Hmmm. This has turned out to be longer than expected. A short summary is called for:
- Trust between citizens in society is crucial to make life pleasurable.
- Trust in strangers is also crucial for the functioning of the economy – buying things you want depends on trading with strangers to an extent unprecedented in history.
- Trust is fragile and undermined by substantial differences between citizens, including income inequality. New Zealand has quite a high level of income inequality according to recent OECD figures.
- If trust is so important, then we want to craft public policy in ways that increase societal trust. Income redistribution is certaintly going to part of this, but there must be more to the picture too. The challenge is that these are complex, long-term, cultural issues and cause and effect are highly murky.
There you go. On with the show.
Trust and be damned
Trust in your fellow citizens is really helpful in an enormous number of ways. If you doubt this, consider all the effort you go to every single day because you can not be sure that someone else won’t burgle your house while you are out, or steal your car, or take your bag or your phone from where you leave it on the table in that cafe you go to. And imagine how much easier life would be with fewer ID checks, security scans, credit checks, locks or keys, and less fraud, theft, or violent crime, let alone less fear. What would it be like if you could really trust your neighbours, let alone those with whom you have more distant social connections?
I treat “trust” as being a firm and justified belief in the reliability, truth and good intentions of a fellow citizen. My hypothesis is that societies where people trust each other more create fewer conflicts between citizens, minimise protective behaviours (like locking doors) that are only necessary because of a lack of trust, and resolve conflicts that are created much more easily and positively. There is less mis-understanding, more helping out your fellow humans, and a higher level of what we might call “societal empathy”, which I think of as the ability to understand, share, and act as if you care about the feelings of someone else with whom you share space in society. As a result of this enhanced low-level (person to person) co-operation, there is less need for higher level (government to person) intervention, and society just becomes a nicer place to be.
I have read a couple of interesting books recently that touch on this issue of societal trust. Both authors argued that trust in society can not be taken for granted, and is undermined by substantial differences between citizens. This makes sense to me. You can’t trust people that you don’t empathise with, and empathy requires having some interaction with other people or some shared experience that makes you feel like you have something in common, and makes you willing to do something to help another person.
Friends with benefits
Paul Seabright’s “The Company of Strangers” tells the remarkable (but mostly unremarked) tale of how much your life depends on getting along with strangers. Mr Seabright thinks that we have reached the point where even the most basic activity relies on a web of international co-operation that functions without anyone being in charge overall. Just think about how you get the food you eat (probably in a supermarket – grown, processed and brought there from all over the world by people you will never meet), the clothes you are wearing (ditto – and even more complex than fresh food because it has a longer shelf-life), and the device you are reading this blog post on (likely built in Asia to a foreign design with components from all over the world, and charged using electricity brought to you through a complex process run entirely by strangers who have no idea who you are, or what you are using their product for).
Given how well this system works most of the time, one could be forgiven for thinking that it is the natural order of things. Mr Seabright says otherwise, reviewing the evolutionary history that has enabled humans, alone amongst all species, to come to trust strangers enough to co-operate on everyday activities to such a extraordinary extent. For most of human history strangers represented danger; they were to be avoided or treated with grave suspicion. Trading between unrelated people was a difficult and unpredictable business, and meetings between strangers could just as easily end in violence as in a mutually satisfactory exchange. But, once we really got the hang of it – which has only been in the last few hundred years – this trust and the trading that has resulted has enabled remarkable improvement in people’s lives all over the world, (as well, of course, as leading to a bunch of other developments of more questionable social value).
The trust system relies on a network of “institutions” – in the economist’s sense of sets of rules, both formal and informal that govern social behaviour – that mean that humans generally treat strangers as honorary friends. We are prepared to deal with strangers in accordance with the rules in the expectation that they too will follow the rules, and the rules or institutions that have been developed are robust, i.e., reliable enough to be taken for granted most of the time, and self-reinforcing to a large extent, i.e., in a variety of ways citizens punish those who betray others’ trust.
The economic system also works because no one really has to think too deeply about the systemic consequences of the actions they take in their little piece of the world. People proceed simply to make decisions that seem to them the right ones within a framework of rules set by the society in which they dwell, and the insititutions as a whole emerge from that behaviour – what we might call “short-sighted co-operation”. To use the example of a trading situation, I can sell you whatever it is that I make without worrying too much about the use you are going to put it to. As the extreme cases, Mr Seabright talks about firms that make cluster munitions, or people who work in nuclear weapons laboratories. In both cases, employees simply do not spend a lot of time considering the negative consequences of their jobs, but like most others, they focus on doing the job they have as best they can. These blinkers are not required in order to make the economic system work, but they do make it a lot more effective because they enable a lot more trading to happen. Consider the time and difficulty of buying a television on hire purchase (where you need to establish your creditworthiness) compared with paying cash for the same item (where you are relying on the credibility of the bank that issues your currency). If one had to be reassured of the good intentions and positive impact of all buying and selling, our market system would work vastly less effectively.
Mr Seabright discusses the limitations of the trust system. It can break down because trusted people turn out to be untrustworthy, or because the short-sighted co-operation leads to society doing things that are unsustainable for society as a whole. He talks about a wide variety of different forms of societal co-operation – cities, environmental issues, the market system itself, firms and families, the growth of knowledge, and also about social and economic exclusion in the form of unemployment, poverty and illness – and discusses why they have emerged, the constraints and difficulties they present, and the prospects for the future.
The book talks in some detail about the system of money and about banking, and discusses in particular lessons that can be drawn from financial crises. There is a particular application to the events of 2007 when, as the real estate market turned sour in the United States, banks quickly became extremely unwilling to lend money to each other, uncertain as to the others’ exposure to what were sure to be substantial property losses. The speed with which the disaster evolved and the extent of the damage it did – leading to both wide-ranging (and expensive) intervention by the US Federal government in the financial markets, and enormous financial losses for shareholders in affected banks – just emphasises how amazing it is that we put so much faith in the financial system as a normal part of our everyday lives. If my experience is typical, we do not really think at all about the risks we are taking in depositing our money in a bank, or borrowing someone else’s money via a bank to buy something that we want without having to save what it costs, like a house.
In the last section of the book, Mr Seabright discusses the development of collective action that societies take to respond to some of the perceived short-comings of the market system, both within their own borders, and in co-operation with other nations. And in the last twenty pages or so, he discusses how fragile this reliance on strangers is, particularly in terms of relations between states and what the prognosis is for the future.
Mr Seabright’s book is very good on economics: indeed, the book is in part a clever re-telling of basic micro-economic theory – when markets work well, when they don’t, what can be done about it in either case. His book is less focused on issues apart from market-based exchange, like the importance of trust and reliance on strangers for community life and the enjoyability of life in cities.
Nevertheless, I think his basic point is extensible beyond economics: modern life requires thorough-going trust of strangers, so modern life is going to get more and more difficult if people trust each other less. If this is right, then public policies that increase societal trust could be useful and indeed increasingly necessary.
Esprit de corps
“The Spirit Level”, by Richard Wilkinson and Kate Pickett focuses on income inequality in societies, and links higher levels of income inequality with a very wide range of societal ills. Their basic point, substantiated with a great deal of data, is that societies with less equal income distributions do worse in a very great number of ways. They have worse mental and physical health, higher rates of obesity, lower life expectancy, worse educational performance, and higher rates of teenage pregnancy. They are also more violent, more crime ridden and suffer from less social mobility. This is shown both across countries and, for many of the same measures, across states in the United States with varying levels of income inequality.
Note that the negative effects referred to are not because countries or states are poorer than their comparators. They relate just to the level of income inequality, regardless of the total income level. Higher incomes are associated with higher life expectancy, to take just one example, but at any level of income, a less equal income distribution will mean lower life expectancy for the population. In this way the social ills tracked are shown to be related directly with income inequality.
Also note that the negative effects of income inequality are not just confined to the poor. It is true that, on many of the measures, poorer people in a society do worse, with lower life expectancy and higher rates of imprisonment, for example, that those with higher incomes. But, from the data, even those on high incomes are better off in a society with a more equal distribution of income. Greater equality helps the poor most, but helps all levels of society to some extent (except perhaps, say the authors, those who are very rich).
The scale of these differences between societies is enormous. As the authors say (p181 in my hard-back version), across whole populations, rates of mental illness are five times higher in the most unequal compared to the least unequal societies. People are five times more likely to be imprisoned, six times as likely to be clinically obese, and much more likely to be murdered. For all of a large number of social ills, living in a society with more equal income distribution means you will be socially far better off.
Put another way (p261), if the United States were to reduce its income inequality to about the average of the four most equal of the rich countries (Japan, Norway, Sweden and Finland on The Spirit Level data), rates of mental illness and obesity might be cut by two-thirds, teenage birth rates could be more than halved, prison populations could fall 75%, and people could live longer while working around two months less a year. At the same time, the proportion of the population feeling they could trust others might rise by 75%, with obvious positive consequences for the quality of community life.
Interestingly the book also refers directly to the impact of higher income inequality on trust within societies. There is long-term evidence quoted in the book that greater levels of income inequality reduce the extent to which people feel they can trust their fellow citizens and the extent to which they are willing to look out for them. In the terms of my hypothesis, greater income inequality makes citizens feel they have less in common with their fellow travellers, and this makes them less inclined to do anything to help others out.
How much equality
Usefully , there has been some news media recently about New Zealand’s relative level of income inequality. An OECD study has found that New Zealand and Sweden (!) have bolted up the international rankings for income inequality in the last 25 years. Most of the change apparently happened in the period from 1988 to the mid-1990s, with the nation above the OECD average level of inequality since then despite incomes becoming slightly less unequal since 1995.
The summary of the OECD study itself says several interesting things:
- Income inequality has slightly declined since 1995 after growing sharply for the ten years before that. There has been income growth for all, but the middle class has been doing particularly well, reducing inequality in the income distribution.
- Poverty has grown throughout the last 25 years to levels similar to the rest of the OECD (about 11% of people are now living on less than half of the median income, which is the definition the OECD uses for poverty).
- In terms of distribution, the proportion of children living in poverty has grown to 15% – at the higher end of OECD figures – and poverty among younger adults has also grown. Poverty amongst the elderly, on the other hand, is amongst the lowest in the OECD, at 2%.
- Poverty is highly correlated with unemployment. Almost half of people living in households where no one works are poor, compared with 4% of households in poverty if there are two or more people working.*
If societies with more equal income distributions are better places to live, then New Zealand became a less nice place to live through until the mid-1990s, and since then it has slightly improved. I guestimate that the sharp decline in equality after 1985 was caused in large part by sharply rising unemployment, which peaked in the late 1990s and then fell away to very low levels in the 2000s.
In terms of politics, the extent to which people think increasing inequality is a good thing or a bad thing varies quite a lot between even right-thinking individuals. And many people don’t like the idea of not liking inequality because it implies that they have to do something about it – especially by taking money from people who have more and giving it to people who have less.
I think some inequality is useful and important, but too much is likely to be bad, in the sense of doing more harm to society than good.
The economically useful part is when differences in income between different people reflect differences in the value of different jobs. These differences help guide people in making choices about what work they want to devote themselves to. Surgeons command higher salaries than baristas in large part because society is willing to pay more for quality surgery than they are for quality coffee. The differences in salaries between these two groups will help ensure that roughly the right number of people work as surgeons relative to the number that work as baristas. Income differences can be pro-social, i.e., they work for the good of society, in these circumstances.
Human beings, however, seem to have very strong views about fairness that limit appropriate distributions of income between different people. Some concept of fair play is built firmly into society, and so it seems normal for people to express concern and want to do something politically about income differences that are not justified or justifiable (my hypothesis is that this justification is made or should be made on the basis of the usefulness of a particular income distribution, from a society-wide point of view). We seem willing as a society to tolerate a level of income inequality, but once it gets out of hand, there is strong societal discomfort, condemnation, and public policy action to put in place a more even distribution. A lot of the debate that we see about economic policy seems to operate in these terms. Note that this is in a country where people generally do not get paid much by rich world standards, where the salary rates for the best paid do not reach the stratospheric levels of other nations, and where the systems for income redistribution are already very extensive.
What is to be done
If we are going to make public policy with a closer eye on how it might affect the level of trust between citizens, it is clearly going to require a much better understanding of what makes people care about others. As Rudyard Kipling wrote in “We and They”, quoted in The Spirit Level “All the people like us are We, and every one else is They”. If it is a good thing for society that everyone look out for each other more, how should it set things up so that people empathise with their fellow citizens?
The making of “they” can be incredibly powerful and I you see it all around me all the time. A person who receives public assistance is either one of us fallen on hard times, as the Dom Post had it the other day, or they are one of them – a work-shy dole-bludger in need of harsh treatment for his/her moral failings. Mr Seabright recounts an ingenious experiment from Benin in 2001 (p294) that demonstrated that voters would prefer policies that enriched them personally at the expense of neighbouring citizens over policies that would be of more general benefit to the nation. The tendency for politics especially to tribally appeal to supporters and define all others as different and dangerous is a constant threat even in liberal democracies like the one in which I am fortunate enough to dwell.
So the question is how do we encourage people in society to look out for each other, and not just those who are the same as us (although that would be a good start), but others who are different but not less worthy of our respect and, yes, assistance, because of that.
On my read, both books are less good on solutions and the policy agenda than they are on establishing their basic points. I am sure this reflects the long-term, uncertain and difficult nature of these problems – which therefore means they are more amenable to political solutions rather than careful policy analysis that weighs up the consequences of alternative approaches.
But from the books, some practical steps to build a more trusting society might include:
- Redistribute earned income, i.e., try to ensure that people get a more equal recompense from working. The most obvious way to do this is with policies that reduce unemployment, since unemployment is closely tied with poverty, and also policies that raise wages, i.e., encourage the nation to focus on producing things that the world is willing to pay a lot for, and ensure the education system makes the maximum contribution to educating people for high-wage work.As part of this redistribution, The Spirit Level also suggests constraining the forces that generate inequality, in particular the extremely high levels of CEO pay, which perhaps is less an issue in New Zealand. The British government is talking about introducing a simple mechanism for shareholders to vote on CEO pay, intending that this will give more direct control by company owners.
The Spirit Level also suggests employee ownership as a solution (rather than such extensive ownership by investors with only a financial stake in the company. They argue that more employee ownership would encourage a more long-term, less rapacious and more fulfilling (for employees) style of capitalism if it were combined with more participatory management methods.
- Redistribute disposable income – i.e., a more progressive welfare system. It isn’t clear to me where the limits of redistribution lie, but it does seem to me that New Zealand is quite progressive already, with 70% of the tax being paid by 25% of the taxpayers. Other tax changes, like introducing a higher rate of income tax for those with very high incomes, seem to be mostly of symbolic effect – they don’t raise enough money to change the distribution of taxation very much at all.
- Provision of public services with public money, especially health, education and welfare services, can help even up society by effectively insuring citizens against the financial burden of education, ill-health or economic or social crisis. The quality of these services also matter: Mr Seabright discusses the importance of a “secular, multi-ethnic and liberal” education to ensure that citizens learn “how to live peacefully and profitably with people whose community and religion are not one’s own”.
- Socialise these ideas – The education system is far from being the only place where people learn how to behave. This point is really just a sustained effort to convince people that the world can easily be a different and more pleasurable place to live, and that improving things is partly down to them and how they live their lives every day. So get to know your neighbours, start a after-school programme, run a block party, join a community group. Get amongst it citizens, the health of your nation is at stake.
* The OECD also mentions that New Zealand does a good job of targetting its welfare at the poorest – one third of total cash benefits go to the poorest 20% of the population – only Denmark and Australia do better. Which is probably just as well, given how little money our nation has to distribute by comparison with the rest of the (much richer) rich world. (It amazes me that managing to get only one third of cash benefits targetted at the poorest 20% is considered a good performance – however, that is for another day).
** These specifics come from The Spirit Level, where the game is discussed from page 199.