For Helpful Help

Is economics a discipline that turns its back on the poor? A number of economists have answered that it is not, and that it should not be, and this year’s Nobel Prize in Economics was awarded to those who have pursued precisely that kind of research. The prize was awarded “for their experimental approach to alleviating global poverty.” In other words, they sought solutions by conducting direct experiments on how poverty can be eradicated.

Their concern was that existing claims about solving poverty had become so theoretical that they ended up repeating only arguments disconnected from reality. Take this example. When distributing mosquito nets to the poor in Africa to combat malaria, one theoretical claim holds that if the nets are given away for free, they will be used for purposes other than those originally intended or sold off, thereby nullifying the effect of the aid. But if one actually distributes mosquito nets both for a price and free of charge and compares the results, that claim turns out to be false. That is why they argue that, for aid to be effective, it is important not merely to sit at a desk solving mathematical problems and punching numbers into a calculator, but also to actually try doing something firsthand.

This perspective is one of the approaches found in the field known as experimental economics. In the social sciences, “experimentation” is generally considered difficult. To construct a valid experiment for acquiring knowledge, all variables other than the one under consideration must be controlled. Yet controlling variables is far more difficult in human society, which is the object of inquiry in the social sciences, than in the material world, which is the object of inquiry in the natural sciences. Experimental economics can be described as a series of efforts to enable economics, one of the social sciences, to overcome this difficulty and acquire knowledge through experimentation in a manner similar to the natural sciences. The claim that one can determine whether a given form of aid is truly effective by trying it directly—or indeed, only by trying it directly—comes from this experimental-economic attitude.

Experimental economics is sometimes introduced as identifying the blind spots of mainstream economics and presenting new alternatives. The idea is that it exposes the problems of a mainstream economics overly tilted toward theoretical approaches by means of empirical data from direct attempts, and offers “experimentation” as an alternative method for overcoming them. But this way of presenting it, or this attitude, often leads to the claim that theoretical approaches themselves are bad. In particular, those who want to rebut the many theoretical arguments that say government intervention in markets and tax-funded assistance to the poor are harmful to the economy may regard this as a useful weapon. Indeed, there have even been cases in which the research themes of this year’s Nobel laureates were presented as if they were part of progressive economics.

But is experimental economics really a domain that overturns theoretical arguments, one incompatible with them? It is not. In fact, what experimental economics calls “errors caused by being too theoretical and thus detached from reality” turn out, on closer inspection, to arise from rashly treating assumptions about economic agents as established facts in order to facilitate simple modeling and then developing the logic on that basis. These are not errors committed out of fidelity to theory; they are errors committed because the foundations of the theory are wrong. Consider again the case of mosquito-net aid. The claim that free mosquito-net aid would be ineffective rests on a hypothetical story—that the recipients would prioritize things other than protection from mosquitoes and therefore would not use the nets as mosquito nets—being treated as an established fact. That is where the error lies. In reality, people may truly need mosquito nets, or, since they received them for free anyway, they may regard something else as more important, such as using them as fishing nets or selling them in the market.

Ludwig von Mises, who profoundly influenced later social scientists through the view of human beings represented in his book Human Action, argued that because it is impossible for us, as outsiders, to know another person’s inner psychology with precision, the social sciences must treat human inner psychology as “given” and deal with human action accordingly. The errors committed by mainstream economic models arise when researchers arbitrarily specify and treat as settled fact that inner psychology—which, as Mises said, is unknowable and therefore must be regarded as given—especially, in economic questions, what corresponds to a “preference system.” The process of theorization does not inherently and inevitably entail the risk of error. Experimental economics has not demonstrated the blind spots of theoretical approaches as such; it has merely exposed empirically the errors that arise when a particular form of preference system is assumed as an established fact.

Ultimately, the real significance of this year’s Nobel Prize winners’ research lies in empirically uncovering the errors that stem from rash assumptions about human beings. Contrary to what those who desire so-called “warm economics” may think, it does not show that theory itself is the problem or that only experimentation—or practice—has genuine meaning. At least with respect to questions in the social sciences tied to human action, it is true that there are things we can know without trying them and things we cannot know unless we do try them. (In fact, the same is true of the natural sciences.) Both theory and experience matter.

If anything, the work of this year’s laureates has major implications for government poverty-assistance and redistribution policies, which are always liable to be devised by “sitting at a desk solving mathematical problems and punching numbers into a calculator.” For aid to truly be effective, information about the inner psychology of the people who will receive it is important, and the laureates’ “experimental poverty economics” has suggested the possibility of discovering such information empirically, even if, according to Mises, it cannot be known deductively. And naturally, it is not bureaucrats—who must be generalists—who possess a great deal of such empirical information, but civic groups and activists working directly in the field. In other words, when it comes to “problems that can only be understood by trying,” the private sector is actually superior to the government.

For that reason, the content of this year’s Nobel Prize in Economics cannot lead to the irresponsible claim that “the important thing is simply to try aid or subsidy policies first.” Such a claim completely ignores the importance and role of careful prior theoretical review. Should we not avoid becoming fools who incur losses by trying things we could have known were misguided without trying them? The proper conclusion, then, is that it is important to entrust such matters to those with extensive hands-on experience. The path by which help truly becomes helpful lies with great individuals who have lived lives of practicing aid, not with the arrogant busybody impulses of government and politics, which presume that once they step in, the problem will be solved.

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Original title: 도움이 되는 도움을 위하여

Author: Young-jun Kim

Date: 2019-10-25

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=17&idx=21990