Income Inequality and Game Theory
Consider this situation: You are a member of a four-person rock band. Each member of the band has contributed somewhat equally over time, and band revenues have always been split evenly, 25% to each member, though its total earnings on an absolute basis have been small However, the band has suddenly become the next U2. It is likely the band will make tens of millions of dollars over the coming years. Just as this is happening, the other three band members come to you and threaten to make you Pete Best. They will allow you to stay with the band, but only if you accept a reduction in your share of the earnings to 10%. You perceive this move as unfair given your equal contribution to the band to date. However, even 10% of the band's new fortunes would be a LOT of money (and fame) and you honestly believe that even a 10% share is better than you could do with any other band or occupation. What do you do -- take 10% or quit? (assume you want to be famous and you have no legal recourse against the other members)
In an analytical vacuum, one might predict that any rational person would take the deal -- while it is less than might be hoped, it is certainly a better deal than one could get any place else. A pure profit maximizing decision would be to stay with the band (and watch you back at night for more knives).
However, numerous studies and surveys have shown that in fact, a large number of people would choose to give up the money rather than feel cheated. Just look at the number of professional football players who have held out for a whole season to try to get a better contract. In every case, the present value of the salary lost for that season is far greater than any increase in salary in the future from taking the tough stand. But these players would rather be paid nothing than feel underpaid.
TJIC had a pointer to an interesting article on game theory. In it, the author talks about this behavior in the context of a game that divides up pies, and summarizes:
Apparently, making money is not the players' only concern; participants have a sense of pride and care about how they are treated by others, economists have concluded. Thus, offers perceived to be "unfair" are rejected out of a desire for revenge.
In fact, revenge and/or envy has been tested in a number of games, where scientists gave players trailing in the game the ability to spend money solely to take away money from the leading players (e.g. you can spend your last $10 to make $10 of your opponents money disappear). There is something in human behavior that wants to bring down the winners, even when doing so makes one worse off himself. (Question to Red Sox fans: would you accept a lifetime bad of the Sox from the World Series if you were guaranteed the Yankees would never make the World Series either?)
I guess I don't really have a problem with such behavior in consensual transactions (though I personally work pretty hard to purge my ego from business decisions). My problem comes when people motivated in this way vote in our society that has proven to have inadequate protections of the minority, at least when we refer to the minority of rich and successful.
In Closing of the American Mind, Allan Bloom tells the story of a question he used to ask his classes vis a vis income inequality. He would ask something like "Would you vote for a law that reduced income inequality but at the same time reduced total wealth, such that the poor might get a larger slice of a smaller pie, and might even be worse off on an absolute basis afterwards." Apparently, he would get solid majorities for "yes" and in fact I have been in classes where this same question was asked and at least 40% said "yes." This is a situation a bit similar to the one above, but without it being personal. In other words, no one has explicitly hosed you, they have just done better.
I hope you can see the parallel. Large numbers of people are willing to pay (or equivalently make less money) to reduce the earnings of people who are wealthy and/or successful. They are even more willing to do so if they think that they have been treated unfairly. Which is why you see so many politicians and media outlets working so hard right now to convince the middle class that current income distribution patterns are somehow "unfair." Politicians are pandering to this base human emotion, the desire to spitefully bring someone else down (in the case of income equality laws, someone the person has likely never even met or transacted with) even if it makes oneself worse off.
I can understand why Pete Best might harbor a grudge against the Beatles. But why do so many Americans harbor a grudge against people they have never met, just because they make more money?
