The Psychological Costs of Scarcity
Decision-making in the context of scarcity disproportionately drains cognitive resources compared to those not limited by scarcity. This decision-making can lead to a cycle of poverty.
Recently, the national conversation has been focused on the pandemic-era unemployment benefits. The April jobs report was quite disappointing, the economy gained a measly 200,000 jobs compared to the 1 million that was expected. This has economists and businesses signaling out the $300 enhanced weekly benefits the Biden administration extended through September. Labor demand is not lacking, the reasoning goes, but that workers refuse to supply their labor because of the generous unemployment benefits and are holding out until wages rise above these benefits. This, I argue, need not be a negative result.
There is a labor shortage, but the unemployment benefits have fostered a moment of realization of people’s self-worth. Specifically, after a period of generous unemployment benefits, workers have come to realize they deserve better than low-wage, precarious employment. Employers will be forced to attract workers somehow, let us assume they cannot lobby away the benefits; therefore, employers must raise wages to attract new workers, downsize, or shut down.
This is where I will restrict the scope of this article, the first of three, as poverty and its psychological consequences are of interest to me and are sorely missing from the benefits debate. If the wage share is declining, the rate of poverty will rise for those that depend on wages. The advancement of poverty will be characterized by an increasing proportion of the population with impeded cognitive functions and stunted psychological development. Impeded cognitive faculties, resulting from tough trade-offs, lead to less-than-optimal outcomes as a result of poor decision-making.
Psychological Consequences of Poverty
Rarely are people so irritated by the cosmetic properties of poverty, unless you are Caitlyn Jenner. Most serious people would argue for the elimination of poverty on the grounds of human flourishing. However, the psychological consequences of an impoverished life are given less attention, and understanding these consequences may provide a mechanism for how poverty reproduces itself. First, let’s define the cognitive resources that are being depleted. Then, let’s discuss its costs, that is, how poverty impedes cognitive functions and psychological development.
I’d venture a guess that most people do not think of our cognitive capabilities as being restricted by a limited stock that can be depleted and needs time to re-accumulate. Well, this is precisely what happens! The resources in reference, attention and working memory, have a fixed capacity and compete for this capacity as the cognitive load increases. As the cognitive load increases and cognitive capacity is spread thin, the quality of information processing slows and declines in quality. Or, if you prefer it in econ terms, each person has a set of cognitive resources that are utilized to process information, the cognitive load, subject to their cognitive budget. As the cognitive load increases, the quality of information processing declines due to an increasingly divided cognitive budget. So, what about the costs of poverty?
Mani et al approached the question of the effect of poverty on cognitive resources through two studies. The first study experimentally induced thoughts of financial hardship in participants, while the second study examined the cognitive function of farmers before and after harvest. Mani et al found that poor participants scored lower on a measure of cognitive functions, while the well-off were not impacted and farmers experienced diminished cognitive capacity across the planting cycle (before and after harvest), respectively. In addition, participants were burdened with cognitive loads requiring disproportionate attention, further limiting the cognitive resources available for other information and tasks. These results suggest that poverty itself reduces cognitive functions and strains cognitive capacity.
A study conducted by Hamadani et al examined the role poverty played in the psychological development of Bangladeshi children. Consent was obtained to evaluate the children of pregnant mothers in poor, rural Bangladesh over a period of five years. The researchers identified increasing cognitive deficits that were identified as early as 7 months of age.
Similarly, Noble et al performed a longitudinal study over the first two years of an infant's life to identify the importance of socioeconomic status (SES) on the development of memory skills and language. Disparities in memory skills and language are reportedly identified as early as 1.5 years of age. Low SES children performed poorly compared to middle SES and high SES children, as predicted.
Although these studies cannot attach certainty to their causal conclusions, they do suggest that being raised in poor environments has significant consequences for cognition and achievement. Poverty itself is a vague term and encompasses characteristics that are not just income-based. Rather, lack of income can expose people to environmental toxins, reduce their nutritional and caloric intake, and increase the risk of their offspring being born with disability.
What sort of environmental hazards can the poor be exposed to and what are the consequences? Lead is, unfortunately, a ubiquitous toxin found in poor communities. Exposure to just 5 μg/dL of lead is associated with a 1.61-point lower score on an IQ test, and a 1.79-unit lower score on a measure of SES. Participants were also found to score lower on a range of cognitive tests from childhood to adulthood. This adds another layer of crisis to communities poisoned by lead, particularly Flint. In maybe another decade or so, researchers will have a better understanding of the economic and achievement gap of those poisoned in Flint and similar communities. Impoverished communities frequently face malnutrition in addition to environmental toxins — adding another dimension to the problem.
Malnutrition encompasses micronutrient deficiencies — iron, zinc, and vitamin A — and protein malnutrition. These deficiencies are particularly common in developing nations and will have serious implications for economic development, which I will discuss in the next article. The brain is of particular importance, it governs our behavior and cognition, as severe malnutrition results in atrophy and depressed development. Scarcity has significant consequences for quality of life and the development and health of the human brain. The implication of the literature is that exposure to environmental toxins and malnutrition, or life in poverty more generally, leads to a decline in cognitive capacity and downward social mobility.
The Poverty Trap
People can become poor through a few avenues, the business cycle can throw thousands or millions into poverty through no fault of their own, while, on the other hand, risky decisions made by the individual can result in the loss of hard-earned income. There is also the argument that temporal preferences cause and perpetuate poverty. However, recent experimental evidence suggests the causal mechanism of poor decision-making is not a preference for consumption today, but poverty itself. So, let’s discuss the behavior of those who are impoverished.
As was stated above, poor decision-making may result in poverty, but the quality of decision-making is context-dependent. Experimental evidence has highlighted the poor decision-making of those living in poverty, or at least simulated poverty, relative to those living above the poverty line. What mechanism is at work here? The author highlights three possibilities: limited attention, limited willpower, and limited cognition.
Poverty is a form of scarcity, which is the primary focus of an individual's attention, distracting them from other pressing issues, or limiting their attention. Limited willpower and limited cognition are understood in the context of decision-making itself. Poor people cannot afford temptation, resisting temptation depletes willpower/self-control, and less self-control remain to resist temptation. Similarly, poor people face difficult trade-offs, a difficult decision depletes cognitive resources, and less cognitive control leads to poor decisions in the future. The experiment, and partial experiment, successfully identified the direction of causality: poverty leads to poor decision-making. It is not clear which mechanism dominates, but that does not take away any significance from these results. The implication of the results is, frankly, rather serious.
A depleted cognitive stock leads to less cognitive and/or behavior control, creating the conditions for poor decision-making and subsequent poverty. In other words, the evidence I have highlighted suggests that poverty can reproduce itself. For instance, the Banerjee and Mullainathan model of the poverty trap highlights the limited willpower poor people have in resisting temptation and the resulting postponement of investment decisions. These types of decisions ultimately place a stringent upper bound on future income. In other words, preference for present-day consumption can be poverty-induced/enhanced.
Not only does the poverty trap apply to a single individual, but it also restricts their children, too.
“Failure to deal with the global problem of childhood poverty will not only affect today’s children, but also carries broader, long-term costs. Cognitively impaired children are more likely to do poorly in school, and as adults to have low incomes and productivity, high fertility, and to be unable to provide a stimulating environment for their own children. In the poorest countries, this chronic brain drain is likely to retard national development and to perpetuate economic inequalities with their resulting social problems.” - Bergen (2008)
Poverty not only reproduces itself day-to-day, but it can also reproduce itself generation-to-generation. The reproduction of poverty on a scale of this magnitude will have macroeconomic repercussions alongside individual health consequences.
Poverty is a phenomenon impacting multiple channels of human life simultaneously. The evidence clearly identifies the psychological costs of poverty, such as reduced cognitive capacity and impeded cognitive functions as a result of high cognitive load, malnutrition, and/or environmental toxins. With these costs in mind, why is it that nations with sufficient wealth to combat poverty’s existence allow it to continue and reproduce itself? To answer this, I will look to political economy for clarity. Then, I will discuss ways to alleviate poverty, its characteristics, and its implications for economic growth.