Economics and Ethics

How Much Inequality Do We Want? This is the Wrong Question.

Mark D. White

Today on The Atlantic's website, Dan Ariely describes an experiment he conducted with Mike Norton in which they survey people about both the current distribution of wealth in the U.S. and what they thought the ideal distribution of wealth is. Not surprisingly, they find that most everybody underestimates the level of inequality of wealth, and that most everybody would prefer a more equal distribution of wealth--and, most interestingly that the "desired" distribution is extremely stable regardless of political party or nation of origin.*

In fact, he writes, "most likely, if you participated in one of our tests, your response too would have fallen in line with these findings." Uh, no, it wouldn't--I would have refused to answer the question because I don't accept its premise, which is that the final distribution of wealth is more important than the processes which led to it. In Robert Nozick's terms, Ariely implicitly uses a patterned theory of justice, whereas I prefer a historical theory of justice. When I see a skewed distribution of income or wealth, my first thought is not, "let's correct that," but rather "let's see what caused the skewed distribution and see if they're anything unjust about that."

Ariely illustrates this distinction with his two proposals for lessening inequality: education and taxation. Education improves the process while taxation improves the results after the fact. This is comparable to making sure a football game is officiated fairly, but then adjusting the score after the game is finished. If the outcomes of a football game--or of the economy--result from just and fair processes, then it is difficult to find a justification for questioning the results (outside simple utilitarianism).

Ariely describes his methodology as inspired by John Rawls' "veil of ignorance," in which people are asked what kind of world they'd like to live in if they had no idea where they'd fall in socio-economic terms (or, more broadly, in terms of race, gender, and so on). Ironically, however, Rawls was opposed to redistribution after the fact, and meant for his veil of ignorance metaphor to be used when designing institutions that would benefit the worst-off in society so wealth would not have to redistributed after the fact. (Ronald Dworkin's resource-egalitarianism takes the same approach: equalize resources at the beginning of persons' lives, and let them make of their lives what they will.)

My point does not lean only to the left or the right; people on both sides of the political spectrum (and especially libertarians) will happily point out injustices in the system that lead to unjust outcomes. This is one thing that the Occupy movement and the Tea Party have in common: there is corruption throghout the system that benefits the few at the expense of the many. But it does little good to say what we want the world to look at any point in time. Instead, we should focus on how we want to world to work over time--all the time--so everyone has a fair chance at leading the life they want to live.

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* They also neglect to ask what means people are willing to accept to reach their desired level of inequality--I imagine that's where differences in political affiliation would show up the most. Ariely admits to this shortcoming, but casts it in terms of what sacrifices people would be willing to make themselves to lower inequality, not what structural changes in our institutions they would recommend:

Our study also doesn't deal with how to bring what people say they want under the veil of ignorance into line with what they're willing to do when it's their money and resources that are about to be distributed. It is one thing to get people to tell us what kind of society the would want to join, and another to get them part with their money in order to create that society.

Charles Murray's Coming Apart discussed by David Brooks and W. Bradford Wilcox

Mark D. White

Charles Murray's latest book, Coming Apart, gets reviewed this morning by both David Brooks in The New York Times and W. Bradford Wilcox in The Wall Street Journal. Murray's thesis is that the gaps in income and wealth in America are no more important than the gaps in culture and values between the more and less affluent. To make his point more forceful, he restricts his analysis to white people, in order to prevent critics from arguining that the decline in values he points out is an issue with racial and ethnic minorities only. These trends are certainly apparent across most if not racial and ethnic groups but it is less recognized in whites, the discussion of which may be Murray's greatest contribution to the discussion.

Of course, your opinion of Murray's thesis is going to depend on what values he chooses, and (according to Wilcox) he focuses on "four 'founding virtues'—industriousness, honesty (including abiding by the law), marriage and religion." I doubt many would have issues with the first two, but the last two will turn off a lot of people (including me, to some extent). Personally, I'd prefer that "marriage" be changed to "family" and "religion" be changed to "community" (since the ethical component of religion is already covered by "honesty," or the whole exercise, really). Perhaps Murray puts his virtues in these broader contexts--I have not yet read the book--but I would guess he chose "marriage" and "religion" because participation in them in measurable (social scientist that he is).

Wilcox, the director of the National Marrriage Project, naturally uses Murray's analysis of marriage (which echoes Kay Hymowitz's Marriage and Caste in America) as an example:

The destructive family revolution of the late 1960s and 1970s has gradually eased—at least in the nation's most privileged precincts. In the past 20 years, divorce rates have come down, marital quality (self-reported happiness in marriage) has risen and nonmarital childbearing (out-of-wedlock births) is a rare occurrence among the white upper class. Marriage is not losing ground in America's best neighborhoods.

But it's a very different story in blue-collar America. Since the 1980s, divorce rates have risen, marital quality has fallen and nonmarital childbearing is skyrocketing among the white lower class. Less than 5% of white college-educated women have children outside of marriage, compared with approximately 40% of white women with just a high-school diploma. The bottom line is that a growing marriage divide now runs through the heart of white America.

Brooks also cites the marriage gap alongside other factors (using the word "tribes" rather than "class" to emphasize the "tenuous common culture linking them"), but links them to the gap in behavior that he feels is Murray's chief contribution:

Worse, there are vast behavioral gaps between the educated upper tribe (20 percent of the country) and the lower tribe (30 percent of the country). ...

Roughly 7 percent of the white kids in the upper tribe are born out of wedlock, compared with roughly 45 percent of the kids in the lower tribe. In the upper tribe, nearly every man aged 30 to 49 is in the labor force. In the lower tribe, men in their prime working ages have been steadily dropping out of the labor force, in good times and bad.

People in the lower tribe are much less likely to get married, less likely to go to church, less likely to be active in their communities, more likely to watch TV excessively, more likely to be obese.

Wilcox points where this disparity in values and behavior cashes out:

The economic and political success of the American experiment has depended in large part on the health of these founding virtues. Businesses cannot flourish if ordinary workers are not industrious. The scope and cost of government grows, and liberty withers, when the family breaks down. As James Madison wrote: "To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical idea."

This is certain to prompt some heated discussion in the coming months. The statement above is too vague to draw significant conclusions, which will come only from a careful reading of Murray's book. Of course, the role of virtue, or ethics in general, among all members of society and its importance to the economy in particular is of great interest to us at this blog. (Start reading, Jonathan!)

Brooks applies Murray's results to the rhetoric from both sides of the political aisle:

Murray’s story contradicts the ideologies of both parties. Republicans claim that America is threatened by a decadent cultural elite that corrupts regular Americans, who love God, country and traditional values. That story is false. The cultural elites live more conservative, traditionalist lives than the cultural masses.

Democrats claim America is threatened by the financial elite, who hog society’s resources. But that’s a distraction. The real social gap is between the top 20 percent and the lower 30 percent. The liberal members of the upper tribe latch onto this top 1 percent narrative because it excuses them from the central role they themselves are playing in driving inequality and unfairness.

At the risk of stating the obvious, I think the most fascinating part of this discussion is how income inequality and cultural inequality interact. In particular, I wonder how much of the decline in "virtuous" behavior that Murray observes among the poor is a result of choices driven by poverty (scarcity), and how much have those behaviors perpetuated that poverty. (This is not to excuse this behavior, necessary, but to understand it better.) And by the same token, the wealthy can certainly be applauded for their virtuous behavior, but to a certain extent it is easier to be good when you have the means, and the extent to which this plays a role should be acknowledged as well.

Whether Murray discusses this issue in these exact terms remains to be seen (after I read the book!), but he does make a political statement, summarized by Roger Lowenstein in his review of the book in Businessweek:

One question I wish he had taken up: Are the “new upper class” and the problems of the lower class related? Coming Apart treats them as separate. That gets to my frustration, which arises in the concluding section. Until then, Murray had merely diagnosed the cultural divide. Now he claims to know the causes. He blames the government and the “welfare state.” This section brims with political resentments; the carefully researched facts give way to bitter generalizations such as “only a government could spend so much money so inefficiently.” The author who tactfully, and wryly, demonstrated how little readers know about the lives of working-class whites, writes of “bureaucrats” with no appreciation, or even interest, in what they actually do. He does not explain why social cohesion should be less today when the Great Society experiment peaked in the 1960s. While blaming the debilitating effect on incentives of social programs, he fails to acknowledge the idea that most Americans probably feel less coddled, less protected today than in 1970.

It's interesting that both Brooks and Wilcox left this part out of their reviews, while endorsing more activist policies on the part of the government to shore up the working class. As valuable as Murray's empirical observations are, it is crucial that we understand them, interpret them, and act on them in a way that doesn't make the situation worse--whatever that may mean.

Reflections on Grading and Inequality

Jonathan B. Wight

Why do students compete for grades? An obvious answer is that they want higher scores so that they can get into graduate school or look more attractive to recruiters from consulting companies. Higher grades lead to more bucks earned after graduation.

What's interesting is that it doesn't take very much inequality to get students to ramp up the hours studying:

A mere 12% increase in score induces some students to knock themselves out to get an A rather than a B!

Of course, the rewards for getting an A are more than just the numerical gain; being scarce, A's offer huge psychic rewards as well as potential pecuniary rewards greater than 12%.

In the raging debate over income inequality the argument is often presented that unequal incomes spur productive behaviors that otherwise would be withheld for lack of incentive. This is surely true, but the advocates of this viewpoint have little empirical evidence to argue that a "huge" difference is needed to spur that activity.

Rather, people fight heroically over quite small differences in rewards—primarily because the reward itself is a symbol of social standing or intrinsic excellence. Some students, for example, want to view themselves as masters of the material or essential lovers of the subject and will work for no "pay" (e.g., they audit or do extra work).

In the wider world Adam Smith argued that the most ambitious businessman really just wants recognition for the rivalry involved or the excellence of the work. Hence, the "necessity" of social recognition promotes profound exertions, without requiring huge financial rewards (e.g., "great objects"):

In every profession, the exertion of the greater part of those who exercise it, is always in proportion to the necessity they are under of making that exertion…. The greatness of the objects which are to be acquired by success in some particular professions may, no doubt, sometimes animate the exertion of a few men of extraordinary spirit and ambition. Great objects, however, are evidently not necessary in order to occasion the greatest exertions. Rivalship and emulation render excellency, even in mean professions, an object of ambition, and frequently occasion the very greatest exertions (Wealth of Nations, Liberty Fund Edition, 493-494).

What is the lesson? Those who advocate for equal distribution of rewards—there are not many in this day and age—are sadly misguided, and perhaps misunderstand human nature. Inequality is good—but here's the main point—huge inequality is not necessary to bring out the human passion for exceling and competing. This does not constitute an argument in favor of government distribution, but presents a counter-argument to those who proclaim as "fact" something that is apparently untrue.

Large inequality is not necessary for markets to function. At least, that's the lesson [from grading] in my classroom. But there would be a riot if points were not awarded "fairly" according to the contract in the syllabus! So justice first, and mild inequality second, are the prerequisite institutions needed. [Clarification added.]

New issue of Social Philosophy and Policy: New Essays in Political and Social Philosophy

Mark D. White

Always an essential read, the latest issue of Social Philosophy and Policy (29/1, January 2012) has the theme of "New Essays in Political and Social Philosophy," and features essays by some of biggest names in those fields (not to mention legal philosophy):

POLITICAL LIBERTY: WHO NEEDS IT?, Jason Brennan

STATE COERCION AND FORCE, Christopher W. Morris

DEMOCRATIC LEGITIMACY AND ECONOMIC LIBERTY, John Tomasi

WHO OWNS WHAT? SOME REFLECTIONS ON THE FOUNDATION OF POLITICAL PHILOSOPHY, Lloyd P. Gerson

HUMAN REPRODUCTIVE INTERESTS: PUZZLES AT THE PERIPHERY OF THE PROPERTY PARADIGM, Donald C. Hubin

WHY FREE TRADE IS REQUIRED BY JUSTICE, Fernando R. Tesón

STRUCTURAL EXPLOITATION, Matt Zwolinski

RESCUING JUSTICE FROM EQUALITY, Steven Wall

REINTERPRETING RAWLS'S THE LAW OF PEOPLES, Christopher Heath Wellman

RESPONSIBLE CHOICES, DESERT-BASED LEGAL INSTITUTIONS, AND THE CHALLENGES OF CONTEMPORARY NEUROSCIENCE, Michael S. Moore

GENOCIDE AND CRIMES AGAINST HUMANITY: DISPELLING THE CONCEPTUAL FOG, Andrew Altman

HARM AND THE VOLENTI PRINCIPLE, Gerald Dworkin

EDUCATION AND THE MODERN STATE, Anthony O'Hear

Call for papers: 14th World Congress in Social Economics, "Towards an Ethical Economy and Economics"

Mark D. White

From the Social Economics Blog:

ASSOCIATION for SOCIAL ECONOMICS
 
14th WORLD CONGRESS IN SOCIAL ECONOMICS
 
CALL FOR PAPERS
 
University of Glasgow, Glasgow, Scotland, UK, June 20-22, 2012
 
"Towards an Ethical Economy and Economics"

The on-going financial crisis continues to evolve from one centered on the Western financial system to sovereign debt crisis, particularly in the Euro-zone. This has brought into sharp relief the inadequacy of standard approaches that emphasise the economy as inherently stable and the incapacity of the current economic system to address its fundamental problems. The crisis has also raised a host of ethical issues revolving around the actions of governments, the financial sector, communities, individuals, and, indeed, the economics profession. The financial crisis has further revealed the reliance on conventional notions of growth to sustain mass consumption and as a vehicle for addressing recessionary pressures, largely ignoring concerns over environmental sustainability and increasing inequalities. Social economics, with its focus on the social values and relationships that drive the market-based system, is well-placed to offer insightful analyses of the present state of economies and of economics and to offer an outlet for discussion of alternatives founded on the notion of the economy as the process of social provisioning.

See here for more details...

Mont Pelerin in the Rear-View Mirror?

Jonathan B. Wight

David Warsh, in a column entitled, "Still an Overgoverned Society?" reports on the beginnings of the Occupy Wall Street movement and its connection with anarchists, and contrasts that with the rise of the Mont Pelerin society.

Anyone who appreciates long cycles of historical analysis will recognize that success eventually breeds over-stretching and hence an inevitable backlash. I've never studied Hegel, but the dialectic of thesis, anti-thesis and synthesis seems to be at work. For example, I remember being somewhat shocked when a Nobel Prize was created in economics (technically it's the Sweden's central bank's Prize in Economic Sciences in Memory of Alfred Nobel). In the powerful sway of Keynesian economics in the 1960s, it appeared that economists were glorified as the new physicists. How little they knew!

One group likely did know the Nobel was something of a sham, and this was the Mont Pelerin Society (even as several of their members won the prize). The hutzpah of economists claiming to know enough to do discretionary fine-tuning is now accepted as a fantasy, and led to the rise of the Austrians and other skeptics. But the Pelerin's own ideological excesses (or those of their followers) may lead to a similar backlash.

Here is David's conclusion:

Believing that societal norms move in long pulses, that a gradual turning has begun, I have to say I am still heartened by the excitement with which Occupy Wall Street has been received.  Its inner story is certainly a disappointment:  the tenets of "contemporary anarchy" are a weak foundation on which to build, but they express a powerful longing for a time in which the power of money will be reduced. Maybe it's a spiral instead of a zigzag; but the direction is slowly changing.  The road from Mont Pelerin is in the rear-view mirror. The next part of the journey has begun.

--David Warsh, www.economicprincipals.com (early edition, November 27, 2011, emphasis added)

The next part of that journey will not renounce markets, I believe, but will introduce pragmatism in establishing institutions that work with markets to achieve various goals of society. I interact each semester with excited, energetic future entrepreneurs: let's not kill that flame even as we seek to address issues of inequality and justice.

I may suck, but not as much as you

Mark D. White

Please excuse the flippant title, and get ready for a bit of a rant. (Listen--it's almost Friday, and it's been a rough couple of weeks.)

I'll start with a old joke: Two campers are in the woods when they spot a bear heading toward them. One camper starts running while the other bends down to carefully tie his shoes. The first camper yells back to his friend, "do you really think that will help you outrun the bear?" The second camper yells back, "I don't need to outrun the bear--I just need to outrun you."

I was reminded of that joke when reading a Real Time Economics blog post at The Wall Street Journal's site a couple weeks ago about a recent study on "last-place aversion." In the paper (available here), the authors report on experiments in which the participants were found more likely to take gambles that might boost their social ranking (rather than certain payoffs of equivalent expected value), and to forego costless action to help those worse off than themselves, the lower in the ranking they were to begin with. The authors use these results to support individuals' aversion to being at the bottom of the social ranking, preferring to have at least one person or group to look down upon.

I don't doubt the findings or the interpretation, but they sadden me. In fact, the entire concept of relative preferences and well-being disturbs me and always has. The idea that many (perhaps most) people base their feelings of satisfaction and happiness on what the folks next door have rather than on their own needs and desires--assuming they even have their own needs and desires--is ironically and tragically counterproductive in the aggregate. (On this I agree with Robert Frank, though not on his policy recommendations based on it.)

Maybe this unconscious desire to one-up our peers has an evolutionary basis--it would certainly seem to inspire a striving for material (and thereby reproductive) success--but it also seems to vary widely on cultural grounds (being much more pronounced in the U.S. than in Europe, for instance). (I thank Dr. Maryanne Fisher for her insights on this point.) But just because it's natural doesn't make it good or right--thank you, G.E. Moore--and just as we strive to counter other hardwired inclinations toward prejudice and oppression toward others, I would hope we would reject those which represent an attitude of disrepect toward ourselves.

It strikes me as horribly inauthentic to subsume your own standards of well-being, happiness, and satisfaction for other people's, especially if it leads to a counterproductive "race to the top" in which no one's intrinsic preferences are satisfied. I said as much here about two years ago (focusing on status goods like Starbucks coffee, which I now drink regularly, thanks to the same Dr. Fisher), so I won't rehash those arguments. Nonetheless... argh.

Don't get me wrong, researchers in psychology and economics do us a great service in highlighting these unconscious dispositions. But where are the voices crying out to restrain them, to orient our decision-making more towards activities that will satisfy our desires rather than simply make us feel good compared to our neighbors? Dr. Frank decries what Thorstein Veblen termed conspicuous consumption, certainly, but he focuses policy changes such as steeply progressive tax rates to "solve" the problem. This is to treat the symptoms rather than the disease (as behavioral economists are wont to do). Once we recognize our flaws we don't have to take them as given--but we have to make the effort.

And we shouldn't want for the people next door to do it first.

Inequality Revisited

Jonathan B. Wight

In contrast to my recent post on inequality, Richard Epstein argues that greater inequality is a good thing (PBS's Newshour "Does U.S. Economic Inequality Have a Good Side?").

Epstein bases his entire argument on the incentive effect that greater inequality provides for innovation. This is a weak—a very weak—claim. The average CEO made 40 times as much as line workers in the 1980s. Can anyone seriously argue that this ratio needed to rise to 300X today before managers had a strong enough incentive?

The Global Entrepreneurship and Development Index (GEDI), compiled by the Small Business Administration, captures the qualitative and quantitative attributes of entrepreneurship comparing 71 countries. Guess who's at the top of the entrepreneurship list? If you believe Epstein's argument, entrepreneurship and innovation are driven mainly by the desire to earn higher incomes than others. Hence, the leading entrepreneurship area should be the U.S. But that's not what the study found. Denmark and Canada come in ahead of the U.S., and both these areas have significantly more income and wealth equality. Surprise, surprise!

One explanation for this is that people's work efforts are driven by social desires for recognition, for status, and so on. In addition, people are driven by the intrinsic desire to create order through perfection, as discussed by Adam Smith. Many of the 20th centuries most profound innovations came about because of non-pecuniary motives (see John Kay's fascinating book, Culture and Prosperity: The Truth About Markets—Why Some Nations Are Rich But Most Remain Poor, 2004). The bottom line is that entrepreneurs are motivated by complex desires, and that social recognitions (acknowledged as being the first, being the best, etc.) are as important—probably more important—than money alone.

Epstein also fails to address any of the evidence suggesting that high levels of inequality are associated with higher levels of stress and indicators of social dysfunction. No one—certainly not me—is arguing for perfect equality. Inequality is a necessary, desirable, and natural feature of society. But inequality taken to excess can degenerate into a bad outcome. East Asian countries grew rapidly while narrowing income and wealth gaps (see the World Bank's report, The East Asia Miracle, 1993). One does not need greater inequality to stimulate rapid economic growth.

How economic inequality harms societies

Jonathan B. Wight

Richard Wilkinson is the co-author with Kate Pickett of The Spirit Level: Why Greater Equality Makes Societies Stronger (2009). He recently posted an interesting TED talk ("How economic inequality harms societies", http://www.ted.com/talks/richard_wilkinson.html).

The provocative thesis is that inequality makes us physically sicker and emotionally more vulnerable, giving rise to higher homicide, alcoholism, and other rates of mental illness. In other words, inequality is positively correlated with substantive measures of health and social interaction, as shown in the chart below:

 

Children are particularly vulnerable to the impacts of inequality, as shown here:

 

The data hold up not only internationally, but also comparing inequality between U.S. states:

The Model: Wilkinson uses a Smithian-type moral sentiments model in which people care about how others perceive them and how we perceive ourselves. Issues of superiority and inferiority, respect and disrespect, trust and distrust, and status competition are important elements in psycho-social health. Greater inequality, according to Wilkinson, generates greater stress (as measured by release of stress hormones). Chronic stress from social concerns lowers one's immune system responses leading to health problems.

There is obviously much more to be done making the link between inequality per se and the biological impacts on health, controlling for a host of other factors. What Wilkinson has accomplished is to make the correlations visibly apparent and to draw attention to the need for more research.

Personal aside: I grew up in highly unequal societies—South Africa, Mozambique, Libya and Brazil—all poster cases for inequality. Our house in Brazil had a large wall with shards of glass embedded in the top. It was a relief to come back to the United States, which in the late 1960s still had fairly equal incomes. As income inequality has grown in the U.S. since the 1970s the gated communities have flourished, and with it the same fear and distrust I remember so well from my time in Brazil. For lots of reasons, including huge current account deficits, fiscal deficits, political dysfunction, and ever-increasing inequality, the U.S. is looking more and more like a developing country.

[Thanks to Nabila Rahman for sharing this TED link.]

Morals without God

Jonathan B. Wight

Frans de Waal, in “Morals without God,” argues against the view of some people of the cloth that without God there would be no morality.  Rather, morality arose for evolutionary purposes and is thus more ingrained in the human psyche than cultural and religious conceptions of right and wrong.  The evidence for this is in fellow primates.  De Waal states:

I interact on a daily basis with monkeys and apes, which just like us strive for power, enjoy sex, want security and affection, kill over territory, and value trust and cooperation. Yes, we use cell phones and fly airplanes, but our psychological make-up remains that of a social primate. Even the posturing and deal-making among the alpha males in Washington is nothing out of the ordinary….

Chimpanzees and bonobos will voluntarily open a door to offer a companion access to food, even if they lose part of it in the process. And capuchin monkeys are prepared to seek rewards for others….  A dog will repeatedly perform a trick without rewards, but refuse as soon as another dog gets pieces of sausage for the same trick.

While God isn’t needed for morality, according to de Waal, religions serve important purposes in society that should not be dismissed.  Hence, de Waal is sympathetic to religions and their morals, which provide a framework for social advances over the centuries:

And more pertinently, what alternative does science have to offer? Science is not in the business of spelling out the meaning of life and even less in telling us how to live our lives. We, scientists, are good at finding out why things are the way they are, or how things work, and I do believe that biology can help us understand what kind of animals we are and why our morality looks the way it does. But to go from there to offering moral guidance seems a stretch….

Even the staunchest atheist growing up in Western society cannot avoid having absorbed the basic tenets of Christian morality….It is impossible to know what morality would look like without religion.

Hence, this leads to the conclusion:

[W]hat would happen if we were able to excise religion from society? I doubt that science and the naturalistic worldview could fill the void and become an inspiration for the good. Any framework we develop to advocate a certain moral outlook is bound to produce its own list of principles, its own prophets, and attract its own devoted followers, so that it will soon look like any old religion.

De Waal thus provides a defense of religion as a foundation for justice, which it certainly is.  But there are other defenses that rely on the pleasure created by religious practice itself—as in mysticism.  That is a topic for another day.