May 28, 2020
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Inequality isn’t always a bad thing

George Danby | BDN
George Danby | BDN

In recent decades, economic inequality in the U.S. and other developed nations has hit levels not seen since the 1920s. Such inequality exacerbates social problems, amplifying health issues among the poor, reducing economic mobility and weakening democracy, research tells us. Inequality even eats away at basic human cooperation, undermining the trust that supports social life.

But some of this research has been rather unrealistic — assuming, for example, that people are identical in all respects aside from wealth. In reality, people differ in many ways, including in productivity and in ability to contribute to a group’s goals. How might these characteristics affect the interplay of inequality and cooperation? Recent experiments find some surprises. Yes, too much inequality is socially corrosive. Yet too little can also be a problem: When some people are more productive for the benefit of the group than others, moderate inequality can actually help further cooperation.

Importantly, however, this is true only if those who get more also produce more for the public good. Poor alignment between rewards and contributions is socially costly, too. Cooperation is perhaps the singular skill that sets humans apart from other species, and these experiments suggest that how it works isn’t simple. Inequality isn’t always bad. Nor is it, as right-leaning economists sometimes argue, something we just shouldn’t worry about.

One approach to studying inequality and cooperation is to set up a simple game in which individuals freely choose how much money to contribute to a public fund. As the rounds progress, they can potentially get back more if many others also contribute. Hence, all have an incentive to cheat, but do best by contributing, as long as many others do also. Such studies have found that people cooperate if their wealth remains fairly equal, but not so much if wealth differences grow too big. Inequality destroys social solidarity.

But what if the participants are unequal not only in wealth? What if some are more productive than others, as is often the case in life? Economist Oliver Hauser and colleagues have explored this question using game theory, computer simulations and online experiments.

They confirmed that too much inequality generally makes people less cooperative. In the online experiments, high inequality caused those with the most wealth to lose interest in cooperating, as they had little to gain from the relatively poor participants. The rich players came to prefer social isolation. This outcome resonates with some disturbing trends in recent years, as the hyper-wealthy have increasingly isolated themselves in gated communities and enclaves. Some are even making plans to survive a global catastrophe by leaving the rest of the world to perish.

The study’s surprising finding is that moderate inequality can boost cooperation as long as those who get more of the pie are more productive for the benefit of all. Both the more and less productive people recognize they can benefit by working together. The less productive tolerate the higher wealth of the more productive, because the larger contributions of this group benefit everyone. The wealthy find it costs them little to contribute more, and they enjoy the extra wealth they’re given in return.

The flip side is that cooperation collapses quickly if more of the wealth ends up in the hands of the less productive.

These experiments are far simpler than real life. Even so, the two factors they identify as most corrosive to cooperation — too much inequality, and misalignment of contributions and rewards — seem central to the problems now plaguing capitalist economies. In their recent book “The Triumph of Injustice,” economists Emmanuel Saez and Gabriel Zucman explore how the wealthy have managed to keep an ever larger share of their wealth by paying taxes at lower rates than the poor. They have, in effect, withdrawn from contributing to the public good. Meanwhile, economist Martin Wolf has suggested that the most plausible explanation for dwindling productivity in capitalist economies is the changing nature of business: Companies have increasingly drawn profits not from productive activities, but from rent-seeking and winner-take-all markets.

If so, it’s no wonder the social ills tied to inequality are getting worse.

Mark Buchanan is a Bloomberg Opinion columnist and a physicist and science writer.


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