Wednesday, 12 April 2017

The Spirit Level: A Rebuttal - Part III

This is part III of IV of a rebuttal/review of 'The Spirit Level' by Richard Wilkinson and Kate Pickett. If you haven't already read them here are Parts I and II.

Part Three: A Better Society

Chapter 13: Dysfunctional societies

In chapter 13, Wilkinson and Pickett summarise the previous 9 chapters and, in the process, reiterate some of what they originally set out in Part 1 of the book.  They look at possible alternative explanations for the relationships observed and rule out cultural factors (all too quickly in my opinion).  They rule out ethnic divisions and prevalence of single parenthood.  They also rule out – again, too quickly in my opinion – the different histories of the countries considered.

Wilkinson and Pickett then finally set out their case for why they believe the relationships they have observed between income inequality and various health and social problems are causal.

They rule out material living standards as the underlying factor, on the basis that their index is not significantly related to average incomes.  They also rule out government social expenditure as an explanation.  Considering possible third factors, which may significantly influence both income inequality and the various health and social problems, they state:

“As for other possible hidden factors, it seems unlikely that such an important causal factor will suddenly come to light which not only determines inequality but which also causes everything from poor health to obesity and high prison populations.”

This is an argument from incredulity/ignorance and is logically invalid.  Let me suggest some possible alternative causal factors:

  • Intelligence
  • Conscientiousness
  • Self-Discipline
  • Tenacity
  • Network Effects

This list is by no means exhaustive – just what I could come up with with two minutes of thought – yet Wilkinson and Pickett have not ruled out any of these – or any other such factors – as possibilities.  Indeed, they haven’t discussed them at all, and appear to have overlooked them entirely.

Yet it’s easy to see how more intelligent, conscientious, self-disciplined, tenacious and better connected people will tend to be better educated, earn more, stay in better shape and avoid substance abuse or a life of crime than those less well endowed with such attributes.  Moreover, there’s no particular reason to think that these attributes would be evenly distributed amongst all members of society anyway; it is well known, for example, that intelligence has a high degree of heritability.  It is also not difficult to see how conscientious, self-disciplined, tenacious and well-connected parents might pass at least some of these traits onto their offspring.

I don’t want to be misinterpreted here, I am emphatically not saying that all of the higher income people in society are necessarily the most intelligent or conscientious people in that society, or that lower income people are lower income because they are stupid or lazy.  Of course other factors, such as geography, personal connections, and above all, luck, also play a role.

You can be incredibly intelligent and hard-working and still not succeed (the definition of ‘success’ is a conversation for another day) through no fault of your own, just down to bad luck.  Conversely, lazy idiots can and do become successful due to good fortune or having all the right connections or just by being in the right place at the right time.

I’m saying that all else being equal, intelligent, conscientious people, on average, will tend to be more successful (at whatever is the focus of their attention) than stupid, lazy people.  Of course, in the real world, all else never is equal.

Chapter 14: Our social inheritance

In chapter 14, the authors discuss social status, friendship, and cooperation and contrast these with rivalry and competition.  They reference the well known ultimatum game social experiments where people have been found to be willing to punish what they perceive as unfair behaviour, even at a small cost to themselves – this is evidence against the notion that people will always seek to maximise their material self-interest; a notion which is a grotesque caricature of how economists see the World.

Wilkinson and Pickett also discuss the differences in the social orders of our closest primate relatives, chimpanzees and bonobos.  They talk about the evolutionary development of the modern human brain and discuss again the impact of stress on newborn babies and infants.

They round off the chapter with a discussion of oxytocin and social experiments showing that the brain’s ‘reward centres’ are stimulated by mutual cooperation and that:

“...the pain of social exclusion involves the same areas of the brain as are stimulated when someone experiences physical pain.”

Near the beginning of chapter 14, Wilkinson and Pickett claim that:

“Evidence that material self-interest is the governing principle of human life seems to be everywhere.  The efficiency of the market economy seems to prove that greed and avarice are, as economic theory assumes, the overriding human motivations.”

I know of no ‘economic theory’ that assumes anything of the sort.  The authors seem to have conflated greed (or avarice) with self-interest, but these terms are not synonymous.  As an example, it is certainly in my self-interest to look after my health and physical well being, but one could hardly call my desire to lead a healthy life greedy or avaricious.  This is a facile interpretation of ‘economic theory’ which betrays a deep ignorance of economics and the history of economic thought on the part of the authors.  I can only surmise that neither Wilkinson nor Pickett have had the opportunity to read much Adam Smith, as a cursory reading of his ‘Theory of Moral Sentiments’ ought to be sufficient inoculation against this misapprehension.

Other than this, there’s not a huge amount to comment on in chapter 14.  The remainder of the chapter contains nothing new or particularly controversial and Wilkinson and Pickett do not put forward any further arguments or present any new evidence in favour of their main thesis that inequality of income causes all manner of social problems.

Chapter 15: Equality and sustainability

In chapter 15, the authors concern themselves with the environment and global warming / climate change.  They ask whether it will be possible to reduce carbon dioxide (CO₂) emissions without sacrificing material living standards and consider whether the goals of increased equality of income and reducing CO₂ emissions can be achieved simultaneously, or whether they are at odds with one another.

They pick out a small group of countries which they show circled at the top-left of Figure 15.1 (p. 219), including Barbados, Chile, Costa Rica, Croatia, Cuba, France, Jamaica, Mexico, Portugal, Sweden and Switzerland; these are all countries with a high life expectancy, but relatively low CO₂ emissions per capita.

They further expand on this with Figure 15.2 (p. 221), which shows the World Wildlife Fund (WWF) ecological footprint per capita against the UN Human Development Index (HDI) for 2003.  Wilkinson and Pickett note that only one country, Cuba, manages to combine a high level of development (defined as having an HDI of above 0.8) with an ‘ecological footprint’ which they define as ‘globally sustainable’.

It’s interesting that Cuba is the one country which really stands out here.  Given the political regime in Cuba I am extremely sceptical of any official figures coming out of the country (as I would be for, say, China or North Korea or Venezuela for similar reasons).  The official healthcare statistics coming out of Cuba are particularly dubious.  One should always be skeptical when the people reporting a particular statistic have strong incentives to exaggerate or misreport it in order to make themselves look good.

Later in the chapter, in the context of discussing a system of tradable carbon rations, Wilkinson and Pickett state [emphasis added]:

To safeguard the poor it may be necessary to prevent people selling unused parts of their ration till the end of the period it covers, so only allowances already saved could be traded.”

Their choice of phrasing here is interesting, they imply that ‘the poor’ (as if ‘the poor’ are a single, unchanging, homogenous group) cannot look after themselves or make decisions that are in their own best interests; that the government needs to restrict poor people's freedom to make their own choices and live their own lives as they see fit, but it’s all for their own good don’t you see?  It reeks of arrogant paternalism.

Wilkinson and Pickett then discuss the concept of a ‘steady-state economy’ first proposed by Herman Daly.  They suggest limiting world oil and coal production as an:

“...effective way of limiting global warming.  Innovation and change would then be concentrated on using finite resources more effectively for the benefit of humankind.”

Full disclosure: I work in the oil & gas industry, so oil (and to a lesser extent natural gas) prices and production directly affect my livelihood.  Cynics will take this to mean that I’m a shill for big oil and will dismiss anything I have to say on the topic as being written out of narrowly-defined self-interest.

I don’t think imposing arbitrary limits on production or use of certain resources is a very judicious policy.  Who is to decide on the limits?  How are they to be set?  This is simply too complex a solution when a much more straightforward and more equitable one, namely a carbon tax, exists.  We want to avoid meddling with markets as much as possible.  If we want to provide an incentive to do less of something, tax it, if we want to provide an incentive to do more of something, subsidise it, but don’t go about arbitrarily setting artificial prices or limits on production or consumption, that’s a sure fire way of creating an even bigger mess.

As Arnold Kling points out:

“Capitalism is inherently sustainable, relentlessly producing more human satisfaction using fewer resources.  What environmentalists call ‘sustainability’ ought to be called primitivism, producing less human satisfaction using more resources.”

Chris Edwards, of the Cato Institute, also observes:

“...the market is the best friend of the natural world because it generates constant pressure to innovate, to cut costs, and to use resources efficiently.  The price system prompts consumers and businesses to minimize consumption of dwindling resources.”

Edwards goes on to provide the example of Bob ‘Hoop’ Hooper of Pittsburgh, who makes his living ‘scrapping’ or finding and collecting scrap metal and selling it on to scrap dealers.
On page 229, Wilkinson and Pickett present, in Figure 15.4, a graph of average annual work hours versus the ratio of earnings of the 90th to the 50th percentiles for a range of countries.  They have taken this graph from an article titled 'Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?' by S. Bowles and Y. Park [ref. 352] (published November 2003 and available to read here).

This is the original graph:
As pointed out by Christopher Snowdon on The Spirit Level Delusion Blog this graph differs from the others presented in the Spirit Level in two significant respects:

Firstly, it uses a very different measure of ‘inequality’ than the authors use throughout the rest of the book; namely, the the ratio of earnings of the 90th to the 50th percentiles rather than Wilkinson and Pickett's typically preferred measure of the ratio between the top and bottom quintiles.

As Snowdon observes, this has a considerable effect on the relative rankings of the various countries.  The example he gives is that by this measure France is much more unequal than the UK or Italy.  Compare the figure above with Figure 2.2 of the Spirit Level (p. 20).

Secondly, only 10 countries are individually identified on this graph.  Again, as pointed out by Snowdon, we do not know which other countries are included or excluded from the data here.  Are all of the unlabelled data points rich countries?  Poor countries?  A mixture of both?  Are all of the countries studied in The Spirit Level included in this measure?  For example, where are Japan, Portugal or New Zealand?

Something which immediately caught my eye with this chart was that there are a lot of data points.  In fact I was sad enough to count them all; and, if I counted correctly, there are 170 countries represented on the previous chart.  That’s most of the World, compare that to the far more selective dataset of 21 rich countries that Wilkinson and Pickett chose to study in the rest of the book.  Why the disparity?

Snowdon suggests that Wilkinson and Pickett have relied on this chart from a single study, rather than seeking out the actual OECD data because that data doesn’t support their position.  He recreates this plot using the OECD data on The Spirit Level Delusion Blog and shows no significant correlation between long working hours and inequality.  Snowdon then asserts that there is a stronger correlation between GNI per capita and working hours and provides a second chart to support this claim.

I don’t know exactly where Snowdon got his numbers from, but I can’t recreate his chart from the available OECD data (the link that Snowdon provides on his blog appears to be defective).  For what it’s worth, I can’t recreate Figure 15.4 from the Spirit Level from this data either (Bowles and Park have rather unhelpfully cited the original source as merely “OECD Labor Market Statistics Data Set”).  But, I’ve had a go at plotting both relationships from the OECD data below.
Here’s my plot of average annual work hours versus the ratio of earnings of the 90th to the 50th percentiles:
And here’s my plot of average annual work hours versus GNI per capita:

For reference I’ve used average annual working hours from here and income distribution data from here for the year 2004.

Based on this data, working hours appear to correlate with both income inequality (at least based on the ratio of earnings between the 90th and the 50th percentiles) and with GNI per capita.  The inequality data appears to be a tighter fit to the trend (R2 value of 0.56 compared to 0.41), however both datasets appear to show relatively strong correlations.

Chapter 16: Building the future

In chapter 16, Wilkinson and Pickett begin by stating that focussing their attention on inequalities within our societies:

“...does not mean ignoring the international inequalities between rich and poor countries.”

They assert that more equal countries are more likely to take positions which are beneficial to developing countries on issues such as international trade agreements, or negotiations on reducing carbon emissions.  They do not, however, provide any evidence to support this assertion.

In chapter 8 of ‘The Spirit Level Delusion’, Christopher Snowdon argues that ‘The Spirit Level’ is a “deeply political book” and that Wilkinson and Pickett are essentially using it to push a socialist agenda.  That their goal here is bigger government and higher taxes largely for their own sake rather than there being any evidence that these things would improve prosperity, happiness, or any of the chosen measures of wellbeing cited in the book – with the sole exception of reducing inequality of income in much the same way as we could reduce inequality of height by chopping off the feet of anyone over 6 feet tall.

This all becomes obvious in chapter 16 of ‘The Spirit Level’.  Having, in previous chapters, satisfied themselves that achieving equality of income is a goal worthwhile pursuing, the authors go on to ask the question of how we can make our societies more equal?  To this end, they advocate a “continuous stream of small changes” rather than a revolution.  They assure readers that reducing material inequality does not mean “lowering standards or levelling to a common mediocrity”.  Although, quite how this could be even possible for those of currently above average means is not explained.

Professor David R. Henderson of the Naval Postgraduate School in Monterey, California, links to an article by Branko Milanovic in the Review of Economics and Statistics titled "Global Inequality of Opportunity: How Much of our Income is Determined by Where We Live?"

Here’s the paper’s abstract:

“Suppose that all people in the world are allocated only two characteristics over which they have (almost) no control: country of residence and income distribution within that country.  Assume further that there is no migration.  We show that more than one-half of variability in income of world population classified according to their household per capita in 1% income groups (by country) is accounted for by these two characteristics.  The role of effort or luck cannot play a large role in explaining the global distribution of individual income.”

Milanovic backs up his assumption of zero migration by pointing out that:

“Assignment to country is fate, decided at birth, for approximately 97% of the people in the world: less than 3% of the world's population lives in countries where they were not born.”

Professor Henderson reproduces the following graph from Milanovic’s paper:

The graph isn’t labelled particularly well, let me try and explain it:
The x-axis is an individual’s position within their own country’s income distribution.  The y-axis is the same individual’s position on the global income distribution.  The figures for this particular graph are for the year 2008.

So, for example, someone at the 20th percentile within the USA is at about the 85th percentile globally, or someone at the 100th percentile in India is at the 80th percentile globally.

As professor Henderson alludes to, the last sentence of the paper’s abstract is not entirely accurate.  Read it again [emphasis added this time]:

“The role of effort or luck cannot play a large role in explaining the global distribution of individual income.”

What is being born into a rich society if not luck?  Surely it is luck whether one happens to have been born on one or the other side of an imaginary line?  But I’m getting sidetracked here.  The point I wanted to make with the previous chart was that the global income distribution differs substantially from that of the income distributions of wealthy, industrialised, ‘western’ countries, such as the US and the UK.  Of the five countries featured in the chart, the global income distribution looks most like that of China.  That is, if you want to imagine a World which is, overall, about as wealthy as the real World which we presently inhabit, but in which there is total equality of income, the level of that equal income would be roughly that of the median Chinese worker today (or rather 2008).

Robert O. Weagley, writing in Forbes in 2010 gives the average annual household income in China, converted to dollars as $10,220 (this is equivalent to about £6,700).  Imagine a World in which every household earns £6,700.  I don’t think that this is quite the Utopia that Wilkinson and Pickett envisage when they dream about eliminating inequality of incomes, but this is the reality that they, and that we all, would be faced with if we could today flip a magical switch to suddenly equalise all incomes worldwide.

Please note that I am emphatically not arguing that it is fair or just or desirable that there are many people in the World today living on incomes far lower than this, or that such a state of affairs necessarily has to be maintained in order that we in rich countries can continue to enjoy levels of income and wealth unimaginable to most people living in Sub-Saharan Africa, or South Asia, or Latin America, or large parts of the Middle-East.

I am here simply pointing out that these statistics are inconsistent with Wilkinson and Pickett’s stated belief that reducing material inequality does not mean: “lowering standards or levelling to a common mediocrity”.

There seems to be an incredibly widespread misconception, where everyone thinks that they are much further down the income distribution scale than they actually are and there are plenty of wealthy ‘others’ who can or should be paying for everything which they expect the government to provide, but this is simply not the case.  This is a point to which I shall return shortly.  

Wilkinson and Pickett reference George Bernard Shaw as their inspiration for the idea that:

“Wealth, particularly inherited wealth, is a poor indicator of genuine merit…”

I agree.  Inherited wealth is useless as an indicator of ‘merit’, but so are many other things, such as degrees Celsius, bananas and musical tastes.  This point, whilst true, is entirely uninformative.  Here, we could easily get lost down an enormous rabbit hole by getting into the question of exactly what constitutes ‘merit’ anyway and how are we supposed to measure it?  Wilkinson and Pickett do not explore these questions in their book (I don’t blame them for that – this is a topic that could easily warrant it’s own work of several volumes).  As such, the discussion of whether ‘merit’ even exists as a coherent concept is best saved for another day.

Wilkinson and Pickett state that they see no indication of lower standards of achievement within more equal societies, and reference a study of over 1600 baseball players, in 29 different teams, over a 9 year period, which found that:

“..major league baseball teams with smaller income differences among players do significantly better than the more unequal ones.”

One could also reference the findings of Simon Kuper and Stefan Szymanski, which they report in their 2009 book ‘Why England Lose.  Kuper and Szymanski looked at the spending of 40 English Premier League and Championship football clubs over a 19 year period between 1978 and 1997 and found a very strong positive correlation between player salaries and league success (i.e. the teams which tend to do well are also the teams which tend to pay the highest player salaries).  They report that over this period, spending on player salaries explained a massive 92% of the total variation in league position.

Kuper and Szymanski also report that for the more recent period of 1998 to 2007, spending on player salaries explained 89% of the variation in league position for a larger group of 58 clubs.  They print a chart on page 62 of their book which shows this correlation for the 1998 to 2007 period.  They report an R2 value of an impressive 0.88; it is clear from the chart that the data fit this correlation extremely closely and there are remarkably few outliers.
I have re-created this chart below:

‘Ws’ is the team's spending on players wages relative to the average and ‘p’ is the team's average league position over the 9 year period considered.

Of course, with Kuper and Szymanski’s finding, as with Wilkinson and Pickett’s, the causation plausibly runs either or both ways here.  The usual caveat of ‘correlation does not necessarily imply causation’ still applies, as always.  In this particular case though, I’d be extremely surprised if there wasn’t some sort of causal relationship between player salaries and team performance.  Teams which are more successful will tend to attract more fans, more TV rights, more lucrative sponsorship deals, etc.  In short, they will make (or at least turn-over) more money than less successful teams.  This enables them to pay higher transfer fees and higher player (and coaching staff, etc.) salaries, which helps them to attract and retain the best talent, which in turn makes them more likely to win games and achieve success in the league.  There’s a self-reinforcing cycle here: greater financial success tends to bring greater sporting success and greater sporting success tends to bring greater financial success.

So, we have one study showing teams that pay players more equally enjoy more success and one study showing teams that simply pay players more have more success, albeit in two different sports and two different countries.  Which effect is larger?  I’m not sure it’s possible to say based on the available data; unfortunately Wilkinson and Pickett don’t provide us with any actual figures from the study they cite and the paper itself is behind a paywall.  I’m not sure how comparable the figures would be with Kuper and Szymanski’s anyway.

Wilkinson and Pickett go on to discuss some recent trends in income inequality in the US and the UK.  They observe that income inequality in the UK, as measured by the ratio of income of the richest 10% to the poorest 10% of the population, has risen between 1975 and 2006.  From Figure 16.1 (p. 240), it can be seen that this largely occurred between about 1979 and 1992 – with a particularly large jump between 1986 and 1988.  By this measure, by 1992 inequality had risen to almost 1.5 times what it had been in 1975.  It then declined slightly between 1992 and 1996 and then remained relatively stable at around 1.3 to 1.4 times the 1975 level for the next decade.

It’s a similar story for the United States, as illustrated in Figure 16.2 (p. 240), albeit the rise in inequality there has been slightly more gradual – with the exception of a fairly substantial jump between 1982 and 1983.  Most of the increase occurred over the period 1976 to 1993, by which point inequality had peaked at 1.4 times the 1975 level.  It declined slightly over the next few years, but remained around 1.3 to 1.4 times the 1975 level for the next decade from 1994 to 2004.

The authors use this data to make the point that income differences can and do change substantially over time and can change quite rapidly.

They continue:

“Confining his attention largely to the USA, [Paul] Krugman argues that, rather than market forces, rising inequality was driven by ‘changes in institutions, norms and political power’.  He emphasizes the weakening of trade unions, the abandonment of productivity sharing agreements, the influence of the political right, and government changes in taxes and benefits.  He could also have added the failure to maintain adequate minimum wage legislation.

Krugman could have added the failure to maintain “adequate” minimum wage legislation to his list.  He didn’t here, however he has previously espoused support for minimum wage legislation on his New York Times blog ‘The Conscience of a Liberal’.

I don’t want to get too sidetracked on the folly of minimum wage legislation.  That is a horse that has been repeatedly flogged, but stubbornly refuses to die.  It has been addressed by a multitude of economists that aren’t Paul Krugman, perhaps most thoroughly and consistently by Don Boudreaux on his Cafe Hayek blog, but also notably by Bryan Caplan, Eric Crampton, Anthony Davies, Arnold Kling, Steven Landsburg (in a direct response to Krugman), Thomas MaCurdy, Adam Ozimek, Mark Perry (who cheekily cites Paul Krugman’s own Microeconomics textbook), Michael Rizzo, Thomas Sowell, Scott Sumner, Walter Williams and of course the great Milton Friedman.

I’ll restrict my comments here merely to the following: I think that government mandated minimum wages are an egregious infringement of freedom of contract.  In addition, they are a truly terrible anti-poverty measure; there are means of achieving the ends that supporters of minimum wage legislation typically espouse, which are simultaneously far more effective, more equitable and with fewer negative unintended consequences.  I’ll restrain myself from any further comment at this time and I leave it as an exercise for the reader to follow-up with any or all of the sources I’ve provided in the links above.

Since Wilkinson and Pickett are so fond of their political cartoons (they begin every chapter of ‘The Spirit Level’ with one) I thought I’d share one of my own favourites with particular relevance here (cartoon by Henry Payne, pointer from Mark Perry):

Wilkinson and Pickett attribute the rise in inequality in the UK and US, at least in part, to:

“ ideology and... policies designed to create a more ‘flexible’ labour force.”

They again resort to the kind of loaded, emotive language that we saw in the book’s preface, when describing the spread of free-market ideas throughout the Anglosphere:

“Stronger linguistic and ideological connections meant that English speaking countries caught the disease quickly from each other and caught it badly.”

They cite a study which analysed trends in inequality during the 1980 and 1990s, in Australia, Canada, Germany, Japan, Sweden, the UK, and the US and which found that the biggest single factor correlating with rising inequality was declining trade union membership.  By this point, I’m growing incredibly weary of repeating the mantra ‘correlation does not equal causation’ to myself over and over again as I read through ‘The Spirit Level’.

Under the heading of ‘Political will’, the authors state:

“The strength of the evidence that a more equal society is a better society has a key role to play in changing public opinion.”

Unfortunately for their thesis, their supposed evidence consists of nothing more than a few variables which happen to be correlated with one another and with inequality of income amongst a remarkably small sample of countries.  Some of which seem to be more strongly associated with overall wealth (GDP/GNP) than with income inequality and some of which don’t hold up under closer scrutiny.

They continue:

“Public opinion polls suggest that there is a substantial desire for narrower income differences.  In Britain over the last twenty years polls have shown that the proportion of the population who think that income differences are too big has averaged around 8o per cent and has rarely dipped below 75 per cent – even though most people underestimate how big income differences actually are.”

They do not give a source for these figures, but reference a 2004 Demos working paper entitled “What do Americans Think About Inequality?” by L. McCall and J. Brash for similar figures from the United States.

Let’s take it on faith that the figures Wilkinson and Pickett cite here are accurate.  Around 75% to 80% of Brits believe that “income differences are too big”.  So what?  The general public have not only uninformed, but systematically biased beliefs about all sorts of things, including inequality.

Bryan Caplan comments on this at EconLog, where he discusses an NBER working paper by Vladimir Gimpelson, of the Higher School of Economics, Moscow, and Daniel Treisman of the University of California, Los Angeles, entitled “Misperceiving Inequality

Here’s the paper’s abstract:

“Since Aristotle, a vast literature has suggested that economic inequality has important political consequences.  Higher inequality is thought to increase demand for government income redistribution in democracies and to discourage democratization and promote class conflict and revolution in dictatorships.  Most such arguments crucially assume that ordinary people know how high inequality is, how it has been changing, and where they fit in the income distribution.  Using a variety of large, cross-national surveys, we show that, in recent years, ordinary people have had little idea about such things.  What they think they know is often wrong.  Widespread ignorance and misperceptions of inequality emerge robustly, regardless of the data source, operationalization, and method of measurement.  Moreover, we show that the perceived level of inequality — and not the actual level — correlates strongly with demand for redistribution and reported conflict between rich and poor.  We suggest that most theories about political effects of inequality need to be either abandoned or reframed as theories about the effects of perceived inequality.”

What follows are several other excerpts from this paper, which illustrate the wide gulf that exists between actual levels of, or trends in, inequality and the public’s perception thereof [emphasis added]:

“What if the masses have little notion of how much wealth the elites have accumulated and whether the gap is growing or shrinking?  What if even the rich cannot gauge how strong is the motive for the poor to revolt?  In such cases, the neat link between actual inequality levels and political outcomes evaporates.  The goal of this paper is to show that such uncertainty and misperception are ubiquitous.  We present evidence from a number of large-scale, cross-national surveys that in recent years ordinary people have known little about the extent of income inequality in their societies, its rate and direction of change, and where they personally fit into the distribution.  What they think they know is often wrong.  This finding is robust to data sources, definitions, and measurement instruments.  For instance, perceptions are no more accurate if we reinterpret them as being about wealth rather than income.”

“A strange inconsistency underlies much recent scholarship.  On the one hand, theories assume that individuals correctly perceive the income distribution.  On the other hand, scholars complain that the data available to test these same theories--in developed democracies and, even more so, in poorer, less free societies--are "dubious" (Ahlquist and Wibbels 2012) and "massively unreliable" (Cramer 2005).  Yet, if experts throw up their hands at the quality of the data, it is strange to assume the general public is better informed.  And if analysts fault the figures available today--despite the most sophisticated statistical agencies the world has ever seen--data quality must have been much worse during the nineteenth century heyday of revolution and democratization.”

“The implications of this point for theories of redistribution, revolution, and democratization, are far reaching.  If these are to be retained at all, they need to be reformulated as theories not about actual inequality but about the consequences of beliefs about it, with no assumption that the two coincide.  We show that, although actual levels of inequality--as captured by the best current estimates--are not related to preferences for redistribution, perceived levels of inequality are...  The actual poverty rate correlates only weakly with the reported degree of tension between rich and poor; but the perceived poverty rate is a strong predictor of such inter-class conflict.”

Here’s Caplan again:

“Gimpelson and Treisman heavily rely on the ISSP survey, which showed respondents around the world five different income distributions, then asked them which one best-described their own country.”

And what were the results? [again, emphasis is mine]:

Respondents turn out to be wrong about their country's income distribution most of the time.  Worldwide, 29 percent of respondents chose the ‘correct’ diagram if we refer to their country's post-tax-and transfer Gini and 24 percent got it right if we use the pre-tax-and-transfer measure.  For reference, a purely random choice among the five possible answers would get the answer right 22.5 percent of the time for post-tax-and-transfer incomes and 20 percent of the time for pre-tax-and-transfer incomes.  In other words, respondents worldwide were able to pick the ‘right’ diagram only slightly more often than they would have done if choosing randomly.”

Not very encouraging for anyone counting on a well-informed populace.  Were most people at least close to the right answer?:

“To check this, we examined what proportion of respondents were within one diagram of the correct one (for instance, if the correct diagram was B, we measured how often the respondents picked A, B, or C).  With only five options to choose between, getting within one place of the correct option is not a very difficult task.  Picking randomly among the five diagrams, respondents should be within one place of the correct diagram 68 percent of the time if focusing on post-tax-and-transfer income and 43 percent of the time if focusing on pre-tax-and-transfer income.  In fact, for post-tax-and-transfer income they were right 69 percent of the time, just one percentage point better than if they picked randomly.”

Personally, I found this next finding to be the single best illustration to sum up the disparity between actual inequality and perceptions of it.  People who owned a second home were asked where they thought they fell on their country’s income distribution [emphasis added]:

“Owning two houses is usually a sign of wealth...  Yet most such property owners did not consider themselves especially rich.  On average, 60 percent of the secondary residence owners placed themselves in the bottom half of the income distribution.  In Uzbekistan, only three percent of respondents lived in households with a second residence, yet almost two thirds of these thought their incomes were below the national median.  Such anomalies were somewhat rarer in the developed countries.  Still, in France, Italy, and Great Britain, 40 percent or more of second residence owners placed themselves in their country's bottom half.”

40% of people who own two homes in Britain think that they are in the bottom half of the income distribution!  That is astounding!

This quote from Professor Caplan nicely sums up this disparity between perceptions and reality:

“Only 1% of people who own a second home think they're in the top decile of their country's income distribution!”

No wonder there’s such overwhelming popular support for more redistribution – almost everyone, apart from the extremely rich, believes that they are below average when it comes to income (and/or wealth – the two are often conflated) and therefore that more redistribution would benefit them and people like them (e.g. their friends and family) financially, when this simply cannot be true for a substantial chunk of the population.

Here’s the conclusion reached by Gimpelson and Treisman [emphasis added]:

“[N]either the pre-tax nor the post-tax actual income Ginis are positively related to support for redistribution at either the country or the individual level.  However, perceived inequality is highly significant in both cases.  In countries where inequality was generally thought to be high, more people supported government redistribution.  But demand for redistribution bore no relation to the actual level of inequality.  In fact, given the average belief about inequality, higher actual inequality was associated with lower demand for redistribution.  Breaking down perceptions into their general and idiosyncratic components, we found a stronger effect of the general perception in the country than of the individual's idiosyncratic perceptions.  Still, both seemed to matter in the way expected.”

More recently, and on a similar note, a 2015 Ipsos MORI survey titled ‘The Perils of Perception: Perceptions are not reality: what the world gets wrong’:

“...highlights how wrong the public across 33 countries are about some key issues and features of the population in their country.”

Such as, in Great Britain people:

“...massively overestimate the proportion of wealth that the wealthiest 1% own.  The average guess is 59% when the actual figure is 23%.  In fact, [Brits are] the most wrong on this out of any of [the populations of] the 33 countries included in the study.”

A similar picture is seen looking across all 33 countries studied:

“[The general public in] most developed countries greatly overestimate the proportion of adult wealth the wealthiest 1% in their country own.  Britain is the most inaccurate (estimating it to be 59%, over twice the real figure of 23%), but France, Australia, Belgium, New Zealand and Canada are all at least 30 percentage points out of line.  [The populations of a] few countries, though, underestimate how much of their country’s wealth is concentrated in the hands of the top 1% - Peru, India, Israel, Brazil and Russia (where the top 1% actually own an incredible 70% of all wealth).  There is a lot of variation between the countries on what they think the figure should be, though most [people] think it should be lower than it really is – with [Russians] again standing out as having the highest gap between the amount of wealth they think the top 1% should acceptably own (23%) and the true figure (70%).”

Simply stating that there is a widespread public perception that X is true does not mean that X is in fact true and this is a terrible line of argument.  It is an example of a logical fallacy known as an argumentum ad populum (appeal to the people) or appeal to popular belief, also known as the bandwagon fallacy.

The next section is entitled ‘Corporate Power – The Elephant in the Living Room’.  The authors start out this section with the claim that:

“We may all decry the vast wealth of the super-rich…”

I’m glad they added the qualifier ‘may’ there, although even with that qualifier, this sentence is still at least somewhat misleading and I think clearly intended to elicit a very specific response.

I don’t decry the vast wealth of the super-rich; at least not in and of itself.  I don’t care that Sir Richard Branson has his own island, I don’t care how many yachts Bill Gates has and I don’t care how big Elon Musk's house is.  As far as I know, they have paid for all of these things with money that they’ve earned legitimately, by providing things that other people have valued and have voluntarily exchanged their money for.  I don’t want to take any of those things away from any of them and, even if I did, I would have no right to.

I’ve never seen anything to suggest that condemnation of the vast wealth of the super-rich (those super-rich who have earned their wealth legitimately through voluntary trade with others) is motivated by anything deeper or more sophisticated than sheer envy.

Harking back to earlier in this chapter, I think it’s shocking that there are households living on just £6,700 per year and that half of the World still live on even less than this, but soaking the rich and stifling trade and development with high taxes is not a solution to this problem.  There simply are not enough super wealthy people around to pay for everything for everyone else.  As an illustration, there are around 60 million people in the UK; there were only 41 British billionaires in 2014 (based on the 2014 Forbes rich list).  If the UK government were to tax 100% of the assets of all British billionaires, the proceeds would just about cover the health budget for a single year – £140 billion – which makes up just under one fifth of total government expenditure – after which all of the money would be gone and there would be no billionaires left to plunder the next year.

Wilkinson and Pickett then talk about ‘concentrations of power in our economic institutions’.  Which they illustrate with the following:

“In 2007 chief executives of 365 of the largest US companies received well over 500 times the pay of their average employee…”

“After reviewing empirical research, the International Labour Organization concluded that there is little or no evidence of a relationship between executive pay and company performance…”

“Top business pay has far outstripped anything in the public sector.  In the USA, the twenty highest-paid people working in public traded corporations received almost 40 times as much as the twenty highest-paid people in the non-profit sector, and 200 times more than the twenty highest-paid generals or cabinet secretaries in the Federal Government.”

On the last of these points my reaction is simply ‘good’.  I’m glad that the highest paid corporate executives are more highly paid than the highest paid government employees.  I would rather live in a world where that was the case than the opposite.  Think about what that would mean.  If the highest paid government employees were paid more generously than anyone in the private sector it would strongly suggest that the government would be overpaying these people.

What’s the fundamental difference between someone working in the private sector and a government employee?  One earns their salary from money received from paying customers who voluntarily hand over that money in exchange for whatever good or service the businessperson is providing.  The others salary is paid out of money obtained through the coercive practice of taxation.

I can’t remember where I first heard or read this now, but someone once said that the surest sign that you’re doing something worthwhile is if someone is willing to pay you to do it.  Of course, this doesn’t apply to anyone being paid by the government, because the people ultimately paying are taxpayers, who are not necessarily all ‘willing’ to pay for everything the government decides to spend their money on.  By contrast, in the private sector salaries are ultimately paid for by the customers, who are willing to pay for the goods and services they receive in return, otherwise they wouldn’t have.  The fundamental difference is the difference between a voluntary relationship and a forced, coercive one.

There is also a point to be made about many of the most financially successful people in the private sector having put their own money and livelihoods on the line in many cases and having taken a massive risk to get to where they are and be able to reap the rewards of that.  It’s worth bearing in mind that for every Bill Gates or Elon Musk there are hundreds or thousands of would-be entrepreneurs who have failed to make their millions.  If one were to average out the earnings of all of the failed business ventures with the successes the picture would look a lot less rosy in terms of average entrepreneur / CEO earnings.  Investing your own money in a private venture is often a high-risk, high-reward endeavour, as opposed to the low-risk endeavour of working as a government employee.

On the point of CEO pay far outstripping that of the average employee of the largest companies and the lack of strong evidence between executive pay and company performance.  It is fairly widely acknowledged that one of the real (but unstated) reasons for high executive pay was that it is essentially a bribe to encourage the CEO not to run the company into the ground, destroy its reputation or business relationships, or pillage it into oblivion.  The more power someone has within an organisation, the easier it is for them to wield that power recklessly, irresponsibly or outright maliciously and the greater the damage likely to be done if they do so.  Wilkinson and Pickett may well already be aware of this hypothesis.

One factor blamed by Wilkinson and Pickett for the widening of income differences in recent years is the “denationalization of major industries”.

Wilkinson and Pickett make the claim that:

“...these productive assets [multinational corporations] remain effectively in the hands of a very few, very rich people, and make our claims to real democracy look pretty thin.”

This misses the fact that in order to remain ‘productive assets’ (i.e. to continue to make money), companies have to continue to satisfy the needs and wants of consumers.  The money that successful companies earn, that makes their owners ‘very rich people’, is money voluntarily handed over to them by us, the consumers, in exchange for something of value provided by these companies.  If you, as a consumer, are not happy with any particular company's offering you are free to withhold your custom from them.  And this is something that each of us, as individual consumers, can do.  What could be more democratic than that?  In this regard, private enterprise is more democratic than anything the state does.

They acknowledge that the ‘experiment with state ownership in the centrally planned economies of the former Soviet Union and Eastern Europe’ was a failure and then turn to look at possible alternatives to both laissez faire capitalism and top-down state-run communism.

Wilkinson and Pickett believe that the ‘institutional framework’ of profit-making businesses [emphasis added]:

“..seem[s] to invite them into an exploitative relationship with society – hence perhaps why we have needed a ‘fair trade’ movement.”

Again , the authors miss the fact that in a free market the only way a business makes a profit is by satisfying the needs and wants of willing consumers.

They go on to ask:

“So how can the inequality-generating forces in the profit-making sector be contained and democratized?”

They repeat their extraordinary and unproven claim:

“...further improvements in the quality of life no longer depend on further economic growth…”

And suggest possible ‘solutions’ might be:

“ plug loopholes in the tax system, limit ‘business expenses’, increase top tax rates, and even legislate to limit maximum pay in a company to some multiple of the average or lowest paid.”

“We need to address the concentrations of power at the heart of economic life.”

Wilkinson and Pickett don’t give details on what tax loopholes we could close.  All of their other proposed solutions further limit the freedom of individuals.

They suggest ‘democratic employee-ownership’ as a possible solution, which:

“..avoids concentrating power in the hands of the state, but… has major economic and social advantages over organizations owned and controlled by outside investors…”

They also suggest the possibility of using tax concessions to encourage employee share-ownership systems.  However, they warn that:

“...many share-ownership schemes amount to little more than incentive schemes, intended to make employees more compliant with management…”


“...research shows that employee share-ownership, on its own, is not enough to make much difference to company performance.”

And suggest that it has to be combined with ‘more participative management methods.’

This harks back to a point first made by the authors in chapter 6 and reiterated here:

“Having control at work was the most successful single factor explaining threefold differences in death rates between senior and junior civil servants…”

They don’t go into much detail about how they see employee-ownership functioning or exactly what is meant by ‘more participative management methods’ or how it is to be brought about or encouraged.  Despite the lack of details, I see this as a more encouraging and likely more productive avenue of exploration than increasing tax rates on the rich.

They point out that employee-ownership has the advantage of being bottom-up rather than top-down.  I couldn’t agree more.  This suggestion seems out of place as it is in stark contrast to most of their other ‘solutions’, which involve top-down diktats from government or further reducing the freedom of individuals.

They talk about employee ownership as involving:

“...a very substantial redistribution of wealth from external shareholders to employees…”

When listing some of the supposed advantages of employee-ownership, Wilkinson and Pickett assert that ‘it improves productivity and so it has a competitive advantage’, although they do not substantiate this claim.  If employee owned companies really are more productive than other types of companies, then no incentives should be needed to encourage companies to organise themselves in this way.  Employee owned companies will outcompete other companies in the free market and we would expect to see them become the dominant organisational structure.  This is unless one can make the case that we’re stuck in a local maxima in terms of organisational productivity, but there is an even more productive global maxima.  This is certainly possible and it would be an interesting line of thought to pursue, however Wilkinson and Pickett do not.

They believe that employee-owned workplaces should be constituted:

“ ways which prevent employees from selling their companies back to external shareholders.”

Again, I’m somewhat sympathetic to the employee-ownership idea, but I don’t think that should preclude private property rights or the freedom to buy and sell, that is, to trade with, whomever you see fit on whatever terms you find mutually agreeable.

Wilkinson and Pickett then put forward the position that:

“In conventional employment people are specifically hired to work for purposes which are not their own.”

“You might disagree with the purpose to which your work is being put...”

Really?  Who are these people?  Who is working at a job in which they disagree with its purpose?  Are there lots of anti nuclear power activists working at Sellafield?  Greenpeace eco-warriors employed by ExxonMobil?  Save the Whales advocates working on Japanese whaling vessels?  I doubt it.

One isn’t obligated to work in any particular occupation, field or industry or for any particular employer.  People will not gravitate towards working in industries or occupations with which they have fundamental political, environmental, or ethical disagreements.

“If, for instance, you get to know that some aspect of a design or manufacturing process is harming children’s health, you would want to change it and would probably start by finding out what colleagues thought about it.”

Why not do this now?  What is stopping anyone who has concerns about the uses to which their work is being put – or anything else that their employer does – from at least investigating whether or not their concerns are justified?

If you fundamentally disagree with what your company does with your labour then I suggest that you may want to look for another line of work.  If you choose not to find another line of work, or another role, or at least challenge practices with which you disagree, then perhaps your disagreement is less fundamental and less important to you than you profess.

Under the heading ‘Running with the Technological Tide’ the authors make some good points on technological change, the need to reform copyright and patent laws, and emphasise that governments should not use their power to “prop up and defend the restrictions of [old institutional structures]”.  I couldn’t agree more.

Unfortunately, the middle part of this section is ruined by some nonsense about public goods, in which the authors argue:

“Once society has incurred the capital costs of making a bridge or road, maximum benefit from the initial investment is gained only if use is unrestricted by charging.  Hence, people should be provided free access.”

“Once the capital cost has been incurred, the more people sharing the benefits the better.”

This is not necessarily true, and is at best rather naive.  A road is the perfect example to illustrate why not.  There is a limit to how many cars can use a road at any given time.  If too many people want to use it at the same time, you end up with congestion and traffic jams, which aren’t good for anybody.  It is analogous to the classic tragedy of the commons scenario.

The final section of this chapter is entitled ‘The Future of Equality’.  In it, as in much of the book, Wilkinson and Pickett display an astounding level of hubris, never acknowledging the slightest possibility that they may be mistaken or overselling their case.  No, according to the authors their cause “...must be taken up and pursued...” and “...we need to recognise what a damaging effect [the rich] have on the social fabric.”

They talk about various potential benefits to American and British society from moving to something more akin to Japanese or Norwegian inequality levels.  This argument rests, of course, on the assumption that inequality is the cause of all of the health and social problems discussed, a claim which now looks extremely dubious.  There is also no mention of any costs associated with these tectonic shifts in society.  Talking about benefits is all well and good, but in order to assess whether a goal is worthwhile pursuing one must also take account of the costs.

They end the section and the chapter with their now tired and worn-out catch-phrase:

“...the rich countries have got to the end of the really important contributions which economic growth can make to the quality of life...”

No comments:

Post a Comment

Comments are moderated. Abusive and/or hateful comments will not be permitted.

The blog author accepts no responsibility for the content of reader's comments.