The Economics of Hope

Two years ago I was a senior in college and sitting in a professor’s office discussing several topics I could focus on for a senior thesis. At the time the economics of happiness was gaining a lot of momentum as a research topic. I asked my professor if I could think about the concept of hope from an economic perspective. We did some searching for relevant literature and didn’t really find much. I moved on to a different topic.

Fast forward to now. The economics of hope has a growing and promising literature. I have plans to travel to Myanmar to try and collect data to better understand this topic. As I begin to dig into the literature, I thought it would be nice to record a roadmap of sorts.

Two summary resources provide a great starting point, and much of the insights in this blog post:

What does hope have to do with economics?

At first it may seem like there is not much connecting a light and fluffy topic like hope with cold and calculating economics. Generally economists have a lot to say about a lot of things. But hope is a topic that has historically belonged to theologians, philosophers, poets, and signer-song-writers. At second thought, however, hope is fundamental to any economic activity. Consider the words of Martin Luther:

Everything that is done in the world is done by hope. No husbandman would sow one grain of corn, if he hoped not it would grow up and become seed; no bachelor would marry a wife, if he hoped not to have children; no merchant or tradesman would set himself to work, if he did not hope to reap benefit thereby. How much more, then, does hope urge us on to everlasting life and salvation?

And John Stuart Mill:

A hopeful disposition gives a spur to the faculties and keeps all the working energies in good working order.

What we talk about when we talk about hope

There are a couple ways the word hope is used in english language and the difference between the two is subtle. Consider the difference between two sentences: “I hope it is sunny tomorrow.” and “I hope to go for a run tomorrow.” Both use the term hope but in different ways. Both terms indicate some sort of uncertainty but the second usage implies human agency. I may hope it is sunny tomorrow, but there is nothing I can do to make it sunny. I also may hope to go for a run tomorrow and I certainly can do things to make that happen. Lybbert and Wydick create a helpful figure to represent the differences between “Hope 1”, “Hope 2”, “Hopeless 1”, and “Hopeless 2”.

Screen shot 2015-04-10 at 8.56.51 PMHopelessness 1 is experienced by someone with both low agency over the future and low optimism about the future. This is a person who is feeling both hopeless and helpless. For example a victim of a famine who has no food availability in the future and no way to get it either. Hopelessness 2 is experienced by someone with high agency over the future but low optimism about the future. This is a person who is feeling hopeless but not helpless. For example someone who works very hard to survive but doesn’t see a future of any other way of life. Hope 1 is experienced by someone with low agency over the future but high optimism about the future. This is someone who hopes it will be sunny tomorrow. Hope 2 is experience by someone with both high agency over the future and high optimism about the future. This is someone who hopes to go for a run tomorrow.

As Lybbert and Wydick explain:

Distinguishing between these types of hope is useful, but individuals often experience hope as a combination of Hope 1 and Hope 2. Both types of hope, for example, are manifest in the case of a famine victim, or someone who is trapped, lost, or stranded, where a person may have to take painful but proactive steps to survive (internal agency) while awaiting relief or rescue (external to agency). Consider similarly the plight of someone suffering from a potentially terminal disease, in which there is some probability that a breakthrough in treating the disease may occur in the future. Survival thus depends on two events: (i) that the breakthrough occurs by time t; and (ii) that the patient is able to survive until time t. Hope for the patient thus consists of Hope 1 (hope that the breakthrough will occur) and Hope 2 (hoping to remain as healthy as is possible until the breakthrough arrives), which implies some degree of agency that may involve costs. (We might call this type of hope “Hope 1.5.”) In contrast, a person beset by hopelessness has concluded that the joint probability of these events is sufficiently dwarfed by the agency costs of survival, ensuring the unfortunate outcome.

 

Hope seems to matter (some evidence) 

Abhijit Banerjee, Esther Duflo, Raghabendra Chattopadhyay, and Jeremy Shapiro have a (2011) working paper entitled Targeting the Hard-Core Poor: An Impact Assessment. In it they evaluate a program designed to provide development services to people who don’t (for whatever reason) take up microfinance when it is offered to them. The program transferred assets (cow, goat, chickens) worth about $100 to the ultra-poor in Murshidabad, India. The results of the program were huge! 21% increase in earned income. 15% increase in consumption. An hour more work per day. Large psychological health effects. These effects are surprising given the amount of the asset transfer. What could be happening? Why are the benefits of giving an extremely poor person in India $100 WAY more than $100? What is making this return so large? Several things could be happening:

Perhaps the asset freed up a “nutrition based poverty trap”. In such a trap wages are so low that by working all day an you would only make, say, 800 calories, far lower than the necessary 1200, or so, calories needed per day. In this type of situation you will not be able to work or work very little and you will be very unproductive and stay very poor. So perhaps an asset transfer allows you to earn a small return on the asset (i.e. the cow gives milk, the chickens lay eggs etc.) and this pushes you above the necessary 1200 calories per day. Now the return on a $100 asset transfer is magnified by the workings of the labor market that you are now able to take advantage of because you are now able to put in a full day of work. Even if the labor market wages are still very low the return from the ultra-poor asset transfer will be quite large.

This nutrition based poverty trap isn’t what seems to be happening in Murshidabad. If the people were so poor that they didn’t have enough food to eat to work for enough hours every day then by giving an asset (such as a cow), all of the extra consumption should be in the form of food. Because feeding yourself adequately is the most productive thing to do. But in this impact assessment the authors find similar increases in overall consumption (15%) and food consumption (17%). People seem to be increasing expenditures in everything, not just food. Moreover, within food consumption the ultra-poor seem to be substituting for higher priced food that is not necessarily the most calories. For example less grains, more meat. Basically if these people were starving they would have maximized the calories available with their resources.

Another possibility is a so-called “credit trap”. In other words the ultra-poor do not have the ability to gain credit (due to a lack of durable assets to use as collateral, or lack of access to a provider, etc.). This again doesn’t seem to be the case because the program in Murshidabad, India was implemented by a microcredit organization explicitly targeting these people because they couldn’t get them to borrow money. So there was a organization in the area providing credit without a restriction of having collateral.

Still another possibility is mental health or psychological health. The beneficiaries of the program recognized fewer symptoms of depression, fewer symptoms of stress, and feeling much happier. This perhaps (as hypothesized by Duflo) could be the mechanism that leads to the large returns on the $100 asset transfer to the ultra poor. The question is whether there is such thing as a “hopelessness trap” (or as Dalton, Ghosal, and Mani (2013) call an “aspirations failure”). Said differently the expectation of future poverty exacerbates current poverty.

Take for example a seamstress. There is a huge difference between the productivity between sewing by hand and having a sewing machine. Additionally there is a big difference between having a mechanical sewing machine and a manual sewing machine. Additionally, there is a difference between having one mechanical sewing machine and two mechanical sewing machines. And so on and so on. In economist speak, the production function for a seamstress has discrete steps. An investment has a threshold before it becomes profitable. The problem is you can’t buy one tenth of a machine. You have to buy the whole thing. If someone is so poor and “hopeless” that they think they will never be able to cross the critical threshold for profitability, there is little incentive to be as productive and rational as possible. Perhaps you should spend more time buying toys for your child rather than save for a sewing machine if you never think you’ll be able to save enough for a sewing machine.

Hope then is a capability (a la Amartya Sen). Hope is a fuel that makes us capable of achieving things. And it also provides motivation to invest in business, education, health, etc.

So, how do we make people hopeful?

There could be many ways, several that have been recorded in the literature so far include:

For a long time those working in development have been focusing on external constraints to economic outcomes. We always think of the obvious things like credit, or agricultural inputs, or business skills training, or health, or nutrition, etc. Perhaps it is time to think about the internal constraints to economic outcomes. Things like aspirations, beliefs, or attitudes. All things that make up what we call hope.

(There is also a theological perspective of all this. Undoubtably, there will be more on that later.)

10 thoughts on “The Economics of Hope

  1. Thanks, Jeffrey. I actually read your article and think I understood some of it. Interesting. My first thought was to wonder where prayer enters into a discussion of hope. Does a person praying raise the level of hope and thus does prayer give more what you call agency? and thus change things? And could one conclude that the only thing prayer does is put one into another category of hope, and that “answered” prayer is different from what ministers and theologians would want us to think of.

    You may also conclude that I don’t understand the basics of all your economic reasoning.

    And in your last line you note too the theological part of this.All very interesting.

    • Grandpa, Thanks for reading. It means a lot that you read this. I was actually hoping to ask you for your insights on some word origins re: hope.
      There are interesting extensions into theological applications for this literature. I haven’t gotten there quite yet. In my research in Kenya we did ask about prayer. I’m just beginning to get the data back and will see what more or less prayer is associated with.

  2. Pingback: The Economics of Refugee Migration | Jeff Bloem

  3. Pingback: Myanmar Days [Part 2] | Jeff Bloem

  4. Pingback: Scarcity, Hope, and the Psychology of Poverty | Jeff Bloem

  5. Pingback: Faith Meets the Evidence-based Spirit | Jeff Bloem

  6. Pingback: The Economics of Hope: Research Methodology and Identification Strategy | Jeff Bloem

  7. Pingback: Poverty Traps, Real or Imagined? | Jeff Bloem

  8. Pingback: Towards a of Psychology of Poverty Traps | Jeff Bloem

  9. Pingback: Towards a Psychology of Poverty Traps | Jeff Bloem

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s