Richard Epstein on Happiness, Inequality, and Envy (podcast)

Richard Epstein on Happiness, Inequality, and Envy

Richard Epstein of the University of Chicago talks with EconTalk host Russ Roberts about the relationship between happiness and wealth, the effects of inequality on happiness, and the economics of envy and altruism. He also applies the theory of evolution to explain some of the findings of the happiness literature.

Play Time: 56.52
Download Size: 26.1 MB (Right-click or Option-click, and select “Save)
Podcast Highlights
0:36    Intro. Happiness research in economics. Standard models of economics assume people have well-ordered utility functions. Social progress in this model comes from two agencies: since you know that people are selfish, trade generates mutual gains, local improvement; if selfish and take from someone else, gain and someone else loses, so prohibition of force. Neoclassical position: cooperation yes, aggression no. Happiness literature: ulterior fashion designed to undercut this market calculus. Behavioral economics line: people are not nearly as rational; backdrop of systematic uncertainty and ignorance. No problem with prohibition of force, so negative side of utilitarian calculus remains pretty much intact. Happiness literature designed to deal with other issues. Logic of neoclassical model implies mutual gains from trade but doesn’t guarantee gains of equal proportion. High dispersions of income off of a higher median. A lot of people worry about this because they are worried about relative status. Suicide contest if your relative preferences really matter. Russian proverb: My neighbor has a cow, I do not. Genie gives me one wish. It’s not for me to have two cows, but for him to have none. Part of happiness literature: world is designed to make everybody miserable. Okay to take away the wealth. Both of these fields are designed to explain why it is that government action in the field of redistribution and guaranteed minimum rights is useful and to undercut “cooperation yes, aggression no, redistribution last. Starting from other end. May seem to be matter of order, but where you start may dictate where you went. Produces perfect equality with everybody poor.

6:15    Used by environmentalists, anti-growth. If you are very poor, increases in material well-being do lead to gains in happiness but not after a while. Neoclassical answers to the environmental question. Environmentalists: We really want gas to be $4/gallon because people will drive less. Giving up a lot of consumption, though. Right way to do this is to have a tax on pollution. Happiness proponents would say: all that extra consumption is an illusion. Don’t get any happier driving around, should spend more time with your family. Theory of revealed preferences. We see people moving hard to get raises. Happiness literature suggests that everyone is under deep delusions about what makes them happy and the guys running the survey know better. Methodological fallacy: data seem to suggest that when you have higher incomes you don’t necessarily have a whole lot higher level of happiness. Example: international megadeal. People make pact: I’ll be miserable for a few years if you’ll make me rich in the longer run. So, in the short run they report being less happy. They don’t want to be unhappy forever, so eventually take a lower paying job–and report being happier. To tell people they have to have a constant ratio between happiness and income at all stages in life is a restriction on freedom. Can’t put together these megadeals unless you get people on an airplane at the drop of a hat. Adopt an information strategy rather than a coercion strategy: publish anything you want on happiness, and people can read it and decide. People understand these kinds of tradeoffs. Don’t necessarily take the job that pays the most money; or the one that pays the least. Tradeoff. Example: Academics don’t make as much money but make that choice, trading off happiness against income. Market ranks jobs out there; people know their own utility functions and decide for themselves what they want to do. Envy’s a terrible emotion in this world. Envy literature. Most people have a relative amount of good cheer for the success of others. Nurses don’t seethe that doctors earn more than they do. What you do see is that resentments are great if two people have similar ranks but one is doing more of the work.

16:02    Wealth-meaningfulness tradeoff: religious literature, both literally and secular religions, preachers: people who want us to recognize that the bigger car and fancier job title doesn’t always lead to more happiness. Even though we may know that it’s hard to act that way. Revealed preference ignores regret. Law firm example. Easy to romanticize and vilify. People do make mistakes. Goes both ways: I could have been a contender. Some people take the safe job. Can regret low risk strategy as well as high risk strategy. Have to gain the self-knowledge as to what you really like. Getting married; serious illness like cancer. If repetition eases the pain of decision, we find that resources are most strapped at the time we need them most. Nothing about a system of economics which will insulate people from hard choices or remove uncertainty. Hayekian insight: if you subsidize farmers to minimize the fluctuations they experience, then all the fluctuations are borne by people providing the subsidies. Need stable legal rules instead. No way that we can remove uncertainty; no way we can remove regret. High risk, high stakes decisions: people who try to make them alone make mistakes. Literature on behavioralism always has people acting in voids in experiments. When you are in trouble, you want to get the view of someone a little removed from the situation. Dynamic labor market in the United States; dynamic marriage market also. Costs of errors are lower in the United States. Clark [clerk] in Scrooges firm. Key advantage of U.S. system of education, competitive at highest level. English and French system route people at an early age. Creates standardization within these professions. In an American law school you get variety in age and background. Richer array of understanding results, stronger people at the top. Competition creates variation and variation creates excellent. Those are the kinds of things that tend to be missed by these models. Almost always solipsistic. Natural tendency to cooperate with people they like, friends, is not present in behavioralist models. Element of trust leads to gains from trade.

24:52    Envy. Theme in literature, working paper, tension: wealth doesn’t make you happy but relative wealth seems to be very important in these studies. Complicated literature: truth within limits. Assume group of people who all have about the same wealth. Within this group, one popular, one nerd or doormat. Informal social rankings; competitive; if someone has high status, someone else inevitably has to have a low status. Misery literature. Maybe woman is disappointed she is not getting married but doesn’t want to wreck someone else’s engagement. Just wish you’d been a little bit better. People tend to say “Congratulations.” Opposite direction in other body of literature: optimistic. Give people choice on how to spend money: make an investment of 10; can recover 12 for yourself or 20 for a group of 4 people of whom you are only 1. Turns out surprising number of people willing to expand and share the wealth. Unlike the usual form of sharing the wealth, which is income redistribution through taxation which shrinks the pie, people are willing to take less. Nice kind of feature. Reduces the serious problem associated with the creation of public goods. See someone littering in a public park. Littering will cost everyone 10, but I’m only 1 out of 100. Why would I want to stop this guy and risk some kind of retribution? Everyone should be indifferent. Always one or two people who do go up to the litterer and ask. At a discrete cost to themselves they are improving the group. Modest public spiritedness on the part of many but not all. Can you reconcile the literatures? The most natural characteristic is variability. There will be some who are selfish, some generous. Some evolutionarily have empathy; others do not. Most of the distribution is around the middle. In a market system you can encourage the do-gooders at one end of the distribution. The last thing you want to do is tax them. Snuff out the bad guys and encourage the good guys. Back together: Guy with envy can’t kill the neighbor’s cow. Guy with envy can go out and cooperate with someone else. System works fairly well.

32:18    Over last 35-40 years, measured inequality has risen in income distribution. Large increase in immigration, demographic change in the 1970s due to an increase in the divorce rate. Returns to education have risen, especially at the high end; entrepreneurial environment, small group of people earn high rewards. Superstar literature, best athletes, entertainers, etc. Bernstein podcast: crime rates, health rates result. How does this inequality start to come about? If entrepreneurial activity, quite wonderful. How much consumer surplus did that entertainer generate? Probably dwarfs the income side. Michael Jordan’s salary vs. pleasure people got by watching him. Another side: systematic decline in the level of public education, correlates with breakup of family and strong oversight; barriers to entry up. Low ability people find it harder and harder to get to that first step. Created in the form of protectionist legislation barriers to entry so they can’t get on the train to begin with. Los Angeles. Unionization one, minimum wage hours another, resistance to vouchers and charter schools. Two-tier educational system. Large public school monopoly systems. NYC, Chicago. Higher returns to education at same time as inferior education given to some. Return to basics, students chosen at random, example. Worry about the social institutions that drag down the least fortunate in society. Can’t slip at an early age or it costs you twice as much to catch up. Jim Heckman: Interest, which is what you save from deferring education, is but a rounding error relative to the additional cost of trying to make that education go. Resentment.

40:38    Evolution: envy and the role of wealth in our lives. Socio-biology, evolutionary psychology. Attacked as form of sexism or racism. If individual self-interest were the only form of motivation in life, we would never be able to have children and never be able to go through the evolutionary cycle: have to find a way to get the next generation up to the same level. Wouldn’t take care of children. W. D. Hamilton: individuals are holders for their genes. Inclusive fitness, act not only to benefit yourself but those who are near and dear to you. Parents have protective instincts toward their offspring–humans, rhinoceros, not fish. Darwin: emotions are not immune from evolutionary pressures. Natural love and affection–legal literature term. Parents internalize your children’s welfare into your psyche. Question: Is happiness an emotion which will promote survival of the species? Within limits yes but not always. Parents can’t just walk away from a sick child in order to be happier–won’t be evolutionarily successful. Parents won’t answer that they are happy, but they wouldn’t choose any other kind of behavior. Happiness surveys falsely assumes a kind of hedonism which is inconsistent with the evolution of the species. Sense of dread, grieving; but can’t be so miserable you can’t take care of your other children. So complex. Happiness literature never looks at this–simply reports that people are not as happy with children as they expect. Momentary happiness may not be high, but lifetime happiness is. Worth the cost. Consistent with religious literature that is not aesthetic or pain-based. Hedonism is not the road to happiness. Father Sirico: attacks on hedonism, discount the future. People think Adam Smith was a proponent of getting whatever you can and get ahead; but that was not his view; Theory of Moral Sentiments. Word “sentiment”–what he meant was the effort to figure out how people react toward the misfortunes of others. You don’t treat them as acutely as if they are your own; but you are not completely indifferent either. Impossible to only care about your children but not your children’s friends. Theory of inclusive fitness. Prisoner’s Dilemma games don’t cause societies to founder. Individual utilities are inherently interdependent. Back to maxims: cooperative first but not aggressive. These sentiments increase the ability to be cooperative, but not perfectly. All you can say about the nature of human sentiments is that on balance we will have an easier time developing pro-social than anti-social behavior, but you still have to worry about the outliers. Hobbes.

52:23    Outliers: At one end, thug, breaks into 100 homes; at other end Thomas Edison, Sergei Brin. Real risk of the thug is when the thug has the power of the state to murder millions of people. Outlier at other end can do all kinds of good. Can you get a monopoly of power to control the thug without becoming the thug himself? Soviet Union, Pol Pot. Don’t want to worry only about the modest little risks. U.S. Constitution fragments power to the point where it becomes harder to perform heroic functions but also harder for anyone to become a tyrant. Danger of populism. Stoking the fire on envy will lead to a climate in which there will be long-term social stagnation. Safeguards weaker today than they have been. Gains from private rent-seeking activity are perhaps larger than they have ever been before.

[originally published in econtalk]

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