• Debraj Roy

The inequality delusion: Do we really prefer unequal society?

Updated: Apr 24, 2018

Understanding Inequality and Inequity ad how they might be related.

Before we begin this discussion I think it is useful to define two crucial terms "equality" and "equity" and understand how they are related. On one hand, equality is about sameness, it promotes fairness and justice by giving everyone the same thing. However, it can only be effective if everyone starts from the same place. In the above illustration equality only succeeds if everyone is the same height. On the other hand, equity is all about fairness and making sure people get access to the similar opportunities. Our past can create significant differences and create barriers, therefore we must ensure equity before we can start talking about equality. However, it should be abundantly clear that they both are severely linked.

"We have reached a tipping point. Inequality can no longer be treated as an afterthought. We need to focus the debate on how the benefits of growth are distributed. Our report ‘In it Together’ and our work on inclusive growth have clearly shown that there doesn’t have to be a trade-off between growth and equality. On the contrary, the opening up of opportunity can spur stronger economic performance and improve living standards across the board!" OECD Secretary-General.

Having defined (in)equality and (in)equity, I must highlight that there are several forms of both. Equality (and equity) can take the form of social, economic, political, health, education etc. While both equality (and equity) have been measured and studies extensively, they largely focus on vertical (in)equ(al)ity and tend to ignore between-group (in)equ(al)ity also known as horizontal (in)equ(al)ity. However, this is a discussion for another day. In a paper published in April in the journal Nature Human Behaviour called ‘Why people prefer unequal societies’, a team of researchers from Yale University argue that humans – even as young children and babies – actually prefer living in a world in which inequality exists. I have read the paper twice and am having hard time to find facts presented in that that corroborates their findings. They seem to suggests that "we prefer equity (fairness)" and then makes this huge jump to "we prefer inequality" in a rather abrupt manner. Should the title be ‘Why people prefer equity’?. Or perhaps I miss the point where they explain "equity leads to inequality". Seems like a interesting topic to discuss? certainly yes! But before I go in details and discuss the paper, lets take a brief look as to why this is important.

Inequality is Inevitable

The 99%. The income gap. The chasm between rich and poor has never mattered more. It’s estimated that the top 1% of the world’s richest people owns 50% of the planet’s wealth.

Solving this level of inequality is often held up as a ‘grand challenge’ for the world. But is that the right way to look at it? Reduced inequality is now a priority in the Sustainable Development Goals listed by the UN and many recent geo-political events in the advanced as well developing economies have been attributed to the rising inequality.

"There is a correlation between economic inequality and personal violence. The explanation for the correlation isn't completely clear; there are a number of possibilities." Steven Pinker

I recently read a great book "The Great Leveller" by Walter Scheidel which gives and amazing insight into the history of wealth inequality. In a scholarly and ambitious book, Scheidel argues that economic inequalities are usually narrowed most effectively as a result of cataclysmic events: war, revolution, the collapse of states and natural disasters.

Scheidel dubs these the “four horsemen” and explores the causal relationships between them and the emergence of mechanisms that significantly redistribute wealth – not just in the societies we think we know, such as western European modernity, but those we rarely consider, such as the pre-conquest Americas, or the dark ages in Europe. His argument, a companion to that of Thomas Piketty, is that the reductions of inequality achieved by welfare states, communist revolutions and confiscatory taxes required by world wars were one-offs, as reviewed by Paul Mason. Marketised industrial societies that do not experience revolution, catastrophe or total war are prone to generating the high levels of inequality we are currently approaching. Scheidel concludes that these catastrophic levellers are “gone for now, and unlikely to return any time soon. This casts doubt on the feasibility of future levelling.” While I do not share his pessimism, its an interesting (must) read.

Do we really prefer unequal society?

Now turning our attention back to the paper ‘Why people prefer unequal societies’, lets try to understand the details presented. The paper starts very strongly presenting interesting facts about income inequality and presents important statistics. The authors presents

Income inequality in Europe and the United States, 1900–2010, but fails to create any discussion related to the significant differences between Europe and the United States. I think at this point the authors missed an opportunity to make a stronger impact. No analysis was presented on the differences, as such the Figure 1 seemed lonely. The other drawback, I felt was complete lack of operationalization of the term "inequality" or "inequity" or "fairness". In fact I was surprised to find that the word "equity" never appeared in the paper, but was used several times in the references. That was quite strange!

“Robin Hood had it right. Humanity’s deepest wish is to spread the wealth."

Now to interesting bits of the paper - the psychology experiments. For example, in one study, a group of six- to eight-year-olds was tasked with divvying up erasers among two boys who cleaned a room as rewards. Researchers found that, if they told the group of children that both boys did a good job, and then gave the group an odd number of erasers, the kids made the unanimous decision to throw away the extra eraser rather than give it to one of the boys as an unfair bonus. This was aversion to inequality. The authors declare that the above findings are all consistent with both a preference for equality and with a preference for fairness, because the studies are designed so that the equal outcome is also the fair one. They claim that when fairness and equality clash, people prefer fair inequality over unfair equality. Fair enough and they show the below experiment as the evidence

" For example, in the study in which children had to award erasers to two boys who had cleaned up their room and chose to throw out the extra eraser, both boys were described as having done a good job. But when children were told that one boy did more work than the other, they awarded the extra eraser to the hard worker".

At this point everything seems to conclude that when fairness and equality clash, people prefer fair inequality over unfair equality. Which is true, except the fact that this analogy of "transactional equity" cannot be applied to explain "wealth inequality" prevalent in our society. The problem is that these experiments do not account for feedback loops over time which is the defining feature of any complex system. The experiment above embodies "meritocracy" , a form of equity as I defined in the beginning. If you notice the fundamental problem with this analogy is that it treats "wealth inequality" as one transaction. However, in reality the shape of the current wealth distribution can be studied as a function of social, demographic and economic practices of past several centuries (Kuznets curve etc.). Imagine the above experiment was to be repeated 100 times, and the children who awarded erasers to the two boys had the means to measure the output of the two boys. Now assume both the boys are equally capable. It will be easy to show after few runs of the experiment both boys will end up with similar number of erasers. This is because "competition" promotes equality, promotes and diversity (shown in numerous studies in various settings). In fact I think the condition of "equal capability" is redundant here. In any case, I think the above analogy to conclude that we prefer unequal societies is overstretched.

Source: "The Great Leveller" by Walter Scheidel

Similarly, I fail to gather enough evidence in the real world examples (from the paper) to sufficiently conclude that we prefer unequal societies is overstretched. However, the paper does provide ample evidence that "we prefer equity". Having said that it may be very well true that we prefer unequal society. I personally think that its a complex issue and there might be a optimum level of inequality which is required (probably good or desired). This is somewhat evident in the book "The Great Leveller" by Walter Scheidel (see the above figure).

Economic Inequality: Is it Natural? Econophysics

Mounting evidences are being gathered suggesting that income and wealth distribution in various countries or societies follow a robust pattern, close to the Gibbs distribution of energy in an ideal gas in equilibrium, but also deviating significantly for high income groups.

Physicists have shown that the income distribution for the majority resembles the distribution of energy among molecules in a gas, a pattern called the Maxwell-Boltzmann distribution. This prompted the idea that the distribution arises because people exchange wealth when they meet, much as gas molecules exchange energy when they collide.

That idea has since been tested using mathematical models where people exchange all their wealth at each interaction. This leads to an income distribution with many ultra-poor people, far more than what is observed in the actual world. In 2000, Bikas Chakrabarti at the Saha Institute of Nuclear Physics in Kolkata, India, added an additional parameter – saving propensity which allowed people to retain a fraction of wealth. This resulted in an income distribution similar to the broad hump of the Maxwell-Boltzmann distribution and the so-called Pareto tail.

It turns out that the main part of the wealth distribution gets narrower, more equal, the more people choose to save. In other words, inequality seems to be inevitable but can certainly managed by tweaking the – saving propensity. This can be achieved through tax reforms, labour laws etc.

Although the real economy is in equilibrium. (Most of the physical world around us is not in true equilibrium either). Nevertheless, the concept of statistical equilibrium is a promising tool for studying non-equilibrium phenomena.

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