The use of shame to change income inequality (Through the Wormhole spoiler alert)

I was watching Through the Wormhole tonight (spoiler alert…unboxed spoilers ahead, so turn back now if this distresses you), and at the very end they talked about using shame to redress income inequality and fairness. As an example of this, I’ll attempt to paraphrase the experiment they used to illustrate the concept:

They took 20 people and gave them all $20 dollars. They then asked these people to secretly donate some of this money in a series of rounds. Whatever the collective donated would be doubled and then redistributed. Obviously, it would be in everyone’s collective interest to donate the maximum (a dollar) each round, since whatever the collective donated would be doubled and redistributed to everyone. However, after several rounds, a couple of people in every run through of this experiment would cheat…they wouldn’t donate the dollar, but would be satisfied collecting the reward at the end, thus they would come out with even more money.

A second series of experiments were then conducted. Similar to the first but with one key difference…at the end it was announced that the bottom 2 contributors would be revealed to everyone. The results were that the amount of cheating was drastically lessened (IIRC, by at least 50%).

The lady running the experiment seemed to feel that this behavior is in all humans, and that there might be some way to use it (I guess California does something along these lines in some program mentioned, but I can’t recall the specific details). What was interesting (to me) was her comment that many of the banks and bankers given bail out money during the 2008 financial crisis used that money to pay for bonuses, and basically they didn’t actually think that what they were doing was wrong or outside of the bounds of good behavior…just part of every day business. Obviously, many disagreed with that assessment (FWIW I can see both sides of that one, but would tend to agree that using bail out money to pay for bonuses was probably out of bounds).

So, using the above as a rough illustration, could this be used in some way to shape or change income inequality? Perhaps by having the tax and revenue departments of a country publicly reveal anyone who is found guilty of tax fraud? Perhaps in having the amount of taxes paid be public record? Or everyone’s income and assets as public record? Those things, of course, would be infringements on individuals rights and freedoms (in the US and many other countries), but could it work? Or are there other ways this could be used by a society to balance income inequality?

(This isn’t a CS debate, so please focus on the question and not the show…and not the more controversial aspects of this particular episode or any of the other ones, on Morgan Freeman or on your feelings about the show in general)

Naked Greed is ugly, and the shame it is hoped to induce doesn’t always occur. Or, cheating works; but only for the cheater. It only takes a few to screw things up for everyone else. Greed overcomes them.

It certainly would work. Plenty of historical societies have applied social pressure like you describe on wealthy people to “spread” their wealth to others. I think even in American society, it was the norm up until the last few decades. Wealthy people who refused to give money would have been looked down upon by others (including their wealthy peers). So a wealthy person who kept all his wealth for himself would have paid a price in lost prestige.

The problem with this is that the idea of “I earned it, it’s mine” is so deeply ingrained into American society that it’s not really possible to shame people. Once someone accepts objectivism or even basic libertarianism, it’s virtually impossible to shame anyone on the basis of their wealth. After all - they earned it. Society gave it to them, and in accordance with the free market, this was necessarily justified.

Dan Ariely in “Predictably Irrational” notes that the reason they forced CEO salaries to be published was to shame them into only accepting reasonable wages. Instead it caused them to want more than their peers at other companies because, after all, they were just better.
Shaming for doing something illegal is one thing, but they do that already. That’s were perp walks are for. Shaming for something us suckers in the 99% won’t like isn’t likely to help and may backfire.

No, society didn’t “give” it to them. Society traded their dollars to them for the goods or services they were offering which society valued more than the money they traded away.

In my opinion the attitude of “I earned it, it’s mine” comes into play mostly when attempts are underway to make people feel guilty about their wealth or affluence, with the underlying assumption that they should be happy to have the government take more of their money to redistribute to others.

This is different from E. Gordon Gottrocks at the country club who’s the only wealthy guy in his social set who refuses to voluntarily contribute to charity or any good causes. Such a person would likely find himself on the outside looking in on social occasions and would be a considerable source of embarrassment to his spouse and children.

Elton John, as a matter of fact, is to me a prime example of the “I earned it, it’s mine” type of attitude. He comes under fire sometimes for his exorbitant spending and I’ve heard him say these exact words in interviews when the subject has come up and that he feels no guilt whatsoever about the money he spends. Yet he’s given millions upon millions to various charities and worthy causes over the years and has worked tirelessly for decades raising millions more for AIDS research and to assist AIDS victims. He’s also voluntarily kept England as his primary residence and paid many millions of dollars in income taxes that he could have saved by becoming a tax exile as many of his fellow rock stars have done. So if he wants to own a dozen Rolls Royces or spend $500,000 a year on flowers I say more power to him.

Let’s take a look at this. If my math is right, and I understand the problem correctly.

  1. Everyone starts with one dollar.
  2. If everyone puts in, then everyone ends up with 2 dollars.
  3. If one person cheats, then he ends up with $ 2.9, while everyone ends up with $1.9. So, the person who cheated ends up better than the non-cheaters, and he ends up better then he would have been if he put in.

And actually, if you go through the maths, in all cases the cheaters wind up in a better position at the end than the non-cheaters. Once the cheaters exceed 10, then everyone winds up worse compared to the situation where everyone put in. But, if the number of cheaters are 9 or below, then the cheaters all end up in a situation better than the situation where nobody cheats.

In economics, we say that rational actors seek to maximize utility. Now, utility has a lot of definitions, but most people tend to reduce it to… well… money, since that’s easy to analyze and quantify.

So, back to our game, if you knew ahead of time that you plus the number of cheaters would be nine or less, then the rational thing for you to do would be to cheat. Since you don’t know ahead of time, what you should do is calculate the odds for each scenario and then bet accordingly.

Ok, now let’s move to the situation where the cheaters are exposed? Why did the behavior change? Now, for me, I’m inclined to say that it’s because people attach utility to social standing, and so their utility calculation changed once they realized they would be exposed. But then, I’m willing to use a definition of utility that’s broader or look at things like behavioral economics to explain this kind of behavior. A lot of economists, though, just pooh-pooh those kind of things. They might chalk it up to some complex odds calculation and say that the rational actors changed their bets in response to the new circumstances. I’m suspicious that most people are capable of doing that in their heads.

But, this really goes to an underlying debate at the heart of capitalism – and it’s a debate which is often glossed over. All markets are structured for some purpose. Even most libertarians admit that markets need to be regulated in some fashion. We’re all arguing about what the purpose of the regulation is. What should be the end result of the market? What objectives do we want to see the market accomplish. When people say “leave it to the market,” that’s a meaningless statement, because we first have to discuss what is the purpose for which we are employing the market as a tool. People obviously disagree on the purpose, of course.

So, again back to the game. Is the goal to have the most amount of people better off at the end? If that’s your goal, then you just put in a rule that says everyone has to contribute. If your goal is to treat it as a betting game, though, then there’s no need to bring shame into it. You’ll accept, perhaps even want, some people to lose, since that’s where the fun comes in.

But shame as a regulatory mechanism is extremely problematic, because it’s hard to quantify, and different people prioritize social standing in different ways. Most people (in my experience, but I haven’t done studies) tend to be very worried about what people who they have direct contact with think, but that seems to get diluted within the larger society. For example, while my family could probably get some good results by shaming me, I could give a rats-ass what anybody on this message board thinks about me (no offense). That’s why shame, I think, would be difficult to use as a regulatory mechanism on a large scale.

And then there’s the problem that different people (I think) are shamed by different things. So, on a macro level, you probably won’t be able to get the results you desire by using shame. But shame as a regulatory tool does work in very narrow circumstances.

Or in less partisan terms, disclosure laws gave the potential CEO more bargaining power. Which anyone would use. After all, that’s exactly why Obama wants worker pay disclosure - it gives workers more bargaining power in contract negotiations and should lead to a rise in wages.

An even less partisan way to look at it would be to say that forcing disclosure removed an information asymmetry and made the market more efficient. That means more efficient allocation of CEOS, which could lead to higher salaries for them if it makes them more productive. It might also cause a wider gap betweeen the highest and lowest paid CEOS. We focus on the ones making megabucks, but maybe it’s because the lowest performing guys who used to make $2 million a year now get $500,000.

FWIW, in countries like Sweden it’s quite easy to find out the amount of taxes any private citizen is paying. Coincidentally (or not?) Sweden has always been one of the most income-equal countries in the world.

Another Scandinavian mechanism that is linked to shame: owning a luxury sports car is often frowned upon, as are many other shows of wealth. Hence the popularity of Volvos, comfortable, durable, quite expensive but not ostentatious. I believe that in most other countries owning a luxury car is seen as a sign of success

Just the notion that being wealthy is a sign of ‘cheating’ and something to be ashamed of is completely alien to me and others who think like me. Generally, people become wealthy because they figure out how to create and sell things that people want, and they do it better than others. To me, this is admirable.

A society that attempts to shame its most successful people for their very success will not benefit from the effort. And what a wonderful message to give our kids to ensure that they continue to strive and innovate: “Do okay. But don’t do better than okay, because that’s shameful. And besides, the only way to do it is to be a cheater. You don’t want to be a cheater, do you?” Yeah, that’ll raise a generation of go-getters.

I regularly violate at least the first 7 rules.

Oh, come on. Take HSBC, one of the largest banks in the world. They got hit for money laundering for drug dealers. Did their banks get seized under civil forfeiture laws? Did anyone go to jail? No. They just paid a fine equal to about 5 weeks of profit. The rest of us, however, are playing under completely different rules, where simple possession, let alone money laundering, could and very likely would result in loss of our property and jail time. There’s a whole list of these I could do.

The rich and the big banks are playing by a completely different set of rules than us. I’m quite happy to call that cheating. But at the very least, it’s deeply unfair.

Except this isn’t true. Forget any argument based on morality. Cold vulcan logic tells you that a system where everyone is putting in a dollar is producing more wealth for everyone than a system where some people are cheating.

So the rational thing to do? Make sure nobody cheats. Putting social pressure on people to prevent them from cheating isn’t a moral cause, it’s basic applied economics. Rational economists are going to pressure people into behaving “honestly” because it maximizes everyone’s payout.

And this is a good analogy for many real world situations. People often claim to be acting in a rational manner by “cheating” when their actual interests would be better served by not cheating. Trust is often the most rational approach.

Yes, the overall system is more wealthy if nobody cheats, but you’re misinterpreting the statement. The statement is about how individual rational actors behave, and it’s a fundamental assumption for capitalist economic theory.

No, that is not how the term “rationality” is used in economics.

No, the math shows that an individual who cheats is better off if nine or less people cheat. Individually, he is better off. If he knew ahead of time that nine or less people would cheat, then he is individually better off cheating.

Look, I’m completely happy to look at how wealth is generated in society as a whole. This is part of why Piketty is causing such a ruckus, because his book shows that even though individual actors may be acting rationally, the wealth inequality being generated has the potential to reduce the overall wealth of society as a whole.

But you actually have to deal with the point I made, rather than making up your own definitions of words.

Pesonally I don’t care whether I earned it or not, as long as I obtained my money legally. If I inherited it all the better; I only work because I need money - I have no sense of pride about it. I don’t care how much anyone has, or what they do with it, or if they earned, inherited it, won it in a lottery. I’m not a fan of shaming really - I grew up Catholic, and I fail to be impressed with the results of shaming.

Wealth inequality in Sweden is quite high, however, disproportionately dominated by the nobility. Note too that social pressure toward conformity in public consumption helps to conceal that inequality.

Tax evasion is thought (pdf) to be high there, too, with some estimates calculating the size of the underground economy to be proportionately twice the size of that of the US. That’s obviously a more controversial topic, though, since it’s so hard to measure.

You know, you can always find cases of malfeasance in any group you want to look at if it’s large enough. But I suggest you step back from the news feed and just look around you. Look at all the products you have - your computer, your chair, your desk, whatever else is in your room. Most of the companies that made those things are run by rich guys.

The doctor that treats you? Rich guy, probably. The dentist who owns the little clinic down the street with a staff of six? Probably fairly rich. The owner of the company that built your home? Probably a rich guy.

The vast majority of wealthy people are not crooks or robber barons or shady people gaming the system and exploiting workers. The vast majority are simply people who worked hard, or who had brilliant ideas and the ability to execute them, or people who took great risks that wound up benefiting others. They are authors who write books millions of people like to read, or actors who entertain millions with their talent, or engineers who come up with breakthroughs that lower the cost of access to space by 90%, or internet entrepreneurs who figure out how to connect billions of people together in ways that enrich their lives, or people who have worked tirelessly at quality control, user experience and supply chain management in their company to rise to the top of their market.

Even in the financial world, for every guy scamming the system there are 200 others making sure that capital flows where it’s supposed to go, breaking through logjams that keep investors from connecting with people who need investment capital, etc.

Yes, there are scumbags out there. And there are badly run companies that go out of control because of poor controllership or because of an ass at the top. But these are the exception, not the rule.

Of course, if your interest in the subject is only piqued when your political news site publishes another tale of crooked rich people, it’s pretty easy to become biased.

And Wall Street bankers get subsidies that the rest of us don’t get. They get options to evade laws and regulations that the rest of us don’t get. There was systematic fraud on the court system committed by Wall Street, and the 50-state mortgage settlement let most of those people of the hook. These are not isolated cases. We are living in an age of regulatory capture by Wall Street and the banks, and they get to play by a different set of rules.

And that doctor and dentist? He’s probably paying one of the higher marginal rates on his earned incomes. But that hedge fund employee? He gets to pay lower capital gains rates on his earned income. How is that fair?

I’m not talking about actors or engineers. I pay high marginal rates on my income too, and it’s not fair that people making more than me get to pay lower marginal rates on their earned income. You are simply hand-waving away systematic unfairness, rather than dealing with reality.

Why 200 you say? Why not 300? or 500? Just making up figures now.

LOL!

Well, since you obviously don’t know anything about how the Wall Street crooks got let of the hook, not once but repeatedly, you get to duck your head in the sand.

Here’s why shame won’t work.

I’m a big financial institution. My contract with employees says if they do X, they get bonuses. I lose money, but individual employees are still doing X. Therefore, it’s only fair they should get paid bonuses, right? Should I feel ashamed?

I’m an employee whose contract specified that when I do X, I get a bonus. My contract doesn’t specify that my employer has to be profitable. So why shouldn’t I demand my employer live up to the contract? Should I feel ashamed?

Here’s an interesting thought experiment. Replace banks with “state governments” and replace “bonuses” with “pensions.” Do governments have the right to skip out on pensions that they’ve contracted to pay? Is it out of bonds to raise taxes to get more money to pay the pensions? Who should be ashamed: the government officials, the employees, or the taxpayers?

One would hope that bargaining power would come from achievements, not from what the best of the other guys salary. Compensation committees had surveys, no doubt, even before this rule.
I can’t argue that the information gave the CEOs bargaining power - but imagine an average guy who knew what others in his group were making trying to get a raise. He’d better come in with some good data on why he is more productive. Given the gap between pay and results for CEOs that isn’t happening. Of course if our friend hired his boss he might do a lot better.
When I’ve done compensation we had a salary pool which had to be split among all workers. CEOs don’t seem to have this problem.
I’m not sure publishing salaries would give people bargaining power - it might make the disconnect between pay and performance more evident. What it might do is force a company to increase the size of the salary pool to avoid a total crash in morale. Anyone who hires PhDs in times of high demand knows that their salary is set by outside market forces, while internal salaries are moderated by the assumption that workers have too much inertia to leave because of minor salary gaps - thus you get compression.
I can tell you from experience that it is easier to be fair during times of high inflation. When average raises were 10% you had money to play around with, when they are 2% you don’t because you don’t give negative raises.
When I did compensation it was often depressing, even though there was no infighting or rancor between managers.
Companies really need an executive salary cap, like in football.
So while the published information might give some bargaining power, I still go with the greed angle, and the “are you telling me that the guy over there is better than me?” pout angle.