Sunday, January 03, 2010

The Age of Envy

A good test of a theory is to ask the simple question: can it more parsimoniously explain the world better than the status quo?

I argue that people are primarily driven by envy as opposed to greed (see here), so they are mindful of their relative, as opposed to absolute, position, and this leads to doing what others are doing as a mechanism of minimizing risk. In contrast, a standard utility optimizer looks at how to generate a maximum return for a given level of portfolio volatility, broadly defined to include human capital. Now consider, investment advisers generate tables of risk and return, and ask their client where they want to be? They do nothing of the sort. Instead, they generate extensive commentary of hot issues, major market sectors that are growing or shrinking, because notify what sectors where investors should shun or increase. This creates the occasional bubble, though that is an unintended consequence.

Understanding the prominence of envy over greed has several other implications. For example, there is a known home bias, where people overinvest in their home country. From a strict mean-variance perspective this makes no sense, because adding Germany and Japan to an American's portfolio would be a first-order diversification tactic. But if you are mainly concerned with keeping up with your neighbors who primarily invest in the US, then the home bias makes perfect sense. Another key implication is that happiness is not a function of aggregate wealth, so even as wealth per capita has risen immensely over the past 100 years, we aren't all that much happier. This is known as the Easterlin Paradox, because it is a paradox to standard asset pricing theory.

Self interest was at first derided as amoral, Machiavellian, but first Adam Smith showed that it could generate socially desirable results through unintended consequences, though to this day many find this fanciful. Evolutionary biologists like David Hamilton and George C. Williams showed that self interest could lead to altruistic instincts towards are families. Game theorist showed that rational, far-sighted self interest produced 'win-win' outcomes, as in the iterated Prisoner's Dilemma. Given the conspicuous failure of socialism in 1989, wealth maximization is intellectually defensible on moral, societal, and libertarian grounds. There is no such bright side to envy, which does not generate any salubrious unintended consequences.

People rarely say what they mean when targeting a goal because the indirect route is usually more efficient in the context of working within a collective where others have competing goals, and so selectively emphasizing process or results to the act or the rule, allows a great deal of rationalization. Efforts at redistribution invariably are framed as win-win or part of a broader altruism, when in fact it is merely taking from the rich just as Stalin expropriated the Kulaks. Christina Romer, an economic advisor to President Obama, notes that we can reduce the cost of health care by basically taxing premium care out of existence, which only makes utility maximizing sense (ie, sense to an economist) if you think those who consume more than others directly hurts those who consume less, intuition given our common envy (see page six, top paragraph here). Paul Krugman baldly states that universal care is the progressive objective for health care, as if distribution were all that mattered. As Greg Mankiw noted, health care reform would lose its impetus if it were revenue neutral; the redistribution isn't a side benefit, its the main point.

We are an envious little species. This is why there is no general risk premium, but has many other footprints, such as the desire for redistribution, why we aren't twice as happy as our great-grandparents, or ten times as happy as those living in Guatamala, why people have a home bias, etc. (my book goes over these in more detail). It is also why the moral superiority of self-rule is self evident to most people, regardless of how incompetent and inefficient the local rulers are (no one is proposing Britain, US, or Italy take over Zimbabwe, Afghanistan, or Ethiopia, regardless of the anarchy in these countries). Envy is why, regardless of how well an immigrant group is doing relative to their home country, or even anywhere else in the entire world, if they are doing below average in America they are presented as dispirited victims--how can you be happy if you have all the creature comforts you can manage, but less than average in America itself?

Egalitarianism is the essence of diversity, which is the primary principle championed by modern universities. The idea that redistribution of money and power--progressive taxation, making wealthy individuals kowtow to elected officials--is suggested as win-win, but there's no data suggesting that affirmative action has ever raised a group out of its inferior socio-economic position, or generated anything but further friction. It remains popular, however, because its short run effects are directly attractive to most people, who have no problem rationalizing taking money and power from those at the top.

John Adams made sure the USA had many republican features because he worried that "There never was a democracy yet that did not commit suicide", an opinion first articulated by Thucydides in the fifth century BC. I think this is because mob rule unleashes the envy of the masses, which brings down the best, and in the process the talented tenth, the elites, that drive anything worth cumulating upon in the realm of ideas (and thus, art, science, and technology). Under the elevation of diversity as an end in itself, envy is almost shameless now.

In sum, envy is a better description of what motivates people in general, and underlies currently popular politics and progressive intellectuals. We can rationalize the desire to take from those with more under various pretexts--reducing health care costs, rectifying racism, improving the financial system--but only because the mind is very good at confabulating (eg, taking money from the top 5% is often presented as an altruistic disposition). People aren't utilitarians, and academics are usually only utilitarian when they presume it is consistent with egalitarianism (eg, Peter Singer arguing that giving everyone positive rights is utilitarian). I don't believe 'ought implies is' anymore than 'is implies ought', so I'm comfortable knowing my pragmatic utilitarianism that emphasizes the the virtue of liberty is not what most other people think is good policy. My only comfort is that I believe most educated egalitarians would admit their beliefs are untenable if they weren't also consistent with utilitarianism, that there is a trade-off between equality and efficiency, and that their instincts are more base than the dismal scientists every imagined.


Anonymous said...

Generally agree with you on the importance of envy, but in reducing desires of fairness and justice to simple envy you are going too far.

What is just? What is fair? Which allocations are legitimate and which are illegitimate? These are complicated questions and most people have a variety of conflicting intuitions on the matter. Egalitarian impulses are not equivalent to envious ones.

I mean, why do you criticize Obama, Eric? It would never have occurred to me to say that it's because you are jealous of his power, although now I am starting to wonder.

Eric Falkenstein said...

I criticize Obama for things like the stimulus package, which is a grab-bag of goodies disguised as Keynesian stimulus. It's all redistribution to highly targeted interest groups. If he just wanted Keynesian stimulus, he could have cut the FICA tax, or the corporate profit tax, immediately. My concerns with his other policies are similar: they are inefficient. But they do give more wealth an power to those based on head count, classic redistribution.

You may disagree, but that gets into the details, which are many. Attributing my criticism to envy is a good way to dismiss it, and surely many have base ulterior motives to their criticisms of various people and policies. But not always.

Anonymous said...

Sorry, that was a rhetorical question lost in translation. Of course your objections to Obama are based on your moral principles and your views on the legitimacy of various political actions, not envy. But I also think that egalitarianism is not equivalent to envy, and that it is silly to reduce the egalitarian impulses (yes, *impulses*, there is no successful or important politician in America who believes that all differences between people are illegitimate and unfair -- our Congress is full of multimillionaires).

Sure, there's a lot of ignorant demagoguing regarding finance. And sure, I'm not saying that the "egalitarian spirit" or whatever is morally pure and always free of resentment. But come on.

According to your analysis affirmative action is easy politics just because people love taking from those on top of society. Really? Are you familiar with American history, with the fact that brilliant enlightened men like John Adams embedded slavery in the Constitution, that slavery in America only ended after a miserable bloody war, that blacks continued to face blatant discrimination for another century after the Civil War? I'm not taking a stance on affirmative action, but to think that its popularity is derived purely from "envy" and has nothing to do with "guilt" is a horrendously blinkered view. I can't even believe that I'm trying to explain this to you -- you're obviously a really smart guy, but this is ridiculous.

But then you also write that health care reform is an elaborate ruse whose true purpose is to take money away from the rich. (You forgot to mention that the English Poor Laws only came to existence to solve the "problem of too many rich people.") This is taking the idea of false consciousness to a whole new ridiculous level. Why would progressives try to write legislation that prevents insurers from withholding coverage from individuals with preexisting conditions? Why, because my next-door neighbor has a nicer car than I do and I'm really good at bullshitting! Couldn't possibly be any other reason.

It is true that when progressives talk about reducing inequality, they tend to minimize the zero-sum game element. Some policies are win-win, but most have winners and losers. But progressives are hardly alone in this regard, and we cannot logically conclude that all progressives care about is taxing the rich. Academic economics is an entire subject mostly designed to ignore zero-sum games as much as possible (Pareto optimality anyone?) It may be the case, in fact, that political stability is predicated on the "noble lie" that all our interests are the same and we shouldn't pay too much attention to potential conflicts. Or it may be the case that this cultural blindness to zero-sum games is what allows conservatives to generate populist outrage on behalf of the 50-year-old who may have to pay taxes on the $100 million estate he just inherited. Or maybe as you say it's just a trick by Democrats to implement progressive taxes on that most oppressed group of all, wealthy white men. Perhaps it's all of the above and much more.

Anyway, in short: not of all your political opponents are ugly envious people who are jealous of success. Shocking, I know.

AHWest said...

Good post Eric,
Ayn Rand wrote an essay back in the 60s called "The Age of Envy," and the character Peter Keating in The Fountainhead which illustrates how envy operates at both the personal and political level.

However I don't think that envy is the top explanation for the home country bias, though the relative status argument provides a secondary support. Right now availability, and "buy what (you think) you know" is probably still the best explanation. There is no home bias for global funds, for example, as weights probably converge at benchmark rates. People are afraid of the short term volatility that currency risk adds, even thought it may reduce the long run risk of a portfolio.

Incidentally, I think envy and relative status-related thinking is the best explanation of why property bubbles happen. Everyone wants to have the best house in the best town, and men cannot stand to hear a wife nag about what a nice house her friend's husband bought, etc. Thus, if the financing is available, a sizable group will run off the property cliff like lemmings, pursuing the obvious relative status benefits a fancier house provides. (followed by expensive vacations, financed luxury (status symbol) cars, etc.

In any case, reading your book last year helped put a number of financial/economic issues in a clearer philosophical/behavioral context.

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paul said...

Eric, its hard to imagine that one of the 7 deadly sins is the primary motivator of human action. I appreciate the anecdotal evidence of a zero risk premium but I don't think a general equilibrium is easily found with that type of utility function.


J said...

You share with Ayn Rand the knack for wrongly titling your articles. What "Age of Envy", if envy was already old in the times of Tuchydides? Envy is eternal, envy is our background, what we are is in the age of democracy, the rule of demos, we the people. Fortunately, it never lasts.