the sword of damocles?
On the 13th of April 2010, the
Dalai Lama tweeted:
Economic inequality, especially that between developed and developing
nations, remains the greatest source of suffering on this planet.
In early 2011, the authoritative
Economist magazine and the
WEF in Davos, both perceived
global inequality as a major global problem. (Although the Economist proposed a quick-fix: increase social mobility).
The complex causes and possible remedies can perhaps be debated endlessly, but what is clear are the empirical facts. Income and wealth are distributed according to a very specific probability distribution, called scaling law, power law, fat tailed distribution or 80-20 rule. To put it pithily: nearly all have very little and very few have very much. This was already observed by V. Pareto 1906 in and still
holds today.
For scientists, the emergence of scaling law distributions is nothing uncommon (although there is no conclusive understanding of their origins). In fact,
a huge range of natural phenomena display scaling laws: from physics, biology, earth and planetary sciences, computer and network sciences, demography and social sciences to linguistics. It seems, that every complex system in nature, i.e., systems comprised of many interacting or interconnected parts, is associated with scaling law distributions. So we shouldn't take economic inequality too personal, but understand it as a systemic "feature".
What if income or wealth would be distributed according to a normal distribution (also called Gaussian distribution or Bell curve)? Like the height of people or IQ? We would see most incomes or wealth scattered around a global average, while few are very poor and very rich. In contrast, if height would be distributed like a scaling law, things would look like this graph: most people would be 6'7'' or smaller, while very few are in fact larger than hundreds of feet:
Taken from
the Height of Inequality (the numbers are said to be from 1971, so this should be an underestimation of the current situation). More in the
Economist about this as well.
OK, you get the idea, so lets look at...
Some Numbers
The wealth share estimates reveal that the richest 2 per cent of adult individuals own more than half of all global wealth, with the richest 1 per cent alone accounting for 40 per cent of global assets. The corresponding figures for the top 5 per cent and the top 10 per cent are 71 per cent and 85 per cent, respectively. In contrast, the bottom half of wealth holders together hold barely 1 per cent of global wealth. Members of the top decile are almost 400 times richer, on average, than the bottom 50 per cent, and members of the top percentile are almost 2,000 times richer.
According to the latest Global Wealth Report from Credit Suisse, the
people with a household net worth of $1 million or more represent less
than 1% of the world’s population but own 38.5% of the world’s wealth: about $89 trillion. That’s up from a share of 35.6% in 2010. Their wealth increased by about $20 trillion last year. In fact, the wealth of millionaires and billionaires grew 29% last year. From the
Wall Street Journal's blog.
The Economist notes in the article
The 99 percent:
A report
from the Congressional Budget Office (CBO) points out that income
inequality in America has not risen dramatically over the past 20
years—when the top 1% of earners are excluded. With them, the picture is
quite different.
In May 2011, Vanity Fair published an article written by Joseph Stiglitz, an economics Nobel Laureate, called
Of the 1%, by the 1%, for the 1%:
The upper 1 percent of Americans are now taking in nearly a quarter of
the nation’s income every year. In terms of wealth rather than income,
the top 1 percent control 40 percent. Their lot in life has improved
considerably.
While the top 1 percent have seen their incomes rise 18 percent over the
past decade, those in the middle have actually seen their incomes fall.
For men with only high-school degrees, the decline has been
precipitous—12 percent in the last quarter-century alone. All the growth
in recent decades—and more—has gone to those at the top.
Stiglitz goes on to note:
Economists long ago tried to justify the vast inequalities that seemed
so troubling in the mid-19th century—inequalities that are but a pale
shadow of what we are seeing in America today. The justification they
came up with was called “marginal-productivity theory.” In a nutshell,
this theory associated higher incomes with higher productivity and a
greater contribution to society. It is a theory that has always been
cherished by the rich. Evidence for its validity, however, remains thin.
Those who have contributed great positive innovations to our society,
from the pioneers of genetic understanding to the pioneers of the
Information Age, have received a pittance compared with those
responsible for the financial innovations that brought our global
economy to the brink of ruin.
First, growing inequality is the flip side of something else: shrinking
opportunity.
The more divided a society becomes in terms of wealth, the more
reluctant the wealthy become to spend money on common needs. The rich
don’t need to rely on government for parks or education or medical care
or personal security—they can buy all these things for themselves.
But one big part of the reason we have so much inequality is that the
top 1 percent want it that way. The most obvious example involves tax
policy. Lowering tax rates on capital gains, which is how the rich
receive a large portion of their income, has given the wealthiest
Americans close to a free ride.
America’s inequality distorts our society in every conceivable way.
There is, for one thing, a well-documented lifestyle effect—people
outside the top 1 percent increasingly live beyond their means.
Trickle-down economics may be a chimera, but trickle-down behaviorism is
very real
Analysis of economic networks have revealed that national power-structures are self-preserving: even in the face of corporate governance reforms and globalization, they do not break up. (B. Kogut and G. Walker, "The Small World of Germany and the Durability of National Networks",
American Sociological Review, 2001; R. Corrado and M. Zollo, "Small worlds evolving:
governance reforms, privatizations, and ownership networks in Italy",
Industrial and Corporate Change, 2006)
Our recent analysis of ownership networks has shown:
- In markets with many
widely held corporations (mostly in Anglo-Saxon countries), the observed local distribution of ownership, meaning shareholder democracy, actually goes hand in hand with a
global concentration of ownership (and control), only visible from
the bird's-eye view given by the network perspective, where the ownership and control ends up in the same few hands.
and
- About 750 top economic agents in the global ownership network of
~600k nodes potentially control 80% of the value (operating
revenue) of the ~43k transnational corporations.
- Of these, the top 50 already have nearly 40%.
- The tiny core of the network, comprised of
~1300 nodes, holds ~40% of the potential control.
- There are about 150 top agents in the core, potentially controlling about 38%.
See
the Backbone of complex networks of corporations: The flow of control and
the Network of Global Corporate Control. Or watch a
TEDx talk about it.
D. Braha from the New England Complex Systems Institute (NECSI), when interviewed about our network study by
New Scientist, said:
The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy.
(Personally, I feel the word "logical" is perhaps a bit too strong.) However, he "suspects they [the companies in the tiny core of the ownership network that have a disproportionately large amount of control] will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest."
So, What About Greed Then?
Michael Lewis, the author of
Liar's Poker,
wrote:
Not
for a moment did I suspect that the financial 1980s would last two full
decades longer or that the difference in degree between Wall Street and
ordinary life would swell into a difference in kind. I expected readers
of the future to be outraged that back in 1986, the C.E.O. of Salomon
Brothers, John Gutfreund, was paid $3.1 million; [...] What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”
Especially recalling Mr.
Tepper's 4 billion from above. Lewis goes on to describe his personal experience in the financial industry:
To this day, the willingness of a Wall
Street investment bank to pay me hundreds of thousands of dollars to
dispense investment advice to grownups remains a mystery to me. I was 24
years old, with no experience of, or particular interest in, guessing
which stocks and bonds would rise and which would fall.
I stumbled into a job at Salomon Brothers in 1985 and stumbled out much
richer three years later, and even though I wrote a book about the
experience, the whole thing still strikes me as preposterous—which is
one of the reasons the money was so easy to walk away from. I figured
the situation was unsustainable. Sooner rather than later, someone was
going to identify me, along with a lot of people more or less like me,
as a fraud. Sooner rather than later, there would come a Great Reckoning
when Wall Street would wake up and hundreds if not thousands of young
people like me, who had no business making huge bets with other people’s
money, would be expelled from finance.
Again from
here. Of course, this is all debatable, from his sincerity, to possible hidden agendas, to being biased by wanting to write a popular book.
However, these things definitely don't help:
Take the now-infamous example of the recently ousted Merrill Lynch
chief John Thain, who not only splurged on his office decor [over $1 million] but also
had the audacity to propose a $10 million bonus for himself. In
recognition of what? A year's work in which the company continued to
make bad business decisions, lost about 80 percent of its value, sold
itself to Bank of America to stave off possible collapse and appears to
have seriously damaged its buyer's franchise?
Bank of America ($45 billion in bailout money)
sponsored a five-day "NFL experience" at the Super Bowl; Wells Fargo
($25 billion in bailout funds) was planning 12 nights in Las Vegas for
select employees.
From
You Can Cap The Pay, But The Greed Will Go On, Washington Post, February 8, 2009.
For Dow Kim, 2006 was a very good year. While his salary at Merrill
Lynch was $350,000, his total compensation was 100 times that — $35
million.
The difference between the two amounts was his bonus, a
rich reward for the robust earnings made by the traders he oversaw in
Merrill’s mortgage business. [...]
But Merrill’s record earnings in 2006 — $7.5 billion — turned out to
be a mirage. The company has since lost three times that amount,
largely because the mortgage investments that supposedly had powered
some of those profits plunged in value.
Unlike the earnings, however, the bonuses have not been reversed.
From
On Wall Street, Bonuses, Not Profits, Were Real, New York Times, December 17, 2008.
Such practices are perhaps a reason why some people working in the finance industry turned away in disgust. Like Michel Lewis, or
Geraint Anderson, a former investment banker, who wrote a book about his personal experiences, called
City Boy: Beer and Loathing in the Square Mile. Some of the reviews:
- London’s pernicious financial world reveals itself in all its ugliness.
- As a primer to back-stabbing, bullying, drug-taking, gambling, boozing,
lap-dancing, this takes some beating...a necessary and valuable boo.
- Engaging, timely and important...an effective indictment of the narcissism and decadence of City life.
Before, he became notorious for his column
City Boy, which he wrote anonymously in
The London Paper. There he gave detailed accounts of greed, drug-taking, prostitutes, gambling and fraud.
Recently, I read a comment where the person asked the question, of how much of the risk appetite of investment banking was fueled by cocaine. In Italy, the government is currently debating drug tests for traders. There is allegedly a new study correlating market volatility with drug abuse among traders (
the news article claiming this).
The story of Andrew Lahde is also telling. As founder and manager of a small
California hedge fund he came into the spotlight in 2007,
after his one-year-old fund returned 866% betting against the
subprime collapse. In 2008 he closed his fund and wrote a
"goodbye" letter to his investors. Some excerpts:
I was in this game for the money. The low hanging fruit, i.e. idiots
whose parents paid for prep school, Yale, and then the Harvard MBA, was
there for the taking. These people who were (often) truly not worthy of
the education they received (or supposedly received) rose to the top of
companies such as AIG, Bear Stearns and Lehman Brothers and all levels
of our government. All of this behavior supporting the Aristocracy, only
ended up making it easier for me to find people stupid enough to take
the other side of my trades.
I now have time to repair my health, which was destroyed by the stress I
layered onto myself over the past two years, as well as my entire life
-- where I had to compete for spaces in universities and graduate
schools, jobs and assets under management -- with those who had all the
advantages (rich parents) that I did not. May meritocracy be part of a
new form of government, which needs to be established.
First, I point out the obvious flaws, whereby legislation was repeatedly
brought forth to Congress over the past eight years, which would have
reigned in the predatory lending practices of now mostly defunct
institutions. These institutions regularly filled the coffers of both
parties in return for voting down all of this legislation designed to
protect the common citizen. This is an outrage, yet no one seems to know
or care about it.
Others have taken the same line in asking how deserved and legitimate the super-high salaries of top earners are. For instance
George Monibot in the Guardian:
If wealth was the inevitable result of hard work and enterprise, every
woman in Africa would be a millionaire. The claims that the ultra-rich
1% make for themselves – that they are possessed of unique intelligence
or creativity or drive – are examples of the self-attribution fallacy.
Moreover, the accuracy of forecasts of financial experts is highly doubtful and the need for advice from experts may be more a psychological than practical thing. "We believe in experts in the same way that our ancestors believe in oracles." Taken from this
Economist article.
The University of St. Gallen in Switzerland, considered to be one of the leading business schools in Europe, has a lecture on the
emergence of new markets, where the increasing importance of innovation is discussed. One of the topics of the course is about leadership, power and conflict:
Innovation is not generated in the power center (management) of a corporation, but instead, exactly by such employees, who diverge from the prevailing mindset of the company.
(From the
syllabus, translation mine.) And what does this say about
income inequality,
Gini coefficients, and who gets payed how much for doing what exactly?
And does high monetary compensation really motivate people? Make us creative and innovative? See for instance the youtube video called
Drive: the surprising truth about what motivates us. (Thanks Ben for your comment reminding me about this.)
Finally, psychologists have also noted the
Power Paradox:
[...] studies also show that once people assume positions of power,
they’re likely to act more selfishly, impulsively, and aggressively, and
they have a harder time seeing the world from other people’s points of
view. This presents us with the paradox of power: The skills most important to obtaining power and leading effectively are the very skills that deteriorate once we have power.
Greg Smith, Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, recently resigned. In an
opinion piece in the New York Times, he heavily criticizes the firm’s ethical culture and moral conduct:
The firm changed the way it thought about leadership. Leadership used to
be about ideas, setting an example and doing the right thing. Today, if
you make enough money for the firm (and are not currently an ax
murderer) you will be promoted into a position of influence.
Moreover, recent studies have indicated that the higher the social class and the wealthier the individuals are, the higher the tendency of unethical behavior and the less generous, charitable, trusting and helpful they proved to be. In general bad behavior appears to be spurred by greed
. See links
here.
Things Are Changing
Lahde's words from 2008 ring very familiar with the current
Occupy Wall Street movement and their mantra "we are the 99%". Also
Joseph Stigliz' analysis from May this year, mentioned above, continues and has an uncanny, prophetic feel to it:
Governments have been toppled in Egypt and Tunisia. Protests have
erupted in Libya, Yemen, and Bahrain. The ruling families elsewhere in
the region look on nervously from their air-conditioned penthouses—will
they be next? [...] As we gaze out at the popular fervor in the streets, one question to ask
ourselves is this: When will it come to America? In important ways, our
own country has become like one of these distant, troubled places.
Americans have been watching protests against oppressive regimes that
concentrate massive wealth in the hands of an elite few. Yet in our own
democracy, 1 percent of the people take nearly a quarter of the nation’s
income—an inequality even the wealthy will come to regret.
Of all the costs imposed on our society by the top 1 percent, perhaps
the greatest is this: the erosion of our sense of identity, in which
fair play, equality of opportunity, and a sense of community are so
important.
It is this sense of an unjust system
without opportunity that has given rise to the conflagrations in the
Middle East: rising food prices and growing and persistent youth
unemployment simply served as kindling. With youth unemployment in
America at around 20 percent (and in some locations, and among some
socio-demographic groups, at twice that); with one out of six Americans
desiring a full-time job not able to get one; with one out of seven
Americans on food stamps (and about the same number suffering from “food
insecurity”)—given all this, there is ample evidence that something has
blocked the vaunted “trickling down” from the top 1 percent to everyone
else. All of this is having the predictable effect of creating
alienation.
However, there are some rich and super-rich who see this predicament. In this "revolution of the rich", they are calling for higher taxes for themselves. In the US, billionaire Warren Buffet wrote an op-ed article in
the New York Times where he sarcastically commented:
These and other blessings are showered upon us [the super-rich] by legislators in
Washington who feel compelled to protect us, much as if we were spotted
owls or some other endangered species. It’s nice to have friends in high
places.
and claims to pay half the percentage in taxes as his employees.
In Germany the musician Marius
Müller-Westernhagen proclaimed
Taxes do not make the wealthy poor.
in an ongoing debate, in which some of millionaires have signaled their support of higher taxes for the rich. Similar advances can be seen in France, where 16 top managers of big French companies have signed a petition supporting higher taxes for the rich. More
here.
The most extreme scaling law distribution of wealth is one person having everything. The most extreme Gaussian distribution, a delta function, would mean that everyone has exactly the same wealth. In-between, there is a multitude of possibilities. What do you think is equality?
But is this all really the right and relevant way to globally asses the well-being of the world's population? Shouldn't the focus be more related to happiness (which, admittedly, is hard to define) and its pursuit? For instance, something like a
happiness index? The obvious answer is: no of course not, financial hardship always results in unhappiness. In contrast, how many people pursue demanding careers, make personal sacrifices and get high compensation actually because they believe this will increase their level of happiness?
But new insights coming from neuro-sciences and behavioral economics have shown that happiness can be very context dependent, constructed and sometimes quite independent from the external world:
A risk and compliance consultant at a major bank told the
Guardian recently:
My sense is that a lot of people in finance hate what they do. There's no passion. But they are trapped by the money.
Recently, the Economist
wrote
So levels of income are, if anything, inversely related to felicity. Perceived happiness depends on a lot more than material welfare.
Just sayin'...
PS
More on neuro-science:
