Hrayr Karapetyan 2017/2018
Principles of Economics and Business 2 Semester 1, Period 3
Policy Makers: Using Nudges and Keeping Poverty in Mind
Halpern (2015), Johnson and Goldstein (2003), Johnson et al. (2012), Larrick and Soll (2008), Ly, Mazar, Zhao and Soman (2013), Sunstein (2013), Thaler and Sunstein (2008) and The World Bank (2015, as cited by Benartzi et al., 2017) wrote that behavioral science can solve some policy problems. They stated that in response, governments started using nudging to steer the behavior of citizens and government personnel. Policy makers also got a more difficult job when Mani, Mullainathan, Shafir and Zhao (2013) concluded that poverty negatively influences cognitive capacity. Policy makers were faced with the question about whether or not they should use nudging in their policies and whether or not they should keep the negative effects poverty has on cognitive capability into account. The problem at hand is that it might be unethical to use nudging in public policy (Benartzi et al., 2017). The other problem at hand is that if public policy does not keep poverty into account as it affects cognitive capacity, poverty can grow, because less cognitive capacity leads to more poverty and so on (Mani et al., 2013). Two examples of poverty having a negative influence on cognitive function, and therefore further perpetrating poverty, are prisoners in the United Stated (Prison labour is a billion-dollar industry, with uncertain returns for inmates, 2017) and workshop workers in Bangladesh (Abrams & Sattar, 2017).
This literature review will be about to what extend policy makers should keep into account that poverty affects cognitive function and that nudges in public policy might work.
A literature review consists of academic articles being discussed and used to answer the central- and subquestions.
This literature review consists out of another four parts. The first part is the theoretical framework in which the academic research done about this subject will be laid out and in which the subjects what public policy is, how nudges and incentives are used in the market and whether using nudges and incentives is ethical or not, how nudges affect public policy, the capability approach, in how far poverty can influence cognitive capability and how public policy can change to keep how poverty influences cognitive capability into account and why it is important to do so, are discussed. The second part is the discussion in which there will discussed which arguments are stronger and which are weaker. The third part is the hypothesis in which the provincial and not yet empirical answers to the subquestions will be given and in which the limitations of the research will be discussed. The fourth part is the conclusion in which the final conclusion to the central question will be given.
Hassel (2015) stated “Public policy is a set of decisions made by governments and other political actors to influence, change, or frame a problem or issue that has been recognized as being in the political realm by policy makers and/or the wider public”. Public policy has to do with normative economics, which are recommendations or arguments about what economic policy should be. Public policy is difficult to make, because not only costs should be taken into account, but also benefits and value (Cowen & Tabarrok, 2015(a)).
Nudges and incentives are used in the market by governments to alter people’s decisions without coercion to benefit the economy (Benartzi et al., 2017). Benartzi et al. wrote that governments measure the ratios of impact to cost for nudging and traditional public policy tools, which have to do with taxes and other financial incentives, and they found that nudges and traditional public policy go well together. Bowles (2008) wrote that nudges in public policy can increase self-interest while improving the common good. But he also stated that even though nudges can improve self-interest and the common good, nudges in public policy only work if they are not undermining moral values. But moral values can decay in the long run due to market interaction, because if the benefit is large enough, humans are willing to ignore their morals (Falk & Szech, 2013). Moral hazard can occur when policy makers are not open about their policy, so when they have more information then the public and use that in their advantage (Cowen & Tabarrok, 2015(c)). Cowen and Tabarrok (2015(b)) give an example of nudging in the market by analyzing supermarkets. They wrote that supermarkets use nudging by placing certain products in a certain way, for example milk in the back of the store, so you have to walk past tempting products like cookies to get there. They also wrote that products in the supermarket itself can use nudges by using a certain language on their packaging, for example 80 percent lean beef. Supermarkets will write on the packaging that the beef in 80 percent lean, not 20 percent fat, because 80 percent lean is more attractive to a customer wanting to buy lean beef.
Benartzi et al. (2017) wrote that nudges are incorporated into public policy by governments using nudge units. They found that nudge units consist out of behavioral science experts tasked with designing nudges and incentives that can be incorporated in the public policy without restricting choice and that are fast and inexpensive to implement into the public policy. They also found that nudges affect public policy, because nudges simplify processes to make benefits easier and so governments are tended to use nudged even though it might be unethical. Cowen and Tabarrok (2015(b)) mention that nudges in public policy can for example incentivize people to pay their taxes in time, sign up to be a donor or to stop smoking during pregnancy.
Nudges can be seen as both ethical and unethical. Cowen and Tabarrok (2015(b)) argue that using nudges is effective and should be used in public policy, because it incentivizes people to for example stop smoking during pregnancy. Bowles (2008) also wrote that nudges should be used, because they increase self-interest while improving the common good. However, Cowen and Tabarrok (2015(b)) also wrote that using nudges is not always ethical, because nudges can be seen as manipulative. Falk and Szech (2013) agree with Cowen and Tabarrok’s (2015(b)) opinion that nudges can be negatively received, because nudges can cause moral values to decay. However, nudges can cause value maximization, through supply and demand (Jensen, 2002). Jensen (2002) wrote that having an open market including nudges can improve wealth for the poor. Satz (2008) agreed with the opinion by looking at the kidney market. She wrote that having an open kidney market can cause value maximization, because people that value money over their kidney can sell their kidney to those people that need a kidney. However, Satz (2008) also wrote that there are negativities to having an open market, because it might cause asymmetric information (Cowen & Tabarrok, 2015(c)), because the seller of an organ can lie about disease to the person needing the donor in order to still sell.
Robeyns (2005) states that “the capability approach is a broad normative framework for the evaluation and assessment of individual well-being and social arrangements, the design of policies, and proposals about social change in society”. She wrote that the capability approach can help determine the well-being of an individual as well as that of members of a certain group. The capability approach helps determine things such as inequality and poverty (Robeyns, 2005).
Mani et al. (2013) used the capability approach to determine poverty and wealth in their subjects and they determined how poverty influences cognitive capability. They concluded that poverty negatively influences cognitive capability and having a lower cognitive capability can further perpetrate poverty. They stated that “The poor use less preventive health care, fail to adhere to drug regimens, are tardier and less likely to keep appointments, are less productive workers, less attentive parents, and worse managers of their finances”. They wrote that poverty causes these negative externalities, because poverty causes worry and stress and so poor people are more likely to worry about money and not be attentive to these negative externalities. Mullainathan and Shafir (2013) agree with Mani et al. (2013) by stating that a scarcity-mind-set tends to reproduce scarcity and so poverty causes more poverty.
Mani et al. (2013) wrote that it is important for public policy to keep poverty into account, because poverty consumes mental resources and thus leaves less attentiveness for other tasks. They wrote that not keeping poverty into account in public policy can cause poverty to worsen which has a negative influence on the economy. Mullainathan and Shafir (2013) researched the influence of poverty on cognitive function as well and found that poverty indeed influences cognitive function negatively. They wrote that poverty can cause tunneling, which causes people to not be able to focus on other tasks. An example of public policy keeping poverty into account, is the IRS helping the poor with their tax returns (Free Tax Return Preparation for You by Volunteers, 2017). By helping the poor with their tax returns, the IRS helps reduce the external tasks.
Sandel (2011) wrote about the ethical aspect of public policy. He stated three types of justice in public policy: the utilitarian idea of maximizing welfare or happiness, the idea that justice means respecting freedom and human dignity and that justice has to do with honoring and recognizing virtues. He wrote that keeping poverty into account in the public policy can be ethical or unethical, depending on what type of justice is being used by policy makers. He stated that policy makers using the utilitarian idea would state that it is ethical to keep poverty into account, but policy makers using the idea that justice means respecting freedom and human dignity or that justice has to do with honoring and recognizing virtues would state that it is unethical to keep poverty into mind, because it might undermine dignity and honor.
In this literature review there are four main subquestions surrounding the central question. There are multiple opinions about whether or not nudges in public policy work. Benartzi et al. (2017) concluded that nudges and traditional public policy go well together. Bowles (2008) also stated that nudges in public policy work, because they improve self-interest while also improving the common good. However, Bowles (2008) also wrote that even though nudges in public policy can work, nudges only work if moral values are not undermined. Falk and Szech (2013) shared Bowles’ (2008) opinion when stating that to much nudging can decay moral values. Cowen and Tabarrok (2015(c)) also shared Bowles’ (2008) opinion when they stated that nudges can cause moral hazard. In conclusion, nudges in public policy can work, but only if moral values are not undermined and moral values are still a factor in decision making.
Cowen and Tabarrok (2015(b)) argue that nudges are ethical, because they can stimulate ethical actions, such as quitting smoking during pregnancy. Bowles (2008) shared the opinion that is ethical to use nudging as long as moral values are not undermined. Jensen (2002) and Satz (2008) both shared this opinion, because nudges in public policy can cause value maximization, which is positive. However, Cowen and Tabarrok (2015(b)) also wrote that nudges can be seen as unethical, because people see nudges as manipulative. Falk and Szech (2013) also see nudges as unethical, because nudges can cause moral values to decay. In conclusion nudges can both be seen as ethical and unethical, because nudges can both have negative and positive outcomes, so it depends on how nudges are being used in public policy whether or not they are ethical or not.
Mani et al. (2013) stated that poverty causes cognitive function to decrease, because poverty consumes mental resources, which thus leaves less attentiveness to other tasks. Mullainathan and Shafir (2013) stated a scarcity-mindset causes scarcity. But overall Mani et al. (2013) and Mullainathan and Shafir (2013) both concluded that poverty causes a decrease in cognitive function, which leads to more poverty.
Mani et al. (2013) and Mullainathan and Shafir (2013) both agree that public policy should keep the effect of poverty on cognitive function into account, because were public policy not to keep poverty into account, poverty could worsen and that would be negative to the economy. However, Sandel (2011) discusses the ethical aspect of keeping poverty into account in public policy, because keeping poverty into account can both be seen as ethical and unethical, depending on what justice policy makers keep into account. When using the utilitarian idea it would be ethical, but when using the idea that justice means respecting freedom and human dignity or that justice has to do with honoring and recognizing virtues it would be unethical. In conclusion, public policy should take the effects poverty has on cognitive function into account, because not doing so can increase poverty and that is worse than not having ethically sound justice in public policy.
A provisional answer to whether or not nudges in public policy work and are ethical would be that they work and that by using nudges there can be value maximization, but in order to use nudges in public policy, moral values should not be undermined, the nudges should be ethical, nudges should not decay moral values and moral hazard must not occur (Benartzi et al., 2017; Mullainathan & Shafir, 2013; Bowles, 2008; Falk & Szech, 2013; Cowen & Tabarrrok, 2015; Jensen, 2002; Salz, 2008). A provisional answer to whether or not public policy should keep the negative effects poverty has on cognitive function into account, would be that public policy should indeed keep it into account, because poverty can worsen when policy makers do not keep it into account (Mani et al., 2013; Mullainathan & Shafir, 2013). However the ethical aspect of keeping poverty into account can be discussed, because, depending on the justice policy makers take into account, it can be seen as both ethical and unethical (Sandel, 2011).
However, this research is limited, because it has a word restriction of approximately 3000 words and only fourteen sources were used. In order to get a more conclusive answer, one might need to do more research and also include inductive research for example. In order to give a more conclusive answer to the central question more research must be done on the subject.
A suggestion to future research would be to do more inductive research and to ask more questions. A question for future research could be if stress influences cognitive function for the rich and whether or not public policy should also keep this into account, if there is a negative effect. Another question for future research would be if public policy could use other sources instead of nudging to get the desired result.
The main goal of this research was to identify whether or not nudges should be used in public policy and whether or not policy makers should keep into account how poverty affects cognitive function. The problems were that nudges can and can not be effective, that nudges can be seen as ethical and unethical, that poverty can or can not affect cognitive function, that policy makers can and can not keep how poverty affects cognitive function into account and that having policy makers keep the effect of poverty on cognitive function into account can be seen as both ethical and unethical. The main results were that nudges can be used in public policy, but moral values should not be undermined and there should not be moral hazard. Another result was that nudges can both be seen as ethical and unethical, depending on how nudges are implemented. Another result was that poverty affects cognitive function in a negative manner and policy makers should keep how poverty negatively affects cognitive function into account, because not doing so can lead to more poverty. And lastly, keeping poverty into account in public policy can be both ethical and unethical, depending on the justice policy makers take into account. So in conclusion, nudges should be used in public policy depending on the usage and whether or not the nudge is ethically sound and policy makers should keep poverty as a negative effect on cognitive function into account.
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Mullainathan, S., Shafir, E. (2013). Scarcity: Why Having Too Little Means So Much. New York, New York: Henry Holt and Company
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