Trickle Down Meanness

Linda Beale over at ataxingmatter had a really excellent post a few days ago about a study by Sreedhari Desai, Arthur Brief, and Jennifer George that examines

...a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy.

The study conclusions are consistent with my own conjectures that there are ethical as well as economic consequences that result from dysfunctional financial markets and the dysfunctional labor markets they induce. The economic consequences include gross misallocations of financial, physical and human capital, away from activities that would promote long run economic growth and well being and to activities that will promote rising income inequality. The ethical consequences are erosion of trust and compassion, both prerequisites to fairness in rewarding contributions to long run growth and prosperity. If the above study is right, we can add frank meanness to the list of ethical consequences.

Adam Smith wrote about the influence of prevailing custom and fashion on moral sentiments in Theory of Moral Sentiments.

The different situations of different ages and countries are apt, in the same manner, to give different characters to the generality of those who live in them, and their sentiments concerning the particular degree of each quality, that is either blamable or praise-worthy, vary, according to that degree which is usual in their own country, and in their own times. 

Nowadays, most of us would object to what appears to be cultural or ethnic stereotyping in some of what Smith wrote. I am unable to say to what extent Smith's views reflected then existing national and cultural heterogeneity that will have no doubt been rendered by economic development more homogeneous over time. Smith was a sound thinker and critical observer, which causes me to attribute his generalizations about different nationalities somewhat to Scots-Anglo ethnocentrism and somewhat to possible real national differences. Nevertheless, his main point seems valid: that what is "either blamable or praiseworthy" varies "according to that degree which is usual" in our own country and own times, that our moral sentiments and behavior are shaped to some extent by the culture in which we dwell.

Smith goes on to discuss "customary characters" of professions and stages of life, conjecturing that they are shaped by the moral sentiments that accompany and promote the duties of a given profession or of a specific stage in the life cycle. Thus, some professions and life stages are more reticent or staid than others. But, while Smith sees custom in the form of social and professional norms reinforcing good moral sentiments and behavior, he also sees it as something that can erode the same.

It is not therefore in the general style of conduct or behaviour that custom authorises the widest departure from what is the natural propriety of action. With regard to particular usages, its influence is often much more destructive of good morals, and it is capable of establishing, as lawful and blameless, particular actions, which shock the plainest principles of right and wrong.

His point being that just as self-interest can prevent us seeing impropriety and injustice, so too can culture and custom. A slave holder in the antebellum US South had self-interested reasons for believing slavery to be morally acceptable. A poor white worker whose wages were depressed by the availability of slave labor might still find slavery acceptable and worth fighting to preserve because the norms and customs of his culture find no impropriety in slavery.

If the US norm becomes extreme income inequality and the custom becomes meanness trickled down from those who reap rewards disproportionate to their product, will it ultimately lead to establishment "as lawful and blameless, particular actions, which shock the plainest principles of right and wrong?"

Causal relationships are always difficult to establish in non-experimental settings. Desai, Brief and George provide results from a small experiment that lend support to their conclusion that increased wage disparity engenders meanness or as Smith might call it "lack of sympathy" among those at the top for those at the middle and bottom of the wage pyramid. Nevertheless, it remains difficult at the societal level to determine to what extent economics shapes ethics and to what extent ethics shapes economics and economic systems.

I would be willing to bet that just as disparity between worker and CEO pay has produced "meanness," so has growing US income inequality produced similar disruption of fellow feeling in the population generally. As the "distance" between the wage rates at the top of the US income distribution and the middle and bottom of the distribution has increased, so has grown the "distance" in sympathy one for the other.

This is not an argument for income equality. There is every reason to believe that most people in the US approve of income differences based on rewards for greater productivity or other merit. I happen to share those views. However, the current disproportionate increase in the percent of national output going to the top 1% of the population, despite increasing productivity among those of us still employed and those who were employed up until 2 years ago, suggests that merit is no longer the trait that is being rewarded.

The conclusion seems self-evident. There is more at stake here than our economy. We must, as a nation, decide whether we want to continue on the path we have been on since roughly 1980. Do we want to continue to reward disproportionately a small fraction of the population that (based on recent performance) seems better at misallocating financial, physical, and human capital through speculative endeavors? Do we want to continue the trickle down of meanness? Shall we live in a society in which trust and fellow feeling are lost, replaced by mindless (not rational, not productive) winner-take-all competition that favors one group disproportionately? If the answers to these questions are all "yes," then the social fabric may already be torn beyond repair and I fear we are about to learn firsthand how empires crumble.

Comments

[rjs]

http://lanekenworthy.net/2010/07/20/the-best-inequality-graph-updated/

[rjs]

those meanies! they should be ashamed of themselves!

The Obama administration's pay czar said Friday that he did not try to recoup $1.6 billion in lavish compensation to top executives at bailed-out banks because he thought shaming the banks was punishment enough.

Kenneth Feinberg said 17 banks receiving taxpayer money from the $700 billion financial bailout made "ill-advised" payments to their executives. But he stopped short of calling them "contrary to the public interest" — language that would have signaled a fight to get the money back.

Feinberg couldn't force the banks to repay the money. But the law instructed him to negotiate with banks to return money if he determined that allowing them to keep it was not in the public interest.

He said such a fight could have exposed banks to lawsuits from shareholders trying to recapture the executives' money. Feinberg said his public shaming of the 17 banks was sufficient.

Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2010/07/23/financial/f080037D20.DTL&feed=rss.business#ixzz0ubyWB7cw

[Marc]

Read The Spirit Level: Why More Equal Societies Almost Always do Better. Don't be turned off by the "spirit" part, which sounds kind of hokey and is not actually mentioned in the text. It is a excellent empirical overview of the relationship between inequality and a range of social, health and economic outcomes.

[Peter Kurze]

I took the time to read the referenced study because I was intrigued with the notion that there was experimental evidence to suggest that the grant of power itself leads to arrogant and abusive behavior. I still find the idea intriguing, but I am not much convinced. It seems reasonable to me that the exercise of power can erode one's moral center over time, but I think that this is much more a case of self-selection. I have been watching that self-selection process at work in companies large and small for forty years now. I have observed in excruciating detail not only outcomes, but the processes and mechanisms that lead to the selection. I have watched good people forgo promotion because they hadn't the stomach for the work that the organization would ask of them, and I have seen people of little talent move up with alacrity armed with nothing more than ambition and a willingness to do anything in service of it. I have watched an organization which tolerated intra-management back-stabbing become an organization which depended on it as part of the selection process, and become so toxic that decent people self-selected out the door in droves. I think it works in reverse as well. Can you imagine your father tolerating employees who curried favor by preying unfairly on vulnerable customers?

It is certainly impossible to imagine that Elizabeth Warren did not have the intellectual capacity or work ethic to compete for the big bucks with the likes of Joseph Cassano. Something besides ability was either lacking or present in each of them that explains the different paths they are on.

I think we need to explore some new mechanisms for making the moral component of commercial life obligatory. Outlawing bad behaviors one at a time does not not seem to be getting us where we need to be.