Monthly Archives: June 2015

The Real Problem with Inequality

Lots of people who talk about economic inequality will often list reasons why inequality is bad. Inequality causes crime. Inequality causes bad health outcomes. Inequality could lead to a revolution. Bringing up these justifications for the harm of inequality doesn’t make sense to me. It’s like writing an article about why being set on fire is a bad thing and giving reasons like you won’t be able to catch public transport.

I think there is a core feature of inequality that makes it a bad thing and in comparison the above problems seems like minor side effects. I almost never hear this problem being mentioned. And it is a fundamental concept in economics so the pro free market economists should be very familiar with it.

The problem is diminishing marginal utility. In this case the diminishing marginal utility of wealth. Giving $100 to a person with an income of $1000 a year will give that person more utility than giving that $100 to a person with an income of $100,000. And taking $100 from the first person will harm them more than taking $100 from the second individual.
Because of this, most form of unequal distribution of resources (represented by wealth) lead to a lower level of utility overall. So if we could costlessly redistribute wealth to decrease equality that could increase overall utility.

There are several exceptions to this. Firstly some inequalities are justified by different resource requirements to reach the same level of utility. For example, if there are two people who spend the same amount on all goods and services, except one has to spend an additional several thousand dollars a year on medical expenses to keep them alive, that person needs more resources to achieve the same level of utility as the other person.

Secondly, there is the argument that inequality motivates people to work, and if there was one standard income that everyone received it would distort the market and resources would not be allocated most efficiently. This is probably true, and figuring out the best trad off between efficient use of resources and utility maximization (which are not the same thing) is a hard problem.

But I think that this is the kind of conversation that should be going on when we talk about economic inequality instead of pointing out other side issues like the correlation of inequality with other negative societal outcomes. It can be hard paying for a funeral, but that is not why death is bad.

Maybe Everyone Is Actually Super Rational!

Back when I was reading through the sequences I noticed that several times after Eliezer Yudkowsky had explained some example of people being irrational a commenter, most commonly Robin Hanson, would say that it is possible that the behaviour is actually not irrational at all.

My favorite example is a post (which I can’t find right now) claiming that when people are confronted with arguments against their position they end up being more certain of the beliefs they already hold and that this is irrational because they are not properly updating when receiving new evidence. In the comments someone said that the subjects could be observing that the argument against their position is weak and be reasoning that in a world where their beliefs were wrong, they would expect there to be better arguments for the true position, so he weakness of the arguments is evidence that their position is correct.

This seems possible but unlikely to me. I think this is valid reasoning and if I was observing for the first time arguments against a belief I had and those arguments were very weak (especially if they were coming from people who I have observed make strong arguments in the past and I know have put a lot of thought in to the issue) I would definitely update towards my beliefs being more likely. But despite that, I still think it is psychologically unrealistic to think this is what is happening in the majority of people’s brains when they are presented with evidence against a belief and end up being even more confident*.

There are other psych experiments where we can apply the same reasoning. For example in the Asch’s conformity experiment, we could reason that when subjects conform they are actually updating on the evidence of other people in the room apparently having different views about the length of the line.

Two possible models that can be used to explain observations of human irrationality are, firstly, “Yes, that’s because humans are irrational, which is exactly what we would expect form what we know about evolution” and secondly “What appears to be human irrationality is actually people behaving irrationality but, for example, trying to achieve different goals then they appear to be. ”

My prior from the inside is that the first is much more likely and that it is exactly what I would predict if I had not observed human behaviour but was told about evolution. The only reason I can think to have a prior that favors second model is a belief in the Neoclassical models of perfect rational self-interested human agents**. The first model also seems simpler so gets Occam’s Razor/Solomonoff’s Induction points.The worst part is that these models are usually used to explain the same observation so it is hard to think of evidence that would be more likely to exist if one was true and not the other.

The second model seems to be connected (conceptually in my head, if not in the reality) with both the idea of revealed preferences and the signalling model of human behaviour. I am skeptical of both of these concepts and will hopefully be writing posts in the future about why.

* Taking the outside view, its possibly that this is just elitism of the “Well I am smart enough to reason like that, but most other people aren’t ” Because of this thought, I am going to update slightly away from the “People Are Irrational” Model.

** Either the extremely unrealistic Econ 101 version or the more nuanced version held my more knowledge Neoclassical economists