instead of just assuming?*

Second, and more importantly, if we assume for the purposes of argument that more poor people are obese, it’s an enormous leap to say that this is because they make worse judgments. There are many other possible explanations. Here are a few, each of which I find more compelling than the behavioral one:

  • It’s more expensive to eat healthy food than unhealthy food.
  • Many poor people work long hours or have limited child care options, which makes it harder to buy and cook healthy food from the grocery store.
  • Poor people have worse health care than rich people.

You can add your own.

This criticism can be easily made of several of their points. Take crime, for example. The most obvious counterargument is that crime is more prevalent among the poor because they are poor. Caplan and Beaulier think they can deal with this by saying that few inmates received illegal income prior to being arrested. But this is only a small part of the puzzle. A major reason for high incarceration rates among the poor is recidivism, and a major reason for recidivism is the difficulty of finding employment and otherwise integrating into society when you have a criminal record. People without stable support networks are more likely to commit crimes and have less to lose, regardless of their ability to make judgments. The failure to control for anything at all should make their point invalid.

Along the way, they also cite Levitt and Dubner to support the proposition that since drug dealers don’t make much money, “it is easy to see the appeal of crime to those who overestimate their chance of becoming a gang leader, or who simply have poor impulse control” (p. 14). But what Levitt and Dubner really say is this (Freakonomics, paperback edition, p. 102):

“To the kids growing up in a housing project on Chicago’s south side, crack dealing seemed like a glamour profession. For many of them, the job of gang boss — highly visible and highly lucrative — was easily the best job they thought they had access to.”

So far, so good for Caplan and Beaulier. But they continue:

“Had they grown up under different circumstances, they might have thought about becoming economists or writers. But in the neighborhood where J.T.’s gang operated, the path to a decent legitimate job was practically invisible. Fifty-six percent of the neighborhood’s children lived below the poverty line . . . Seventy-eight percent came from single-parent homes. Fewer than 5 percent of the neighborhood’s adults had a college degree; barely one in three adult men worked at all. The neighborhood’s median income was about $15,000 a year, well less than half the U.S. average. During the years that Venkatesh lived with J.T.’s gang, foot soldiers often asked his help in landing what they called “a good job”: working as a janitor at the University of Chicago.”

Levitt and Dubner’s real points are these: First, people turn to drug dealing because there are no good options. Second, drug dealers are just like people pursuing other glamour professions.

OK, enough for that point. What else? Well, there are measurement problems, although they probably aren’t that big. Poor people are more likely to use illegal drugs and commit crimes in part because society defines those drugs as illegal (as opposed to, say, prescription pain-killers) and enforces the laws more strictly against poor people. But that’s probably not a huge factor.

In any case, the idea that poor people are more likely to exhibit bounded rationality is a huge assertion backed up by not much of anything. This isn’t even a standard correlation-causation problem. This is a correlation where their preferred cause is well down the list of possible causes.

But . . . that still leaves the theoretical point. Is it possible that expanding people’s choice sets enables them to make bad decisions? Of course. Even if you’ve never read a behavioral economics paper in your life, just look at any chapter of Predictably Irrational. But does that justify this conclusion?

“Most obviously, if government assistance to the disadvantaged amplifies the ill effects of their judgmental biases and self-control problems, it strengthens the case for reducing the size of welfare benefits, limiting their duration, restricting eligibility, and even abolition.”

Let’s take that sentence one clause at a time. Does government assistance necessarily amplify judgmental biases? Not at all. As Konczal noted, there’s a lot of picking and choosing going on in this paper. Take retirement savings, for example. Mountains of research shows that people are very bad at savings and investment decisions, because of all the usual culprits: loss aversion, hyperbolic discounting, etc. So Social Security is a good thing: it forces people to save, and doesn’t let you invest it all in tech stocks, and forces you to wait until you’re in your sixties to get anything back. (There’s also a redistributive component, but even without that component it would still be a good thing for the above reasons.)

Then there’s the topic du jour: the individual mandate. Because of optimism bias, some people will not buy health insurance even when they should, with negative consequences for them and for society as a whole.

At most, even if we accept the first clause of Caplan and Beaulier’s sentence for purposes of argument, it should affect the way we deliver welfare benefits, not their existence or size (which should be determined on other grounds). If the problem is choice, then we should just reduce choice. For example, we could eliminate every single welfare program and replace all of them with (1) Medicare for everyone and (2) a flat $10,000 (indexed) cash payment to every person in the country. (If you want to switch to a flat tax or a consumption tax to raise the necessary revenue, I’m willing to take that trade, as long as nothing eats into (1) or (2).) That way we would achieve the social goals of welfare with none of the choice problems Caplan and Beaulier complain about. Even leaving aside my fantasy, we should be happy about things like unemployment insurance and the EITC, which both give you an incentive to work.

Finally, on Konczal’s broader question: Like any field, behavioral economics gives you lots of opportunity to pick and choose, and if you’re willing to be superficial or unscrupulous, you can justify lots of policy positions with it. But on balance I think it cuts in favor of the welfare state. In its popular form, behavioral economics is all about judgment errors that hurt people’s own self-interest, which provide support for the idea that government should attempt to correct for those errors. Forced saving is one example. Robust disclosures are another (although not one I’m particularly optimistic about). Now, there is a valid argument about how effectively government policy can correct for those errors, and at what cost, so maybe we should be humble about the ability of Cass Sunstein to come up with the right correction for every problem. But in principle that seems like the simplest inference to draw.

More fundamentally, behavioral economics throws into question all of the foundations of traditional microeconomics, on which the entire theory of the free market is based. One of the findings of the research is that not only do people not make decisions that are consistent with their preferences, but their preferences are arbitrary in the first place, even under conditions of perfect information. (See “Coherent Arbitrariness” by Ariely, Loewenstein, and Prelec, for example.) If people can be tricked into valuing something more highly because, say, the last two digits of their social security numbers are high, how much confidence should we have that market prices reflect absolute value to consumers?

* This may seem harsh, especially coming from a blogger. Frankly, I would be more sympathetic to Caplan and Beaulier if they had put their ideas in the form of a blog post instead of a “paper,” with the level of carefulness the latter used to imply.

82 responses to “Does Behavioral Economics Undermine the Welfare State?

  1. More reasons why poor people tend to be obese: exercise options are often limited when you’re poor, especially during the winter; & leisure options are limited too, so cheap tasty comfort food becomes a favored leisure option. Also, quite literally a comfort when life is extremely stressful.

  2. I’ve seen some really poor people in India who were not obese..

  3. Bruce E. Woych

    See: Carl A. Maida 2008
    Pathways through Crisis: Urban Risk and Public Culture.

    comprehensive on welfare and poverty:

  4. Bruce E. Woych

    From TRNN:
    December 26, 2009 …note the early date (anticipating “austerity” legitimation by Commission)
    The Deficit Commission
    Hickey: The Republican proposed deficit committee would be used to force through cuts in social programs (Video)

  5. Bruce E. Woych

    This index to Steve Kangas includes a good many related essays and myth busting facts:

    definitely an interesting place to browse!

  6. I saw the Twinkie…I purchased the Twinkie…I chewed and I swallowed the Twinkie. I enjoyed the Twinkie. I am responsible. I admit it. ’nuff said.

  7. Poor people in India don’t go to Burger King, KFC etc. Don’t worry, they’re coming

  8. For the longest time, you didn’t see fat people in China at all, so their poor weren’t fat. Third world countries are like that. Now that they’re becoming part of the first world with all the trappings of the first world (increased beef intake, increased cholesterol intake, increased sugar intake) their rich AND poor are getting fatter.

    When India gets there, they’ll experience the same issue. It’s just a case of having those options open to them.

  9. Another way to put part of James Kwak’s point is this:

    1. Behavioral economics is systematically claiming a rigorous scientific framework (namely, psychology, behavioral studies, etc.)

    (Let’s set aside the question of how scientific economics could have been all this time if economists have to appeal to psychology for greater scientific rigor.)

    2. Behavioral economics systematically explains the behavior of one segment of the population better than it does others.

    That is a glaring admission of some kind of key flaw in behavioral economics. Imagine a physicist saying, “We can explain the behavior of big objects, but not small ones.” As a matter of fact, that _was_ the case in the history of physics, and it was taken as evidence of fundamental flaws in our then-understanding of the physical universe.

    The extraordinary thing about economics (proven monstrously in events of the past 4 years), is that explanatory inadequacy is NEVER taken as evidence of the discipline’s inadequacy. Indeed, on the right-wing, explanatory inadequacy is taken as _buttressing_ right-wing economics.

    This is a mark of religious fanaticism, not science.

  10. Great comment!

    One assumption is that poor people care about money as intensely as everyone else does. In many cases that is not true — a lot of people living below the poverty line made choices in their youth not to narrow their lives with competition, hoop-jumping and studying deadly-boring job skills. They chose rock and love, and simple labour. Actually chose. Of course they are ‘economically deviant’ — unlike the authors of this paper, they do not put money first! They don’t model well.

  11. Peter the Australian

    So if these ‘freedom lovers’ chose not to care about money, why should the rest of us fund their choice through our taxes?

  12. Rich people more likely to invest w/ Madoff

    Clearly, this was irrational behavior – Madoff was a felon, prevented by the SEC from ‘running money’. He gave no prospectus, had no CUSIP, and created only phony documenation to support his ‘returns’. All these are BIG ‘red flags’ for fraud.

    Consequently, rich people are irrational and can’t be trusted with their money.

  13. And rich people may well do more crime than poor people do — just are not so likely to be charged for it. That is how things are set up. And a lot of crimes are not illegal, not yet anyway. Like helping manipulate the system to steal pension funds out from under workers. Like plugging away for some big extraction company which is killing people in Africa. How exactly is that different from running deliveries for a dealer?

  14. Angel Kovachev

    So bankers are extremely poor then.. And most of the politicians.. Not to mention central bankers:
    “Global inflation? Us? No.. Nooo! How can you even think that giving “banks” free cash will rise prices of commodities? They will purchase junk bonds. They will never speculate again! You are ridiculous! They will lend them to the poor because they are irrational and stupid to accept low wages, so they need extra cash to pay their previous loans to us! Clearly irrational people are those poor morons. Aren’t they?”

  15. Eugenics version, what, 4?

    Guarantee that Caplan and Beaulier will be testifying before at least one House committee in the next two years and their material trotted out and/or obliquely referenced by certain news outlets as “studies show that the poor make bad decisions.”

  16. If you think there are no behavioral or “thinking” differences between average Americans and the poor, go live in a trailer park for a three months.
    However, Rush Limbaugh and FOX have been striving to lessen some of those differences…

  17. Anecdotally, I can cite enough instances of poor appearing to make stupid decisions than I can rich. But I also know far fewer rich than poor, so my sample sizes are decidedly skewed. Not to mention the plural of “anecdote” is not “data”.

    We probably all have far more anecdotes of poor behaving stupidly than rich. Does that scientifically validate the conclusions we might draw from it? No. We must be honest with ourselves when our internal bias kicks in. I have to admit to thinking maybe the bias towards bad decisions in the poor IS in fact higher than middle class or rich. However, if I’m being honest with myself it’s a scientifically invalid conclusion.

    Of course, my reaction is not “THE POOR DON’T MAKE WORSE CHOICES!”, but if you’re going to make such an assertion you’d better have repeatable experiments performed on a large enough sample size and documented properly to really prove it.

  18. Do you think obesity with its associated medical problems is proportianately distributed over the poor-rich spectrum?

    Is alcoholism and drug abuse?

  19. Great job of dissecting nonsense, James!

    @ Hugh Sansom: “explanatory inadequacy is NEVER taken as evidence of the discipline’s inadequacy”
    –brilliantly stated!

  20. I am not an economist. However, i have had the opportunity to work with 2 groups of people who are very poor — American Indians living on a remote reservation (at the time there were no casinos on reservations) and a large group of seriously mentally ill persons in a major urban area who lived on their disability payments. By in large both groups were very clever and inventive in “making-do” with extremely limited incomes. There are many tricks to the trade. However, no matter how inventive they often did without the basics. Did they sometimes make poor choices — sure, every now and then you have to do some-
    thing that provides hope even if the choice is “far-out”. I suspect that “poor choices: are a relatively minor aspect of the economics of poverty

  21. Besides, who are these economists to judge what a ‘bad choice’ is? Their values are not absolutes.

    All around the world the poor have always done just that you say, ‘do something that provides hope’. The poor of rural India, of Japan, had beautiful traditional festivities to celebrate the seasons, spending scarce resources to purchase colored paper and fireworks — poor decisions ? Hardly.

  22. Herbert Wetherby

    And then “He” and others took the law over and people wonder why todays troubles. They/he are slowly being advised that they/he needs to consider other options if progress is to be achieved in feeding, aiding, and educating the poor.

  23. There is simply not enough free time to dedicate to a critical analysis of Caplan and Beaulier’s so-called study, as your post suggests all manner of mischaracterization, demonization and justification to support a further eroding of our tattered social safety net.

    However, it’s just too tempting to leave it be, so here’s two quick observations:
    average and poor citizens are increasingly one and the same; and doubtless the poor must live with the consequences of their decision making, less so with “average” or the well heeled.

  24. Somebody send Bryan and Scotty a copy of the classic book “The Prince and the Pauper”.

    Scheesh…and the really disgusting part is they got $$$ to come up with such crap…

  25. Bryan Caplan (I check the Kling/Henderson/Caplan blog daily) is the perfect example of a highly left-brained-dominant thinker. As Temple Grandin (a functioning autistic with attendant right-brained dominant thinking) so succinctly characterized it, when questioned about left-brained dominant people in a long-ago NPR interview: “Highly verbal people are illogical.”

  26. Based on a careful reading of the exegesis provided by Mr. Kwak, it would appear the labors of Messsrs. Caplan and Beaulier succeeded in producing little more than a complete crock of cat poo.

    It would have been a more interesting “paper” if their gooble-dee-gook focused on the miscreants and sociopaths leading “Wall Street”, rather than aiming such sociological (behavioral crapola) junk at people who have nothing.

  27. Perhaps you meant scatalogical?

  28. Another important thing to note is that when “average” or wealthy people make poor choices (as they certainly also do from time to time), they are likely better insulated from the ill effects of those choices by their greater wealth, support networks etc. So their savings accounts, access to credit, families or friends who bail them out are all akin to welfare programs that enable them to sometimes make poor choices and not suffer as greatly for them.

    I’d also be interested to hear from them how behavioral economics might explain the seemingly higher proportion of celebrities (who are typically rich) who seem to make poor choices with regard to drugs, alcohol, sex and on and on.

  29. Easy enough to test. Give money to poor people and see if the correlations still hold.

  30. Kwak–I just want to thank you for your measured and sensible response to Caplan & Beaulier’s load of class-biased crap. I’ve had significant experience with poor people, and lived, with my children, at or below poverty level for several years. This stuff pisses me off too much for me to come up with coherent arguments–I’ll just refer people to you the next time this stuff comes up.

  31. I think the correct answer to the headline question is:” we do not know enough yet, and maybe in the meantime we should be careful with current results. I guess James’ discussion of the article (interesting one though, for people with an open mind and concerned about the combination of underclass formation and wasting gvt revenue; maybe there are cheaper ways to deal with the plight of the poor and trying to find those is certainly not immoral, on the contrary, fair to the non-poor who have to pay for this). There is one thing that puzzles me: since the poor “have only their votes to sell”, why do so few of them vote?

    Incidentally, I like economics as simply an abstract form of applied mathematics, with tenuous (at best) links to reality and mainly relevant to other professionals, media, as well as all kinds of agents (pension fund managers etc) and politicians who need fall guys. I guess the needs of agents to legitimize their use of fall guys drives them to seek increasingly higher levels of official plausibility. And behavioralism is basically a bottomless pit for research funds. Clever!

  32. ” I guess the needs of agents to legitimize their use of fall guys drives them to seek increasingly higher levels of official plausibility. And behavioralism is basically a bottomless pit for research funds. Clever!”

    There were thousands of acts today, free will acts, by people all over the globe that were rich in truth beauty and goodness, not to mention downright genius.

    If you found any beauty or truth or goodness in this PSYCHOlogical crap, enough to admire it as “clever”, then may I suggest you go get “rich” in Austria from here on in…

    We The People are demanding $$$ in order not to – sing it with me, people – “burning down the house”…

    You want real estate flipping – if the PSYCHObabble is true in flaming BrYon’s and Scotty’s clever boyz study of “the poor” and then about the MAJORITY OF THE WORLD being “poor” after the cluster f-k gloabl economic crash – may I suggest the high tech buildings getting BILLIONS through Patriot Act scams to “spy” on so many “bad decisions” – austerity will start with that funding, trust me :-)

    Enjoyed an old Western movie last night – “The Redhead of Wyoming” – nothing has changed about how some monkey brains intend to get to the “governor’s” mansion in Red States, has it?

  33. On the contrary. How could I admire cleverness. Gentlemen are not supposed to be clever but leave that to the Poor who aspire to living above their station..

  34. Herbert Wetherby

    One of my favorite oldies was called “The girl of the golden west”. And one, if not my all time favorite actor, played a role, his name is Buddy Ebsen. And noo, his family did NOT make explosives. Or live anywhere near one.

  35. It’s almost paradoxical, but when you have a mountain of troubles, and you never know if you’ll be alive in a week or another month, the normal calculations go out the window with respect to those other activities.

    For a Con who has been conditioned and lives existence where certain things are taken for granted, you have one set of rational calculations. Based on an entirely different set of expectations and experience a person might live life in a way that contradicts someone else’s set of “rational expectations”, but based on their own experience the reasoning makes perfect sense.

    If it’s common experience to see peers killed before you reach adulthood, and if you have a parent who has been murdered, is it really rational to think: “I should be saving for my retirement in 40-50 years?”

    No, of course it isn’t. The odds overwhelmingly say you’re either going to be dead or in prison by the time you hit 40, and the probability of catapulting into the middle class are close to zero (never mind that in your experience, no one that you actually know has ever made that leap — you take it for granted that its normal for people to be killed or put in prison well before retire ever comes into consideration).

    You’re going to maximize pleasure and minimize pain on the basis of a completely different set of expectations about what the future is likely to hold in that situation.

    As far as obesity, etc go. If the costs of exercising for the uninsured include the risk of a $5K to $10K visit to the emergency room in the near-term for broken bones, sprains, etc, but $0K of risk in the near-term if you simply minimize those kind of activities; what is the rational thing to do?

  36. Caplan & Beaulier fire the latest salvo in the war against the underclasses.

    But, what we should remember is that knowledge comes from experience, and experience comes from participation. I doubt they have any participation with the people they purport to write about and therefore no knowledge to share.

    “Describing and explaining are the stuff of desks and books and seminars, in short part of the academic round. They are important, but they do not by themselves make for understanding. Understanding is at a different, higher order of complexity and it demands prticipation in the situation or process that is to be understood.” Manfred Max-Neef in “Economics, Knowledge and Reality.”

    The other point is that, contrary to their ‘hypothesis,’ giving people the opportunity to make their own decesions about their life is the most important factor in their development, not whether or not they have met certain economic threasholds.

    “I suggest that a focus on economic needs and economic “poverty’, a culture of development discourse that becomes preoccupied with what the people “do not have” gets trapped in the negative thinking and dependence orientation that this generates, rather than motivating the society to become constructively ingaged in moving forwards. With a constructive engagement, the people show imaginative ways of progressively fulfilling their needs and urges. This includes, naturally, their need and urge for economic betterment. However,…it is the constructive engagement rather that economic achievements per se, which is the more universal aspect of popular initiatives – the fact that the people are mobilized, engaged in tasks set by themselves and going about them together, pooling resources and energy whereby they can do better than walking alone, drawing strength and sustaining power froma shared life and effort…This urge is often for the sake of creation itself, but in the process of satisfying this urge this also creates the means of satisfying whatever other needs, ‘basic’ or ‘non-basic’, that we wish to and can satisfy, according to our own priorities. Through such creation we evolve – develope – as creative beings. This is the basic human need – to fulfil our creative potential in ever newer ways…” Anisur Rahman in ‘Real Life Economics’, edited by Manfred Max-Neef and Paul Elkins, p.171-4.


    “The foundation for knowledge and development is the creation of those conditions where people are protagonists in their future and where they are able to fulfill their creative potential in ever newer ways.” —Manfred Max-Neef

    C & B’s pseudo-science is meant to strip people of their dignity, to make them unworthy, making it easier to susequently strip them of their rights.

    “The creation of a society that promotes order, tolerance, peaceful coexistence and hope for the future depends on the establishment of an environment in which each of the members of society has been given the greatest possible opportunity to ‘pursue happiness’ in his or her life.”—Russell Ackoff (5, p. xiv)

  37. The Lottery Winner Curse or the Pro athlete is all you need to know about the financial literacy of the less fortunate becoming quickly fortunate without education.

    I think the feedback of poverty is more accurate. Not one or the other. Being stupid leads to poverty or keeps you poor, but being poor is more likely to keep you stupid. And being stupid definitely leads to negative lifestyle choices. The harsh reality is you cannot save anyone over age 8.

    The other question is whom, if not the individual, should manage money? States, Fed, and Wall-street are all busts for the average Joe. for the most part.

  38. I’d like to note that the most interesting, convincing, and brief responses above (kudo’s to Jay L, Rien Huizer, Pickard, Wafa, and RA) use no econo-jargon or reference any mathematical modeling. And isn’t that really the problem with the way JK (and Caplan et al) has framed the debate? The questions at hand are really these–to what extent are poor people responsible for bad lifestyle choices, and what sort of assistance might result in better ones? The first is a moral and philosphical question which should be debated on those terms. The second is a practical matter–determining what has worked, and what has not.

    Novel social science theory coated with a thin veneer of the scientific method adds nothing to the debate. The conclusions of such studies always precisely reflect the political bias of the investigator or sponsor. Let’s stop pretending that this sort of thing is anything other than politics disguised as science.

  39. Bayard Waterbury

    James, great, and revealing work. First, I must laugh at the behaviorists who make the claims of the poor that you listed. This is complete, inane, absurdity. Humans are, if nothing else people of habit. Poverty isn’t a habit, but probably, in many cases, arises from habits established in childhood. Sure, we can blame genes, and environment, and surely each of those plays into habit formation. There are lots of wonderful, moral, slender, and smart poor people, and I personally have known some very wealthy, amoral, fat criminals. It’s about habits, luck, some IQ (of course), but, to make any meaningful rule like what is attempted and what you attack so appropriately, is nearly absurd. And, as you so cogently pointed out, it is possible to bend your statistical findings to nearly any argument. It just takes a little effort.

    As to public assistance programs, it is the built in incentives or non-incentives which will, in the long run, determine the programs’ outcomes. Most social welfare programs are sufficiently small that they don’t really reward bad behavior (bad choices). Unemployment is designed to be pure subsistence level benefit, and is time sensitive. If you aren’t employed after 99 weeks, goodbye. Seems like a reasonable period, that is, until the economy tanks so much that millions are now exceeding that limit, and many of those, especially with children, are now in dire straits. Their unemployment benefits, contrary to what some would say, are not responsible for the fact that they are still without work.

    So, what should society do? Don’t look at the safety nets, but rather look to create environments in which different choices make much more sense. Anyone who every saw “Boys in the Hood” can understand that, at some level of poverty, all choices which make sense almost completely vanish. None of the boys in that movie, realistically believed that they would survive past the age of 25. And there are lots of hoods in this great nation, and now more every day.

  40. Excellent comment, Bayard.

    I am reminded of pagan cultures which valued raw courage and loyalty above all else, like the pre-Christian Irish (see How the Irish Saved Civilization) and the Mohawks. Warrior culture. Life was expected to be short and dying well did not mean dying old and rich. “Economics” rested mainly with the women. Not unlike some hoods. When police are essentially an occupying enemy army, male economics is captured by deeper issues.

  41. “There are lots of wonderful, moral, slender, and smart poor people, and I personally have known some very wealthy, amoral, fat criminals.”

    As Larry Summers flashes before my eyes…

  42. Behavioral economics grew from a desire to explain asset pricing anomalies. Trust me, this is not the poor.

  43. In plain English: Caplan and Beaulier are backing Republican policy to deny the option of welfare to the poor.

  44. Ah, don’t we always manufacture reasons for what we want to do? How very human of the smug little dears. After all, it is only Darwinism. If only their clan would stop hiding behind the Bible and come out of the closet.

  45. There is evidence that greater options do help the poor, and not all Republicans are as mean as Caplan and Beaulier would have us believe:

    The Tuohy family are Christian Republicans. Their adopted son Michael Oher is now an offensive tackle for the Baltimore Raven. Their story is written in a book called “The Blind Side” by Michael Lewis.

    The Tuohy family live in Memphis Tennessee and are very wealthy. Mr. Tuohy owns 80 fast food franchises. What I took away from the story is that there are Republican Christians out there who are very decent and break with notions of stereotype.

    The Tuohy family had achieved the American dream. But something was missing in their lives. They adopted a homeless, black, 15 year old teenager (who stood over 6 feet tall and weighed over 300 pounds) named Michael Oher. Mr. Tuohy is full of understated wit. While there are photos of the Tuohy women hugging Michael Oher, the women are glowing with happiness hugging this huge bear of a man. I think the family had so much genuine love to give and they poured their love into helping an abandoned child.

    Michael Lewis says Leigh Anne Touhy (the mother) is a Southern eccentric. I say the more power to her. It’s a beautiful story that breaks with Republican sterotype and bridges the liberal / conservative divide.

  46. . . and hardly following Darwinian logic.

    I have nothing against true-hearted Republicans, and agree with their assertion that nanny-state “help” weakens and infantilizes people — all of us, not just the poor. In that sense we do indeed need more options, and the elbow-room to exercise them. Maybe there has to be a fire first to clear the underbrush, to reclaim ourselves. We are unable to encourage self-reliance (as for example micro-loan success stories in poor countries) because we are over-regulated, over-stimulated by media ads and entertainments, and over-schooled in our youth.

  47. “Their judgmental biases are more extreme, and their self-control problems more severe, than those of the rest of the population” Sounds like some of my relatives from Sicily.

  48. Welfare, welfare…. What no mention of corporate welfare? Socialize the losses for the taxpayer to assume, guarantee and pay. Privatize the profits, and the 100’s of billions in bonuses while claiming the D’s are not business friendly? And the result of all this largess, “Moral Hazard” and a fight to the death for more taxpayer support, lower taxes and no responsibility for their actions.

    Growing fat? Nah, it is only the poor who are affected by welfare. Only the poor.

  49. What could it even mean that “[some academic subfield] better describes [one group of people] than it does the rest of the population”? It seems to me there’s a category error here. Behavioral economics describes human beings, and the major population used in most experiments is undergraduates at prestigious universities. If the findings of the research are biased in any way, that’s the bias.”

    The whole article’s a bullseye (if a little bull-in-china-shop) but I liked this bit the most.

    Thanks James, I’m sure this field of critique will not lack new areas of interest for a lonnnnnng time.

  50. Hi, Love the blog but didn’t finish this piece because it seemed to be driven by emotion (“OK, this is offensive”; the general tone of the post is angry). The claim that poor people are less rational than people of average income does not strike me as inherently ridiculous or offensive: there is a tendency for very unintelligent people to be poor, and one would expect less-intelligent people to be less rational. Meritocracy is not fair to the unintelligent, which is one reason why we need a welfare state. That a lack of rationality may be the result of a lack of education is neither here nor there. Intelligence is increased by education. The welfare system should be designed to deal with actual people based on their actual intelligence level — it makes no sense to base it on native intelligence.

    The point is that I cannot see immediately why you are so angry, and your initial points did not seem very telling to me. Anyone who spends a lot of time reading blogs has to have a radar for politically-motivated arguments, and mine has been triggered by this piece, which is why I haven’t finished it. Perhaps the authors of this paper really have made some academic mistakes, but now I will never know. The reason I have commented is that the radar is not normally triggered by your excellent blog.

    Best wishes, JB

  51. Not “less rational” — less rational in their choices. That is very classist because it is based on the assumption that the authors’ values are the right values. As for the intelligence factor, animals are less intelligent than we are but they are supremely practical in their choices.

    All classes have their weaker members. Yes, the lower classes do include many of those who drifted “down” because they could not win the competition games. But the priviledged classes include some very spoiled kids who cannot leave the nest and have rotten social values. Lower class kids are good at becoming independent of the nest. Lower classes tend to collect those who are lazy but upper classes collect those who will do anything for money. Adultery is much more common among the well-off. I think you should take another look at your assumptions on this subject. If the bias of that paper had been bad-science racism instead of bad-science classism, would you have been less troubled by the angry reaction?

  52. Herbert Wetherby

    Also more commen among the upper class/well-off, are expensive habits that the lower class has little or no need for, unless that cowboys game is being wired all the time, and they shuffle thru pretty quickly. The object is the weak grow strong and the strong carry on. And spoiled kids soon cost the elders their hard earned money, and disipline needs to be applyed. Sometimes in reverse order, try as they may, neither side enjoys the experience much, but eventually they understand and some get a fresh start.

    And Jonh, I hope you have plenty of time, for you can’t rush thru this blog, as say, the more or less intelligent ones.

  53. @ HW

    Nicely said,…:-)

    PS. Anybody here ever shoveled driveways, and sidewalks/steps when the snow was a foot or more higher – or had too literally fight to buy a overpriced paper route in a poor neighborhood?

    The poor always tipped well…whereas the rich sections at the end never did?

  54. I think a few people need to watch the movie Trading Places again…

  55. What you have to realize is that micro economics is a wonderful, beautiful mind game. But it has absolutely nothing to do with reality. Behavioral economics is even more removed from reality. Arguing with these people is just like going to an insane asylum and discussing these nutty ideas with the inmates. A no win proposition!

  56. Some people are poor because they made bad choices; others are poor because they had no good choices. Caplan and Beaulier assume poor is predominately a function of bad choices. Such a view also assumes there is social mobility based on bad choices. So a rich, or middle-class, person who makes bad choices — such as alcoholism, drug use, obesity, or crime — should become poor. Where is that study?

  57. Herbert Wetherby

    That study lost in time as is much of your argument. The law does not exactly have its “act” together. So the choas that evolves from the law not being correct, has many studies. Non of which are relevant to making “bad or good choices” it can be a matter of bad luck, bad timing, or simply bad judgement, -vs- good.

  58. @ HW

    Again, nicely said:-)

  59. Herbert Wetherby

    Why Tyvm.

  60. So Jim do you think society would be better off if SNAP (formerly known as “food stamps”) were to be replaced by an equivalent value cash payment?

  61. . . or alternatively we could see what happens if we give the fat cats their bonuses in food stamps . .

  62. Does behavioral economics undermine a system of market regulations imposed by elected officials who can receive unlimited corporate cash donations from those corporations they regulate?

    Does behavioral economics undermine a system of market regulations enforced by individuals installed via a revolving door from those corporations and colleagues that made them wealthy?


  63. James,

    While you are on this subject you might want to check out Charles Karelis who has been making similar propositions.

  64. GT, if you want to understand how people make decisions, see The Role of Risk in Consumer Behavior, Journal of Marketing, 1974. You won’t find an economic theory in sight.

  65. Blaming poor financial decision skills on lack of education, parenting, or peer inspiration, is beside the point. It is not required that the poor be congenitally worse at decision making for the question of whether cash is an optimal form of welfare to be relevant.

    It’s easily imaginable that in some cases the decision-making of some group is so bad that even centralized life-planning by a government bureacracy results in better outcomes for them.

    This notion should cheer liberals as much as it fills libertarians with loathing.

    Caplan and Beaulier have underachieved. Let’s produce the graph which demonstrates at what level of decision-skills a population is better served by totalitarianism!

  66. Great comment ! You went straight to the heart of the matter. Makes me think of FIREFLY which the powers-that-be slew before the first season was over.

  67. Bennette Sebastian

    The Constitution is actually what undermines the welfare state. Maybe you all should read it.

    Maximum employment, even the liberally-coveted “full” employment, does not result in maximum production. Unemployment has always existed. In a country with a good or even booming economy, a small amount of unemployment indicates the standard of living is so high that in being unemployed in such a country, you have your basic needs met.

    There is no basis for a welfare state according to the literal foundation of the country.

  68. Bennette Sebastian

    Hazlitt – Economics In One Lesson. Downloadable in PDF format.

  69. Congratulations to Mr. Kwak for managing to place two patently false statements into one sentence: “…behavioral economics throws into question all of the foundations of traditional microeconomics, on which the entire theory of the free market is based.” Further compliments on making a virtue out of blogging vis-à-vis the attempt to publish research in a format that entails persuading a set of scientific peers. I could not have chosen a more fitting last name than the one you already have.

  70. I think the problem of poor decisions will be relieved in the effort to reduce the government deficit.

    As the need for more income tax revenues increases and as the government’s definition of the rich declines in order to produce revenues at higher marginal rates, then the numbers of the “rich” will increase and bad decisions will decline.

  71. Poverty has been criminalized, and the things poor people do have been criminalized. It is a huge factor in the difference.

    Wealthy people abuse drugs and alcohol just fine. They just have more to lose and better support systems, and so they tend to end up in jail less often.

    As for who is more deviant sexually…..

  72. I have always had this disgusted fascination with a society that advocates as a premise that it should be built on a basis of unequal rewards, that a degree of unemployment is necessary to function properly, and that wage levels must be suppressed in order to achieve prosperity… and then spend so much time and effort wondering why the poor won’t go away.

  73. anandopadooda

    Society always portrays those they exploit as stupid and not deserving of respect. That way they don’t have to feel guilty. I remember in the first movie cartoons (reruns on TV when I was a kid in the ’50s) there were lots of jug-headed, skinny nags — cultural images left over from the days when horses were cruelly exploited for their labor. Now we no longer see such horse characatures — but one does see many cartoon drawings of stupid, ugly chickens and cows. Go look at a factory farm and see why. And the same goes for the poor — they are smugly stereotyped as stupid or irrational — lesser types of human beings.

  74. Chris Koresko

    James Kwak: “What could it even mean that “[some academic subfield] better describes [one group of people] than it does the rest of the population”? It seems to me there’s a category error here. Behavioral economics describes human beings, and the major population used in most experiments is undergraduates at prestigious universities. If the findings of the research are biased in any way, that’s the bias.”

    I disagree with this. Consider two objects: a brick and an electron. One might say that classical mechanics better describes the brick than the electron. All that means is that the deviations from the simplified, classical mechanics description are proportionally larger for the electron than for the brick.

  75. Peter the Australian

    The question is whether welfare helps those to whom it is given, or whether it doesn’t. There is a large body of opinion in the UK that says that its welfare system has created an underclass to replace the old working class. These people are really, really awful. They have goldfish-like memory, no family life, they are often ill-nourished (men commit crimes so then can get 3 meals a day in prison).

  76. I didn’t bother reading most of the comments, but have only this to say in reply:

    1. Possibly we should redefine away from ‘rational’ and ‘irrational’ economic choices (no choice is ever ‘irrational’, they are all rational to some end) and realize that you can’t in the study of human behavior, and all human behavior IS economic behavior, impose values from without of an individual’s perspective, and than call it ‘good’ or ‘bad’ behavior without imposing your will upon what those behaviors ‘should’ be, and therefore what constitutes ‘rational’ and ‘irrational’ behavior. You are in effect deciding for whoever ‘they’ are and for society as a whole what their goals and therefore behavior should be. But if you undertake this task, you are going to end up labeling some people as ‘wrong’, ‘poor-decision-makers’, or ‘stupid’. And just like that you will have created marginalized groups by eh, marginalizing them.

    Perhaps we could just avoid all this and see if a decision is ‘rational’ by trying to deduce whether or not the move was ‘selfish’ behavior. ‘Selfish’ in that the actor(s) was attempting to perform and action that gained some good toward themselves. But then of course a whole array of ‘irrational’ behavior might then be construed ‘rational’ based on the results.

    For instance I know a kid who had no problem spending $700 on an outfit to impress girls when that money would (if I impose my values on him) be much better and ‘rationally’ spent on savings, investment, his education. But he could never be convinced to spend money on those things because he wants the benefits that money can give him now. Not tomorrow, NOW.

    What kind of kid is this? The kind that deals some drugs on the side, ends up in jail because he stole some things and then yes, raped a girl. This kid is not smart. Not by my book. But then to study ANY behavior, and to make ANY decision, we essentially MUST place values on the outcome and then usually place a MORAL value on the behavior in question and the associated outcome. This does in fact IMPOSE my values on others. HOWEVER, in this kid’s head, EVERYTHING he did got him something he wanted and he wouldn’t change a thing. He literally MAXIMIZED the economic output of his actions. He got a lot of what he wanted. (Which was to feel high and that poor girl RIGHT NOW.)

    Now, I can’t defend behavioral economists language fully. I don’t like it. I prefer if we would change our use of ‘rational behavior’. But, as long as we are going to go about with morals, and as long as certain classes of people are going to socially create public moralities that include and favor some behavior and exclude and ostracize certain other behavior, then perhaps the left-leaning academics who socially create outcast groups with their ‘planning for the future’ ethos and ‘individual rights including the one not to get raped’ should broaden their social horizons and include the people they are so vigorously defending.

    2. Readers, if you are ever so inclined to spend a few years among the ‘poor’ I would encourage you to do so. ‘Their’ economic choices might make a lot more sense if you spent time with ‘them’. Actually, their choices might seem very rational. And yes in part they make the choices they do because of lack of education, limited choices early on, and their choices are controlled by the social acceptability of their peers. But they are making many choices everyday that they know will just keep them where they’re at. And they’re really fine with that. Seriously, spend some time with them, get to know ‘them’ and ask.

    Finally, now of course I’m not suggesting the author or those who share his views are in favor of what what I described and yes do indeed have intimate and long-standing knowledge of. But the post DID reek of the lack of understanding that comes from little to no meaningful contact with the subject in question. The behavioral economists might be phrasing the question entirely wrongly and prejudicialy, I will certainly grant that, but the answer the author is assuming they have arrived at might be worth debating. Perhaps better if we phrase it this way:

    Is it good to give free money, goods, and services to people who are likely to use it all selfishly? (Oh wait, that might just cover all humans including the middle class and rich…) How about; Is it good to give free money, goods, and services to people with no agreement that these will not be used for merely selfish purposes, but must be used to establish oneself in a self-sufficient life?

    Sound empowering at least…

  77. Maybe I am a bit obsessive with details, but having read the Beaulier and Caplan paper ENTIRELY and the comments it generated, one thing strikes me as missing:

    Has anyone realized Beaulier and Caplan are not psychologists, and yet they not only act as if they had solved the problem of what is intelligence (for them, it’s high IQ), but also disentangled its causes and effects and proposed policy guidelines.

    And the intellectual foundation they used to achieve that remarkable feat is 4 papers in psychology and one pop psychology book, highly controversial, The Bell Curve, by Herrnstein and Murray (which underpins their whole case on IQ!!!!).

    And, believe it or not, that paper was actually published in a journal.

    Frankly, the intellectual and academic standards of scholarly publishing seem alarmingly low, to me.

  78. @ Magpie

    Gosh…I love that name, and second the rebuttal :-))

  79. great academic rebuttal