Inequality

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….DeWaal

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: Monkeys

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.

 

 


Book review: Inequality, Development, and Growth (Routledge, 2011)

Irene van Staveren

Idg Review of Inequality, Development, and Growth, edited by Günseli Berik, Yana van der Meulen Rogers, and Stephanie Seguino. London: Routledge, 2011, 361 pp. ISBN13: 978-0-415-59944-3 (hbk), ISBN13: 978-0-415-60994-4 (pbk).

This volume is a flagship for feminist macroeconomics and was first published as a special issue of the journal Feminist Economics in 2009. Its major contribution to the study of inequality and growth is that it follows a two-sided approach to the relationship between these two phenomena. The book examines not only the effect of macroeconomic policies and economic growth on inequalities but also as the effects of inequality on growth. The volume presents a wide diversity of theories, methods, country studies and levels of integration by an equally wide diversity of authors, male and female, and from the developed as well as the developing world.

Continue reading "Book review: Inequality, Development, and Growth (Routledge, 2011)" »


Consequences of Economic Downturn -- Part III: More of the rich getting richer?

Martha A. Starr

Since the early days of the financial crisis, claims have been made that it was somehow caused by rising inequality. A big dose of suggestive evidence comes from statistics on income inequality: as the chart shows, on the eve of the 2008 crisis, inequality had risen to levels not seen since 1929.

  Inequality
Data for the U.S. from the Top Incomes database (accessed 4/12/2011)

Conseq But how exactly are inequality and financial crisis related? The chapter in Consequences of Economic Downturn by Jon Wisman and Bart Baker of American University takes on this question, identifying three dynamics implicated in both the 1929 stock market crash and the 2008 financial crisis. First, both crises came after years when real incomes rose for households at the high end of the income distribution, but stayed flat or slipped for others. Drawing on Veblen’s ideas about conspicuous consumption, they argue that this led average people to rely increasingly on borrowing to “keep up with the Joneses”, building ever more risk into the financial system. Second, with the consumption of the rich already very high (how many Audis, ski vacations, homes in the Hamptons, etc., does one actually need?), they tended to channel their rising incomes and wealth into financial investments, which kept interest rates low and encouraged the creation of new credit instruments with poorly-understood risk properties. Third, with rising economic clout, the rich gained increasing control over politics and ideology, shifting the government and public into a mentality of laissez les bons temps rouler. They conclude that, because these dynamics reflect structural economic problems –- spending levels above purchasing power, loanable funds above productive investment opportunities – we can’t expect measures to repair flaws in the financial system alone to put the economy back on secure footing.

While there is much to be said for this argument, I have small nagging doubts about it. For one, as popular as the “keeping up with the Joneses” story is, careful empirical research shows that people tend to emulate relatively successful people in their own social segments, not so much the rich. Sure, one can argue that pervasive media influence has widened our perceived social circles, so that we increasingly understand ourselves as peers of Donald Trump. But most people's spending is concentrated in everyday things like the rent or mortgage, food, utilities, transportation, health insurance, etc., not silk ties and mobile champagne coolers. For another, data on household finances show that, in the years before the crisis, high-income households were accumulating non-financial assets (residential properties, business interests), not increasingly risky financial assets; rather, it was financial institutions that were gobbling up the MBSs, CDOs, etc. So as much as interested readers will find this paper rich and nuanced in its historical arguments, I’m not sure we’ve yet got the story fully nailed down.


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

Mark D. White

Conseq 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.


Inequality: Confusing the Issue

Mark D. White

The topic of today's "Room for Debate" feature at The New York Times is inequality, prompted by a recent paper by Mike I. Norton and Dan Ariely that shows a large number of Americans would prefer to live in a society with a more equitable distribution of wealth (like Sweden). Norton himself starts the discussion, followed by Tyler Cowen, and then five other notable figures.

Norton's point in the debate (and, to a lesser extent, in the paper with Ariely) is that Americans underestimate the degree of wealth inequality in the US, lulled into a false sense of security by easy credit (which ended several years ago) and unrealistic beliefs in social mobility (according to the authors), and therefore oppose policies such as redistributive taxation that would lessen the gap between rich and poor.

Cowen offers some alternative explanations for the survey results, such as that people don't compare their well-being to Bill Gates and Michael Bloomberg, but instead to their neighbors and peers, so they don't grasp the full extent of wealth inequality. Also, many people who aren't at the top of the scale nonetheless live very well, so they aren't concerned as much with how they compare to the super-rich (and they likely compare very well to the superrich of previous generations in terms of standard of living). He comes close to the real issue when he says that people distinguish between earned and unearned wealth rather than simple, raw numbers, and some people realize that they have not earned the higher standard of living that innovators like Mark Zuckerberg have). In other words, it is not the simple fact that the wealthy earn more, but a sense that they don't deserve it, that drives envy and resentment.

And this leads to the real issue with inequality, which is completely glossed over in Norton and Ariely's paper and Norton's commentary in the Times. It is not the pattern of wealth distribution that people care about, but the process by which it results. Fine, the wealthy have more--but did they earn it? Was the game rigged? Or did they compete fair and square? Any opinion on this is valid, and good arguments have been made on both sides, but this is the real issue with inequality: process, not outcomes.

At the end of his piece at the Times, Norton says:

My colleagues and I are now exploring whether educating Americans about the current level of wealth inequality (by showing them charts and pictures) might increase their support for policies that reduce this inequality. In addition, we are assessing whether different forms of redistribution – for example, raising the minimum wage, or longer term interventions like reducing disparities in education – are less likely to evoke heated opposition, and perhaps increase advocacy for greater wealth equality.

But even if people do recognize the true nature of wealth inequality, that does not imply that they will automatically support redistribution, which changes the end result without addressing the core problem with the process that generates it. Raising the minimum wage is redistribution, but reforming education is process reform; this difference needs to be appreciated. People may believe the system is unfair, but they may believe that increasing the progressivity of the income tax (for example) is unfair also, even if it might reduce wealth inequality. They want an even playing field, not one riddled with redistributional wankery. (We already have the U.S. income tax code, thank you very much.)

To put it simply, people want a fair system, which will generate (by implication) fair results. (Note that I haven't specified what system people "should" think is fair--mine is a more general point, and is open to many different interpretations regarding what is fair and is the U.S. there.) It is irrelevant whether people favor the current pattern of wealth distribution--do they think the process is fair? If they don't, that is what they will want to change. And if they do think it's fair, that would explain their reticence to introduce policies that limit its operation, regardless of the inequity of the results.