April 11, 2007
People Will Spend Money To Make Wealthier Poorer

James Fowler at UC San Diego and colleagues have performed an interesting study about the willingness of people to spend their own money to lower the wealth of others. (PDF format)

Participants in laboratory games are often willing to alter others’ incomes at a cost to themselves, and this behaviour has the effect of promoting cooperation1–3. What motivates this action is unclear: punishment and reward aimed at promoting cooperation cannot be distinguished from attempts to produce equality4. To understand costly taking and costly giving, we create an experimental game that isolates egalitarian motives. The results show that subjects reduce and augment others’ incomes, at a personal cost, even when there is no cooperative behaviour to be reinforced. Furthermore, the size and frequency of income alterations are strongly influenced by inequality. Emotions towards top earners become increasingly negative as inequality increases, and those who express these emotions spend more to reduce above-average earners’ incomes and to increase below-average earners’ incomes. The results suggest that egalitarian motives affect income-altering behaviours, and may therefore be an important factor underlying the evolution of strong reciprocity5 and, hence, cooperation in humans.

It is no wonder that redistributive taxes are popular. Economists argue against highly progressive taxes by claiming (probably accurately) that such taxes reduce economic growth. But the participants in this experiment showed themselves willing to reduce their own net worths in order to reduce the net worths of wealthier people. The economists therefore are arguing against a harm that many people are in fact quite willing to inflict on themselves. I see this as driven by a need to lower the status of others who have much higher status. The feeling of one's status position is a relative feeling. If the money spent lowering status of others is less than the money lost by others then policies that do offer considerable appeal.

To separate motives, we use a simple experimental design to examine whether individuals reduce or augment others’ incomes when there is no cooperative norm to advance (see Methods). We call these behaviours ‘taking’ and ‘giving’ instead of ‘punishment’ and ‘reward’ to indicate that income alteration cannot change the behaviour of the target. Subjects are divided into groups having four anonymous members each. Each player receives a sum of money randomly generated by a computer. Subjects are shown the payoffs of other group members for that round and are then provided an opportunity to give ‘negative’ or ‘positive’ tokens to other players. Each negative token reduces the purchaser’s payoff by one monetary unit (MU) and decreases the payoff of a targeted individual by three MUs; positive tokens decrease the purchaser’s payoff by one monetary unit (MU) and increase the targeted individual’s payoff by three MUs. Groups are randomized after each round to prevent reputation from influencing decisions; interactions between players are strictly anonymous and subjects know this. Also, by allowing participants more than one behavioural alternative, the experiment eliminates possible experimenter demand effects12—if subjects were only permitted to punish, they might engage in this behaviour because they believe it is what the experimenters want.

Over the five sessions income alteration was frequent. Among participants, 68% reduced another player’s income at least once, 28% did so five times or more, and 6% did so ten times or more. Also, 74% of participants increased another player’s income at least once, 33% did so five times or more, and 10% did so ten times or more. Most (71%) negative tokens were given to above-average earners in each group, whereas most (62%) positive tokens were targeted at below-average earners in each group.

I see a lesson here that is applicable to the immigration debate: Human societies have a limit to the amount of inequality that people will tolerate. Given that many of the forces that generate inequality do so by incentivizing the most productive to generate wealth we should ask whether we should avoid other policies that generate inequality without generating much wealth.

To put it another way: Think of societies as having inequality budgets. A society has a fixed amount of inequality to spend. In my view it is better to spend that inequality on policies that cause economies to generate the most wealth per person and the most new technology and science. Policies that generate a lot of inequality with little increase in productivity of wealth creators (e.g. immigration of people who have low skills and low earnings power) essentially waste inequality that would be better spent on incentive systems for those with the most potential to generate wealth.

Beyond some level of inequality the masses will demand taxes and other measures to limit the extent of inequality. The masses probably wont' show fairness or wisdom when they demand such taxes and other restrictions on the power of wealth. But by supporting such policies they are catering to their own very deeply felt needs for higher relative status and a reduction in the feeling that wealthier people control their lives.

One of the fundamental problems I see in the world: Globalization is making people part of much larger status hierarchies. In an earlier era of much less communications technology one could only worry about one's status vis a vis one's local community. Now one can develop an appreciation of what one's status is vis a vis all the billionaires or all the national leaders or all the corporate CEOs or all the best athletes or prettiest models around the room. This inevitably gives most people a much larger group of people who seem like they have higher status. Therefore global feelings of lower relative status might well be growing.

Share |      Randall Parker, 2007 April 11 11:56 PM  Brain Economics


Comments
Ned said at April 12, 2007 7:31 AM:

I am reminded of an old story about a Russian peasant who lived alone in a miserable hut in some tiny village in the middle of nowhere. His only possession of value was a cow, of which he was extraordinarily proud. One morning he awoke to find that the cow had died during the night. The peasant was devastated and began to pray fervently. That night an angel appeared to him and said that God had heard his prayer and taken pity on him and would grant him a single wish, anything he wanted. "Anything?" the peasant asked. "Yes, anything," the angel replied. The peasant thought a bit and then answered,"Then I ask that all my neighbors' cows should die too!"

Charlie said at April 12, 2007 9:10 AM:

This effect may be real, but I always find such experiments to be heavily contrived. There is a mighty gulf between rejecting a computerized, random allocation of wealth than to deride a real distribution, based, at least partially, upon merit. Indeed, merit is the foundation of fairness in the distribution of wealth for many people, but this principle is absent from the experiment. Hence, we should expect the punishment of inequality to be higher in this experiment compared to such feelings toward our real neighbors.

rsilvetz said at April 12, 2007 11:03 AM:

And if folks understood free-markets, they would understand that advancing standards of living at all levels is the outcome, would we have all this redistributive nonsense terminated once and for all. Even more absurdly, the impact of redistribution on cost and production is double -- it raises everyone's cost and simultaneously prevents products from coming into existence.

Alex said at April 12, 2007 11:22 AM:

Charlie's point is interesting. Perhaps if participants were asked to take a skills based game for a couple of minutes before they're randomly assigned a wealth, that might cut down on this "fairness" complication.

Purenoiz said at April 12, 2007 1:21 PM:

Funny thing about "free markets". They Are in no way shape or form free, somebody who has a vested interest always finds ways to interfere with them. AKA corporate welfare and cronie-ism, taxation and regulations. There is always somebody adjusting the rules.

The only thing government can truly provide for is minimum standards, and the industry will fight them tooth and nail to make a penny, even if it protects human life and pushes up standards of living. A good example is the standards enforced by civil engineers on buildings. Something the market simply can't/won't raise. People are selfish by nature, nothing wrong with that, but as a society you need "some" checks and balances to prevent it from running rampant.

Purenoiz said at April 12, 2007 1:22 PM:

sorry AKA should have been i.e.

Marak said at April 12, 2007 1:53 PM:

Socialism requires draconian changes to human nature to work. Capitalism is unfair, but it works.

I am always amazed by people who complain about wealthy and powerful people acting in their own perceived self interest. While that may help the powerful stay on top, they are aided by the many forms of self-defeating behaviors that people near the bottom exhibit.

The problem with egalitarians is that they want to equalize everyone by pulling down the ones on top, perhaps assuming that this will automatically raise those on the bottom. But it doesn't, of course.

TTT said at April 12, 2007 2:24 PM:

Juvenile envy will always exist, and find ways to inhibit meritocracy. That is why there is a Democratic Party.

Bryben said at April 12, 2007 4:58 PM:

The pithiest phrase pertinent here that you may have heard is:

Free men are not equal. Equal men are not free.

Randall Parker said at April 12, 2007 6:23 PM:

Charlie,

The problem is that lots of people do not see the market as fair. So while the experiment seems contrived I'm thinking it is realistic due to this perceived lack of fairness.

Go to a left-leaning web site and start an argument about whether the wealthy deserve their money. You'll hear about investment bankers, Enron, big money, insider-trading, old boys networks of interlocking corporate boards of directors and more. Well, some of those complaints have large amounts of truth about them. Trying to point out that redistributive taxes also take from people who are highly productive and who produce more wealth than they earn will not win arguments in many venues.

I think the sense of unfairness is going to grow as world globalization increases the size of status hierarchies.

Mthson said at April 12, 2007 6:36 PM:

Despite the experiment's precautions against incentive to promote cooperation, participants will always feel their actions are supporting a larger cause of cooperation/fairness in society. It is in all of our own self-interest to live in a broadly cooperative society in which e.g. cars can be left parked on the street without being damaged etc. (unlike in Paris).

PDulaney said at April 12, 2007 8:54 PM:

I think the recent attempt to tax millionaires in California to fund pre-schools is an excellent example of such envy. And in keeping with the principle of "no taxation without representation" I think the balloting should have been limited to millionaires. (No, I'm not a millionaire, or even close).

Purenoiz said at April 13, 2007 12:43 PM:

Could people stop pretending like the rich don't have an extremely unleveled playing field in their advantage. Concentrating wealth into an ever smaller growing pool people isn't evidence that capitalism works, only that capitalism values capital over people. Those born into the upper echelons are not better people, they just have a better starting place. They also get into the better schools with ease even if they don't deserve it, look at our current president, a C- avg at Yale. Please tell me you think he would have really had any chance had his last name been anything other than Bush.

Yes, there are some people who pull themselves up by their bootstraps and go onto be very successful entrepreneurs, but the majority of Americans will work amazingly hard to slowly slide backwards.

Your fooling yourself if you really think the system is fair.

That said, rich people are not inherently good, or evil, they are either more adept at playing the game of capitalism, or have stronger drive to succeed, or were lucky enough to be born into and not have to work hard to get where they are.

The same could be said about poor people. Being born into the "wrong" family will have the same effects that being born wealthy will, only in a deleterious aspect.

The question is how big will the divide get between these two groups before serious social problems errupt?

wcw said at April 13, 2007 5:31 PM:

On the ideological argument, can we take it somewhere else? This seems the wrong venue.

On-topic, I personally would happily give up my entire current liquid net worth to see Paris Hilton distribute her entire inherited fortune (we're assuming this fantasy prevents her father from withholding it) by hand, one twenty dollar bill at a time, with a Real-World-style camera in tow to broadcast same later, to every beggar she can find in whatever city she is in, just one day a week. Sundays seem right to me for some reason. I can't put my finger on why..

I can earn more. She can, too. It would totally be worth it.

Balthar said at April 14, 2007 7:53 AM:

The system ain't fair but it do work. Pretending that crying "shame" or "unjust" is gonna do anything to help the underclass is stupid immature ranting. It might just be making you feel better but it shows how impotent you are. Those who can't do, protest.

rsilvetz said at April 14, 2007 11:24 AM:

We could discuss the fallacy of wealth concentration ad nauseam but it's not worth the effort. There is presently a mixed-economy where foolish government favoritism distorts an otherwise competitive marketplace and impoverishes the masses. But for those truly interested in learning, the best materials to date are still those at George Reisman's Capitalism. While there you should check out the excellent article on globalization.

John S Bolton said at April 14, 2007 11:13 PM:

No doubt maximizing economic freedom will yield better progress, and be more protective of rights.
Globalizing a rich country, though will make it more like majoritarian South Africa,
and this has a lot to do with status hierarchies.
Government cannot run public propaganda organs for young people so as to work against envy,
against socialism and egalitarian feelings on what a fair distribution of income might be.
Power works for, not against, itself.
For each point of IQ difference between populations in the same polity, the
lower group has greater incentive to try to shift the status hierarchy towards one of ruthless violence, and away from one dominated by IQ and its correlates:
income, years of education, more peaceable ways of relating to others, etc.
Likewise, for each point of greater difference in conceptual ability
between groups in the same sovereignty, the
Demagogue has greater chances to hugely aggrandize his power,
by harping on the differential results between groups,
exploiting this basic tendency to take offense at unequal distribution of goods valued in all status hierarchies.
Whether this egalitarian feeling comes from nature or long-ingrained tradition only,
it is certainly not to be regarded as eradicable in the short-term,
and policies which assume otherwise will tend to trip over it.

Todd said at April 20, 2007 3:33 PM:

There was a study at I believe Harvard a while back. People were asked would you prefer to either.

1. Make $50,000 a year when everyone else in your field and neighborhood made $25,000
2. Make $100,000 a year when everyone else in your field and neighborhood made $200,000


The vast majority of people chose 1. However when you did the same thing with vacation time (would you prefer 6 weeks if your neighbors get 8 vs would you prefer 4 for you and 2 for them, something like that) people chose the longest vacation times they could for themselves and others.

So it is not just juvenile people, but Harvard MBAs as well. This is human nature to care about status, its not going to change.

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