How, in a democracy supposedly based on one person one vote,
could the 1 percent could have been so victorious in shaping policies in its
interests? It is part of a process of disempowerment, disillusionment, and
disenfranchisement that produces low voter turnout, a system in which electoral
success requires heavy investments, and in which those with money have made
political investments that have reaped large rewards — often greater than the
returns they have reaped on their other investments.
There is another way for moneyed interests to get what they want out of
government: convince the 99 percent that they have shared interests. This
strategy requires an impressive sleight of hand; in many respects the interests
of the 1 percent and the 99 percent differ markedly.
The fact that the 1 percent has so successfully shaped public perception
testifies to the malleability of beliefs. When others engage in it, we call it
“brainwashing” and “propaganda.” We look askance at these attempts to
shape public views, because they are often seen as unbalanced and manipulative,
without realizing that there is something akin going on in democracies, too.
What is different today is that we have far greater understanding of how to
shape perceptions and beliefs — thanks to the advances in research in the
social sciences.
It is clear that many, if not most, Americans possess a limited understanding
of the nature of the inequality in our society: They believe that there is less
inequality than there is, they underestimate its adverse economic
effects, they underestimate the ability of government to do anything about
it, and they overestimate the costs of taking action. They even fail to
understand what the government is doing — many who value highly government
programs like Medicare don’t realize that they are in the public sector.
In a recent study respondents on average thought that the top fifth of the
population had just short of 60 percent of the wealth, when in truth that group
holds approximately 85 percent of the wealth. (Interestingly, respondents
described an ideal wealth distribution as one in which the top 20 percent hold
just over 30 percent of the wealth. Americans recognize that some inequality is
inevitable, and perhaps even desirable if one is to provide incentives; but the
level of inequality in American society is well beyond that level.)
Not only do Americans misperceive the level of inequality; they underestimate
the changes that have been going on. Only 42 percent of Americans believe that
inequality has increased in the past ten years, when in fact the increase has
been tectonic. Misperceptions are evident, too, in views about social
mobility. Several studies have confirmed that perceptions of social mobility
are overly optimistic.
Americans are not alone in their misperceptions of the degree of inequality.
Looking across countries, it appears that there is an inverse correlation
between trends in inequality and perceptions of inequality and fairness. One
suggested explanation is that when inequality is as large as it is in the United States,
it becomes less noticeable—perhaps because people with different incomes and
wealth don’t even mix.
These mistaken beliefs, whatever their origins, are having an important effect
on politics and economic policy.
Perceptions have always shaped reality, and understanding how beliefs evolve
has been a central focus of intellectual history. Much as those in power might
like to shape beliefs, and much as they do shape beliefs, they do not have full
control: ideas have a life of their own, and changes in the world—in our
economy and technology—impact ideas (just as ideas have an enormous effect in
shaping our economy). What is different today is that the 1 percent now has
more knowledge about how to shape preferences and beliefs in ways that enable
the wealthy to better advance their cause, and more tools and more resources to
do so.
Beliefs and perceptions, whether they are grounded in reality or not, affect
behavior. If people see the “Marlboro man” as the type of person they aspire to
be, they may choose that cigarette over others. If individuals overestimate
some risk, they may take excessive precautions.
But important as perceptions and beliefs are in shaping individual behavior,
they are even more important in shaping collective behavior, including
political decisions affecting economics. Economists have long recognized the
influence of ideas in shaping policies. As Keynes famously put it,
The ideas of economists and political philosophers, both
when they are right and when they are wrong, are more powerful than is commonly
understood. Indeed the world is ruled by little else. Practical men, who
believe themselves to be quite exempt from any intellectual influence, are
usually the slaves of some defunct economist.
Social sciences like economics differ from the hard sciences in that beliefs
affect reality: beliefs about how atoms behave don’t affect how atoms actually
behave, but beliefs about how the economic system functions affect how it
actually functions. George Soros, the great financier, has referred to this
phenomenon as reflexivity, and his understanding of it may have
contributed to his success. Keynes, who was famous not just as a great
economist but also as a great investor, described markets as a beauty contest
where the winner is the one who assessed correctly what the other judges would
judge to be the most beautiful.
Markets can sometimes create their own reality. If there is widespread belief
that markets are efficient and that government regulations only interfere with
efficiency, then it is more likely that government will strip away regulations,
and this will affect how markets actually behave. In the most recent crisis
what followed from deregulation was far from efficient, but even here a battle of
interpretation rages. Members of the Right tried to blame the seeming market
failures on government; in their mind the government effort to push people with
low incomes into homeownership was the source of the problem. Widespread as
this belief has become in conservative circles, virtually all serious attempts
to evaluate the evidence have concluded that there is little merit in this
view. But the little merit that it had was enough to convince those who
believed that markets could do no evil and governments could do no good that
their views were valid, another example of “confirmatory bias.”
If individuals believe that they are being treated unfairly by their employer,
they are more likely to shirk on the job. If individuals from some minority are
paid lower wages than other equally qualified individuals, they will and should
feel that they are being treated unfairly—but the lower productivity that
results can, and likely will, lead employers to pay lower wages. There can be a
“discriminatory equilibrium.”
Even perceptions of race, caste, and gender identities can have significant
effects on productivity. In a brilliant set of experiments in India, low- and
high-caste children were asked to solve puzzles, with monetary rewards for
success. When they were asked to do so anonymously, there was no caste
difference in performance. But when the low caste and high caste were in a
mixed group where the low-caste individuals were known to be low caste (they
knew it, and they knew that others knew it), low-caste performance was much
lower than that of the high caste. The experiment highlighted the
importance of social perceptions: low-caste individuals somehow absorbed into
their own reality the belief that lower-caste individuals were inferior—but
only so in the presence of those who held that belief.
Fairness, like beauty, is at least partly in the eyes of the beholder, and
those at the top want to be sure that the inequality in the United States
today is framed in ways that make it seem fair, or at least acceptable. If it
is perceived to be unfair, not only may that hurt productivity in the workplace
but it might lead to legislation that would attempt to temper it.
In the battle over public policy, whatever the realpolitik
of special interests, public discourse focuses on efficiency and fairness. In
my years in government, I never heard an industry supplicant looking for a
subsidy ask for it simply because it would enrich his coffers. Instead, the
supplicants expressed their requests in the language of fairness—and the
benefits that would be conferred on others (more jobs, high tax payments).
The same goes for the policies that have shaped the growing inequality in the United States—both
those that have contributed to the inequality in market incomes and those that
have weakened the role of government in bringing down the level of inequality.
The battle about “framing” first centers on how we see the level of
inequality—how large is it, what are its causes, how can it be justified?
Corporate CEOs, especially those in the financial sector, have thus tried to
persuade others (and themselves) that high pay can be justified as a result of
an individual’s larger contribution to society, and that it is necessary to
motivate him to continue making those contributions. That is why it is called
incentive pay. But the crisis showed to everyone what economic research had
long revealed—the argument was a sham. What was called incentive pay was
anything but that: pay was high when performance was high, but pay was still
high when performance was low. Only the name changed. When performance was low,
the name changed to “retention pay.”
If the problems of those at the bottom are mainly of their own making and if
those collecting welfare checks were really living high on the rest of
society (as the “welfare deadbeats” and “welfare queen” campaign in the 1980s
and 1990s suggested), then there is little compunction in not providing
assistance to them. If those at the top receive high incomes because they
have contributed so much to our society—in fact, their pay is but a fraction of
their social contribution—then their pay seems justified, especially if
their contributions were the result of hard work rather than just luck. Other
ideas (the importance of incentives and incentive pay) suggest that there would
be a high price to reducing inequality. Still others (trickle-down economics)
suggest that high inequality is not really that bad, since all are better off
than they would be in a world without such a high level of inequality.
On the other side of this battle are countering beliefs: fundamental beliefs in
the value of equality, and analyses such as those presented in earlier chapters
that find that the high level of inequality in the United States today
increases instability, reduces productivity, and undermines democracy, and that
much of it arises in ways that are unrelated to social contributions, that it
comes, rather, from the ability to exercise market power—the ability to exploit
consumers through monopoly power or to exploit poor and uneducated borrowers
through practices that, if not illegal, ought to be.
The intellectual battle is often fought over particular policies, such as
whether taxes should be raised on capital gains. But behind these disputes lies
this bigger battle over perceptions and over big ideas—like the role of the
market, the state, and civil society. This is not just a philosophical debate
but a battle over shaping perceptions about the competencies of these different
institutions. Those who don’t want the state to stop the rent seeking from
which they benefit so much, and don’t want it to engage in redistribution or to
increase economic opportunity and mobility, emphasize the state’s failings.
(Remarkably, this is true even when they are in office and could and should do
something to correct any problem of which they are aware.) They emphasize that
the state interferes with the workings of the markets. At the same time that
they exaggerate the failures of government, they exaggerate the strengths of markets.
Most importantly for our purposes, they strive to make sure that these
perceptions become part of the common perspective, that money spent by private
individuals (presumably, even on gambling) is better spent than money entrusted
to the government, and that any government attempts to correct market
failures—such as the proclivity of firms to pollute excessively—cause more harm
than good.
This big battle is crucial for understanding the evolution of inequality in America. The
success of the Right in this battle during the past thirty years has shaped our
government. We haven’t achieved the minimalist state that libertarians
advocate. What we’ve achieved is a state too constrained to provide the public
goods—investments in infrastructure, technology, and education—that would make
for a vibrant economy and too weak to engage in the redistribution that is
needed to create a fair society. But we have a state that is still large enough
and distorted enough that it can provide a bounty of gifts to the wealthy. The
advocates of a small state in the financial sector were happy that the government
had the money to rescue them in 2008—and bailouts have in fact been part of
capitalism for centuries.
These political battles, in turn, rest on broader ideas about human rights,
human nature, and the meaning of democracy and equality. Debates and
perspectives on these issues have taken a different course in the United States
in recent years than in much of the rest of the world, especially in other
advanced industrial countries. Two controversies—the death penalty (which is
anathema in Europe) and the right to access to
medicine (which in most countries is taken as a basic human right)—are
emblematic of these differences. It may be difficult to ascertain the role the
greater economic and social divides in our society has played in creating these
differences in beliefs; but what is clear is that if American values and
perceptions are seen to be out of line with those in the rest of the world, our
global influence will be diminished.
Reprinted from The Price of Inequality by Joseph Stiglitz. Copyright ©
2012 by Joseph Stiglitz. With the permission of the publisher, W.W. Norton
& Company, Inc.