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.

Willpower and poverty

Mark D. White

Just read a very interesting article from The New Republic by Jamie Holmes titled "Why Can't More Poor People Escape Poverty?", detailing new work on the intersection of psychological studies of ego depletion and self-management--the work by Roy Baumeister, Kathleen Vohs, and others that I've cited widely in my own work on willpower--and economists working on development and poverty.

The basic insight in that deprivation imposes greater cognitive costs on the poor since the relative scarcity of resources leads to higher negative consequences of choice (even in decision-making contexts that seem trivial to the wealthy) and therefore greater decision-making costs (with respect to trade-offs as well as self-control problems), which in turn makes the ascent out of poverty all the more difficult. Some reasonable policy suggestions are offered at the end, which (thankfully) do not veer into Nudge territory, but which mostly involve increasing options for leveraging willpower.

A very worthwhile read, and a fascinating application of the psychological work on willpower to a pressing economic problem.

William Easterly on two new books about global poverty and aid

Mark D. White

In today's The Wall Street Journal, William Easterly, author of The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good and a tireless critic of traditional apporaches to global aid (see his Aid Watch blog), has a review of two recent books in the area: Dean Karlan and Jacob Appel's More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty and Abhijit V. Banerjee and Esther Duffo's Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.

He praises both books for their "on their ground" mentality:

More Than Good Intentions and Poor Economics are marked by their deep appreciation of the precariousness that colors the lives of poor people as they tiptoe along the margin of survival. But I would give an edge to Mr. Banerjee and Ms. Duflo in this area—the sheer detail and warm sympathy on display reflects a true appreciation of the challenges their subjects face. Messrs. Karlan and Appel are at their best in addressing the subtleties of behavior and testing them in the psychology laboratory and in the field. They have produced a remarkably readable and credible analysis of the intertwining of irrationality and poverty.

This echoes Jonathan's work with his co-authors in Accepting the Invisible Hand, in which they discuss the need for context- and culture-specific considerations when designing aid programs. Easterly continues in this same spirit:

Unfortunately, the books also indulge another sort of irrationality: the demand for big, general statements even if you're discussing limited, context-specific matters. The authors criticize over-promising and generalizing in the aid business, but they too often do their own exaggerating when it comes to what their methods can deliver. Both books end with overselling, "five key lessons" (Banerjee and Duflo) or "seven ideas that work" (Karlan and Appel), ignoring their own previous cautions about sensitivity to context and the limits to each intervention. Other economists criticize overselling as a common fault of those who do these small experiments.

Along the way, Easterly also makes a similar point to one I often make regarding libertarian paternalism and "nudges": behavior judged irrational by an outside observer may well have completely reasonable explanations for the decision-maker himself or herself. He provides this example from one of the books:

In More Than Good Intentions, for instance, we meet Vijaya, a flower seller in Chennai, India, who makes daily payments on multiple loans she has taken out to pay for rent, school fees, flowers from wholesalers and other expenses. She pays several points in daily interest, and she has almost nothing left at the end of every day after making her loan payments. But in an interview she just indifferently says her money is in "rotation"—and makes no effort to save, even in tiny increments, so that she might pay off her debts and keep some of her profits.

However, from later in the review, Easterly commends the authors for investigating this further:

In addition to testing out ideas, such field work also has the benefit of letting researchers chat informally with poor people—conversation that can be thoroughly illuminating. What looks like irrationality may just be the failure of outsiders to fully appreciate the problem. The flower seller Vijaya reveals that she doesn't want to take money home: "Whatever I bring home, my husband drinks it up." Paying the moneylender (or maybe accepting microcredit!) is preferable to helping a spouse stay soused.

A tragic situation, to be sure, but not one that implies irrationality on Vijaya's part. Would that behavioral economists and libertarian paternalists might take the same time to consider the multifaceted and complex motivations and interests of people whom they would happily nudge in whatever directions they judge as rational.

Amartya Sen on India and China (in New York Review of Books)

Mark D. White

In the new issue of The New York Review of Books (May 12, 2011), Amartya Sen has an article titled "Quality of Life: India vs. China" about the meaning (or lack thereof) of the comparison between GDP growth rates in India and China:

The steadily rising rate of economic growth in India has recently been around 8 percent per year (it is expected to be 9 percent this year), and there is much speculation about whether and when India may catch up with and surpass China’s over 10 percent growth rate. Despite the evident excitement that this subject seems to cause in India and abroad, it is surely rather silly to be obsessed about India’s overtaking China in the rate of growth of GNP, while not comparing India with China in other respects, like education, basic health, or life expectancy. Economic growth can, of course, be enormously helpful in advancing living standards and in battling poverty. But there is little cause for taking the growth of GNP to be an end in itself, rather than seeing it as an important means for achieving things we value.

It could, however, be asked why this distinction should make much difference, since economic growth does enhance our ability to improve living standards. The central point to appreciate here is that while economic growth is important for enhancing living conditions, its reach and impact depend greatly on what we do with the increased income. The relation between economic growth and the advancement of living standards depends on many factors, including economic and social inequality and, no less importantly, on what the government does with the public revenue that is generated by economic growth.

Unfortunately, the article is not free online (though the $6.00 charge does not seem unreasonable).

Welcome Martha A. Starr to the Economics and Ethics blog!

Mark D. White

It is both a pleasure and an honor to introduce Martha A. Starr (American University) as our first guest-blogger here at Economics and Ethics! Over the coming weeks (and maybe longer, hint hint), Martha will blog about her new edited book, Consequences of Economic Downturn: Beyond the Usual Economics, the second release in the Perspectives from Social Economics series from Palgrave Macmillan.

As the title indicates, the book discusses the effects that the current economic malaise has had on the real people behind the statistics and soundbites, so please join us as Martha takes us on a guided tour through the various chapters and topics in this extremely timely volume.

EEA 2011 Sessions: Alternative Perspectives of a Good Society

Mark D. White

Another pair of sessions at next weekend's Eastern Economic Association meetings are definitely worth highlighting, both organized by Steve Pressman and derived from John Marangos' "Alternative Perspectives of a Good Society" project, from which a volume is in preparation for the Perspectives in Social Economics series through Palgrave:

Saturday, February 26 3:45 p.m.

ALTERNATIVE PERSPECTIVES OF A GOOD SOCIETY - PART 1

Session Organizer and Chair: Steven Pressman, Monmouth University

Not Just Fun & Games: Re-conceptualizing the Role of Young People in Economic Development (K. Maeve Powliek, Skidmore College)

The Ideology of Sustainability in Indonesia, Australia and the U.S. (Janet Spitz, The College of St. Rose)

Does the Field of Comparative Economic Systems Care About the Good Society? (Lynn Duggan, Indiana University, Bloomington; Barbara Hopkins, Wright State University)

Discussants: Michael Murray, Central College; Danièle Meulders, Université de Bruxelles; Sile
O’Dorchai, Université de Bruxelles

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Sunday, February 27 8:00 a.m.

ALTERNATIVE PERSPECTIVES OF A GOOD SOCIETY-PART 2

Session Organizer and Chair: Steven Pressman, Monmouth University

Freedom for Whom? The Double-Sided Nature of Economic Freedom and Societal Consequences (Michael Murray, Central College)

Divided We Stand, United We Fall—The Implications of Measuring Poverty Based on Individual
Rather than Household Income (Danièle Meulders and Sile O’Dorchai, Université Libre de Bruxelles)

Obesity, Evolutionary Psychology and the Good Society (Steven Pressman, Monmouth University)

Discussants: Lynn Duggan, Indiana University, Bloomington; Barbara Hopkins, Wright State
University; Janet Spitz, The College of St. Rose

No More Santa Claus

Jonathan B. Wight

Do you remember what it felt like when you learned that there was no Santa Claus? Or when you began to suspect that pro wrestling was rigged?  Loss of innocence can be both joyful as well as painful.

Recently I asked my economic development student to reflect on moments of “loss of innocence.”  Going in, many students held the delightfully-naïve Santa Claus model of economic development: a rich and benevolent uncle from the north has capital and technology and can bestow presents in the form of gifts, loans, or investments that will magically transform a poor relative into a middle class citizen. 

Or, there is the equally naïve notion that economists in Washington or Cambridge can derive blackboard policies that will work as well in Bangladesh as in Bulgaria.  Dani Rodrik convincingly demolishes that quaint notion, because development is always context-dependent. 

Here are a few other “loss-of-innocence” moments:

1. International aid (whether monetary or donation of goods) does not necessarily increase economic well-being in a poor country.  A person's definition of well-being depends a lot on his/her culture. 

2. Economic development is not a mechanical process amenable to stable abstract models.  Development is an organic process, much more like biology, in which novelty-by-combination is the norm.  Hence, while biologists and economists may be able to explain past evolutionary transformations, we certainly cannot predict future ones. 

3. Not all reform policies should be implemented at the same time.  Sequencing matters, because economic development is deeply disruptive. 

4. Economic evolution is not necessarily efficient, but it is always adaptive to the needs of those who have the power to bring change.  For a perceptive discussion, see Raghuram G. Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (Princeton 2004).

New book: Crisis and Recovery: Ethics, Economics and Justice

Mark D. White

In a case of excellent timing with Irene's recent post, as well as Martha Starr's upcoming book, Consequences of Economic Downturn: Beyond the Usual Economics, I just received a new book edited by Rowan Williams, Archbishop of Canterbury, and Larry Elliott titled Crisis and Recovery: Ethics, Economics and Justice (Palgrave, 2010).

The contributors seem to be drawn from a wide range of fields, from academics and politics to the non-profit sector and the church, all commenting (as do Irene and the contributors to Martha's book) on the moral aspects of the current downturn. Chapters which looks particularly intriguing to me upon first glance are Phillips Blond's "There Is No Wealth But Life," Andrew Whittaker's "Culture and the Crisis," and the Archbishop's own "Knowing Our Limits."

Baker, "A Stoic Defense of the Market" (from Accepting the Invisible Hand)

Mark D. White

Today we continue our preview of Accepting the Invisible Hand: Market-Based Approaches to Social-Economic Problems with Chapter 4, "Don't Let the Best Be the Enemy of the Good: A Stoic Defense of the Market," by Jennifer A. Baker. (Chapter 3 by James D. Gwartney and Joseph Connors was discussed here, Chapter 2 by John Meadowcroft was discussed here, Chapter 1 by me was discussed here, and the preface was posted here.)

From the introduction to the chapter:

The moral relevance of general affluence is often overlooked. We might wish for humane conditions, we might talk of human value, but short of some minimal level of general affluence, life is too grim to entertain ethical notions beyond it. It seems we can hardly count the very poor of the world into our moral considerations. If everyone has to be considered, “well,” the ethicists seem to harrumph, “then we are dealing with too much need and everything thought conventionally moral is off the table!”

In this chapter I would like to offer a corrective, a way to acknowledge the moral significance of general affluence without disassembling conventional morality. To do this we have to recognize that markets are our only means of bringing about general affluence. We have, literally, nothing else capable of doing the job. Yet markets are, for reasons we will go into, left out of our moral calculations. We either suggest “it isn’t personal, it’s just business” in the hopes that all moral bets are off when we are engaging in trade, or simply live with the cognitive dissonance of refusing to integrate our support for markets with the rest of our beliefs about what is good. (p. 69)

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For many reasons, it will be helpful to point out a way in which we can situate support for general affluence within conventional morality. Clearing up the deep confusion we so often display about the role of ethics in the market is one, clarity about our own behavior is another, and what we owe other humans worldwide is a third. After reviewing approaches that will not work, I will offer a means for this. I argue that the solution is to organize our thoughts about morality using an ethical theory—Stoicism—that has a two-level structure. One of these must acknowledge the value of material inputs to human life, and the other must function to maintain a standard for personal choices. How these levels serve as a framework for making choices we already admire is what I aim to demonstrate. (p. 70)

Baker surveys the difficulties with justifying the market using standard theories of moral and political philosophy, as well as attempts by economist-philosopher to do so, before laying out her Stoic alternative, based on essential concepts thereof such as indifferents, neutrality, and the bi-level theory of value.

She phrases her conclusion exceptionally well (emphasis added):

Is the market just? Not in the sense that it meets some discrete ideal of political good. The market, not being an ideal, simply cannot measure up to such standards. If we are to dismiss it as amoral, we are left without guidance when it comes to how we should act in the market. Far better is to determine that the market has a peculiar status of “just enough.” It is not glorious. It is never how we would prefer it to be and never as good as it could be. But humans thrive in market-based systems and can do so without the cost of horrific violations of human dignity. Higher standards cannot be imposed on a social system until the possibility of meeting these higher standards exist. We are not to expect too much, or to confuse political ideals for actual social good. (p. 83)