Inequality and Fairness

Jun 18, 2012 Editorial

Nobel Prize winner and former Chief Economist Joseph Stiglitz points out that in all countries, it appears that there is an inverse correlation between trends in inequality and perceptions of inequality and fairness. These mistaken beliefs, whatever their origins, are having an important effect on politics and economic policy.
Perceptions have always shaped reality, and understanding how beliefs evolve has been a central focus of intellectual history. Much as those in power might like to shape beliefs, and much as they do shape beliefs, they do not have full control: ideas have a life of their own, and changes in the world—in our economy and technology—impact ideas (just as ideas have an enormous effect in shaping our economy). What is different today is that the top one percent now has more knowledge about how to shape preferences and beliefs in ways that enable the wealthy to better advance their cause, and more tools and more resources to do so.
Beliefs and perceptions, whether they are grounded in reality or not, affect behaviour. If individuals overestimate some risk, they may take excessive precautions. But important as perceptions and beliefs are in shaping individual behaviour, they are even more important in shaping collective behaviour, including political decisions affecting economics. Economists have long recognized the influence of ideas in shaping policies. As Keynes famously put it,
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Social sciences like economics differ from the hard sciences in that beliefs affect reality: beliefs about how atoms behave don’t affect how atoms actually behave, but beliefs about how the economic system functions affect how it actually functions. George Soros, the great financier, has referred to this phenomenon as reflexivity, and his understanding of it may have contributed to his success.
Markets can sometimes create their own reality. If there is widespread belief that markets are efficient and that government regulations only interfere with efficiency, then it is more likely that government will strip away regulations, and this will affect how markets actually behave. In the most recent crisis what followed from deregulation was far from efficient, but even here a battle of interpretation rages.
If individuals believe that they are being treated unfairly by their employer, they are more likely to shirk on the job. If individuals from some minority are paid lower wages than other equally qualified individuals, they will and should feel that they are being treated unfairly—but the lower productivity that results can, and likely will, lead employers to pay lower wages. There can be a “discriminatory equilibrium.” Even perceptions of race, caste, and gender identities can have significant effects on productivity.
Fairness, like beauty, is at least partly in the eyes of the beholder, and those at the top want to be sure that the inequality today is framed in ways that make it seem fair, or at least acceptable.
If it is perceived to be unfair, not only may that hurt productivity in the workplace but it might lead to legislation that would attempt to temper it. In the battle over public policy, whatever the realpolitik of special interests, public discourse focuses on efficiency and fairness.
The same goes for the policies that have shaped the growing inequality —both those that have contributed to the inequality in market incomes and those that have weakened the role of government in bringing down the level of inequality. The battle about “framing” first centres on how we see the level of inequality—how large is it, what are its causes, how can it be justified?
Calling it ‘incentive pay” executives justify profits and pay for their “larger” contribution to society. But the crisis showed to everyone what economic research had long revealed—the argument was a sham.

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