Do Rich People Deserve to Be Rich?
by Forgot About Keynes
One of our abiding modern myths, as Russell Brand and George Monbiot explained in a recent episode of the Trews is: “that if you’re rich, you deserve to be rich and that story means that if you’re not rich, you don’t deserve to be rich and that means everything’s the way that it should be and nothing should change.”
This is what Melvin Lerner described as the just-world hypothesis. We have an in-built bias which makes us view the world as fundamentally just and the basic reason it exists is to make us feel more secure in ourselves as we go about our daily lives. What this means however, is that we are prone to errors in judgement such as what Monbiot refers to as the self-attribution fallacy and what psychologists often refer to as the fundamental attribution error. In essence, we not only overestimate the extent to which our successes are down to ourselves alone – we also often take credit for things we didn’t do.
This matters because in this day and age, we believe that we live in a pure meritocracy and that as such, our outcomes in life are down to our own hard work alone. This belief is deeply ingrained within our social psyche and forms the basis of the way in which some of those with the highest incomes justify earning so much while reserving the right to avoid tax. This kind of attitude leads us as a society to, for example, believe that tax cuts disproportionately affecting the disabled and the poorest in society are fine both inherently and as a means of reducing the budget deficit. In the grand scheme of things, this kind of attitude is at the heart of how we justify—and exacerbate—today’s vast social and economic inequalities.
What I’m going to argue here is that Brand and Monbiot have hit the nail on the head: it’s stupid to attribute your success in life to yourself alone. That’s to say: rich people don’t deserve to be rich (or at least, not as rich as they are – especially the super-rich).
This is the first in a series of posts in which I’ll be looking at (ir)rationality, meritocracy and inequality. In this post in particular, I’ll be explaining, with reference to the writings of Daniel Kahneman and Thomas Piketty, why our modern conceptions of meritocracy do more harm than good and segueing into the next post on what can be done about the inequalities that result. So then…
…WHAT DO WE MEAN BY MERITOCRACY?
I’m going to be borrowing fairly heavily from Piketty’s Capital in the Twenty-First Century (as well as Kahneman’s writing later) throughout, because he captures the essence of the issues I’m writing about here. Firstly:
Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents … [That is, in a democracy,] inequalities must be just and useful to all, at least in the realm of discourse and as far as possible in reality as well. (Piketty, 2014: 422)
[However,] in the United States, France, and most other countries, talk about the virtues of the national meritocratic model is seldom based on close examination of the facts. Often the purpose is to justify existing inequalities while ignoring the sometimes patent failures of the current system. (Ibid.: 487)
INHERITANCE, INEQUALITY AND A DIGNIFIED LIFE
Nineteenth-century literature is alluded to quite often in Piketty (2014) and provides a useful backdrop for his discussion on inequality. As we’ve established above, democratic society has to at the very least, pay lip service to meritocracy (that is, virtuous and justified inequality).
Interestingly, nineteenth-century novelists … often give a very concrete and intimate account of how people lived [… and sometimes] this went along with a certain justification of extreme inequality of wealth … Notwithstanding the extravagance of some of their characters, [they] describe a world in which inequality was to a certain extent necessary … without a fortune it was impossible to live a dignified life. (Piketty, 2014: 415-16)
Piketty (Ibid.) credits these novelists for not describing this view of theirs as meritocratic, if nothing else, because what contrasts the likes of Austen and Balzac from the likes of Greg Mankiw however, is that the latter does just that.
It is interesting to note that the most ardent meritocratic beliefs are often invoked to justify very large wage inequalities … The most worrisome aspect of this defense of meritocracy is that one finds the same type of argument in the wealthiest societies, where Jane Austen’s points about need and dignity make little sense. In the United States in recent years, one frequently has heard this type of justification for the stratospheric pay of supermanagers (50–100 times average income, if not more) (Ibid.: 417)
The vast social and economic inequalities we have today cannot be justified as those of the nineteenth century were, because, as Piketty explains, while back then a dignified life required an income (or a fortune) far in excess of average earnings—due to the prohibitive costs of travel, food preparation and all the other conveniences civilised life demands—these days, all of that is much, much more affordable. To a large degree then, modern inequalities are useless in comparison.
PAYING FOR LUCK
Not only then does modern (Anglo-American) society have no right to be so unequal, the justifications for the disparities in earnings and wealth put forward by today’s 1% are found wanting as well. Both Piketty and Kahneman are in agreement with Monbiot on the fact that our thinking is often faulty and on the damage that results from not accounting for these biases in our policy-making.
The most convincing proof of the failure of corporate governance and of the absence of a rational productivity justification for extremely high executive pay is that when we collect data about individual firms (which we can do for publicly owned corporations in all the rich countries), it is very difficult to explain the observed variations in terms of firm performance.
If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances.
In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.” (Ibid.: 334-35)
AN ILLUSION OF SKILL
The standard theory of how the stock market works, Kahneman explains in Thinking, Fast and Slow, is that share prices follow a random walk; there is no reason or rhyme to the movements of stock prices. This is consistent with the (strong form of the) efficient markets hypothesis, which holds that share prices embody all the information available on the market and that as such, it’s not possible that they are wrong enough that one could systematically outdo the market. And yet, when buyers and sellers of shares participate on the stock exchange, they are aiming to do just this – show that market prices are wrong. Kahneman goes on to explain that:
Mutual funds are run by highly experienced and hardworking professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than fifty years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker … The successful funds in any given year are mostly lucky; they have a good roll of the dice. There is general agreement among researchers that nearly all stock pickers, whether they know it or not—and few of them do—are playing a game of chance. (Kahneman, 2011)
Some time ago, Kahneman had the chance to study the illusion of financial skill up close. Addressing a group of investment advisers whose performance he had assessed, he explained the extent of this illusion.
No one in the firm seemed to be aware of the nature of the game that its stock pickers were playing. The advisers themselves felt they were competent professionals doing a serious job, and their superiors agreed.
On the evening before the seminar, Richard Thaler and I had dinner with some of the top executives of the firm, the people who decide on the size of bonuses. We asked them to guess the year-to-year correlation in the rankings of individual advisers. They thought they knew what was coming and smiled as they said “not very high” or “performance certainly fluctuates.” It quickly became clear, however, that no one expected the average correlation to be zero. Our message to the executives was that, at least when it came to building portfolios, the firm was rewarding luck as if it were skill. This should have been shocking news to them, but it was not. (Ibid.)
What Kahneman’s account shows is the breathtaking extent to which we are cognitively biased. We are prone not only to be overconfident about our capacity to control and change our circumstances, we also see skill where it is in fact luck that is operating. As Monbiot explained, we are programmed to think in this way and as Piketty explained, this kind of thinking, when we are not vigilant, can lead to vast disparities in incomes and life opportunities. Kahneman continues that:
There was no sign that they disbelieved us. How could they? After all, we had analyzed their own results, and they were sophisticated enough to see the implications, which we politely refrained from spelling out. We all went on calmly with our dinner, and I have no doubt that both our findings and their implications were quickly swept under the rug and that life in the firm went on just as before.
The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base rate information that people generally ignore when it clashes with their personal impressions from experience. (Ibid.)
While ordinarily, when confronted with evidence of say, optical illusions, we are content to modify our responses based on our new knowledge, in the case of cognitive biases, we find it much harder (if not impossible) to do so.
We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot. (Ibid.)
The just-world phenomenon is not only problematic because of our inherent cognitive biases. One of the other major problems with the myth that society as we have it is fair and just is that it doesn’t account for the extent to which success hinges on arbitrary factors, such as inheritance.
LORD ROTHERMERE AND LILIANE BETTENCOURT
Returning to Brand and Monbiot’s discussion then, to what extent is inheritance rather than hard work responsible for the success of the richest in today’s society?
Lord Rothermere, what he brilliantly done is, he came out of the vagina of this lady who was married to a person whose name was also Lord Rothermere. And that meant that he got a thing called a Daily Mail, a newspaper, given to him. (Brand, The Trews 223)
The main thesis of Piketty (2014) is that when earnings on capital (r) exceed the rate of economic growth (the speed at which output and incomes rise) (g)—that is, when r > g—as was the case in the nineteenth century and is increasingly so in this century, arbitrary (rather than truly justified) inequalities result. This gulf in standards of living serves only to undermine the fabric of democratic society.
While people tend to believe that the age of inheritance is now over, or at least has little prominence, examination of the data show why we should remain vigilant:
One of the most striking lessons of the Forbes rankings is that, past a certain threshold, all large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates, regardless of whether the owner of the fortune works or not.
In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. (Piketty, 2014: 439-40)
While we are led to believe that our own efforts are sufficient to yield a living income, in an age where r > g, this is becoming less true by the day. Capital, it bears repeating, grows according to a dynamic of its own. While we are led to believe that:
you are on your own and what you achieve is down to you and if you don’t achieve, that’s your fault – and don’t expect us to pick up the pieces… (Brand, The Trews 223)
…Piketty shows that inequalities are increasingly less down to our own actions and owe more to the particular way in which capital accumulates on its own.
People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies. (Piketty, 2014: 26)
PSYCHOPATHS IN BUSINESS AND MERITOCRATIC EXTREMISM
On a related note, there genuinely are special qualities that distinguish some of the most successful in business to the rest of us, Monbiot explains – such as the extent to which corporate executives behave like psychopaths. Some of those highest up in British industry today are actually more psychopathic than the average psychopath in Broadmoor Hospital!
We’ve built a society that rewards psychopaths! … On an individual level, we’re encouraged to be selfish and greedy … the apotheosis of that is psychos running our businesses and ultimately, our society is an echo of that madness. (Brand, The Trews 223)
This, right here, is the most damning criticism of what Piketty refers to as meritocratic extremism (by which he means):
the apparent need of modern societies, and especially US society, to designate certain individuals as “winners” and to reward them all the more generously if they seem to have been selected on the basis of their intrinsic merits rather than birth or background (Piketty, 2014: 334)
The perpetuation of the myths of a just-world, of individualism, the insistence that we don’t have duties to each other, the insistence that the successful must be rewarded handsomely (paradoxically, even when they fail) – all this leads to exactly the kind of vastly unequal society that we currently have in the Anglo-American west, where hyper-psychopathic behaviour is held up as the model way to conduct oneself.
SO WHAT CAN WE DO ABOUT THIS FINE MESS?
What we can learn from Kahneman’s Thinking, Fast and Slow—and behavioural economics in general—is that while in professional life most people are highly skilled and rational, we overestimate the extent to which we are.
We do this for a number of reasons. Partly it’s down to culture, which can make even patently false ideas appear to be eminently wise. We must also remind ourselves that we are human and as such, we are deeply flawed. Social psychologists have known since at least 1970 that we routinely confuse external causation (or situational factors) for internal causation (or dispositional factors). That is, we take credit for things that we did not do. We behave this way in order to protect our egos because often, the truth is too much to bear.
In terms of a policy response to the inequalities that result, according to Piketty:
There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions. (Ibid.: 1)
We cannot rely on economic growth (growth in output and incomes) alone to make democratic society fairer because history shows us that high rates of growth manifest themselves only rarely (in the case of countries still in the process of industrialisation and in post-war periods). What we have to do then, is tax capital in a progressive way and as far as possible, on a global scale.
In the rest of this series, I’ll be looking in more detail at what we can do to remedy today’s inequalities and trying to get to the bottom of what it is that really makes us successful to the degree that we are. Because, as George Monbiot puts it, “if wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire”. There’s a lot more to (financial) success than meets the eye.