How Inequality Corrodes Cooperation: New Experimental Evidence

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One of the fundamental premises on which my argument in Ultrasociety is built is that structural inequality is detrimental to cooperative action. By structural inequality I mean large differentials in power. For example, between a slave and a slave-owner, or between a peasant and a lord. Other examples include cooperating with someone who is physically much stronger than you in a situation where they can beat you up to impose their will on you. Or, to take a more modern situations, cooperation with someone who is much wealthier than you–someone who can afford to hire expensive legal aid that you can’t afford.

Intuitively it seems clear that such situations are not conducive to cooperation. First, cooperation requires mutual trust and a basic degree of sympathy, and large differentials in power destroy that. Second, cooperation can yield high returns on effort expended by each cooperator, but that also means that dividing up the gains from cooperation becomes vulnerable to one cooperator taking all. A large differential in power would mean that the weaker party would have no recourse if cheated (in other words, there is no possibility of moralistic punishment).

All this makes sense, but if we want to develop the science of cooperation, we cannot go on introspection alone. We need data. It would be particularly nice to have direct experimental evidence of the effect that inequality has on cooperation.

Recently (22 December 2015) Nature published a study that provides such evidence (I only regret that the article came out after my book was published). Katherine Cronin and co-authors observed how participants played cooperative games while inequality among them was manipulated by the experimenters.

The experimental setup was a bit complex, and involved participants playing a combination of a public goods game and an ultimatum game. Here’s how it was done.

A group of ten participants was ranked on the scale of 1 to 10. In one version of the experiment, ranks were assigned randomly, while in another participants first competed for higher ranks by playing Tetris, solving arithmetic problems, etc. But whether ranks were earned or randomly assigned turned to be of no significance to the results, so the authors combined the two unequal treatments and compared them against those that were unranked—equal.

Next, pairs of experimental subjects, who knew each others rank, played a variant of the public goods game, in which they could gain large returns if they contributed enough to the common pot. The kicker came at the final stage when the gains of cooperation were distributed, using a variant of the ultimatum game. The higher ranked individual proposed a distribution (for example, she could reserve 70% for herself and offer 30% to her partner). The lower ranked subject could either accept, or reject. Unlike in the usual ultimatum game, however, rejection was not final—it did not mean that the pot was lost to both participants. Instead, a lottery was held, and the pot was given to one of the participants with the probability proportional to her rank. For example, if my rank was a lowly 1 and yours a hefty 9, then my chances of getting the pot after rejecting your offer would be only 10%.

Ultimatum2

So what would I do if I found myself to be a low-ranked participant playing against one with a high rank? Well, I would find the whole setup for dividing the gains completely unfair. Not only am I going to be in the position of low power because the other person is deciding how much to offer me. I couldn’t even get the satisfaction of rejecting an unfair offer, because then the pot would be given to the proposer with a high probability. No way would I cooperate (contribute anything) in such a case!

And that’s precisely what happened in the experiment. The greater was the difference between ranks in interacting pairs, the less cooperation–the less powerful players simply did not contribute to the common pot.

Inequality corrupts cooperation.

What are the implications of this study for the broad-scale, society-level cooperation in our modern societies? As I wrote in an earlier post, the capacity of the Americans for social cooperation declined together with growing inequality over the last three-four decades. The experiment by Cronin and co-authors suggests the following explanation of this trend.

As such social commentators as Kevin Phillips worried, increasing inequality of wealth gave rich people disproportionate power to influence politics in our democratic societies. The work by Martin Gilens has shown that public policy in the US reflects only the desires of the richest segment of the population—the top 10 percent, and most likely the top 1 percent. In other words, when it comes to dividing the pot, the 99 percent have no say anymore. Should it then surprise us that several measures of social trust and cooperation have been declining?

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Swami

I am only on your second chapter in the book, so no comment on that, but I really need to speak out against the paradigm you are using in this post.

In a nutshell, you are confusing inequality and unfairness. These may seem like the same thing, and certainly there is some overlap, but they are distinct concepts.

In the experiment, we see a clear case of unfair privilege. And privilege is just a form of cheating before the game starts by putting thumbs to the scales in the very rules themselves. It is like playing Monopoly where everyone else gets $200 when passing go, but I get $800 because I play the Top Hat. Unless there is a damn good reason for allowing the player using the Top Hat to get more passing go, most of us would consider the game unfair and rigged. We would be fools to play a zero sum game which was clearly unfair.

There are multiple distinct types of fairness. There is equality of outcome. There is the fairness of outcome proportionate to input or effort. There is the fairness of outcomes proportionate to value added. There is fairness of outcomes proportionate to need. And there is even outcomes proportionate to rank (the quarter master gets double the pirate booty in recognition of his role).

But note that each of the above definitions of fairness can contradict the others. Dividing the spoils equally when the effort or contribution was vastly different can be unfair and unproductive. Thus there is no inherent universal betterness of strict equality compared to the other definitions of fairness. Equal can be grossly unjust. Strict equality of outcome is probably the most naive, non abstract and even childish of the concepts. A capuchin can probably get simple equality of outcome (grapes vs cucumbers) but an adult human “gets”rewards proportionate to effort or value added. It is a more sophisticated concept.

Long set up, but my point is that inequality and unfairness are not the same. It entirely possible to play Monopoly or tennis fairly and yet get wildly disproportionate payouts. And it is possible to bias a game so that the outcomes are absolutely equal but that the game is now both unfair and no longer either fun or productive.

The fact that Yo Yo Ma makes a hundred times what I make, or what the average cellist makes is not proof that he cheated, or that the system is unfair. He may just be a great player and add more value to others lives and is being rewarded as a superstar in proportion to his contribution.

Similarly the fact that a union employee makes the same as the manager is not proof of fairness. If the union worker achieved equality of outcome by unfairly prohibiting prospective workers from offering to do the job for less, then the union employee cheated or used privilege.

We are probably both against unfairness, but it is very possible to be for radical fairness and radical inequality of outcome. I don’t think you really grok this.

If you want my recommendation on how to identify fairness and ensure it is built into a system, I would be glad to do so, but this comment is getting as long as your post, and I need to say one more thing. You end the piece by shifting from inequality of economic outcomes, to an unsupported leap into politics. The cure for political abuse (bias, privilege, cheating and unfairness) is to restrict inequality of economic outcomes. It is to limit the value Yo Yo Ma can add to fellow humans because Mr Ma could use his riches to contribute to Clinton’s campaign. May I suggest you stop trying to fix the abuses of politics by destroying the creative powers of markets?

To the extent inequality of incomes is generated by privilege and unfairness and even political rent seeking, then I am at your side in contempt of the abuse. But note I stand against unfairness. In reality, I think most recent increases in inequality are due to less nefarious conditions (a billion lower skilled workers entering the market, for example). To the extent I am right, inequality is a good thing within the domain of markets — it is the system working and solving the problem of expanding overall human well being,

Your response to my comments are greatly appreciated,

al loomis

perhaps society should give a basic income to everyone, at a survival level. then work is optional, but desirable, and will be entered when the cost/wage suits both.
some societies function well with income disparity at 10 to 1, more than than induces mindless greed. worse, it disconnects the rich from the nation to the point that they seek wealth by policies that actively harm others.
the history of the bush family, in backing the nazis, and the bin ladens, investing in munitions production while pressing for war in iraq, show that they see themselves as ‘stateless people,’ members of an upper class, not of a nation, but of humanity. it can’t be good, to go to war to enrich the shareholders of the carlyle group.

Yoram Gat

He may just be a great player and add more value to others lives and is being rewarded as a superstar in proportion to his contribution.

This seems to take for granted that “being a great player adding more value to others’ lives” is a justified reason for getting preferential status (social and material). One might as well take for granted that greater physical strength, or being born to an aristocratic family are justified reasons for privilege.

Swami

Yoram,

I am taking nothing for granted. if Yo Yo Ma can add value to others by voluntarily playing in exchange for something in return (say a wage), then as long as people are willing to pay him to play more, value is created. Those paying and those playing both gain. The world is made a better place according to the people involved. There is no limit in this value creation process. More playing for more willing payers just increases the range and extent of cooperation, and that is what any voluntary economic interaction is — a positive sum, value creating act of cooperation. By definition.

Ma is not operating under privileged status if the process is voluntary. Everybody is completely free to not pay to listen, or to listen to someone else if they so choose. Similarly Ma is not required to play. The justification for the arrangement is that everyone involved agrees to the terms and everyone involved gains. In addition, every other potential cellist on earth is allowed to fairly compete for my ear.

Greater physical strength implies coercion, which clearly is not voluntary and thus is likely not Pareto efficient. If I was In the audience and Yo Yo used coercion to force me to pay or listen or pay more than I thought was fair I would feel cheated. Similarly if some jerk told me that he was an aristocrat so I had to listen to him play the cello, I bet you can guess where I would tell him to stick that instrument.

The way to think of it is that Mr Ma is competing with every other person on earth to cooperate with me by performing music for my pleasure. It is a constructive arms race of cooperation.

Don’t get me wrong, voluntary market interactions can’t solve all problems. There are other domains which require other methods and institutions, science and politics are two such other domains, and they are very important as well. But there is a very good justified reason for me and Yo Yo to voluntarily cooperate.

My guess is you are confusing the concept of privilege (a form of cheating) with advantage. A common mistake, and one which is widespread among so called progressive ideology. I could clarify if it would help.

Richard

To continue the discussion on legitimate advantage vs. illegitimate advantage, I have to note that many libertarians seem to be clueless about power.
They all say that they are for legitimate advantage and against illegitimate advantage, but they fail to see that it is human nature to try to preserve for yourself and your descendents what you have even by illegitimate means even if you gained it legitimately.

For instance, Rockefeller may have started his oil empire legitimately, but would you consider using monopoly power and coercion (including the threat of physical violence) to force out competitors legitimate or no? Of course, you have some on the libertarian side who defend monopolies; I’m not sure they understand where their logic leads, because it’s the same logic that justifies despotism and rule of the strong over the weak.

Swami

Thanks for the comment, Richard,

“To continue the discussion on legitimate advantage vs. illegitimate advantage, I have to note that many libertarians seem to be clueless about power. They all say that they are for legitimate advantage and against illegitimate advantage, but they fail to see that it is human nature to try to preserve for yourself and your descendents what you have even by illegitimate means even if you gained it legitimately.”

I am not a libertarian, though I am familiar with the ideology and what I perceive as its weaknesses (a peculiar emphasis on natural rights and belief in untested social experiments absent adequate empirical evidence).

I am certainly not clueless on the prevalence of incumbents to do everything in their power to bias the game in favor of themselves over potential competitors. I would say this is one of the central insights of history. I would also say that most libertarians also recognize this issue. The predominant term they and economists use is “rent seekers.” Others use “privilege seekers,” or “incumbents,” or the broader concept of “concentrated benefits and distributed costs”. Examples include guilds, state monopolies, class, gender, race or caste privileges, import restrictions, and most unions. These are all incumbent, rent seeking acts of exploitation and privilege.

So, I am not sure why you think either I or the average libertarian is ignorant of, or not alarmed by, this HUGE problem with cooperation. It is truly endemic even today.

“For instance, Rockefeller may have started his oil empire legitimately, but would you consider using monopoly power and coercion (including the threat of physical violence) to force out competitors legitimate or no?”

Of course I do not support someone using coercion and threats to keep competitors from voluntarily cooperating (selling oil) to customers. I also do not support this person using his wealth to influence the political process to build rules which bias the economic realm in his favor*. I am against privilege, with privilege defined as unfair rules which would not be chosen absent knowing whether you were Rockefeller, the consumer or the competing new entrant oil company.

“Of course, you have some on the libertarian side who defend monopolies; I’m not sure they understand where their logic leads, because it’s the same logic that justifies despotism and rule of the strong over the weak.”

Umm, like me libertarians unanimously and vigorously condemn any monopoly which is created via coercion, threat or state biasing of the rules. They and I also despise despotism. Are you sure you are familiar with libertarian thought? I won’t speak for them any more, but I will say that for me most natural monopolies face the threat of competition from potential entrant competitors. To the extent they don’t, then I am skeptical of markets to manage the process. Markets can’t solve all problems, and only a fool would expect them to.

what I find crazy is the idea that the best way to keep a wealthy person from using his wealth illegitimately is to make sure he never becomes wealthy, especially if the wealth earned was enriching the lives of economic cooperators (aka enlarging the size of the pie, which is standard fare in markets).

Richard

“Umm, like me libertarians unanimously and vigorously condemn any monopoly which is created via coercion, threat or state biasing of the rules.”

Not all of them, yet they call themselves “libertarian”. But that’s not my main point. My main point is that while its all well and good that you and many libertarians condemn strong-arm tactics, a libertarian ideology allows strong-arm tactics to flourish. And against power, what use is your approbation?

“what I find crazy is the idea that the best way to keep a wealthy person from using his wealth illegitimately is to make sure he never becomes wealthy, especially if the wealth earned was enriching the lives of economic cooperators (aka enlarging the size of the pie, which is standard fare in markets).”

Strawman. Please point out where someone on this site has said that the best way to keep a wealthy person from using his wealth illegitimately is to make sure he never becomes wealthy.
Even if everyone agrees that capitalism has many virtues, it does not follow that unrestrained capitalism with giant inequality is the best possible state.

Also, in terms of growing the pie, again, it is not at all clear that unrestrained capitalism with giant inequality grows the pie the largest.
Plus, how the pie is divided also matters.
If a pie totals 100 units in the beginning with the bottom quarter getting 5 units, the middle 50% getting 35 units, 2-24 percentiles getting 40 units, and the top 1% getting 20 units, tell me why most people should support a system where the pie grows to 150 but the bottom quarter gets 5 units , the middle 50% gets 25 units , 2-24 percentiles gets 50 units, and the top 1% getting 60 units?

Richard

BTW, the hypothetical I gave is actually not that far from reality:

http://www.businessinsider.com/change-in-real-wages-by-income-percentile-2015-7

Richard

Longer term:

http://www.economist.com/blogs/freeexchange/2013/09/incomes

Even if it’s stagnation rather than a fall, if most of the gains in a growing pie accrue to a small percentage of the people, you still have to justify why most people would be for that as the growing pie would lead to a greater power imbalance.

Swami

Richard,

“My main point is that while its all well and good that you and many libertarians condemn strong-arm tactics, a libertarian ideology allows strong-arm tactics to flourish. And against power, what use is your approbation?”

So, the belief that we need to have institutions which prohibit any and all coercive, strong-arm tactics is somehow shifted around in your mind to be one which allows strong-arms tactics to flourish? I am not following you.

As for the strawman accusation, I count three or four examples where Turchin or commenters have made the connection that growing economic inequality is leading to injustice. In every case they pivot from economic inequality to injustice in non economic realms (specifically public policy, state monopoly protection, and courts). If the above commenters want to assure me that they (and you) see no problem in market-based economic inequality absent abuses in non economic institutions, I will gladly retract or correct my statement. Indeed I would be delighted to. I am not holding my breath though.

“Even if everyone agrees that capitalism has many virtues, it does not follow that unrestrained capitalism with giant inequality is the best possible state.”

Strawman back at you. Just to clarify, I am not for unrestrained capitalism. I find the concept absurd. Markets work great with proper rules in the proper circumstances. They don’t work at all without rules or in the wrong circumstances. One way to think of it is that politics, markets and science are three separate problem solving systems. A successful society uses the proper mix and balance and interplay of all three. Like I said in another comment, Sweden and Singapore are two great examples of places that balance the institutions well and their citizenry flourish in great part because of this.

“Also, in terms of growing the pie, again, it is not at all clear that unrestrained capitalism with giant inequality grows the pie the largest.”

See the above comment. You are attacking a position I do not hold.

“Plus, how the pie is divided also matters.
If a pie totals 100 units in the beginning with the bottom quarter getting 5 units, the middle 50% getting 35 units, 2-24 percentiles getting 40 units, and the top 1% getting 20 units, tell me why most people should support a system where the pie grows to 150 but the bottom quarter gets 5 units , the middle 50% gets 25 units , 2-24 percentiles gets 50 units, and the top 1% getting 60 units?”

This comment is for everyone following this post.

The answer of why anyone would join a society is that they expect the position of themselves and those they care about to be better than it would alone or in another society with different rules. See comment elsewhere on Rawls and the veil. The lowest decile of people in advanced western societies have a lifespan, health, entertainment, travel opportunities, prosperity, education and literacy which are better than most of the elite in societies before the great modern enrichment (which again involves a balance of three key institutions). Compared to the average or the poor of prior eras, the western poor have lives which are incomparably better.

You need to grasp that an increase from $600 a year (common today in some African nations and the norm three hundred years ago) benefits the poor more than an increase in a billion dollars does to someone like Gates. He wouldn’t even notice a change in lifestyle of a billion dollars. Yet the increase from $600 a year to $6000 year is the difference between dying of diarrhea in the dirt and living in a central heated apartment with a lifespan of 80 years and modern health care, Internet access, 259 channels on cable and a used car. Economic prosperity helps everyone, but the biggest gains happen with the first ten thousand or so. In terms of utility gained, it isn’t the poor who have gained the least, but rather the most compared to poor of non market societies.

Back to your “units”, if the poor today in the worst African countries get 5 units, the poor today in the US get 50 units. And remember the first units count the most. Standards of living of our poor is above the OVERALL AVERAGE in the world, and above elite levels of three hundred years ago. Compared to the alternatives available to THEM, the poor gain the most.

But I need to point out that you are making a colossal mistake in your groupings. You are assuming (implying?) that a person in bottom quartile is always in the bottom quartile. This is demonstrably wrong. Most people follow a trajectory of moving up into higher deciles through their life within modern market economies. We start out of school (publicly funded) at a low initial wage, then we leverage this into more experience and productivity and higher wages. It is uncommon (though not impossible) for anyone to be in the bottom decile or even quartile their whole life. The point of this comment is that you must not compare annual income distribution, you must compare lifetime income distribution. Two very, very different things. (Remember we are explaining why someone would choose this society for their life, not for a year).

Next, you are neglecting the social redistribution which occurs in all well functioning developed states. This is non market transfer payments and insurance which is provided by non market means and is frequently overlooked. Medicare, housing subsidies, welfare, social security payouts, education funding. I am a big fan of effective safety nets for those who are unfortunate or inherently unproductive (mentally challenged, paraplegics, children, the elderly). The point is that when people are in the lowest decile, temporarily, or in some cases permanently (my nephew is mentally challenged and unlikely to ever be out of the lowest decile) then a good society uses its wealth to help these people out. In the US, the top half pay pretty much all income taxes, and the top decile pay over half. Again, why not? from a utility standpoint they miss it the least (thus it is something that most of us would agree to behind a veil).

As the pie has grown from about $600 year to almost one hundred times this number, effective societies use the larger pie to improve the lives of all. More insightful, they use the incentives (referred to as an invisible hand) to channel self interest into other interests. Yo Yo Ma makes more money by entertaining more people. A win win. Then we tax his earnings when rich redistributing it to when he was or could have been poor. A win/win/win.

Finally, you need to be careful about comparing shorter term trends within societies when that society is interconnected via markets to a wider globe of billions of people. When previously restricted markets expand, the Stolper/Samuelson theorem clarifies that the expansion can have disparate impacts on the various factors of production depending upon the net change in scarcity. The most recent generation has seen the greatest expansion in markets ever, and accompanying this is the greatest ever increase in wages. More people have risen out of extreme poverty worldwide than any other generation since humanity arose. However, within developed nations, unskilled labor has faced the expanded competition from a billion similarly skilled workers. This holds down wages in the previously advantaged societies and it increases the rewards to capital, entrepreneurship, and more scarce skilled labor. As the process enlarges the pie globally at the fastest pace ever, the developed worker wages have increased at a lower pace, and in some cases not at all. But note that those who started the poorest (the billion in China and Vietnam and so on) are the ones gaining the most. Overall, this is possibly the greatest utilitarian increase in the history of man. Odd, considering how so-called progressives try to spin this as a negative.

Here is a link on the overall global enrichment by starting percentile, see the third chart:

http://www.voxeu.org/article/labour-power-sets-neutral-real-rate

Sorry for the long comment.

Bruce Lepper

Perhaps of interest: in Holland, Geert Hofstede’s studies based on surveys of individuals’ values in different cultures led him to model six dimensions representing “independent preferences for one state of affairs over another that distinguish countries (rather than individuals) from each other.” His first dimension is Power Distance, which expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally.
He says: The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of Power Distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low Power Distance, people strive to equalise the distribution of power and demand justification for inequalities of power.”
On the site http://www.geert-hofstede.com a country-comparing tool enables visualisation of different national scores and comparison between any two countries. For example, the US scores only 40 on Power Distance compared with Russia’s 93.

Geert Hofstede, Gert Jan Hofstede, Michael Minkov, Cultures and Organizations: Software of the Mind. Revised and Expanded 3rd Edition. New York: McGraw-Hill USA, 2010

Peter Richerson

Here is an old, somewhat similar experiment with the same bottom line:

Insko, C. A., Gilmore, R., Drenan, S., Lipsitz, A., Moehle, D., & Thibaut, J. (1983). Trade versus expropriation in open groups: A comparison of two type of social power. Journal of Personality and Social Psychology, 44, 977-999.

Yoram Gat

Hi Swami,

There are at least two important assumptions in your claims about fairness that I think are unjustified.

First, the notion of “willing to pay” is quite problematic. In the case of musicians, this appears benign because people can relatively easily forego music. But what about what people are “willing to pay” for food? Or what people are “willing to pay” in order not to be beaten by a stronger person? How are we to differentiate between legitimate “willingness” to do something and being coerced to do that something?

Second, your notion of “the people involved” is far too narrow. If Mr. Ma becomes rich, say, then this affects people who may never had a say in him becoming so. As in the example that Peter gave, the fact that Mr. Ma is rich puts him in a better legal situation than his neighbors due to his ability to hire more powerful legal help, at which point he may feel comfortable to become more aggressive toward them knowing that he is likely to prevail in court if I sue him.

you are confusing the concept of privilege (a form of cheating) with advantage

It seems to me that the difference between privilege (illegitimate advantage) and (legitimate) advantage is purely an ideological construct. Thinking there is a natural difference between the two is a common mistake, and one which is widespread among so called conservative and liberal ideologists.

Swami

Yoram,

“There are at least two important assumptions in your claims about fairness that I think are unjustified. First, the notion of “willing to pay” is quite problematic. In the case of musicians, this appears benign because people can relatively easily forego music. But what about what people are “willing to pay” for food? Or what people are “willing to pay” in order not to be beaten by a stronger person? How are we to differentiate between legitimate “willingness” to do something and being coerced to do that something?”

Let me ground the conversation, because otherwise we are just going to talk past each other.

1)Life involves constant problem solving. Absent continuous problem solving we all die in a matter of minutes (consider breathing, eating, circulating blood as just a few of the constant stream of problems). Life itself is the source of this “coercion”. Yo Yo Ma isn’t the source of this problem, he is part of the solution.

2). There are two general ways to solve problems, alone or with others. With others can be further sorted into taking from or cooperating with. Note Yo Yo takes nothing and uses no coercion, neither does your local grocer.

3). People have found that we can accomplish more cooperatively than apart. However as anyone familiar with the “problem of cooperation” and the Prisoners Dilemma, knows, it is even better to cheat or exploit or take while others cooperate.

4). When it comes to food, goods and services, the dominant (most successful) problem solving institutional model which has evolved over the past ten thousand years (most spectacularly since 1776 when modern economics arose) is one where rather than solve problems for ourselves, or take from others, we agree to a set of common conventions on property, contracts and rules. We then voluntarily exchange our labor or property to others. This allows the creation of value. It is in effect a complex adaptive cooperative problem solving system where everyone serves everyone’s else using a set of agreed conventions and voluntary interactions. This is basically a system of division of labor and exchange, and it has proven empirically to be unimaginably good at creating value compared to alternative systems. Coercion, cheating and privilege are explicitly considered unacceptable by the conventions.

5). Societies supplement the above market based value creation system with other institutions such as family or welfare state which help children, invalids and those experiencing unusual circumstances. The state also fills the role of rule-setter and enforcer.

6). By combining numbers 4 (markets) and 5 societies have been spectacularly successful at enriching the lives of pretty much everyone. Look at trends of lifespan, health, leisure, literacy, education, opportunity and poverty over the past 250 years for those using this model compared to those not adopting it.

I set this model out in detail so you can identify any areas of potential disagreement. If you agree, sorry for the needless elaboration, but honestly I find most people emerging from modern universities today do NOT subscribe to the above paradigm.

So, on to your question. The system works by allowing people to convert their ability to work into ability to pay. When I became an adult I looked for a job, worked for others adding value to fellow humans in exchange for compensation which I could then use to buy concert tickets, food and so on. Coercion and violence are not allowed as per the agreed upon conventions of the institution. The safety nets of state, family and charity supplement the market system by redistributing some of the value created by markets, allowing children and victims of bad luck to get on their feet and add value to others.

The desire to solve problems for myself (get money for food, concerts, etc) acts as an “invisible hand” which directs me to serve others (assuming the above proper institutional constraints). I first did this by being an employee providing a service to retail establishments. Then I gained skills and added more value in return for more rewards. Then I became a manager and directed others. Then I became a manager of managers, and eventually became an entrepreneur who designed and created new products and services which (apparently) delighted people and (hopefully) enriched their lives. Along the way, also became an investor, risking my past rewards in new endeavors which could enrich others. They served me and I served them, creating value all along the way. Cool huh?

My story isn’t unique. It describes what hundreds of millions, perhaps billions are doing today.

How have you added value to fellow humans? Please do share. It is an awesome process, no?

Note that in no case is coercion allowed by the rules of markets (it often is with state safety nets, but let’s set that aside).

Where you appear confused is that you are assuming markets created the compulsion to serve others. Not true. Nature created the compulsion to solve problems or die. The choice is whether we do it together cooperatively or alone. Markets and social safety nets are just the best way found so far to solve the problems nature throw at us.

“Second, your notion of “the people involved” is far too narrow. If Mr. Ma becomes rich, say, then this affects people who may never had a say in him becoming so. As in the example that Peter gave, the fact that Mr. Ma is rich puts him in a better legal situation than his neighbors due to his ability to hire more powerful legal help, at which point he may feel comfortable to become more aggressive toward them knowing that he is likely to prevail in court if I sue him”.

Again, you just repeated the sleight of hand which I called Turchin out for. You just shifted from market outcomes to the rule of law. If your rule of law and system of justice allows wealthy people to buy better justice, then how in the Hell is this a problem with markets? This idea is ludicrous. You are clearly defining a problem with government. The solution lies with government as well. Justice should be blind and impartial, and if it isn’t then it should be fixed. How anyone can envision that the path to solving injustice in courts is to destroy the system creating value (and thus funding the existence of courts) is beyond me. Have you actually ever just sat back and thought how absurd this course of action is?

“It seems to me that the difference between privilege (illegitimate advantage) and (legitimate) advantage is purely an ideological construct. ”

Umm, well I suppose every definitional difference between complex abstract concepts is an ideological construct. But it isn’t “purely” so. It comes down to a matter of the utility or practical effectiveness of the institutions operating under the chosen definitions..

I’ve spent twenty years contemplating and studying what separates successful rules of society from unsuccessful ones. In general, I agree with a simplified/modified version of Rawls. A fair game is one which you would choose to join not knowing your exact position once the game starts. And an even more fair game is the game you would join as per above with a large supply of alternative games available to choose. The game which makes the most sense for most people to join is the one leading to (indeed incentivizing) highest average outcomes, most degrees of opportunity and freedom and the best safety nets (the exact balance differs based upon values of the ones choosing and we may very well disagree hence the importance of multiple games).

I would choose to join a game which encouraged people to develop and optimize skills, creativity, intelligence, hard work, honesty in exchange for value from others using a system of specialization and voluntary exchange backed by agreed upon sets of convention along with well designed safety nets which help those in need while not incentivizing free riding. . I would NOT join a game which was partial or privileged and which biased the rules in favor of some players over others. The reason is that these games shift from positive sum, value creating arms races into negative sum, value destroying viscous cycles of privilege/rent seeking. The latter lead to low average standards of living, limited choice and widespread coercion. Think of the difference between Singapore or Sweden vs North Korea or 1970s era China.

The system I choose would encourage people who are exceptional at the cello to develop their skill and people who are exceptional at designing products to develop that skill and then convert that skill into value added utility for fellow humans. It would encourage people to engage in a an arms race with each other to cooperate better with each other.

What would you choose to join?

pseudoerasmus

“The work by Martin Gilens has shown that public policy in the US reflects only the desires of the richest segment of the population—the top 10 percent, and most likely the top 1 percent. In other words, when it comes to dividing the pot, the 99 percent have no say anymore.”

This is not accurate. It is true Gilens shows that when the policy preferences of the rich diverge from the rest, the rich do get their way. But as I tried to point out on Twitter, most of the divergence is in matters unrelated to economic or redistributive policies. In fact, the policy preferences of the rich are positively correlated with the policy preferences of the middle and the poor on economics, taxes, and social welfare. The divergence is substantially driven (in Gilens’s analysis) by gun control and environment (see Table 5.5). The rich are more ‘progressive’ on those things.

Gilens himself:

“As table 4.6 shows, for example, Americans of all incomes
opposed proposals for a federal sales tax, opposed across-the-board
increases in income tax, favored across-the-board income tax cuts,
and favored unpaid family leave laws. Americans at all income levels also
strongly supported corporate accounting reform in the wake of the Enron
scandal and differed only modestly on cutting taxes for low- and middle income
taxpayers and increasing taxes on extremely high earners.25
Federal government policy on many of these consensual economic issues
did reflect the predominant preferences of the public. Lawmakers have
never seriously considered a federal sales (or “consumption” or “valueadded”)
tax, and the marginal income tax rate for the average taxpayer
fell from about 31 percent in 1981 to about 24 percent in 2002.26 Also
consistent with public preferences, a national family and medical leave
law was adopted in 1993, requiring employers to grant up to twelve weeks
of unpaid leave per year. The 2002 Sarbanes- Oxley Act strengthened corporate
accounting rules in the wake of the Enron, Tyco, and other corporate
scandals, again reflecting strong public support.”

I think this post by Bryan Caplan conveys a more accurate sense of Gilens http://econlog.econlib.org/archives/2012/09/why_is_democrac.html

pseudoerasmus

( Note I am not endorsing Caplan’s economic libertarianism in that post. )

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