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Are Economists in Over Their Heads?

Abstract and Keywords

Sociologists see economic decisions as being “embedded” in social relationships, just as psychologists see economic decisions as being embedded in a life of the mind. While the idea of social embeddedness is not new to economists, its role in creating and perpetuating poverty is not yet well captured in economic thought. This article discusses three overlapping levels of social embeddedness relevant to poverty. First, it considers the economic implications of interpersonal social networks: “social capital” as the concept has been developed and expanded by sociologists distinctly from their fellow social scientists. Next, it discusses how long-standing and ongoing cumulative social processes accentuate and accelerate the dynamics of poverty among social groups. Neighborhoods and racial groups are powerful examples of social groups where poverty dynamics are often self-reinforcing. Finally, it reviews how identity and culture influence economic decisions. In particular, it considers both how self-identification with social groups shapes behavioral choices and their attendant consequences, and how some social norms that constrain the choices of poor people are surprisingly resistant to change even in the face of radically altered economic circumstances.

Keywords: social embeddedness, poverty, social networks, social capital, self-identification, social graphs, economic decisions

When you dig deep down, economists are scared to death of being sociologists.

Charles Schultz, former president of the American Economic Association (cited in Kuttner 1985)

1. Introduction

Are economists in over their heads in their approaches to understanding poverty? For the most part, the answer is a resounding “no.” Just over 20 years ago Hirsch and coauthors (1990) characterized the approaches to poverty of economists and sociologists as “clean models” versus “dirty hands,” respectively. Since that time, economists have been on the ground, digging more deeply to better understand the causes and consequences of poverty, dirtying their hands along the way. Both development and labor economists have fielded and analyzed detailed household surveys that yield fine-grained depictions of poverty while simultaneously expanding the range of poverty-related questions addressed empirically. Most recently, economists have allied with governments and nonprofit organizations to evaluate policy interventions through large and small randomized controlled trials. Surprisingly enough, economists concerned with poverty now face the charge, from inside and outside the discipline, that they have become too focused (p. 751) on interventions at the expense of theory. Stated differently, economists have been criticized for focusing on whether or not policies alleviate poverty, without understanding why they do or do not work, or why the poor are poor in the first place (e.g., Deaton 2009).

In their quest to understand the causes of poverty, economists have often drawn on insights from kindred social sciences. Psychologists expanded economic theories of poverty by showing how psychic costs shape economic decisions and exposing how psychological “channel factors” facilitate or inhibit rational actions. Armed with valuable insights from cognitive science, behavioral economists compelled the discipline to revisit conventional modeling of intertemporal decisions about consumption and saving across the income spectrum, as well as other building blocks of microeconomics (see Bertrand, Mullainathan, and Shafir 2004 for a summary and additional references).

Sociology has made a less discernible mark on economic understandings of poverty in recent years, despite the galvanization of the social science community around the urban underclass debate after William Julius Wilson published The Truly Disadvantaged (1987). We claim that the economics discipline as a whole may not fully appreciate sociological insights about poverty that can inform their research about the poor’s behavior. That said, many economists already incorporate sociological insights in their theoretical and empirical formulations (see, for example, works collected in Barrett 2005). For students and policy makers, we aim to complement the economic understanding of poverty presented in the rest of this volume and show where it is limited. For researchers, we seek to provoke further inquiry into questions where the contributions of economists are greatly needed, while drawing on and highlighting the work of economists who have begun to tackle the issues we raise.

Sociologists see economic decisions as being “embedded” in social relationships, just as psychologists see economic decisions as being embedded in a life of the mind. To be sure, the idea of social embeddedness is not new to economists, but its role in creating and perpetuating poverty is not yet well captured in economic thought. Accordingly, we discuss three overlapping levels of social embeddedness relevant to poverty. First, we consider the economic implications of interpersonal social networks: “social capital” as the concept has been developed and expanded by sociologists distinctly from their fellow social scientists. Next, we discuss how long-standing and ongoing cumulative social processes accentuate and accelerate the dynamics of poverty among social groups. Neighborhoods and racial groups are powerful examples of social groups where poverty dynamics are often self-reinforcing. Finally, we review how identity and culture influence economic decisions. In particular, we consider both how self-identification with social groups shapes behavioral choices and their attendant consequences, and how some social norms that constrain the choices of poor people are surprisingly resistant to change even in the face of radically altered economic circumstances.

(p. 752) 2. No Ties or Wrong Ties?

To sociologists studying poverty, interactions among individuals form the first layer of social embeddedness that influences economic outcomes. Qualitative sociologists have documented myriad ways in which interpersonal connections are used to economic ends. Like all people, poor people use their social networks to accomplish economic goals. However, their social networks yield far fewer benefits and often incur higher costs compared with the networks of the nonpoor.

Newman’s (1999) study of Harlem fast-food workers provides vivid examples of how social networks both aid and limit poor people. Her subjects used their tight networks of friends and family to obtain child care and to smooth consumption over employment spells. For job search, however, their networks mostly delivered frustration: they had many acquaintances, but few had the information or influence needed to obtain a better job. Newman’s ethnographic case study points to the complicated bridge between the social and economic spheres. On the one hand, the low-wage workers made ends meet through creative income-smoothing strategies that draw on strong social networks; on the other hand, the same networks reinforced their precarious economic status via weak links to the labor market.

Newman’s case study illustrates both the theoretical power and analytical problems associated with the concept of “social capital” because its implications partly depend on the definition used and partly on the ends for which social capital is deployed. The concept of social capital initially appeared in the economics literature but has since been more fully developed by sociologists, only to be (re)exported to economics and political science.1 Along the way, the concept has become problematic, as Newman’s case study shows. Critiques from both sociologists and economists charge that the broad application and vague definition of social capital threaten its analytical value for empirical research (Durlauf 2002; Portes 2000). Therefore, we first offer a brief summary of the evolution of the concept, and we then highlight the promises and pitfalls of social capital for the study of poverty.2

The economist Glenn Loury (1977) initially proposed the concept of social capital to explain racial income disparities. For Loury, social capital referred to individual resources that accumulate in families and are used for creating human capital through the cognitive and social development of youth and for finding jobs through social contacts (Coleman 1988: 300). The sociologist James S. Coleman (1988, 1990) amplified the concept to acknowledge a broader set of institutions within which social ties are created. Importantly, Coleman stressed that social capital is embodied in social relations between and among persons and that it facilitates instrumental social actions, including those with economic ends.

After Coleman’s elaboration, the concept of social capital witnessed a conceptual split, primarily but not exclusively along disciplinary lines (Portes 1998, 2000). (p. 753) Perhaps because of a focus on place-level outcomes and a desire for comparable universal measures, many economists, political scientists, and economic development professionals, along with some sociologists, came to treat social capital largely as a characteristic of social aggregates disassociated from any specific instrumental goal. According to a World Bank white paper (Grootaert 1998), “By definition, social capital can only be acquired by a group of people.” Outside of sociology, early empirical applications of the concept of social capital focused on its association with macroeconomic growth (Helliwell and Putnam 1995; Knack and Keefer 1997; Temple and Johnson 1998).

Conceptualized as a property of aggregates, social capital refers to the overall density of formal and informal social networks or to norms, attitudes, and institutions that reduce transaction costs or otherwise make human activities more productive by “greasing the wheels” of economic life (Fafchamps 2006; Fukuyama 2001; Knack and Keefer 1997; Putnam 2000).3 For example, in societies that have many professional organizations, new advances in business or technology can spread rapidly through social ties or institutions. Likewise, in communities where residents trust their colleagues and neighbors, formal contracts (and their associated costs) might be less common.

Viewed as a property of collectives without reference to specific instrumental goals, social capital can assume many forms, from a national legal system to bowling clubs or alumni associations, to an enormous number of banal exchanges, such as providing child care, bartering, or borrowing. Researchers concerned with social or political collectives measure social capital in numerous ways. Illustrative aggregate indicators of social capital include the density of social networks in a place; the number and levels of participation in organizations; or general levels of trust in other people or institutions as measured through surveys or behavior in games (Attanasio, Pellerano, and Polania Reyes 2009; Fukuyama 2001; Karlan 2005; Knack and Keefer 1997; Putnam 2000). From a sociological perspective, however, aggregate formulations of social capital often conflate the sources of social capital with the benefits derived from it (Portes 1998, 2000; Portes and Landolt 1996). By failing to specify the benefits obtained from social arrangements as well as the position of individuals and subgroups within the social structure, collective formulations miss the point where the study of poverty is concerned. There are abundant examples of poor places where dense social networks prevail and trust is widespread, but where returns to “social capital” are nil or arguably negative.4

For most sociologists, social capital is created by networks of individuals and has meaning only for a specific purpose. We argue that this use can potentially add value to the economic study of poverty.5 Succinctly stated, social capital is the ability of an individual to accomplish instrumental goals through the use of social contacts or, in the words of Lin (1999), “resources accessed in social networks.” Thus, the size of a person’s network, the nature of the interpersonal connections, and the potential and realized usefulness of each contact—which is largely determined by contacts’ social status and their connections—define social capital at the individual level.

(p. 754) The density of social networks may shape the aggregate manifestation of social capital (depending on how it is defined); however, it is the density of ties, the quality of those relationships, and especially a person’s ability to activate network ties in order to access a specific resource that determine the value of network social capital. Within this conceptual framework, civic organizations or a generalized atmosphere of trust may facilitate individuals’ ability to develop a social network and to leverage it for achieving instrumental goals, but they do not, ipso facto, constitute social capital because their instrumental value to the individual, and even to the group, is unclear.6

We argue that a network-based conceptualization of social capital, with its focus on instrumental value, adds more to the economic understanding of poverty compared with the formulation based on properties of social aggregates.7 Newman’s study illustrates how the network conceptualization of social capital adds clarity but also requires context. Her fast-food workers are well equipped with social ties that allow them to obtain child care or to smooth consumption, but their contacts are not well connected to the labor market—hence their relegation to low-wage, dead-end jobs. Thus, the concept of network social capital helps explain both why Newman’s subjects are poor and also why they are not even worse off.

Of course, the utility of a particular social network varies with the objective in question, but it is nevertheless possible to draw less particularistic inferences about network properties that yield analytical leverage. A few general principles of network theory provide guidance for understanding poverty through the lens of social capital. Networks with a high degree of “closure”—that is, whose contacts in turn know each other—facilitate transactions because of the rapid and reliable flow of information about opportunities and reputations. This is the property that most aggregate formulations of social capital intend to measure. Diamond traders’ ability to swap valuable goods “on a handshake” because they are tied in a network of friendship, family, religion, and intermarriage provides a classic example (Ben-Porath 1980).

Despite the importance of closure, “weak ties”—that is, connections to persons who are tied to few other persons in the subject’s network—appear more likely to provide access to nonduplicate information or resources (Granovetter 1973, 2005). Diversified nodes within a social network—that is, contacts with persons of unlike status levels, occupations, or locations—also increase the chances of accessing nonduplicate and, thus, more beneficial resources. Contacts beyond one’s own ethnic group, village, or country, for example, are likely to be especially valuable to the poor. People who bridge otherwise unconnected network clusters might extract rents from their position, as illustrated by immigrants who profit by recruiting their compatriots on behalf of their employers.

Higher-status contacts are presumed to contribute more social capital than lower-status ties, ceteris paribus, because they can deliver greater benefits for any given cost they incur in delivering assistance. This assumption finds empirical support in some quasi-experimental and observational evidence showing that people turn to their higher-status contacts for more important goals and that (p. 755) having higher-status contacts is associated with better outcomes (for reviews, see Granovetter 2005; Lin 1999). For the poor, employment is an important aspect of status, especially when it comes to job searches. Knowing employed people, whether directly or through a social connection, is critically important in order to facilitate referrals that result in job offers.

The tendency toward homophily in the formation of social groups both magnifies the (dis)advantages experienced by network members and increases the value of ties with persons in dissimilar circumstances. To wit, networks with few employed members confer limited labor market benefits to their constituents, thus raising the value of bridging connections with social groups characterized by a higher density of employed members (Montgomery 1991). Importantly for the study of poverty, employment and unemployment have a contagion effect within networked models of job search: as one member of a network becomes unemployed, the probability of unemployment increases for every other member of the network (Calvó-Armengol and Jackson 2004). This phenomenon is critical to the next section’s discussion of the role of the neighborhood in poverty.

Another crucial factor not yet well developed in the empirical literature about poverty is the willingness and ability of target contacts to assist with particular requests (Smith 2005). Whether social ties are successfully activated can depend on the cost of assistance, the perceived benefits of assistance (or consequences of nonassistance), the relative social statuses and the types of connections of the individuals involved, and the cultural norms that define the social relationships. Few economists would have difficulty formalizing perceived costs and benefits, but cultural norms pose a greater, albeit surmountable, challenge. For each person in a social network, the choice to assist or not assist any particular acquaintance can involve complex trade-offs, challenging sociologists and economists to develop better models of these cost-benefit calculations.

2.1. Social Capital and Poverty

The prior section highlighted three general characteristics of a person’s social network that can enrich their social capital: (1) connections to well-placed social contacts—that is, higher-status contacts or those that can bridge groups; (2) densely tied (closed) social networks; and (3) social ties that incur fewer reciprocal demands. To varying degrees, poor people are in worse shape on all three aspects of social capital compared with the nonpoor. The challenge for researchers is to demonstrate how social capital either facilitates exit from poverty or perpetuates it through social obligations.

Much of the qualitative sociology literature focuses on the challenges the poor face because they lack well-placed social contacts. Put simply, these studies do not claim that the poor know too few people but that they do not know the right people—that is, contacts who are well positioned to deliver information or access to jobs and other resources (Sullivan 1989). Because employment holds the key to exiting poverty, most qualitative research focuses on the job market. Not surprisingly, the (p. 756) basic insight from qualitative studies is that less-skilled workers and those living in the poorest neighborhoods rely more heavily on informal job-search methods compared with higher-skilled workers, yet their networks deliver lesser benefits (Elliott 1999). Job seekers without an adequate set of contacts express frustration at the limits this imposes, but their counterparts who know a well-positioned family member or friend may have a ticket into the labor market.

The fact that the poor have less human capital also partially explains why they have fewer useful contacts, including “weak ties,” than the nonpoor. Education, for example, not only enables individuals to amass credentials and skills, but also gives them access to a larger, better-positioned, and more diverse social network (Newman 1999). Further, the ability (or inability) to reach well-placed contacts is transmitted across generations, which may intensify gaps in human capital across racial and other groups. Mercer Sullivan’s (1989) study of youth and crime in Brooklyn, New York, illustrates the power of social ties to rescue delinquent youth by securing legitimate employment through parental ties. The divergent destinies of black (African-American), Hispanic, and white youth in this study reflect the strength and breadth of their parents’ social networks, which facilitated a legitimate job for a white youth when he came of age, but not for his minority friends.

The extensive qualitative research on the importance of well-placed social contacts and poverty is supplemented by a smaller quantitative literature on social capital and employment, but with little focus on the poor. Both in North America and Europe, many studies that use cross-sectional data find an association between the social statuses of a person’s social contacts and their occupation or wages (see Lin 1999 for a review). Studies that attempt to quantify resources actually assessed through networks have begun to portray how race, ethnicity, and social class shape those networks and the benefits they deliver. For example, using a phone survey designed to measure social capital in networks, McDonald, Lin, and Ao (2009) study the association between the characteristics of a person’s social network and information received about job openings. They find that women and minorities receive fewer job leads than white males with a similar job status and other relevant market attributes. Persons with more white males or higher-status contacts in their networks gain a greater number of job contacts. This finding begs the question of how women and minorities can include higher-status contacts in their networks, however.

Although the study of social networks and economic outcomes is largely based on North American evidence, there have been several extensions to Europe, China, and elsewhere, and to situations beyond the job search. Goldstein and Udry (2008) show that plots owned by women in rural Ghana are less productive largely because of the women’s more tenuous ties to male village leaders combined with insecure property rights for all plotholders. Men, especially if strongly tied to village leaders, can let their land lie fallow without fear of losing it. This practice gives them a productivity boost in comparison to women, who must constantly cultivate land or risk losing it.

(p. 757) International migration—which might be regarded as an extraordinary case of job search—provides clear evidence of returns to social capital. Not only do social networks facilitate international migration and determine who migrates to particular destinations, but there also is convincing evidence that Mexico-to-US migrants with larger social networks earn higher wages as a result (Aguilera and Massey 2003; Munshi 2003). Still, there is ample room for economists to clarify whether migrant networks render labor markets more efficient by connecting workers to areas with labor shortages, or whether—and under what conditions—they produce labor market distortions via information lags about rising unemployment or institutional changes that discourage employers from hiring the native born.

The density of network ties—closure—is another aspect of social capital that is associated with economic well-being. To be clear, sociologists have not argued that sparse social networks cause poverty, but the density of a network influences how effectively people cope with low incomes and, importantly, their capacity to exit poverty. For various settings, qualitative studies provide rich evidence that poor people with dense kin and friend networks rely on them to make ends meet; to bridge credit constraints; to diversify income sources; and to smooth consumption (Edin and Lein 1997; Newman 1999). Poor people also develop institutions that legitimate activation of their proximate and distal ties. The traditions of designating “godparents” with obligations for ceremonial functions8 or the establishment of informal rotating credit and savings associations are examples of the intentional strengthening of network ties.9

Whether social networks are open or closed partly depends on instrumental ends and membership costs. For example, Rauch’s (2001) study of black entrepreneurs revealed a troublesome paradox: If recent immigrants to the United States can succeed as owners of small businesses, why are native-born blacks less able to do so? This puzzle is all the more troubling because residentially segregated neighborhoods provide “natural markets” for retail goods, and black natives do not confront the language barriers faced by recent immigrants from Asia and Latin America. Rauch’s fieldwork revealed that, compared with recent immigrants, the black entrepreneurs he studied had thinner business networks; that their contacts were less willing to share information about their buyers and other wholesalers (for fear of own-group competition); and that they were less inclined to formalize business associations that require membership dues even though the benefits of such organizations not only would consolidate their social ties, but also potentially improve their revenues. In short, Caribbean and Korean immigrants used ethnicity as a currency to maximize market linkages, but blacks were hurt by their failure to use race as a conduit to retail markets. Rauch proposed creation of commercial intermediaries as functional substitutes for economic functions that informal ethnic networks serve in immigrant communities.

The idea that a dense network of entrepreneurs aids economic activity is not controversial; however, there is less consensus about why some racial and ethnic groups have more dense business networks than others. For one, as the black/immigrant case shows, the nature of social contacts matters more than the number (p. 758) of ties: a higher proportion of the relatively small population of Korean immigrants that Rauch studies are entrepreneurs, so the average Korean is more likely to have other entrepreneurs in her network of contacts simply by chance, and these entrepreneurs are more likely, in turn, to be tied to other entrepreneurs. Shared experiences, connections with common suppliers or buyers, and cultural barriers also may promote cohesion among business owners who otherwise might become competitors. For example, immigrant retailers often share ties to the same importers and face a common language barrier. Finally, entry into immigrant social networks is controlled, to some degree, by immigration restrictions that may limit reciprocal demands and free-ridership. Indeed, Rauch (2001) describes the efforts of a Caribbean immigrants’ business association to balance the benefits and costs of expanded membership as African Americans with weaker ties to the Caribbean joined.

The demands of social networks are a third feature that can help explain why the poor may benefit less from their social ties: the people they know are more likely to be poor because they, too, live in poor neighborhoods or villages, come from poor families, or are members of poor ethnic, racial, or religious groups. Thus, the poor—and especially the near-poor—may face reciprocal demands that are more costly in both absolute and relative terms compared with the wealthy. Moreover, the demands of reciprocity may strain resources and raise competition with others attempting to derive benefits from members of their social network. Severance of ties is a potential solution to avoid costly reciprocal demands, but this response also carries social and cultural penalties. In explaining why some groups are more successful in their economic pursuits, Granovetter (1995) speculates that immigrant groups may have the right balance of durability and “decoupling” of social ties to achieve economic objectives. In fact, Chiteji and Hamilton (2002) claim that economic obligations imposed by immediate family exacerbate the black/white wealth gap in the United States; the demands made by more distant relations and friends may yet be shown to produce similar burdens.

Smith (2005) describes how black low-wage workers face numerous requests for job referrals and carefully weigh how making a recommendation will impact their own workplace reputations. Workers living in the poorest neighborhoods were considerably more guarded in providing referrals than respondents from working-class neighborhoods. It is unclear whether this self-selection process improves the employment prospects of low-skill workers, however. Selective referrals may benefit the most productive job seekers from poor neighborhoods by helping them overcome statistical discrimination. The reluctance of residents of poor places to refer their friends, however, might simply reinforce discrimination based on race and neighborhood.

Reciprocal obligations also may weaken social networks. Judging that relentless demands from friends and relatives will outweigh any possible future benefits, Newman (1999) documents how some poor seek work far from their neighborhoods in order to discourage peers from requesting favors at their workplaces, as well as other instances where working families relocate to escape their social (p. 759) network obligations. Portes and Landolt (1996) discuss a case in the Andean highlands where social ties were largely coincident with Catholic Church membership, which implied demands from both the church and many of its members. Religious conversion to an Evangelical church provided an escape from burdens of reciprocity. To date, empirical support for claims about how poor people strategically expand or narrow their social networks in order to achieve instrumental goals largely consists of qualitative evidence. This leaves ample opportunities for economists to formalize and rigorously verify the empirical regularities documented by qualitative researchers.

2.2. Social Capital in the Economic Understanding of Poverty

What should economists do with social capital theory, given that sociologists are still at work defining many of its aspects? One way that economists can incorporate insights from qualitative research to advance the understanding of poverty is to consider how poor people use social networks to achieve instrumental economic goals. This is a tall order that requires avoiding one-size aggregate indicators and developing outcome-specific, relationship-oriented measures. The opening anecdote based on Newman (1999), about the fast-food worker with strong networks containing other poor people but few contacts to potential employers, illustrates the need for context-sensitive measures of social capital.

Incorporating social capital into quantitative social science will require different approaches to data collection. Recent survey work has tended to emphasize the institutional and norms-grounded concepts of social capital. For example, the World Bank’s Social Capital Assessment Tool contains several instruments designed to measure levels of trust and cooperation. A typical question in this vein is “If a community project does not directly benefit your neighbor but has benefits for others in the village/neighborhood, then do you think your neighbor would contribute time for this project?” (World Bank n.d.) Such questions are interesting, but they do not measure social capital as discussed above.

Instead, the measurement of network social capital requires information both about the existence of individuals’ social connections and also the utility of each, which is a complex exercise. At its heart, a social capital–oriented instrument should measure respondents’ ability to use their social environments to realize relevant goals. A different item in the Bank’s social capital–assessment tool provides an example of a question that could be used to measure social access to a specific resource: “If you suddenly had to go away for a day or two, whom could you count on to take care of your children?”

“Position-generator” instruments can be used to query survey respondents about whether they or someone they know has any ties with persons in particular positions, with particular credentials or of a particular social status. Lin (1999) discusses these and other appropriate survey instruments. In all cases, investigation (p. 760) of social capital requires that researchers make realistic assumptions about what types of contacts may be useful to poor persons to achieve specific goals.

In their study of pineapple farmers in Ghana, Conley and Udry (2010) ask respondents about whether they have sought farming advice from seven randomly selected members of their survey roster. The survey question itself is thus solidly grounded in the instrumental value of the connection and allows the researchers to map actual social networks. These economists monitor changes in fertilizer use over time to demonstrate the spread of innovation through the village networks. In so doing, they demonstrate that farmers’ social ties precede in time the benefit they deliver, overcoming one of the formidable empirical obstacles in the study of networked social capital. Their data collection approach is promising but probably practical only in smaller communities with relatively dense social ties.

For poverty researchers, the broader lesson from the study of Ghanaian farmers derives from the focus on the instrumental value of specific interpersonal ties; such precision demands much more data and theoretical specificity from both researchers and the practitioners compared with aggregate concepts of social capital. Unlike human capital, the networked version of social capital is unlikely to yield near-universal measures. Despite its heavier data and theory demands, the networked formulation of social capital has begun to yield new insights about living in poverty, such as the study of microfinance (Karlan 2007). The examples we have given here might inspire economists to study social networks more deeply in a broad array of settings.

3. Poverty as a Cumulative Process

Social-capital endowments of individuals are associated with membership in social groups, which represent a wide range of experiences and constitute a key unit of analysis for sociological approaches to poverty. Compared with economists, sociologists ascribe greater importance to class divisions rooted in geographic, racial, and gender inequality, and they are more likely to view economic disadvantage (or advantage) as a status that accumulates among both groups and individuals. As a result, sociologists consider both group and individual attributes and dynamics extensively in order to understand the causes and consequences of poverty.

The overlap between neighborhood and racial groups in the United States triggered a flurry of research to evaluate the role of place in perpetuating poverty. William Julius Wilson’s studies (1987, 1997) of the black American ghetto redirected social scientists’ attention to the cumulative effects of social exclusion in both concentrating and perpetuating poverty. In brief, he argued that deindustrialization of northern cities, where blacks once held jobs that paid family wages, was the driving force behind the re-emergence of concentrated urban poverty during the (p. 761) 1970s and 1980s—a period generally characterized by rising wage inequality in the United States (Danziger and Gottschalk 1997; Levy 1998).

By themselves, job losses do not produce social exclusion, even in the context of a major transformation in the industrial composition of employment away from manufacturing toward service jobs. Rather, exclusion requires blocked access of displaced workers to emerging jobs in local labor markets. Massive manufacturing job losses combined with an expansion of suburban service jobs spawned the “spatial mismatch hypothesis,” which attempts to address the emergence of pervasive inner-city joblessness by showing how the industrial transformation of employment disrupted the geographic balance of labor supply and demand. First proposed by the economist John F. Kain (1968) to explain high black urban unemployment, this idea was revived during the 1980s by Kasarda (1985, 1988) and others to explain how the demise of manufacturing jobs gave rise to concentrated joblessness. Commuting costs, imperfect information about new job opportunities, and job-search costs all contributed to the high joblessness of displaced inner-city workers, they but did not address why joblessness became increasingly concentrated.10

Wilson drew on the core tenets of the spatial mismatch hypothesis to argue that concentrated joblessness produced a spiral of neighborhood demise that accentuated social dislocations in urban ghettos in Chicago, which others (e.g., Bane and Jargowsky 1990; Jargowsky 1997) applied to urban metropolises across the United States. Specifically, Wilson claimed that the exodus of working-class white and middle-class black families from ethnically and racially mixed neighborhoods was responsible for the spatial concentration of urban poverty.11 The expansion of large public housing complexes, which were attractive to poor minority families with limited options in the open housing market, reinforced the spatial concentration of urban poverty. Massey and Denton (1993) fleshed out the mechanisms of Wilson’s narrative by documenting how restrictive real estate covenants and redlining practices spatially “contained” the black population in northern inner cities, explaining why poor blacks are less likely than other groups to exit economically declining neighborhoods.

Once begun, the cycle of urban decay triggered by the exodus of working-class and middle-class families undermines the consumer base of local businesses and erodes local institutions, such as churches, schools, and youth facilities, that facilitate the creation of social capital. These cumulative, self-reinforcing processes not only accentuate economic disadvantages, but also change the very character of the neighborhoods in which future generations develop. Over time, the process of ghetto formation becomes self-perpetuating because employers use neighborhood residence (signaled by address) along with physical traits to profile and reject ghetto job applicants (Holzer 1996; Kirschenman and Neckerman 1991). To justify their decisions, employers claim that, compared with applicants from working-class neighborhoods, ghetto residents are less punctual (partly due to long commutes on public transportation); have inferior literacy and workplace skills; and are more likely to have criminal records.

(p. 762) Young people reared in ghetto neighborhoods also have difficulty attaining the social prerequisites for marriage—a steady job and minimal savings. With sparse role models displaying mainstream behavior, the young lack incentives to complete schooling and to defer childbearing (Tienda and Stier 1991). Wilson and Neckerman (1986) argue that chronic joblessness and high male incarceration rates produce a shortage of “marriageable men,” which, combined with the lack of working role models and high rates of school failure, perpetuates high rates of single motherhood. To be fair, economists have acknowledged the possibility that social disorder can be contagious (e.g., Case and Katz 1991). The degree to which such processes build momentum, are transmitted across generations, and become self-reinforcing is arguably underappreciated, however.

Wilson’s approach to explaining the process of neighborhood decline emphasized the structural underpinnings of concentrated poverty both to distance his argument from the culture of poverty hypotheses that became popular during the 1960s (Lewis 1959, 1966) and to avoid blaming the poor for their economic plight. Importantly, Wilson (1987) and others argued that residents of the ghetto value stable employment and normative lifestyles, a claim that has been reiterated by numerous qualitative researchers (e.g., Edin and Lein 1997).12 In this structural perspective on poverty, pervasive inner-city joblessness and deviant behavior result not from a crisis of values but from rational choices among extremely bad options for earning a livelihood and responses to the other incentives present in the ghetto environment.

Although social scientists in the United States have used neighborhoods as a spatial unit to document the mechanisms of cumulative causation discussed here, similar analyses of poverty in other countries and for social groups defined by nongeographic boundaries are likely to generate new insights about the social forces that perpetuate poverty. For example, slums and villages in many developing countries and marginalized suburbs in Western European countries offer some parallels with Wilson’s narrative about ghetto poverty: a selective migration process that concentrates the poor geographically and isolates them from wage employment; weakened social network connections to formal markets and pro-social institutions; employer discrimination against job applicants based on residence; reliance on informal employment for income generation; and the cyclic compounding of these processes over time and across generations. Insecure legal recognition for land titles, poor infrastructure, and other elements of disadvantage not found in North America may add to these self-reinforcing mechanisms, inviting the participation of economists specializing in growth into the new socioeconomics of poverty.

3.1. Evidence for Poverty as Cumulative Process and the Limits of Economic Thought

Wilson’s and many other sociologists’ theories of urban poverty hinge in part on neighborhood effects, which can be defined as the mutual dependence of one person’s circumstances on that of her social peers or geographic neighbors. This (p. 763) basic concept, with its easy generalizability to social groups defined by nonspatial attributes, inspired a number of studies both by sociologists and economists that assessed how proximate social contexts, particularly neighborhoods, influence individual behavior. Clarity about what constitutes a neighborhood effect remained ambiguous because few analysts theorized causal mechanisms that influence specific behaviors, distinguished between contextual and ecological attributes hypothesized to produce particular behavioral outcomes, or considered the time frame in which impacts would be expected to emerge (Jencks and Mayer 1990; Tienda 1991). Mechanisms alleged to produce neighborhood effects include contagion (the influence of peers); socialization (learning social norms and internalizing cultural values from leaders, adults, and other role models); and institutional influences (the promotion of behaviors through organizations) (Crane 1991; Jencks and Mayer 1990).13 All of these mechanisms require social interactions, which empirical research about neighborhood effects seldom portrays except as qualitative case narratives that are not subject to rigorous empirical verification. Furthermore, researchers making claims about place effects on behaviors associated with syndromes of social exclusion seldom indicate the conditions under which spatial contiguity is either necessary or sufficient for negative externalities to emerge. Another legitimate criticism is that much of the literature claiming the existence of neighborhood effects lacks direct measures of social interaction and ignores the existence of externalities. Rectifying this omission will likely require genuine collaboration between economists and sociologists.

Economists have articulated the identifying assumptions needed to estimate neighborhood effects and, unlike sociologists, made considerable progress toward estimating the magnitude of neighborhood effects while also controlling for selection into neighborhoods and identifying confounding events. Importantly, economic studies about place effects on poverty-linked behaviors find mixed evidence for crime, hours worked, and other outcomes (Weinberg, Reagan, and Yankow 2004). Magnuson and Votruba-Drzal (2009) claim that deep, protracted, and early exposure to poverty is associated with poor scholastic achievement, but there is less agreement about other child development outcomes because of the variation in study designs and ages of children studied (Duncan and Brooks-Gunn 1997). Although there is emerging consensus that child poverty is associated with many deleterious health and social outcomes, including the likelihood of becoming a poor adult, it is still unclear whether it is poverty per se, socialization in contexts of extreme deprivation, or the length of exposure to poverty during sensitive developmental periods that drive the worsened adult outcomes of youth raised in poverty.

This circumstance leaves ample empirical terrain for economists to explain whether and how neighborhood context influences the life chances of the poorest poor. Much effort has been expended to separate “real” neighborhood effects from the sorting processes that undergird the spatial distribution of poverty. From a sociological perspective, however, these sorting processes are part of the very process of social exclusion, not simply a confounding variable. Moreover, the story that Wilson and others (Massey and Denton 1993) tell claims that neighborhoods (p. 764) impact their residents in ways that transcend specific outcomes studied piecemeal by empirical researchers. For example, in Wilson’s accounts, selection into and out of neighborhoods is simultaneously an inconvenient confounding variable, a central driver of social change, and an explanation for the increasing geographic concentration of poverty in America since World War II (Sampson, Morenoff, and Gannon-Rowley 2002). Therefore, it behooves empirical analysts to address the selection regime focusing not only on who leaves, but also who stays, for how long, and why (Tienda 1991). Tiebout’s (1956) public choice model and its descendants (e.g., Bénabou 1993) provide a starting point but could benefit from modifying their assumptions based on sociological evidence about the constraints on mobility and information flows imposed by social networks.

The empirical study of poor people and poor places provides numerous examples illustrating differences in how social scientists approach poverty, and this suggests rich opportunities for economists to build on existing findings. One of the most promising efforts to measure neighborhood effects on employment, delinquency, and other outcomes through policy interventions resulted from legal actions against the Chicago Housing Authority (CHA) and the US Department of Housing and Urban Development (HUD), alleging deliberate segregation via assignments of tenants to buildings. Designed as a partial remedy for prior discriminatory actions, the Gatreaux program sought to resettle some 7,000 black families in mixed-race neighborhoods throughout the Chicago metropolitan area by offering volunteers rent subsidies and assistance in moving to majority-white neighborhoods. Evaluations of the unprecedented experiment found that participant families who relocated had better economic and educational outcomes than their peers who did not move; over time, participants appeared to be socially integrated within their new neighborhoods (J. E. Rosenbaum et al. 1991; E. Rosenbaum and Schill 1999; Rubinowitz and J. E. Rosenbaum 2002).14

HUD was encouraged by the apparent success of Chicago’s Gatreaux program, despite initial skepticism and early incidents of racial discrimination. Critics alleged that success was due to the program’s voluntary aspect, which introduced formidable selection biases in the evaluation. In response, HUD initiated “Moving to Opportunity” (MTO), a multicity program that offered poor inner-city public-housing residents assistance in locating to low-poverty neighborhoods. In this case, however, movers were randomly selected from volunteer families. Assessments of the MTO experiment found significant short-term improvements in mental health, physical health, educational progress, and arrest rates for some groups of participants, but also evidence that initial benefits faded over time. Specifically, few economic outcomes showed improvement seven years later, and for young males offered housing in better neighborhoods, arrest rates, physical health, and education measures actually worsened (Goering and Feins 2003; Kling, Liebman, and Katz 2007; Ludwig et al. 2008). Not all analysts of the data agreed that MTO failed to support the importance of neighborhood effects, however. Clampet-Lundquist and Massey (2008) found that outcomes depended on what types of neighborhoods the members of the treatment group chose to move to and (p. 765) that longer exposure to nonpoor, racially integrated neighborhoods was associated with better employment outcomes.

The MTO experiment sparked a vigorous debate over analytic techniques and the external validity of an experiment based on a small and extremely disadvantaged target population (Clampet-Lundquist and Massey 2008; Ludwig et al. 2008; Sampson 2008; Briggs, Popkin and Goering 2010). Only about half of participants in the treatment group accepted the offer of relocation, and many of these movers subsequently relocated to poorer neighborhoods (Clampet-Lundquist and Massey 2008). Although participants reported that their social networks included more middle-class, white, and employed people after moving, these contacts were not helpful in securing better jobs—an observation that has implications for the limits of social capital for pursuing economic ends and should be used to refine future theoretical formulations of the construct (Ludwig et al. 2008).

The MTO experiment left some sociologists dissatisfied because it seemed to have ignored some of their basic insights about neighborhood effects. The impact of poor neighborhoods on poor people, as Wilson and others conceptualized it, resulted from the impoverished social networks of the poor, which compound their disadvantages over generations, including their lack of awareness of opportunities and prerequisites for employment. Why should the simple act of moving to a different neighborhood improve job prospects, for example, especially if this move ocurred at the expense of severed social networks? Is seven years a sufficient amount of time to recreate social networks and to build trust with neighbors, especially if relocation imposes new barriers of race and class?

In short, the MTO experiment tested the effects of a specific intervention, namely relocation to a less poor environment, but had less to say about the larger, cumulative poverty-inducing mechanisms that Wilson and others claim hampered exits out of poverty for residents of concentrated poverty neighborhoods. At the expense of some benefits of random assignment, a reanalysis of subgroups of the MTO population sought to clarify why the relocation intervention did not produce the expected results. Rather than simply rule MTO as a failed experiment in poverty reduction, Clampet-Lundquist and Massey (2008) sought to understand who might have benefited and who may have not, and why. A simple comparison of the treatment and comparison group could not be expected to show how the social networks forged by individuals and families are embedded in their neighborhoods, how they are fortified over generations, under what conditions families are willing to sever their social ties for uncertain economic mobility, and which residents of poor neighborhoods are best positioned to exit poverty via geographic mobility.

In some ways this example illustrates why economists may be in over their heads as viewed from outside the discipline—at least in their approach to concentrated poverty. The need to quantitatively establish causal inference arguably encourages empirical economists to look at social mechanisms in isolation and to consider relatively limited spans of time—especially given the current popularity of experimental methods. Sociologists’ more flexible standards of evidence and use of qualitative methods give them more freedom to expand the time horizons (p. 766) of their study and to consider the cumulative and multiplicative effects of many simultaneous social processes. At the same time, many of the ideas we have outlined still beg for formalization and empirical evaluation in their full complexity, which is well within the scope of applied economics.

4. Durable Social Structures in a Flexible Economic World

Preferences are the key building blocks of microeconomics, but economists know fairly little about how they arise and change. As a result, some behavior by the poor remains puzzling. Why do poor (and nonpoor) people fail to open bank accounts or save, even when they express a desire to do so and would clearly benefit? Why are poor women more likely to bear children out of wedlock compared with less poor women? Why do poor people respond to some economic incentives and not others?

In order to gain traction on these and similar questions, we consider two aspects of social relations that are internal to individuals but are properties of collectivities: group identity and culture. For many sociologists, culture—the values, knowledge, and attitudes shared by a group—is a fundamental starting point for understanding individual preferences and how individuals gather and interpret information. Identity, in this case, refers to a person’s self-conception as a member of a particular group.

As analytic tools, both culture and identity fell out of favor with sociologists studying poverty, but they have recently enjoyed rekindled interest (Small, Harding, and Lamont 2010). In part, sociologists were reluctant to study culture in relation to poverty because of the exaggerated, misused, and distorted claims about the “culture of poverty” in American politics and the popular media since the intellectual birth of this concept in the 1960s (Lewis 1959; Moynihan 1965). The notion that the poor possess a distinct, defective “culture of poverty” also rang false to many ethnographers, who argued that even the most economically disadvantaged profess mainstream values and often go to extraordinary lengths to uphold them (Edin and Lein 1997; Newman 1999; Newman and Massengill 2006; Small and Newman 2001).

In recent years, there has been a revival of sociological interest in culture and poverty, but with a more nuanced understanding about the myriad ways that culture and persistent poverty are interlinked. Although Wilson sought to distance his structural explanation of concentrated poverty from the original culture of poverty thesis that blamed the poor for their plight, in recent work (Wilson 2010) even he conceded that it is difficult to separate culture and enduring poverty. Presumably, any role that culture plays in maintaining poverty is secondary to structural forces. Empirical evidence, ranging from richly textured qualitative (p. 767) studies (Edin and Lein 1997) to field experiments (Goering and Feins 2003; Kling et al. 2007; Ludwig et al. 2008; J. E. Rosenbaum 1995) and mixed methods studies (Newman and Massengill 2006; Wilson 2010), has not given sociologists a clear picture of the role of culture in poverty.

Empirical research faces several formidable challenges. The biggest revolves around specifying what aspects of culture are relevant to understanding poverty. A related difficulty is operational—how are researchers to measure culture and what are the relevant units for measurement? Cultural change cannot be tracked until it can be measured. Some researchers manage imprecision by narrowing the scope of inquiry and focusing on specific problems. For example, sociologists addressing academic underperformance and social maladjustment among economically disadvantaged youth theorized that minority, and especially black, students perceive overwhelming barriers to their scholastic and economic success (Fordham and Ogbu 1986; Massey and Denton 1993). Fordham and Ogbu (1986) suggested that children adopt an “oppositional culture” to distance themselves from white, mainstream values. By identifying with this alternative value system, minority youth presumably avoid the disappointment and frustration of failure according to mainstream metrics. This hypothesis has not found widespread empirical support (Harris 2006) but provides an excellent example of cultural approach to poverty that defines specific mechanisms. Fordham and Ogbu’s cultural explanation of academic underperformance was rooted in structural processes and avoided the larger (and largely unsupported) claim about the existence of a widespread, problematic ghetto culture.

Even culture-based theory must generate testable hypotheses that meet social science standards of external and internal validity. Social identity theory is one example of a culturally grounded approach with strong potential to generate testable hypotheses. It proposes that each person maintains psychological membership in a number of nonexclusive groups (e.g., nationalities, racial/ethnic groups, neighborhoods, religions) whose claimed characteristics or beliefs have been learned over time (Hogg, Terry, and White 1995; Howard 2000; Owens, Robinson, and Smith-Lovin 2010). Importantly, this theoretical perspective claims that self-identification with social groups shifts frequently in response to specific social contexts and cues. Thus, one woman might self-identify as Latina in a room full of non-Hispanic whites, but she may consider herself as a Colombian American in a room of Hispanics or as a lawyer in a room of Colombian Americans. This simplified description of social identity theory is only one of several social science perspectives about identity formation and group membership, but its central insight provides a crucial tool for the sociological study of poverty: People’s identity, and thus to some extent their psychological state, changes in response to signals from their social context and especially in response to other actors.

Led by Akerlof and Kranton (2000, 2002, 2005), economists have made limited but important incursions into culture and identity, which has been used in economic models of behavior without being explicitly labeled as such. For example, Fryer and Torelli (2005) examine the friendship penalty incurred by students as their grades rise. For blacks, but not whites, high achievement comes at the cost (p. 768) of fewer friends—an effect the authors describe as a penalty for “acting white.” In schools with majority-black student bodies, however, this penalty is not observed, which they interpret as contradicting the “oppositional culture” hypothesis. This evidence of behavior shifting according to social context in their two-group signaling model is consistent with social identity theory.

There is also a growing body of evidence that identity can affect cognitive performance. “Stereotype threat”—the premise that American blacks perform more poorly on standardized achievement tests because of psychological pressure from negative cultural images about blacks’ intelligence—is a powerful example. Multiple experiments show that receiving cues reminding them how standardized tests are used to evaluate intelligence caused underperformance for black students but not for white students; the cue presumably activated a stereotype that blacks are less intelligent than whites in the minds of the black students (Steele and Aronson 1995, 2004). Other work attributes part of black-white performance gaps in education to stereotype threat, including evidence of racial disassociation by high-performing minority students and instances where minorities avoided challenges that were within their ability (Aronson 2004; Charles et al. 2009; Massey et al. 2003).

The growing body of empirical research about stereotype threat in the context of academic performance suggests that this cognitive mechanism may operate in other spheres, such as jobs, sports, economic decision making, and the armed services, and it could even apply to gender stereotypes about aptitudes in math and science. Research about identity and stereotype threat points to other factors that can be manipulated to improve performance or participation in various spheres of economic life. For example, according to Aronson (2004), teaching children that intelligence is malleable—as opposed to a fixed aspect of group identity—or educating them about stereotype threat can improve academic performance. The same principle could apply in other areas of life: marketing financial products to the poor in ways that help them to identify as members of an empowered group might improve savings account take-up rates, for example. Identification with social groups thus might join the list of psychological deterrents and incentives that behavioral economists have tested and policy makers are using to craft pro-poor programs and policies (Bertrand et al. 2004).

Identity may be flexible, but the other values, beliefs, and practices that make up culture can impose strong inertia that prevents functional adaptation at a pace commensurate with economic change. One case where sociologists find powerful cultural inertia is the drastic (but narrowing) differences in marriage rates across races and levels of education in the United States. From 1997 to 2001, 68 percent of black women giving birth were unmarried, versus 21 percent of non-Hispanic whites. Forty-three percent of women with only a high school education were unmarried when they gave birth compared with 7 percent of women with a college degree (Kennedy and Bumpass 2008). This differential is potentially problematic given the association observed between growing up with an unmarried or absent father and subsequent poor health, educational, and social outcomes (McLanahan and Percheski 2008).

(p. 769) The marriage disincentives allegedly created by social welfare benefits have received extensive investigation. Despite the prominence of this issue in political debates, there is little evidence that welfare policy explains a large portion of nonmarital childrearing among the poor (Moffitt 1998). Sociologists and economists have developed the promising concept of “marriage markets,” modeling marriage decisions as a function of the stock and quality of available, socially relevant partners as well as various returns to marriage. These analysts ascribe differentials in US marriage rates to rising income inequality among men and high incarceration rates for black men (Gould and Paserman 2003; Loughran 2002). Of course, many other factors are involved, as described by researchers who document the behavioral implications of marriage from a cultural perspective (Edin and Kefalas 2007).

Economists have paid relatively little attention to another economic barrier to marriage, namely the perception that, as a condition for marriage, prospective mates must secure steady jobs and accumulate a minimum of savings, in addition to a loving relationship. Wealth, even more than income, has been shown to be a key predictor of the decision to marry in America. Because blacks have lower wealth than whites with similar income and education, a substantial portion of the black-white marriage gap appears to result from a wealth gap (Schneider 2011). This evidence suggests that for the poor as well as for other Americans, marriage is highly valued but has become a deeply felt aspiration rather than a social obligation (Cherlin 2004). Motherhood, by comparison, is not viewed as a luxury but rather as a source of valuable identity (Edin and Kefalas 2007). Thus, the combination of mainstream values and restricted ability to accumulate wealth for men, especially for black men, largely explains low marriage rates among the poor as well as racial gaps in marriage rates (McLanahan and Percheski 2008; Oppenheimer 1994; Watson and McLanahan 2009).

This evidence for a marriage bar has implications for public-policy interventions intended to promote marriage. Rather than focusing on improving the economic returns to marriage, interventions that instead help young people establish wealth and achieve steady employment could both directly boost them over the marriage bar and also out of poverty. This argument reverses the political arguments that the culture of poverty (allegedly stoked by social welfare programs) is the reason that the poor undervalue marriage and stable families. What is perhaps even more remarkable, however, is the durability of these mainstream cultural values in the face of long-standing shifts in the economy and society.

Although this illustration applies to the United States, other examples of socially determined behavior relevant to poverty abound in the developing world. For example, building on ethnographic evidence about expensive burial ceremonies, Case and colleagues (2008) empirically document and model the burdensome expenditures South that African households incur for funerals. Spending on funerals averaged ten times the median monthly per capita income for black South Africans. The mean age at death in their study population was 38 years, implying that the financial burden of funerals has grown enormously as a result of the AIDS epidemic and may already be a nonnegligible hindrance to economic (p. 770) growth, adding another dimension to the epidemic’s tragic effects. The epidemiological and economic reality has changed; culturally defined expectations and rituals about life and death have not.

The “stickiness” of cultural practices poses a challenge to economic models and concepts of equilibrium states. In both the marriage and funeral cases, there is little reason to believe that people are not well informed about their economic and social circumstances. It is unclear whether, when, and how rapidly South African families will cut back on funeral costs or poor American women will adapt their choices about marriage and childbearing. Establishing generalized theories of the point at which cultural values and behaviors change, and the mechanisms through which they do so, will require concerted effort by sociologists and economists.

The fertility transition provides another case where social change is an important omitted variable. Neither epidemiological nor economic changes nor changes in the availability of contraception adequately explain the timing of the decline in family sizes internationally (Bongaarts and Watkins 1996). Considering links of geography, language, and cultural norms is essential to generate satisfactory empirical explanations of cross-national variation in fertility decline. In this instance, both information about family planning and social approval of the practice of regulating fertility are necessary to bring about changes in behavior (Kohler, Behrman, and Watkins 2001). Thus, information about sources and content of messages received from social elites and the media can strengthen the predictive power of economic models about changes in reproductive behavior. Social networks, by transmitting information and new examples of what constitutes normative behavior, also play a key role in shifts in cultural norms, bringing our chapter full circle by tying the cultural to the behavioral.

5. In Over Their Heads, Crippled by Rigor, or Neither?

We have highlighted here three general ways in which sociological theories can supplement conventional economic understandings of poverty. We argue that social capital as created by interpersonal networks is a key asset, along with human capital and financial capital, and that it determines the economic success of individuals and groups. Building on insights about the creation and deployment of social capital for instrumental goals, the concentration of poverty in specific neighborhoods and in specific racial and ethnic groups partly results from self-reinforcing and cumulative social processes that erode social connections to formal employment. Finally, identification with social groups and adherence to cultural norms appear to explain economic behaviors to an extent that might surprise many economists.

Economists are already hard at work testing, incorporating, and building on many of the sociological insights that we discuss. Still, there remain many useful (p. 771) distinctions between economic and sociological approaches to poverty that can be productively bridged in future research. Sociologists deservedly admire the commitment of the dismal science to rigorous causal inference and economists’ ability to generate and test policy prescriptions. These virtues create limitations, however: the need to conclusively establish causal impacts empirically often results in piecemeal examination of social processes over short durations in order to mitigate selection, omitted variables, and other biases. In sociological analyses of poverty, particularly those grounded in social embeddedness, sorting and participation in social networks play key roles explaining the causes and perpetuation of poverty over lifetimes and across generations. Furthermore, given the complexity of social relations and the durability of cultural practices even after economic incentives have been changed, sociologists are arguably more skeptical about the generalizability of one-size-fits-all policy prescriptions.

The challenge going forward is to turn sociologic insights into more rigorous empirical tests and appropriately tailored policy interventions. Economists have documented how people respond to information in various spheres of life and how information spreads through networks (e.g., Conley and Udry 2010); establishing who is left out of these networks and whether they can be included in a meaningful way through policy changes might be a natural next step. The failure of moving poor people out of poor neighborhoods to solve persistent poverty does not, in itself, refute the existence of “neighborhood effects.” More holistic interventions that build on, rather than erode, existing social ties might prove more successful in reducing persistent poverty. Furthermore, given the importance of context and cues in activating identity, understanding the exchange value of group identity could be fertile ground for behavioral economists to develop and test new ideas about poverty reduction. Finally, the durability of cultural practices is a lurking source of unintended consequences resulting from policy prescriptions.

These suggestions are illustrative of the frontiers where modern economic researchers might redirect the economics of poverty agenda, but they also indicate potential pitfalls for practitioners who are unaware of the limits of economic thought. Our reading of the evidence is that economists are in no way “in over their heads” when it comes to poverty. On the contrary, the work we highlighted is testament to the willingness of economists to allow insights from outside their field to guide their intuitions; to make sociological theories more rigorous; and, consequently, to render economic models of rational behavior that are more nuanced and realistic.


We thank Dean Spears, Daniel Schneider, and Philip Jefferson for their helpful feedback on early drafts of this chapter.


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                                                                                                                                                                                                                      (1.) Portes (1998) describes the concept of social capital as one of sociology’s most successful “exports.”

                                                                                                                                                                                                                      (2.) For a history of the concept of social capital in sociology, see Portes (1998).

                                                                                                                                                                                                                      (3.) Fukuyama (2001) defines social capital as an “instantiated informal norm that promotes co-operation between two or more individuals.”

                                                                                                                                                                                                                      (4.) The theoretical problems with social capital as an aggregate are matched by practical problems: models that use aggregate measures of social capital as predictor variables often present identification problems that are arguably more difficult to resolve than the already substantial difficulties with models that use individual-level data (Durlauf 2002).

                                                                                                                                                                                                                      (5.) A few economists have used the concept of social capital as an individual attribute, although not always consistently. For example, Glaeser and associates (2002) define social capital as something that a person can invest in, a social side of human capital: “social characteristics—including social skills, charisma, and the size of his Rolodex.” Even this definition, which views social capital as something akin to a social aspect of human capital, is problematic in conflating human capital with social capital. As Coleman (1990) explains, the hierarchy of tangibility, “Physical capital is wholly tangible, being embodied in observable material form; human capital is less tangible, being embodied in the skills and knowledge acquired by an individual; social capital is even less tangible, for it is embodied in the relations among persons” (emphasis in original). Thus, the rolodex may be relevant only insofar as it identifies the range and strength of social relationships that can be activated for specific purposes, but it does not reveal whether and how specific contacts are used.

                                                                                                                                                                                                                      (6.) This conceptualization of social capital also avoids one problem inherent to the aggregate view of social capital as the existence of organizations: organizations may also implicitly or explicitly promote social ills, such as crime, discrimination, or terror.

                                                                                                                                                                                                                      (7.) Woolcock and Narayan (2000) attempt to bring network sociology to the aggregate level and reconcile it with institutional/norms-based social capital in part by distinguishing between “bonding” (within group) and “bridging” (across group) social capital. This represents an improvement but fails to deal with the problem of instrumental value: even a connection to another group may be enormously valuable or completely useless.

                                                                                                                                                                                                                      (8.) For example, weddings and coming of age ceremonies of poor people in many settings in the United States often involve several godparents who assume responsibilities such as providing music, the wedding cake, the liquor, the photographer, and so on, which essentially distributes the costs among a wide range of friends and relatives.

                                                                                                                                                                                                                      (9.) Rotating credit and savings associations (ROSCAS) differ in name as well as their organization and rules of operation, but the core principles involve individuals who both contribute and borrow from a collective pool of money over cycles specified by members. These organizations are found in both industrial and developing communities.

                                                                                                                                                                                                                      (10.) Hellerstein and Neumark (in this volume) suggest that spatial mismatch is only part of the reason for the low black employment rate in urban areas.

                                                                                                                                                                                                                      (11.) Although underemphasized in Wilson’s original formulation of concentrated poverty, in-migration of poor people coupled with the exodus of working-class families accelerated the geographic expansion of the ghetto and urban neighborhood decay. He acknowledges this explicitly in more recent writings (Wilson 2010).

                                                                                                                                                                                                                      (12.) See the review in Newman and Massengill (2006) and several recent illustrations in Small, Harding, and Lamont (2010).

                                                                                                                                                                                                                      (13.) An example of institutionalization of deviance is the establishment of gangs, which are highly organized social organizations, despite their generally antisocial means and ends.

                                                                                                                                                                                                                      (14.) The Gautreaux Program, named after the initiator of the original lawsuit, ended in 1998 after its placement of 7,100 families had been completed.