Another look at inequality

In a prior blog post on privileges and incentives, I argued that thinking about “privileges” as a source of unfairness in society is not a very helpful construct. This is part of a more basic belief I have: namely, that inequality is not that important.

I’ve always believed that, from a public choice perspective, making everybody better off is better even if it comes at the cost of increased inequality. Surprisingly, I have found that many intellectuals and scholars have often taken opposing views. So, it was a pleasure for me to spot, earlier this week, a policy analysis by Will Wilkinson at the Cato Institute that looked at some aspects of income inequality and came to conclusions somewhat similar to my intuitions.

What do people want?

It’s always good to ask whether people prefer a more unequal, richer society to a more equal, poorer society. One philosophical framework I’m aware of that addresses this is as follows: if a worker agrees to an increase in her income with a simultaneous increase in somebody else’s income of a much greater amount, would she accept? In other words, would a worker trade higher income for more inequality? If she would, then she cares more about equality than about her absolute wealth. If she wouldn’t, then she cares more about her absolute wealth than about her inequality.

Do people make these kinds of choices? At the atomic level, in the marketplace, we see such choices being made every day. A poor person buys a product from a rich corporation, making the corporation and its major shareholders richer and making herself “poorer” in financial terms (though presumably richer in material terms because of possession of the product). Such a purchase may result in an increase in inequality. People often choose to work for richer employers who offer better wages than poorer employers, thus increasing profits for the richer employers and possibly widening the gulf between the rich employers and the poor employer.

As Wilkinson’s Cato Institute paper points out, people’s viewpoint on progressive taxation often runs counter to their own financial interest. Wilkinson points out that people earning over $200,000 were more likely to vote for the “increase-taxes-on-the-rich” candidate Barack Obama in 2008 than they were to vote for John Kerry in 2004. This suggests an interesting possibility (not suggested by Wilkinson):

Poor people may prefer more inequality if it allows them to improve their absolute standard of living. Rich people may prefer more equality even to the detriment of absolute standards of living, because they are rich enough to have time to worry about social issues like inequality.

I’m not claiming that this possibility is true or that there is strong evidence for it, but it may well have a partial ring of truth. So-called “intellectuals” I have encountered both in India and in the United States (most of them reasonably well-off) denounce the significant inequalities in wealth and income, and the hypocrisy of the rich. But other poorer people seem much less concerned about the huge wealth of people like Bill Gates, since they are more keen on improving their financial position. This anecdotal evidence makes me suggest, tongue-in-cheek, that the best way of eradicating inequality is to ensure that there are enough rich people, or perhaps a few super-rich people, who have the luxury to think about issues of inequality.

Wired for equality?

There has been much recent literature on prosocial behavior. Prosociality is the trait by which people often deprive themselves in order to uphold some moral principle rooted in social welfare and justice.

A typical example of prosociality is the “ultimatum game” with two players. One player is given some money and is asked to decide how to distribute it among the two players. The other player can then either agree to the distribution or disagree. If the second person agrees, the money is distributed. If the second person disagrees, neither player receives money.

Money versus worth

This post again returns to the what we do as individuals line of posts, continuing from the earlier post on Races and Head Starts.

I’ve been reading a lot of rhetoric of late regarding the issue of markets, how they function, and how they fail. At one extreme of the spectrum is the Ayn Rand school of thought, which places markets and individual choice as the ideologically correct thing, while at the other end, we have the communists who insist that market mechanisms are inherently exploitative. Then there are the moderates, who say that market mechanisms usually work well but only under certain minimum conditions of stability.

Further, many of them argue that forcing a market mechanism when the infrastructure and rule of law is not strong enough, is as bad as having rigid government controls and quotas. The problem, they argue, is that if the mindset of people is rooted in an era of government control, and if the demand-supply system for prices is not good enough, then suddenly going to a market mode leads to hyperinflation, lack of basic security, unemployment, and many other problems.

Nonetheless, it is generally agreed that the basic principle of the market, which is that individuals make their choices in mutually beneficial ways, is a central tenet to any democratic society.

From the large-scale perspective of the market, let’s move to the small-scale perspective of an individual buyer and seller. Suppose I am offering some service to you. This service could be, for instance, a car or house for rent, a one-hour private tuition, a musical performance, a consultancy. This service makes use of some skills and talents that I have. You gain something from this service (or at least you believe that you will gain something from it). This is the real transaction. The ability for me and you to negotiate the conditions under which I offer you the service is what I mean by the market mechanism at the micro-level.

For instance, I may, in return for providing the service, expect nothing at all. I may, instead, expect a certain amount of monetary payment. I may expect you to provide me similar services without fuss at some later date, or I may ask you to provide me some nice freebie (like an ice-cream or chocolate). Or I may ask you to provide similar service to others who ask for them (the transitivity principle).

You may wish to pay me something for the services, or you may wish to give me a nice gift, or you may want to offer me some similar service in the future.

The point in all these is that it’s completely a matter between you and me. We’ll agree to something that we are both agreed to. Of course, it may happen that I get more out of it than you do. However, these kinds of ordinal comparisons don’t matter so long as each of us is convinced that we are getting a unique and distinctive value from my providing the service.

Further, the money that I charge you and the money that you finally choose to pay me is also a matter between you and me. It’s a matter of the equation between us and the motivations we both have for doing what we want. This money could be taken as one of many indicators of the worth and value of the service I am providing you, in so far as it is somewhat related (other factors being the same, you would be willing to pay more for greater value of service provided).

Economists, when trying to make computations of the production in an economy, typically use the amount of money exchanged as an easy indicator (there are probably several variants of this, but this is the rough idea). Of course, the money exchanged is a poor indicator of th eamount of production or value, because many times the payment may not be monetary but may be based on several other factors. However,it is still some indicator, and the main value of money is that it can be exchanged for a wider range of goods than most things can. Thus, in return for the value I provide you by giving a one-hour private tuition, I can get money which I can use to hire a domestic help, or buy a chocolate, or give to a charitable organization.

In another sense, the very danger of money lies in the fact that it can be used for a wide variety of things. Money thus destroys the localness and closed interdependence of a system by subjecting it to outside pressures and outside influences. Thus, to protect itself against outside influences, a closed system may decide to use its own money (or its own way of rewarding service) that cannot be taken outside the system. This is the idea behind the protectionism that industrially non-advanced countries followed against bombardment by goods from the industrially advanced countries, this is the same philosophy that the anti-globalists preach (use local currency and local goodwill rather than nameless faceless money) and this is the same idea which is followed in most organizations to reward things internally. For instance, within an organization, people may render each other free service in exchange for mutual goodwill; something which they may refrain from doing outside the organization. This is not because they consider their services useless but because the internal reward system is different. They feel that the amount of money one has cannot be a good judge of the amount of service one should receive.

This is the same kind of principle which people in one caste or community use to exclude people from other castes and communities. They say that a person fron so-and-so caste or community cannot avail this service even if he/she pays the full money. Or, equivalently, that people from other castes/communities have to pay more. The idea is simple: design monetary systems so as to encourage people to feel that certain services are for free, but at the same time make sure that those services are available to a sufficiency exclusive section of the people.

The point here is that not charging things is often a way of excluding and selecting just as much as charging things. There’s nothing intrinsically holy about not charging — it is just a selfish mechanism for mutual aid that may or may not help the wider interests of the world. However, there’s nothing anti-market about providing free service. It’s just as much an exercise of individual choice and mutual contract as charging for a service.

However, the skew between charging and not charging leads to some interesting results. The main problem is that the same people who may offer each other free services in one sphere still have to pay for the services they require in other spheres. For instance, I may be willing to provide free service to an academic colleague, but the chalk and the boards that we may use in the process of our discussion has to be paid for by somebody. Somebody has to pay for the meals that we have. Somebody has to fund these things.

Of course, we can get grants and scholarships for the purpose (which is how research works). However, many money-phobic communities (particularly research communities) feel uncomfortable actually accepting money for the services they render, because this would mean that their system starts valuing itself by money. But at the same time, they want to have enough money so that a lack of money doesn’t come as a hindrance in their work. So this requires a complex kind of thinking.

For instance, a person who has been called to give a talk in some far-off place may insist on not receiving payment for the talk — at the same time, this person may be reluctant to incur all the expenditure needed to go far away to give the talk. So, the person demands only enough money as a compensation for the time and expense of the travel as long as that money does not serve the personal needs of that person.

The reason why I think this kind of thinking is limiting is that money is not just useful for reimbursing necessary expenses like travel and food. Money is a powerful tool in the hands of any researcher (or social worker or a person in any money-phobic profession) to be channeled towards achieving what he or she needs. This, of course does not mean that money in itself can achieve much, or even anything. But having money in one’s hands enables one to consider options that would earlier have seemed too far-fetched. For instance, one can consider the possibility of setting up a new research lab, the possibility of a new degree of network connectivity to co-author papers with people at the other end of the world, the possibility of a new kind of teaching environment and paradigm. Of course, these things cannot simply be commanded with money. But understanding that money may be required for these things (even if they are currently perceived as luxuries and not as necessities) is an important step in being able to dream freely and fully.

The interesting corollary of the anti-money kind of philosophy that is prevalent among many people (irrespective of how much money they are drawing from their work) is the tendency to view things in a narrow monetary prism, as a kind of “rationing” activity. Thus, for instance, a person as a student may view his/her main job as a kind of rationing activity of managing money with the bare subsistence stipend he/she gets rather than optimizing the quality of learning and research output (this is a very typical response that may be a vestige from days of genuine scarcity). The reason why people can indulge in this kind of money management is that they see the money they get as fixed and not linked to performance. If money was closely and strongly linked to performance then even those ardently keen on money management would work hard to perform well.

If all that I said is confusing enough, I’ll add further to the confusion by making yet another assertion: money can be very empowering, just as many other facilities and resources can be. However, it is not having money alone that counts. Those who know and understand the value of service and of worth, those who can struggle and manage without money, are precisely the same people who will value the money, the free service, when they receive it. Those who think of money as a kind of fixed and static quantity given from God for judicious use will treat it as such even when there are unlimited amounts to claim.

The same is true for almost any resource one can use. Those who can fight for the resources in times of scarcity, who understand the value of the resources and who don’t despise the resources, can flourish in situations when the resources are abundant. Those who treat the resources like some fixed givens by some glorious God for subsistence, fail to make use of the greater availability of resources.

Individuals who recognize the importance of their work and their worth know that their primary goal is to develop themselves to the level where their work is naturally valued by the community enough that they can command a lot for it, they will think in terms of enhancing their personal value, by investing in themselves. By doing so, they naturally create a lot of wealth for themselves (monetary or otherwise) but more importantly, they develop the potential to command greater amounts of wealth.

The daily labourer has a skill which you and I may not have — the skill to persevere for several hours doing a lot of boring and tiring work. However, this skill, while not to be undermined, is far from unique; the time it takes to develop this skill is not much, the number of people having this skill or eager to develop it is very high. Hence,the worth of the individual daily labourer is low. The fact that this worth is low cannot be traced or attributed to exploitative tendencies alone (of course, everybody wants to pay as little as possible) — rather it can be traced to the fact that what the daily labourer provides is not sufficiently unique and differentiating. (This is of course not the daily labourer’s fault, and I’m not trying to assert that life has been fair to the daily labourer — I am simply pointing out that the value proposition that he/she offers is not high enough for the labour hirer to selfishly be willing to pay a huge amount).

On the other hand, when a person develops a sufficiently unique and valued skill, the money takes care of itself. The person need not rely on the generosity and fairness of society after crossing a certain point in developing skills and convincing others of his/her skills. For instance, if you are the only interpreter between people of different languages living together, then your skills are naturally valued — those people will ensure that you survive. Thus, whether or not you charge money for your services, you can command their services because they know they need you.

This is the kind of unique value that makes real long-term sense to develop. Of course, developing a unique value proposition also has to be viewed in the context of the kind of area one wants to work in. However, within every field of endeavour, there is scope for offering unique value propositions — and nobody else loses out for it. And even if there are no unique value propositions at the moment, you can always create one. That is where the scope for real expansion and value creation lies.

I’ll talk more about creating a unique value proposition in a subsequent post.