Nanoeconomics (Bernardez & Perelrozen)

 A “nanoeconomics” approach and tools such as those we are going to present in this article can potentially unlock economic growth in two ways: 

(a)  improving the performance (cost/benefit) of informal economic activities in terms of the net benefit for the households and community and 

(b)  enabling and promoting upward mobility and formalization and consequent stability and growth of households’ net worth and social capital.

We are not advocating for growing the informal economy, but actually the opposite.

Using a gradual approach based on understanding the “micro-motives” behind the macroeconomic behavior (Schelling, 1978) it is possible to actually increase and accelerate the transition to formality of informal settlements. 

Only by actually understanding the micro-motives and mechanisms that drive people into the informal economy it is possible to “nudge[1]” them into the legal and economic integration. (Thaler, 2008)

Adopting a nano-economic framework, we created a reporting and measuring system that shows the economic activity of each household across multiple “lanes” of informal and formal economy. More importantly, looking at the economic activities from the household perspective it is possible to identify key points and create “nudges” or choices to drive them into better formal options. Those “nudges” operate as “ladders” between informal and formal lanes of economic activity and income levels.

This nano-economic, household-focused approach helps to understand the real economy of the low-income neighborhood and therefore, monitor and manage upward mobility and transitioning from informal to formal economic systems.

Nano-economic approaches like this may also help households and neighbors to gain control over their own economic destiny and manage more effectively a mix of entrepreneurial, informal and formal employment.

Although this level of analytic information is not readily available to informal settlement’s households, it provides a better picture of their actual economic situation and the type of factors that “humans” -unlike “econs”, the rational “homo economicus” used by classic economics- take into consideration in their economic decisions. (Thaler, 2008)

“Eyes on the street” data

Gathering this kind of data -often under or unreported- can be challenging, mostly for the fears of penalizing consequences those in the informal economy are used to experience. Creating trust by working closely with households under a clear agreement of cooperation and confidentiality is critical for obtaining valid data on a regular basis. (Fukuyama, 1995)

Using the kind of nano economic scoreboard exemplified in Table 5 may help improving the quality of economic decisions households make and thus, their chances for moving upward between economic lanes as well as in terms of survival and prosperity. (Christensen, Ojomo, & Dillon, 2019)

Even in the case Table 5-type information is not available or reliable, identifying the nano-economic variables can be critical for

(a)    understanding and predicting households’ behavior and reactions (individual and aggregated) to economic development and commercial integration proposals,

(b)    identifying factors that can help “nudge” households towards better and more desirable economic choices -what Thaler calls “choice architecture”- instead of blindly “pushing” through regulation that usually generates unintended and adverse consequences, and

(c)      helping households make better economic and business decisions plans avoiding the “survival trap” most such entrepreneurs at this level get caught in.

The nano-economic approach sets “eyes on the street” -as Jane Jacobs recommended (Jacobs, 1993) (Kanigel, 2017)- and provides a realistic perspective of the realities informal settlers engaged in diverse forms of “survival entrepreneurship” (Neuwirth, 2011) and informal economics face and operate daily. (Dalglish & Tonelli, 2016)

A “nano-economics” approach not only helps understand the objective realities that households in informal settlements face daily: it also helps identify the subjective, cultural mindset that informs economic decisions (Davis, 2007) (Bastia, 1985) (Bazan, 2018) (Ossona, 2014) (Harrison, 1985). 

For those who grew up in the informal economy taking jobs in the formal economy can be challenging and also counter-intuitive. Why pay taxes or into social security, healthcare, set up credit card payments, open a bank account when the cash-based, off-the-books economy seems to save all those costs and hazards?

Convincing answers to such kind of questions are critical to engage households in informal settlements into economic development programs that give them access to the gates of upward mobility.

Instead of using artificial statistical aggregates as a construct to explain “macro behavior”, nano economic analysis provides a real vision of a population’s actual economic behavior and the real “micro motives” that drive it. (Schelling, 1978)

References

• Bernardez, M. & Perelrozen, M. (2019) Nanoeconomics in Barrio 31, Buenos Aires. Performance Improvement Journal, ISPI

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[1] “A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” (Thaler, 2008)