Towards an Objective Understanding of Scarcity

When Henry Holt & Co. sent me an advance edition of Sendhil Mullainathan and Eldar Shafir’s Scarcity: Why Having Too Little Means So Much to review, I had presumed it to be another book on the ubiquitous nature of scarcity. However, their book, while acknowledging the phenomenon of scarcity to be omnipresent, argues, in a novel manner, the adverse effects scarcity has on the cognitive resources of individuals. In other words, scarcity (of money, time, etc.) forces people into a scarcity-trap: the poor stays poor; the busy remain busy; and the lonely remain lonely. For, ‘[s]carcity creates a mind-set that perpetuates scarcity.’ The aim of their book, writes Mullainathan and Shafir, is ‘to unravel the scientific underpinnings of scarcity’ in order to make more sense of ‘social and behavioral phenomena’ and is targeted at a ‘wide audience’. Their book is an attempt to present ‘the logic and consequences of scarcity.’

‘Scarcity captures our mind. … It changes how we think. It imposes itself on our minds.’ And, ‘scarcity’s capture of attention affects not only what we see or how fast we see it but also how we interpret the world.’ Hence the authors argue that scarcity ‘is not just a physical constraint. It is also a mind-set.’ The consequence of scarcity, according to Mullainathan and Shafir, is that it makes ‘us less insightful, less forward-thinking, less controlled.’ It reduces our ‘bandwidth’ – our cognitive ability. There is however a positive outcome of scarcity, the ‘focus dividend,’ which makes us more effective in the immediate period but ‘scarcity eventually ends in failure.’ They label the mechanism which reduces our cognitive resources ‘tunneling’. ‘Sometimes when we tunnel, we neglect other things completely.’ ‘Focus dividend’ is a short-term positive outcome of scarcity whereas ‘tunneling’ is a long-term adverse consequence arising from the tax scarcity imposes on our bandwidth. They are, in fact, interdependent phenomena. Based on their experiments, they observe that poor people ‘tunnel’ and therefore do not purchase insurance which would have helped them in the future. For, ‘scarcity taxes bandwidth’ and ‘generates internal disruption’ by lowering ‘fluid intelligence and executive control’. The authors acknowledge the role ‘self-control’ could play in overcoming scarcity, but they note that ‘will-power’ is something which is not yet fully understood. To summarise: ‘[t]he problem is not the person but the context of scarcity.’

Opposite of scarcity is ‘slack’ or ‘abundance’. ‘Slack’, writes the authors, ‘is a consequence of not having the scarcity mind-set.’ Those who have an abundance of resources (money or time) have the luxury not to make trade-offs. Additionally, ‘[s]lack gives us room to fail.’ Scarcity therefore not only leads to ‘greater errors’ due to the bandwidth tax, but also implies that there is ‘less room to fail.’ Marginalist economics treats any unused or underutilised resource as wasteful and inefficient and the authors follow this logic. Although, in the later part of the book, they distinguish between useful and useful slack. Of course, what is useful or wasteful depends on the goals or aims of the individual, organisation or government. The subjective assessment of physical/objective scarcity is also dependent on the goals, and the process of tunneling depends on this subjective measurement of scarcity and the goals. Therefore, the experience of scarcity is in itself conditioned by the goals and they affect each other in a dynamic fashion – reasoning is not limited to the means to achieve the ends, but it also can modify the ends. In the initial chapters, the authors, using results from experiments, quite convincingly argue that the subjective feeling of scarcity generates an objective result – it taxes the bandwidth and lowers the cognitive ability. In fact, the entire book can be seen as an attempt to provide an objective understanding of scarcity (which can be real or imagined or both).

Scarcity leads to borrowing. Borrowing, according to the authors, is a ‘simple consequence of tunneling.’ Although, it is conceivable that scarcity can lead to borrowing, it certainly cannot be maintained that all borrowing is because of tunneling. The phenomenon of a debt-trap is nothing new. ‘Scarcity leads us to borrow and pushes us deeper into poverty.’ Scarcity, writes the authors, causes the poor to focus more on immediate (short-term) goals and they overlook long-term goals. The focus on several short-term goals is termed juggling, and is a ‘logical consequence of tunneling.’That is, the poor resort to ‘short-term fixes.’ Can one get out of scarcity? Without some external intervention, the authors argue, it is highly unlikely. For, getting out of the scarcity-trap requires a (long-term) plan but since the goal is not immediate, the scarcity mind-set does not accommodate it. ‘Planning requires stepping back, yet juggling keeps us locked into the current situation.’ Also, ‘future planning requires bandwidth, which scarcity taxes heavily.’ To state the obvious, the authors note that ‘[a]ll this is complicated by the lack of slack.’ Scarcity implies a lack of slack. Similarly, slack implies a lack of scarcity. Owing to the objective effects of scarcity on cognitive resources, getting out of a scarcity-trap is extremely difficult, be it those who lack money or time.

Chapters 7 and 8 are devoted to understanding (income) poverty and some suggestions are offered for improving the lives of the poor. The authors rightly argue that the extant explanation of poverty is largely ‘piecemeal.’ Their major contribution, I think, to studies on poverty is that the poor ‘lack not only money but also bandwidth’ as a consequence of their income poverty. As they ask: ‘Why not look at the structure of the programs rather than the failings of the clients?’ This bandwidth tax is something the designers of social programmes ignore. Therefore, ‘strong incentives’ do not often function well. The authors call for social programmes which are ‘fault tolerant’ given the already taxed bandwidth of the poor. A limit ‘penalises but fails to motivate’ the poor and according to the authors such limits/penalties on incentives are flawed because they do not take into account the cognitive effects of scarcity. ‘Limits create scarcity, the logic goes, which might lead to better management of how the resource is “used.” This almost relies on the psychology of scarcity. But it is flawed.’ A better solution, according to Mullainathan and Shafir, would be ‘to create smaller but more frequent limits.’

A greater focus on the creation of dependable jobs and stable incomes for the poor across the world could be psychologically transformative.

All this is a radical reconceptualization of poverty policy. … Now, rather than looking at education, health, finance, and child care as separate problems, we must recognize that they all form part of a person’s bandwidth capacity.

A powerful and political conclusion emerges from the authors: social engineering should be built on better foundations, in this case, that of the psychology of scarcity.

Chapter 9 is titled ‘Managing Scarcity in Organizations’ wherein the importance of slack is stressed, in contrast to the views espoused by the ‘efficiency experts.’ Organizations should ‘explicitly manage and ensure the availability of slack.’ In other words, the quality of the workplace must be improved – less surveillance, adequate leaves, reduced working hours, etc. For, as the authors note:

Increasing work hours, working people harder, foregoing vacations and so on are all tunneling responses, like borrowing at high interest. They ignore the long-term consequences.

In line with the optimizing story told by marginalist economics, Mullainathan and Shafir emphasise the need to ‘maximize our limited cognitive capacity.’ They call for a greater focus on the ‘cognitive side of the economy’ and even go as far as to suggest the creation of a ‘Gross National Bandwidth’ index!

Despite the authors adopting some static concepts employed in marginalist economics of a very subjective nature, their research points towards a very dynamic and objective understanding of scarcity. Moreover, the adverse consequences of scarcity on cognitive resources highlight the extreme importance of careful social engineering, especially in the reduction of poverty.