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Inequality isn’t a simple equation

by Dennis Gentilin
12 April 2018
LAW, JUSTICE AND HUMAN RIGHTS;
SOCIETY, RELATIONSHIPS AND CULTURE
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In a speech delivered last year, Bill Shorten stated “tackling inequality will be a defining mission” should his party win government. Dennis Gentilin explores why this mission is far less straightforward than it appears.

 
In his poem Joe Heller, the late Kurt Vonnegut provides us with a timeless piece of wisdom:
 
True story, Word of Honor:
Joseph Heller, an important and funny writer
now dead,
and I were at a party given by a billionaire
on Shelter Island.
I said, "Joe, how does it make you feel
to know that our host only yesterday
may have made more money
than your novel 'Catch-22'
has earned in its entire history?"
And Joe said, "I've got something he can never have."
And I said, "What on earth could that be, Joe?"
And Joe said, "The knowledge that I've got enough."
Not bad! Rest in peace!
 
The knowledge that one has enough is without question one of the keys to human happiness. Yet a quirk in the human condition ensures that it is a piece of knowledge that remains elusive. This quirk also helps explain why there can be detrimental consequences associated with inequality. But before revealing it, exactly how much is “enough”?
 
This was a question economists Daniel Kahneman and Angus Deaton attempted to answer in survey research conducted in 2008 and 2009 in the US. Kahneman and Deaton explored the relationship between income and two forms of happiness: “emotional well being” (the emotions felt by participants on a daily basis, be they positive or negative) and “life evaluation” (how satisfied participants were with their overall life).
 
The results showed that at an income level of circa $75,000 USD, the relationship between earnings and emotional well being broke down. Beyond this point, it didn’t appear that income influenced participants’ daily moods. The same could not be said for life evaluation. It continued to rise as income got higher, suggesting that for this alternative measure of “happiness”, no amount was “enough”.
 
This latter result, which is a common finding among researchers, can of course be explained by the quirk in the human condition I alluded to earlier – our obsession with status. Consciously or otherwise, we spend our lives judging how we compare to those around us. And like trying to fill a sieve with water, no amount of income is enough when there is someone more affluent in our midst.
 
This affliction is not just reserved for those on below average incomes. In a recently published study, Grant Donnelley from the Harvard Business School and his colleagues demonstrated that even for multi-millionaires, life satisfaction does not satiate with income. Over 50 percent of those surveyed by Donnelley and his colleagues, some of whom had a net asset position of over $10 million USD, said they would need an increase in their net wealth of over 50 percent to be happy.
 
As mentioned, our obsession with status also helps explain why high levels of inequality can be deleterious. When a large proportion of society feel that their living standards are languishing while those of a minority thrive, mistrust and cynicism begin to corrode the bonds that hold communities together. As history has shown, at extreme levels this can inspire angry populist uprisings and a backlash against the aristocracy.

‘People are not totally opposed to inequality.’

And of course we are currently living through such a period of history. Over the past decade the economic fortunes of the middle and lower classes in developed nations have stagnated and diverged from those at the top of the economic tree. In response the populists (be it the Brexiteers or the so called “deplorables”) have revolted  against the aristocracy (the so called “elites”).
 
So, is the answer to eradicate all inequality? In short, no. History has also shown societies that have imposed systems that attempt to achieve this outcome create other types of intractable problems. As noble as it may seem to some, pushing for total equality can, amongst other things, suffocate motivation, inspiration and innovation. The result, paradoxically, is a poorer society for all.
 
In addition, people are not totally opposed to inequality. In research published in 2011, Michael Norton and Dan Ariely surveyed a large sample of residents in the US and asked them to nominate their ideal distribution of wealth. Their preferred distribution was the top quintile owning 32 percent of total wealth. This is markedly more egalitarian than the actual distribution where the top quintile owned 84 percent, but far from equitable.
 
Granted this research was conducted in the US where the promise of the American Dream lives large in the public consciousness. But one would think even in Australia, the land of the “fair go”, people don’t wish for total equality. Yes, we lend a hand to the disadvantaged, but we don’t begrudge someone from the spoils associated with legitimately earned success.
 
Therefore, policy makers are left with a dilemma. Inequality, in the right doses, can act as a source of motivation and inspire people to make meaningful contributions. Too much inequality, especially when coupled with lack of opportunity, can be a source of malice. Finding the right balance is a difficult and continuously evolving exercise.
 
It is therefore not surprising that inequality has been, is, and will continue to be a central policy plank for parties seeking election. There is no ideal setting and opinions will differ on where the right balance is. But in a world where the wisdom of Joe Heller is elusive, politicians must be vigilant and constantly strive to find it.
 
Dennis Gentilin is the founding director of Human Systems Advisory and an adjunct fellow at Macquarie University. Follow him on Twitter: @dennisgentilin


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