Tolerating inequality

Inequality sustains itself by generating an ideology which favours the rich. This might sound like classic Marxism - which it is. But it is also orthodox social science, as a new paper from the NBER shows (ungated pdf).

Jimmy Charitie, Raymond Fisman and Ilyana Kuziemko ran a simple experiment. They randomly gave $5 and $15 to two people and then asked others whether they wanted to redistribute the money between those two people. On average, subjects voted to close 94% of the $10 gap. However, when subjects were told that the two people already knew whether they were getting $5 or $15, they closed only 77% of the gap.

This suggests that preferences for redistribution depend upon reference points. In the first experiment, the reference point is an equal allocation. In the second, however, there's another possible reference point - people's expectations. Such expectations reduce demand for equality.

The effect here is big. The experimenters also allocated the $5 or $15 according to scores on a SAT and then asked people to redistribute. On average, they closed 56% of the difference. This tells us that the effect of tweaking reference points on people's tastes for equality is equal to about half the effect of the difference between random allocations and merit-based ones. I reckon this is quite a lot.

You might be thinking here of Scott Alexander's wise warning: beware the man of one study. Except this is not the only research on this point. Experiments by Kris-Stella Trump have found a similar thing. She says:

Public ideas of what constitutes fair income inequality are influenced by actual inequality: when inequality changes, opinions regarding what is acceptable change in the same direction.

The very fact that the share of the top 1% in UK incomes has more than doubled since the 1970s (from under 6% to 12.9%) might therefore reduce demand for redistribution.

Several cognitive biases feed into this: the status quo bias, anchoring effect and just world illusion.

The point here is surely important. Public tolerance of inequality can increase as inequality increases. This isn't (just) because of a biased media - the media  doesn't exist in these experiments - but because actual inequalities condition our attitude to fair inequalities.As Marx said:  

Men, developing their material production and their material intercourse, alter, along with this their real existence, their thinking and the products of their thinking.

Marx was right.

Comments

[Icarus Green]

This is another way of putting the boiling frog problem.

The same can be said of tolerance for corruption in countries.

[Luis Enrique]

I imagine that philosophers are all over this kind of question, but how seriously should we take it for normative purposes? I mean, if people's subjective welfare is based on reference points etc. should that have any impact on redistributive policy?

I don't like that thought.

[jesus alfaro]

The veil of ignorance

[Luis Enrique]

Does that cover it Jesus? In the extreme suppose reference points are so powerful that your expected welfare is the same rich or poor, then behind veil of ignorance you'd be indifferent

[Steven Clarke]

This link is to a Joseph Rowntree Foundation report on public attitudes to inequality.

On p.22 and 23 of the PDF are time series graphs of (i) public opinion on the income gap, and (ii) the Gini co-efficient, over the same time period:

http://www.jrf.org.uk/sites/files/jrf/2080-attitudes-economic-inequality.pdf

[Mike Hall]

Except that other studies have shown that the vast majority of US citizens actually believe the US has considerably more equal outcomes in both income and wealth than the reality. Moreover, they still show a preference for a more equal outcome than the one they believe is the case.
I'm afraid I don't recall the details of who did this study, but it was recent.

[Alex Bollinger]

Mike, I think this is the link you're looking for:

http://wondergressive.com/income-inequality-in-america-whats-the-big-deal/

of course there can be more than one cause for low apparent demand for equality. Also, that survey was about wealth inequality, which is much deeper in the US than income inequality, but people may have a hard time noticing wealth inequality or distinguishing it from income inequality.

[H]

tempora mutantur, nos et mutamur in illis

[William Meyer]

Before we get to public perceptions of wealth inequality, it would be interesting to examine how the public understands the concept of "wealth" and "money". I strongly suspect they view it metaphorically. As in "wealth/money is rich red blood; if you have too little of it, you die." Hence the need for "sound money", gold enthusiasm, complaints about "debasing the currency," etc., etc. I wonder if a more accurate description of wealth--as in, control over other people's future labor--would change such distributions. A big problem for economics is that at root it is based on barely conscious or unconscious metaphors of the body--by the way, I think this is as large a problem for economics professors as for lay people, given the pains the profession has gone to in order to slide over these metaphors by using such empty expressions as "utility".

[Art Vandalay]

William Meyer does not understand economics, or economists, at all.

[Zomby Poet]

We should not tolerate this:

1) Female genital mutilation
2) Punishing rape victims
3) Honor killing
4) Strapping bombs to children
5) Sexually enslaving women
6) Murdering homosexuals
7) Child marriage