Scarcity: Why having too little means so much
Sendhil Mullainathan and Eldar Shafir
Allen Lane, £20.00
Potential readers should be warned that the title of this book may mislead. It is not about the rationale for exorbitant prices for positional goods, nor about the winner-takes-all nature of scarce talents in a global marketplace.
Instead, it claims to develop a new theory of the socio-economic effects of perceived scarcity, whether of money, time or the willpower of a dieter. However, in the opinion of this economist reviewer, it fails. The book provides an abundance of anecdotes but a scarcity of evidence or new insights.
The authors have impressive pedigrees: Mullainathan is a professor of economics at Harvard and Shafir a professor of psychology and public affairs at Princeton. Their collaboration has resulted in a folksy narrative where each new concept is illustrated extravagantly and exhaustingly with examples - many of which are hypothetical.
While behavioural economics is a respectable academic area, its treatment in this book leaves one wondering whether it deserves to be.
In the first two-thirds of the book, whole chapters are spent illustrating new, or at least nuanced, meanings for familiar words such as focusing, tunnelling, bandwidth and slack. The basic thesis is that when people perceive a scarcity, say, of money, they will focus more sharply on what things cost than people who have an abundance of money. They will be more careful with their purchases than the rich person.
Most economists will recognise this behaviour as a familiar aspect of diminishing marginal utility. But the authors believe it is more than that. Because the poor are so focused, their thoughts will 'tunnel' around that issue to the detriment of rational trade-offs over time.
They may take out expensive payday loans that can lead into a 'scarcity trap' as they roll them over in an attempt to extricate themselves.
The authors' concept of 'bandwidth' is explored in depth. When scarcity is pressing, it narrows a person's bandwidth - or capacity - to plan ahead or consider alternative courses of action.
Similarly, people with a scarcity of time will act irrationally as a deadline approaches, tunnelling their thoughts around that deadline and thereby perhaps neglecting other tasks, which puts them behind with other deadlines - another type of 'scarcity trap'.
When bandwidth is limited by scarcity, a person is more likely to make errors because cognitive performance is diminished. There is considerable experimental evidence for this, and it might seem fairly obvious in any case.
The authors suggest, however, that recognition of this relationship can help to explain why many programmes for helping the poor have such low success rates. For example, a welfare-to-work intervention that tries to help unemployed people prepare a CV and dress appropriately for an interview may have a high dropout rate, simply because the unemployed are using most of their 'bandwidth' worrying about how to pay next month's rent, sapping their motivation to look for a job.
Although this is a plausible, and perhaps kinder, explanation than blaming the unemployed directly for being lazy or forgetful, little evidence is provided one way or the other.
Introducing 'slack' into a schedule, or providing loan facilities to the poor, is one remedy for the scarcity trap. However, too much slack creates inefficiency because it diminishes focus.
As the authors illustrate this point with many examples from the workplace, the reader is left wondering whether this theory of scarcity has any optimal solution.
Indeed, in their concluding chapter, the authors suggest that abundance may set the stage for scarcity and they cite the global financial crisis as an example. Abundant credit availability enabled households to borrow and spend too much, which subsequently turned into bad debts in the banking system and a scarcity of credit.
The final third of the book tries to apply the theory to three problems: improving the lives of the poor, managing scarcity in organisations, and scarcity in everyday life.
This section degenerates into a list of suggestions familiar from development literature, industrial organisation and self-help guides to time management.
So, if you have a time scarcity and find your back-to-back meetings tend to overrun, ask your assistant to interrupt you with a five-minute warning before the next meeting is due.
It is dispiriting to read 234 pages to discover advice such as this.
- Dame DeAnne Julius is a founder member of the Bank of England's Monetary Policy Committee and was an adviser at the World Bank in her early career.