Are we all confusing status competition and ‘inequality’: Short answer, yes

The authors of the Spirit Level have done a piece on the relationship between inequality and negative outcomes here.

Now I’ve previously strongly disagreed with the Spirit Level here.  However, I feel that I can discuss this specific post separately – I feel that it is clear and more focused than the book.  I am still unhappy with this post, however I think they have picked the clearest and most fundamental of their arguments to discuss here.

In the post it is clear what the concern is, a society that promotes status competition will see increases in negative mental states.  I don’t disagree with that in of itself – psychosocial stress is a major issue, and has a significant impact on people’s quality of life.

My problem is the naive view that a static measure of statistical dispersion in incomes (what measured inequality in terms of how they interpret and analyse it) is equivalent to social and cultural organisation that promotes status competition.

If measures of statistical dispersion (inequality in measured incomes at a point in time) seem to be related to status competition, it is likely a symptomatic relationship – not a causal one.  As a result, if we focus on policy to “chase inequality” rather than our perceived failure coming from status competition we are entirely missing the point, and any “policy impacts” we estimate will be wrong (the Lucas Critique – our “parameters” are not policy invariant in the relationship we are fitting).

To tone down the technical jargon a bit, I’m saying that if we chase “inequality measures” to reduce status competition, we will simply drive people’s inherent desire for status competition into other places.

They would respond to me by saying that, by reducing income inequality measures this would reduce status competition, as the data shows!  However this is not only not self evident, but is also not a result of the data – we do not have appropriate measures to suggest that.  Definitions change too often, and many of the examples that hold in a small area will not generalise [eg do we really diagnose mental illness in the same way we did in the 70s, or even in the 00’s?].  Seriously – status competition was alive and well in the 1950s-1970s, we just had different cultural groups engaged in different ways due to the excessive levels of sexism and racism!

Here we have other social scientists wandering into an issue that strongly involves the allocation of scarce resources WITHOUT references to the vast literature in economics (and philosophy of economics) about what measures represent, and the ethical statements they are compared to [Note here that I believe many of the analysts do references more economic literature, but W&P were quite clear in the Spirit Level that they felt they didn’t need to read past the basic definition of a Gini coefficient to get everything they wanted from economists].  A consideration of status goods, viewing poverty as a relative concept, and broad discussions of need within policy are a huge part of “normative” economics as it currently exists – why ignore that literature to make chasing inequality a “silver bullet”.

The status good argument is nowhere near a new argument, but acting like we solve an issue of self worth associated with peoples relative position by making ONE element of someones life more equal is missing so much of the point!  Let me give a simple example – assume we have total equality of incomes.  Then people will compete in terms of “status jobs”, “status consumption”, and other forms of dominance behaviour.  In all honesty, the core of this specific issue comes from group behaviour, and people’s ability to move into and out of groups – hence why mobility, capabilities, and opportunity are incredibly important concepts when thinking about these ideas (Update:  Opps, wrong link.  That was about Sen asking “equality of what” as a starting question – I meant to relink the relative poverty and capabilities post.  I am happy with both though 🙂 ).

Now I’d like to note something here.  There is no economist, anywhere, who could analyse this issue in sufficient detail.  To do true policy work, we need analysts from a variety of backgrounds – group behaviour analysis requires sociologists, plain and simple.  But I’m also pointing out that when it is an allocative issue, there is literature by economists.  When economists have “built the measures”, pushed for increases in microdata, and spent piles of time analysing the small conditional truths you can get from this, these are bits and pieces worth reading – rather than simply coming out and saying “slay the Gini coefficient, and buy our book”!

Sidenote:  Their overconfidence in what the data actually shows vexes me greatly.  It is overconfidence, plain and simple, and I wish they were called out on it.  Of course economists are often guilty of that too.  In that way I find Acemoglu’s comments on Piketty’s new book telling:

Part of his interpretation I do not share. Piketty argues that there is a natural tendency for high inequality in ‘capitalist’ economies (the term capitalist is not my favorite) and that certain unusual events (world wars, the Great Depression and policy responses thereto) temporarily reduced inequality. Then both earnings inequality and inequality between capital and labor have been reverting back to their ‘normal’ levels. I don’t think that the data allow us to reach this conclusion. All we see is this pattern of fall and rise, but so many other things are going on. It is consistent with what Piketty says, but it is also consistent with certain technological changes and discontinuities (or globalization) having created a surge in inequality which will then stabilize or even reverse in the next several decades. It is also consistent with the dynamics of political power changing and this being a major contributor to the rise in inequality in advanced economies. We may be seeing parts of several different trends underpinned by several different major shocks rather than the mean-reverting dynamics following the shocks that Piketty singles out.

Note:  I haven’t read Piketty’s book yet, I preordered it and I’m waiting for it.  I am looking forward to it and it will be interesting to see how much it persuades me that their specific narrative for the data is the right one – I aim to blog it!

Determining causal chains is hard, impossible maybe even for many of our social questions – our recent discussion on models helped to point to this.  Instead of trying to fine-tune the economy by fiddling around with the distribution in what come across as relatively arbitrary ways (once we start thinking about income as a lifetime concept, and as due to choice among heterogeneous individuals), why don’t we start off by thinking about endowments, opportunities, and providing a form of social insurance given that – we do need to appreciate the true limits of our knowledge when discussing policy.  Principles of fairness, knowledge of trade-offs, and the practical efficacy of policy are three very very very hard issues.  Mental health, and the scope for individual vs social responsibility in that space, is a danged hard issue as well.

Either Wilkinson and Pickett are saying let’s just do something to reduce statistical dispersion because that is the cause of our ills, which is insulting to the complexity of actual social issues, or they are saying that we need to consider social issues … in which case almost every policy analyst in the world would respond “duh”.

Note:  Paul, Brennan, and me have been chatting about inequality (here, here, here).   Income distribution stuff is a big issue, and I have read a hell of a lot of good literature on it over the past four months, it has been glorious.  But the status good argument for redistributing is fraught with oversimplification and IMO a misspecification of the entire problem – given how important status good problems are, and the coordination problems they incur, a strong analysis of them (which is one of the key arguments towards redistribution within economics) is key.  A strong analysis combined with a robust political process will lead to the right policies – the W&P description offers poor guidance in this space.  Poor guidance leads to poor, well meaning, policy.