Accounting for the Poor

Robert M. Townsend
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American Journal of Agricultural Economics
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Economists and other social scientists have long tried to understand the nature of poverty and how poor people make decisions. T.W. Schultz, a Nobel Laureate, former professor of economics at the University of Chicago, and former president of the American Economic Association, spent his career working in development and agricultural economics. In his 1980 Nobel Prize acceptance speech, Schultz suggests that there is some accounting for the behavior of the poor in agriculture. “Farmers, the world over, in dealing with costs, returns, and risks are calculating economic agents. Within their small, individual, allocative domain they are fine-tuning entrepreneurs, tuning so subtly that many experts fail to recognize how efficient they are,” (Schultz 1980, p. 644).

The notion of “accounting for the poor,” as in the title of this paper, refers to a number of aspects of measurement. The first involves the millions of poor people in the world and their contributions to the economy. In many economies, when added up, the contributions of poor populations are a substantial part of Gross Domestic Product (GDP). Thus, one has to account for them. There is a countervailing view, though, that while there may be many poor people, they do not really contribute much in terms of value-added, and the larger source of economic activity is from manufacturing and industrialization. This turns out to be a false assumption, and we do need to take the poor into account. The second meaning of the title is literal: Creating financial accounts for the poor, and doing it well. That is, to assemble an appropriate set of accounts of the poor. The third and final meaning of the title addresses concerns that economists are not able to account for the behavior of the poor, as if poor people follow some alternative norms or are not maximizing. As Schultz suggests in the quote above, his view—and the view taken here —is the opposite: Namely, we can and should use standard economic theory in combination with data.


East Asia and the Pacific
Informal Economy