Dispersion causes discohesion. It is hard to have a cohesive, high-functioning, society when dispersion of individual outcomes — “inequality” — is high.

Some people argue that mobility is an answer to dispersion, that it’s okay, great even, to have extremely unequal outcomes as long as it is possible for people who begin poor to end up rich (and vice versa). I’ve argued against that before. This post will further explain why I think celebrating the combination of inequality and social mobility is a particularly dumb idea.

We’ll start with a simple, tragic fact. In a society where there is both a high dispersion of outcomes (income, wealth, status, whatever people aspire to) and a high degree of mobility, from most individuals’ perspective, it’s more profitable to engage in distributional conflict to advance within the distribution than to cooperate to help shift the distribution, without competing to improve ones own rank.

Let’s illustrate this with a some pictures.

The grey bell curve represents the distribution (of wealth, income, status, whatever) in a society with a high dispersion of outcomes. The cyan bell curve represents how that full distribution might advance over the course of one lifetime, if most members of the society worked cooperatively to increase the general Welfare. The trouble is, if there is social mobility in this society, individuals have an alternative strategy. Rather than cooperating to shift the bell curve, they can compete with one another for slots within the existing bell curve. I’ve illustrated the situation of a hypothetical modal person.

Competing for rank in the distribution is a zero-sum game, so a “representative agent” that formed its expectations by averaging all outcomes, or an individual agent whose “rational expectation” was formed by assuming its odds are as good or bad as anyone else’s, might conclude that the expected value of this strategy is zero. However, that strikes me as unrealistic. In societies that celebrate social mobility, individuals are encouraged to have optimistic expectations, to believe that with our hard work we can exploit our own talents to “get ahead”. Let’s imagine that’s so, and a substantial fraction of agents believes that by competing for a better position, they can advance by one standard deviation within the distribution (the red arrow labeled “Conflict“). Now suppose that the plausible rate of aggregate progress, holding ranks constant, even if we organized effectively and cooperatively, is smaller than a one-standard deviation shift (the green arrow labeled “Cooperate“). Then basically it will be individually rational for all “optimistic” agents to devote themselves to contesting their rank within the distribution, rather than cooperating to work in ways that would contribute to aggregate prosperity but might not improve their own rank. The more optimistic the society is, in the sense that people believe that individuals can get ahead through their own efforts, the smaller the share of people who will eschew contesting social rank in favor of cooperating to advance aggregate prosperity.

Now let’s run the same thought experiment for a less unequal society.

Nothing has changed except the standard deviation of the bell curves I have drawn, representing the dispersion or inequality of the population. Again, “optimistic” individuals believe that by contesting their ranks, they can advance one standard deviation in the distribution. However, because this distribution is narrower, that degree of advancement is less than the progress they could plausibly expect if they held their rank within the distribution, but they organized cooperatively to achieve aggregate gains. Contesting ones place in the distribution, rising up by pushing others down, is a dumb strategy relative to cooperating to achieve aggregate gains.

To riff on Eugene Debs, whether it makes sense to try to rise from the ranks or to rise with the ranks is endogenous to both the level of inequality in a society, and the perceived social mobility available to optimistic agents. In a very unequal society with a high degree of rags-to-riches optimism (whether objectively defensible or not), lots of people will choose zero-sum conflict over rank rather than positive-sum cooperation towards progress. You can resolve this problem in a couple of ways. If you want a society that is both functional and unequal, you can choose illiberalism. Once mobility is off the table, if people understand that contesting their social rank will be fruitless, perhaps even punished, then the only strategy with any payoff is to cooperate to advance aggregate welfare. Unequal, illiberal societies can be very functional, so long as they credibly promise that gains will be widely shared, rather than hoarded only by high ranks. Perhaps contemporary China is a rough approximation of this kind of society, though I don’t have much handle on perceptions of social mobility there.

My own strong values are liberal, so I’d prefer we retain a high degree of openness to social mobility, but diminish pathological inducement towards zero-sum conflict by limiting the dispersion of the distribution, by reducing inequality. I believe we really do have to choose. We can have inequality without liberalism (the path offered by Donald Trump’s Republican Party). We can have liberal, less unequal societies (the path highlighted by Scandinavian societies). Or we can try to sustain a liberal, very unequal society, and find ourselves beset by continual conflict over rank and position, relying on social pathology at the bottom of the distribution to justify outsize fortunes of the top. I don’t think this last choice, our current choice, can last very long. I don’t think it is intellectually coherent to be liberal but not egalitarian, at least relative to current levels of dispersion.

But, the “classical liberal” will remind us, there is an obvious rejoinder to all of this. I have treated competing to advance ones place within the distribution and cooperating to shift the full distribution forward as distinct, mutually exclusive strategies. Isn’t the whole point of capitalism, its core virtue, that an invisible hand transmutes competitive individualism into cooperative gain? Yes! Absolutely! But that doesn’t happen by magic, automatically.

Not all competition takes the form of competitive supply into open and contestable markets that economics textbooks tell us maximize output and eliminate markups. I think it’s particularly important to distinguish this kind of economic competition from tournament competition, whereunder people compete for a relatively fixed numbers of slots with high payouts. Too often in the United States we use “competition” as a broad, bland term to legitimate almost any sort of outcome. That is dumb. When warlords pummel one another’s villages until, finally, one of them gains supremacy, I think we’d all agree that is a hypercompetitive process. But, as the smoking wreckage attests, it is a negative-sum game, it is bad not good. Similarly, the tournament that selects admission into Harvard is certainly competitive, but when you add all the resources expended by the losers as well as winners into activities they would not have undertaken for personal development, that tournament is probably also negative-sum. If you have achieved a lucrative partnership at a top law firm, you have brutally competed for your entire career. But if you didn’t win that partnership, someone else would have. Your gain was someone else’s losses. The costs of these usually negative-sum tournaments may be somewhat offset by the virtue of putting the most talented people in places where they can do outsized good. But that depends on very particular circumstances. In a society where economic competition is far from perfect, where firms with outsize market power dominate to harvest outsize markups, individual prospects are largely determined by tournaments for positions within those dominant firms. A world like this is certainly “competitive”, but in a way that should lend it no legitimacy at all. The tournaments for lucrative slots are negative-sum internally, and the external effect of this form of organization is to curtail the textbook economic competition that might otherwise contribute to aggregate well-being.

The classical liberal isn’t wrong when she argues that the virtues of economic competition can undermine the case I’ve made above, can reconcile aggregate progress with an unequal distribution in a liberal society. But that it can do so doesn’t mean that it does, or is likely to, in practice. When we say markets civilize greed, we are acknowledging that greed needs to be civilized, that if it is not caged and channeled by certain kinds of institutions, it does harm. To reconcile competitive inequality and collective progress, we’d need markets that are perpetually contested, in which victory is always transient because anyone’s profit is everyone’s wide open opportunity. The world that we actually inhabit looks less and less like that. The more competitive behavior in an economy is characterized by tournaments, the less persuasive classical liberalism’s answer to reconciling competition with cooperation becomes. We revert to the world of our thought experiment. If we adopted some muscular version of antitrust, if we replaced patent monopolies with less destructive approaches to rewarding high-fixed-cost innovation, if we developed means of countering the market power engendered by technological network effects, maybe we could reconcile social mobility, high levels of inequality, and brisk improvement of aggregate welfare. But that would require designing and performing unusually excellent institutions. It would require sustaining those institutions over long periods of time, against continuing, earnest efforts by incumbents to undermine them.

Which again suggests we must limit inequality. Because when incumbents have very, very far to fall, it means they have a lot of power today, and extraordinary incentives to rig the game.

This entry was posted on Friday, July 31st, 2020 at 3:38 pm PDT.
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