What do you owe the world, and what does the world owe you?


This post is long-ish and quite out of character, but do read on it should be worth the while.

Landsburg, Harford, Rodrik, Cowen. The nominal subject is whether *we* should be compensating the losers from trade; here's the conversation:

Landsburg: Hey, without trade we'd still be jumping from branch to branch, banana in hand. Trade brought economic prosperity and got everyone rich in the first place - now why are the losers complaining?

Harford: Don't really know, but people who lose out from trade shouldn't receive better treatment than people who lost out due to other causes.

Rodrik: The idea of compensating those who lose out because of globalisation is not absurd, and in any case economists are not the people to ask - our tools are only helpful for positive, not normative, analysis.

Cowen: As economists and policy advisors we have a responsibility to think about ethics deeply. No, I don't think that an economist's core education covers these issues, but other disciplines do and economists have an obligation to study those too.

And your host:

I'm not so interested in trade itself or other stuff that create economic 'losers', my interest lies in fairness. Just two remarks in passing:
a) indeed, from a 'positive ethics' point of view, compensating losers from trade differently than you would losers from technological growth (etc, etc) does not really make sense.
b) where do we owe the immense wealth we enjoy today? Mostly economic/ technological growth, for which we have our ancestors to thank (whether that's Einstein or the guy who first thought of wearing shoes). Very little of these guys' social contribution was captured as private rents passed on to their children; for most part, they were scantily compensated for their efforts. These guys are dead now; it would only be right if we spread the wealth we inherited from them equally. Given our current level of wealth, everyone should be able to go through life without ever having to work to meet basic (and some not-so-basic) needs; those who wish to expend effort and take the whole enterprise further should only be rewarded at a level over and above that.

To the point now. Fairness is important because it is an integral part of politics. Not only the capital P variety but the small p too: without group ('social') notions of fairness very little mutual co-operation could ever ensue, and our civilisation could never have existed in the first place. There are too many prisoner dilemmas in any real-life group to allow an agent economicus to survive as a species for long (no, repeated games can only account for some of the observed co-operation).

By the way, maybe we need the concept of evolution-consistent rationality to be introduced to economics? In other words, individuals can only be as rational as would be consistent with survival.

Your homo economicus would struggle to coexist in a group and survive in modern day New York (or for that matter the Savanna) for a day, let alone deliver you the truly amazing world we enjoy. Message for economists: why don't we apply the trusted *positive* tools we have to analysing and predicting society's *normative* preferences? Come on, economics needn't refuse to dwelve into the origins of preferences (especially social preferences), don't be such cowards.

Are we worth our salt as policy advisors when we have not tried to predict in any systematic way which policies are 'fair' and popular? (no, asking people whether they are pro-trade doesn't cut it, I want a theory, I want to know why. I want a systematic approach to this dammit)

Think of Becker's model of crime and Acemoglu's work on the political process. Modelling perceptions of fairness (yes, there's no such thing as fairness, only perceptions of it) as a way of supporting survival-consistent equilibria should be extremely rewarding (and while I'm at it, don't forget to throw a bit of information modelling in there; group notions of fairness are nothing if not efficiency-improving informational shortcuts).

I've been planning to have a go at a formal model of perceptions of fairness myself and will be doing so soon; stay tuned.

11 comments:

  1. Anonymous Says:

    Why do you say that Becker's model of crime is a fair one? Plus- in many models involving the issue of fairness so much rests on whatever social welfare function you assume. I'd be interested to see how you get around that in whatever you do.

  2. datacharmer Says:

    Anonymous - sorry for the confusion, I didn't mention Becker's model as having to do with fairness, but rather as an example of modelling something that people had never thought of modelling before.

    Social welfare functions: I guess one of my main points is that there is no reason why we should be content with simply 'assuming' how they look like. We model the people's inflationary expectations or their demand for butter, why not their ideas of fairness too?

    Going a bit deeper (but not much, I'm in a hurry), perceptions of fairness are more a 'constraint' rather than what society actually maximises (or ought to be maximising), plus a lot of fairness is indeed procedural (and not blending well in a welfare function)

  3. data-baiter Says:

    I think you may be commiting the classic 'naturalistic fallacy'- that is attempting to deduce an 'ought' from an 'is'.
    Many moral philosophers would argue that factual propositions cannot be used to prove the truth of moral propositions, as the two types of propositions have different logical status.

  4. Anonymous Says:

    But no-one is talking about morality here. All it says is that we should be taking notions of morality into account in our models, analysing them systematically just as we do with pretty much everything else.

    Right now we simply pretend we are living in an an a-moral world, with notions of fairness (when they feature in models at all) being purely exogenous.

  5. Matt Nolan Says:

    I love it how you have divided the issue into the four ways economists make arguments:

    1) Use the neo-classical model
    2) I don't know, but I'm going to attempt to say something anyway
    3) Economics is a positivist science, we can frame the issue but leave the value judgements to the experts
    4) Economics is a positivist science, however we should add normative judgements.

    I tend to use a mix of all four. My goal is to many use the third one, but sadly I end up in the second camp all too much :)

  6. Will Says:

    "...it would only be right if we spread the wealth we inherited from them equally..."

    The need for fairness or redistribution today doesn't follow from the fact that our predecessors (Einstein or whoever) didn't collect the rents from their innovations. It does follow that if we could, we might want to redistribute across time (from now to Einstein and co), but it doesn't follow that we need to redistribute from rich to poor today.

    Did I misunderstand your second point?

  7. datacharmer Says:

    Matt, you are spot on! (shame it wasn't intentional...)

  8. datacharmer Says:

    Will - that's another way to look at it. Fairness is a completely artificial construct anyways.

    What my view is now: these guys should be compensated for their work. Without it, no-one in the developed world today could earn even a hundreth of what they do.

    If we found a way to go back in time to compensate these fellas, fair enough. But that's not possible. So, given that these guys have been dead for ages and have not specified in their wills how this extra money they helped create should be allocated, I propose that it's fair they are allocated equally (along the lines with someone who dies today and has no will or family, where the money goes to the public purse)

  9. Will Says:

    But our ancestors' innovations didn't create income inequality in our time.

    I'll grant you they've increased levels of incomes mucho, but I'm not seeing why their work created inequality.

  10. datacharmer Says:

    How could you be earning immense salaries as a banker without our ancestors having invented fiat money first? How could you start an airline company without all the accrued knowledge in engineering?

    Now, the knowledge of our ancestors is taken advantage of by the strongest, smartest or luckiest of their brethren.

    Instead, think of having the patent to everything reverting to public ownership rather than elapsing all together.

    That's not even to mention assets- how come I got born and all the bloody land was already taken?

  11. Will Says:

    So some people taking more advantage of the knowledge handed down to us is causing inequality.

    I'm not sure why that's an argument for redistribution.