Why inequality matters
- Paul Berkowitz
- 13 Oct 2011 08:55 (South Africa)
As I've remarked before, conventional economic theory can be a dreary topic best used to frighten children and treat chronic insomnia. It is usually when a casual reader of theory steps off the road more travelled and hacks her way through the jungles of experimental/behavioural economics that things start jumping.
Behavioural economics in particular makes an effort to leave the theory of textbooks and to simulate real-world scenarios to test theory against observed behaviour. The resulting disjunction between the prescriptions of theory and what people actually choose has been more helpful in advancing our understanding of what makes humans tick.
Let’s examine a situation that has come to be known as the Ultimatum Game. There are two players in this game and between them they have to divide an amount of R10. The first player proposes how the money should be divided between the two. The second player decides whether to accept this offer or reject it. If the second player accepts the first player’s division, both players walk away with some money. If he rejects the division, they both leave with nothing. This game is played as a once-off event and the two players don’t interact in the future.
The first player can choose any division she likes: an equitable down-the-line split of R5 each, a R6/R4 split slightly in her favour, or a R9/R1 split that leaves the second player with precious little for his time. She could even propose a ‘winner-takes-almost-all’ split of R9.99 for herself and leave the second player with one cent for his troubles.
Conventional game theory tells us the second player should accept any division of the money that’s put to him. The proposed division is essentially of a surplus, and any money he receives for his troubles is more money than he had before the game. If people are really made in the image of rational economic man (homo oeconomicus) they’ll take the money, any money.
The reality is quite different. The second player tends to reject offers that are considered manifestly “unfair” to him. Typically, any proposed division that leaves the second player with R3 or less is rejected outright by the second player. The results are remarkably consistent across most countries and cultures where the game is tested. The notable exceptions are found in societies that bear little resemblance to the modern nation-states we’re used to. The Machichuenga people of Peru were likely to accept any offer put to them, but they are described by anthropologists as “among the most asocial people on earth”, a “people with no economy to speak of”, and uncooperative with either each other or outsiders
Far from exhibiting so-called rational behaviour, most people seem happy to forgo extra money for a chance to “punish” inequitable behaviour. (Many divorce lawyers appear to earn their daily bread from this.) What is going on here?
There are a few theories about this phenomenon. One of the more popular ones is that a rejection of “unfair” behaviour is hardwired into our genes as a result of evolutionary processes. If our ancestors needed to assert themselves against being pushed around in their tribes or if the survival of their families depended on an equitable division of resources, an “unselfish gene” (or some approximation of one) could have evolved naturally.
There are other bits and pieces of corroborating evidence. When people are asked whether they would prefer earning R500 000 in a society where the average salary is R200 000, or R1 million compared with an average salary of R2 million, most choose the former. In other words, most people would prefer to earn less in absolute terms, but more money relative to other members of their society, implying that the relative distribution of wealth matters more to people than their absolute wealth (what you might call a “keeping-up-with-the-Joneses effect”).
In South Africa, the incidence of service delivery protests is clustered around our metros and larger towns. People in Temb'elihle, looking across at their middle-class neighbours in Lenasia, are more likely to demand services than entire municipalities in the former Transkei and Ciskei homelands, even though the latter are worse off in absolute terms than the former. The evidence around us supports the findings of behavioural economists elsewhere - inequality matters to us and we attach a cost to it.
Ivo Vegter has argued that a fixation on inequality is wrongheaded and pulling people out of absolute poverty is what really matters. I agree with him that alleviating absolute poverty should be our first order of business. As a lapsed libertarian myself, I also agree with him that this job is too important to be left solely to the state and that the Gini coefficient tables are a blunt tool for ranking the problems different countries face. But I disagree with him on the importance of tackling inequality within a society and the real social costs that inequality imposes on us.
South Africa is an urban society and urbanisation is set to continue: more than 50% of our population lives in our 27 biggest municipalities and this will probably rise to 60% or more in the near future. As more and more of us are living as neighbours in a modern urban environment we will need to grapple with solutions to the systematic and systemic inequalities of our economy. We need to understand the role that inequality plays in our crime epidemic and how it fuels social unrest and political protest. We desperately need to understand that our self-interest depends on fixing the things that maintain and entrench inequality (including transport costs left by apartheid urban planning, our badly broken education system and current urban planning laws).
Whether we need to do these things out of any sense of moral obligation is another story for another time. I am not peddling my agenda for change on a platform of guilt and moral coercion. I acknowledge that there will always be inequality, in any and every society, but also that social revolution is always a consequence of inequalities that have grown beyond a certain point. I submit that there are acceptable and unacceptable levels of inequality and these aren’t based on political agendas, but on what our brains have evolved to accept or reject. Our system will not automatically self-correct, particularly since our politicians insist on tinkering with it in all the wrong ways.
Our challenge, as responsible members of a society (and not as citizens responsible to the government of the day) is to do what we can to ensure that the national surplus is divided in a way that is acceptable to all of us. The cost of a division that is rejected by an increasing number of us is that one day the surplus won’t be available to any of us. DM