The Price of Inequality: How Today's Divided Society Endangers Our Future (58 page)

5.
See Michael I. Norton and Dan Ariely, “Building a Better America—One Wealth Quintile at a Time,”
Perspectives on Psychological Science
6, no. 1 (2011): 9–12.

6.
See the survey on the perception of inequality in the world, conducted by the Fondation Jean-Jaurès, available at (in French)
http://www.jean-jaures.org/Publications/Dossiers-d-actualite/Enquete
-sur-la-perception-des-inegalites-dans-le-monde (accessed March 4, 2012).

7.
See R. Benabou and E. A. Ok, “Social Mobility and the Demand for Redistribution: The POUM Hypothesis,”
Quarterly Journal of Economics
116 (2001): 447–87; K. K. Charles and E. Hurst, “The Correlation of Wealth across Generations,”
Journal of Political Economy
111, no. 6 (2003): 1155–82; and L. A. Keister,
Getting Rich: America’s New Rich and How They Got That Way
(Cambridge: Cambridge University Press, 2005).

8.
From Charlotte Cavaille, “Perceptions of Inequalities in the World: Food for Thought,” available at
inequalitiesblog.wordpress.com/2011/09/27/perceptions-of-inequality-in-the-world-food-for-thought
(accessed December 19, 2011)
.
She provides an interesting interpretation, quoting Alexis de Tocqueville’s classic work: “When inequality of conditions is the common law of society, the most marked inequalities do not strike the eye; when everything is nearly on the same level, the slightest are marked enough to hurt it. Hence the desire for equality always becomes more insatiable in proportion as equality is more complete.”
Democracy in America
(Middlesex, UK: Echo Library, 2007), p. 428.

9.
The tenets of rationality, in the jargon of economics, are that individuals maximize a well-defined utility function (or have a well-defined set of preferences) and maximize that with rational expectations. The alternative perspective of behavioral economics is expressed in the title of the popular book by Dan Ariely,
Predictably Irrational: The Hidden Forces That Shape Our Decisions
(New York: HarperCollins, 2008).

10.
These ideas have begun to be used in the context of politics. See George Lakoff,
Don’t Think of an Elephant! Know Your Values and Frame the Debate
(White River Junction, VT: Chelsea Green, 2004).

11.
This is called the anchoring effect. See discussions of anchoring and framing effects on judgments and preferences in Daniel Kahneman, Paul Slovic, and Amos Tversky, eds.,
Judgment under Uncertainty: Heuristics and Biases
(Cambridge: Cambridge University Press, 1982); and Daniel Kahneman and Amos Tversky, eds.,
Choices, Values and Frames
(New York: Cambridge University Press, 2000). For a popular and recent discussion, see Daniel Kahneman,
Thinking, Fast and Slow
(New York: Farrar, Straus and Giroux, 2011); and Richard Thaler and Cass Sunstein,
Nudge: Improving Decisions about Health, Wealth, and Happiness
(New Haven and London: Yale University Press, 2008).

12.
See the discussion of framing effects in the case of the introduction of lifecycle funds in U.S. 401(k) plans in Ning Tang, Olivia S. Mitchell, Gary R. Mottola, and Stephen P. Utkus, “The Efficiency of Sponsor and Participant Portfolio Choices in 401(k) Plans,”
Journal of Public Economics
84, nos. 11–12 (2010): 1073–85; and Olivia S. Mitchell, Gary R. Mottola, Stephen P. Utkus, and Takeshi Yamaguchi, “Default, Framing and Spillover Effects: The Case of Lifecycle Funds in 401(k) Plans,” NBER Working Papers 15108, 2009.

13.
Thus, the Right wanted to believe that it was the government that caused the problem, and not the market; so it discounted evidence that it was the markets that had failed—that, for instance, the subprime mortgage debacle
began
in the private sector, and that even at the peak, the performance of Fannie Mae mortgages was better than that of the private sector.

14.
There is by now a large literature on confirmatory bias. See, e.g., Matthew Rabin and Joel Schrag, “First Impressions Matter: A Model of Confirmatory Bias,”
Quarterly Journal of Economics
114, no. 1 (1999): 37–82.

15.
See, in particular, Karla Hoff and Joseph E. Stiglitz, “Equilibrium Fictions: A Cognitive Approach to Societal Rigidity,” 
American Economic Review
100, no. 2 (May 2010): 141–46; Hoff and Stiglitz, “The Role of Cognitive Frames in Societal Rigidity and Change,” World Bank, 2011, available at
http://www.ewi-ssl.pitt.edu/econ/files/seminars/110405_sem814_Karla%20Hoff.pdf
(accessed March 4, 2012), and the references cited there. The authors explain how equilibrium fictions may play a role in sustaining discrimination. Those who believe in caste differences are cognitively more sensitive to failures of the purported inferior caste and ignore their successes. Even worse, individuals who believe that they are inferior will behave that way.

16.
Persuasive marketing is the gentlest and most honest way that corporations try to manipulate behavior. The cigarette companies secretly made their products more addictive, rendering it more likely that smokers would continue to smoke. David Kessler, the former head of the Food and Drug Administration who led the U.S. government charge against the cigarette companies, points out that producers of fast foods, snacks, and other products do quite similar things (even if it isn’t precisely addiction), through their fine understanding of how smells and tastes stimulate the brain and create cravings. See Kessler,
The End of Overeating
:
Taking Control of the Insatiable American Appetite
(New York: Rodale Books, 2009).

17.
John Maynard Keynes,
The General Theory of Employment, Interest, and Money
(New York: Harcourt, Brace & World, 1936), p. 383.

18.
See George Soros,
The Soros Lectures: At the Central European University
 (New York: Public Affairs, 2010).

19.
See in particular the report
The Financial Crisis Inquiry Report
of the bipartisan National Commission on the Causes of the Financial and Economic Crisis in the United States, which concluded that Fannie Mae and Freddie Mac “contributed to the crisis, but were not a primary cause” (p. xxvi). The report is available at
http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
(accessed February 20, 2012). Only one member, Peter J. Wallison of the American Enterprise Institute, dissented. Other, more academic studies have confirmed and supported their findings.

20.
See the discussion of statistical discrimination in chapter 5
.

21.
See Karla Hoff and Priyanka Pandey, “Discrimination, Social Identity, and Durable Inequalities,”
American Economic Review
96, no. 2 (May 2006): 206–11; and Hoff and Pandey, “Making Up People: The Behavioral Effects of Caste,” Working Paper, World Bank. A large literature in social psychology shows that “priming” a stereotyped identity (that is, making it salient) shifts performance in the direction of the stereotype. See C. M. Steele,
Whistling Vivaldi and Other Clues to How Stereotypes Affect Us
(New York: Norton, 2010); and Michael Inz-licht and Toni Schmader, eds.,
Stereotype Threat: Theory, Process, and Application
(New York: Oxford University Press, 2012).

22.
Of course, neither government nor markets are perfect. As I’ll explain later in the chapter, while there are many instances of government failures, they pale in comparison with the losses from private sector failures—in particular, those surrounding the Great Recession.

23.
In 1772 the East India Company was lent hundreds of thousands of pounds by the Bank of England after a combination of factors, including a famine in Bengal and a stock market crash in London, threatened the company’s survival. From Nick Robins,
The Corporation That Changed the World
(London: Pluto Press, 2006), p. 97.

24.
While it might be in the interests of an individual or group to work to alter perceptions in ways that advance particular interests, typically change doesn’t happen in such a concerted way. There is no general forum in which plots are hatched, no opportunity for a conspiracy.

25.
See Richard Dawkins,
The Selfish Gene
, 30th anniversary ed. (Oxford: Oxford University Press, 2006).

26.
See
The Financial Crisis Inquiry Report
.

27.
In January 2012, the Pew Research Center released a poll that found an even divide in perceptions: about 46 percent of the respondents (Americans) believed that rich people obtained their wealth because they were “fortunate enough to be from wealthy families or have the right connections,” while 43 percent thought they were wealthy because of “their own hard work, ambition, or education.” The same poll found that 58 percent of Democrats “say wealth is mainly due to family money or knowing the right people. An identical proportion of Republicans say wealth is mainly a consequence of hard work, ambition or having the necessary education to get ahead.” See “Rising Share of Americans See Conflict between Rich and Poor,” report of the Pew Research Center, January 11, 2012, available at
http://www.pewsocialtrends.org/2012/01/11/rising-share-of-americans-see-conflict-between-rich-and-poor/?src=prc-headline
(accessed March 4, 2012).

28.
One other change has occurred recently that may affect the future evolution of ideas and beliefs and reinforces the problems posed by confirmatory bias noted earlier: the rise and proliferation of the Internet has made it easier for individuals to create their own “communities”—groups that share the same information. In the past, most Americans would have had a shared experience of watching the national TV news on CBS, ABC, or NBC. But now there exists a plethora of cable channels, some appealing to the left, some to the right. An individual who wants to be reinforced in his conservative views can turn to Fox News. The views to which he is exposed have been preselected to conform to his beliefs. The consequence is the risk of further polarization of beliefs. The fact that beliefs about inequality are thus so
polarized has obvious implications for the ability of our society to deal with the problem on the basis of a national consensus. For a discussion of these issues, see, e.g., Cass Sunstein,
Infotopia: How Many Minds Produce Knowledge
(New York: Oxford University Press, 2006),
where he suggests
that people are trapped in “information cocoons,” shielded from information at odds with their preconceptions. Charles Lord and coauthors carried out important research on belief polarization: they showed research results on the death penalty to two groups of people, pro– and anti–capital punishment. They found that people tended to hold that research that agreed with their original views had been better conducted and was more convincing than research that conflicted with their original views, and they tended to have a stronger position after reading about research that supported their position. Charles Lord, Lee Ross, and Mark Lepper, “Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence,”
Journal of Personality and Social Psychology
37, no. 11 (1979): 2098–109.

29.
Hoff and Stiglitz, “Equilibrium Fictions” and “The Role of Cognitive Frames.” See also Glenn C. Loury,
Anatomy of Racial Inequality
(Cambridge: Harvard University Press, 2002).

30.
The “Swift boat” attack on Senator Kerry is a legendary example of “marketing” with no basis in fact, which nonetheless was extraordinarily effective. For a discussion of this case and a list of resources from the
New York Times
,
see the
New York Times
“Times Topic” on “Swift Veterans for Truth,” available at
http://topics.nytimes.com/topics/reference/timestopics/organizations/s/swift_boat_veterans_for_truth/index.html
(accessed March 4, 2012).

31.
See Richard H. Thaler, “When Business Can’t Foresee Outrage,”
New York Times
, November 19, 2011, p. BU4. See Daniel Kahneman, Jack Knetsch, and Richard H. Thaler, “Fairness and the Assumptions of Economics,” 
Journal of Business
59, no 4 (1986): S285–300. Amelie Goosens and Pierre-Guillaume Meon, “The Impact of Studying Economics, and Other Disciplines, on the Belief That Voluntary Exchange Makes Everyone Better Off,” University of Brussels working paper, 2010, show that there are both selection and learning effects. For an overview, see John R. Carter and Michael D. Irons, “Are Economists Different, and If So, Why?”
Journal of Economic Perspectives
5, no. 2 (Spring 1991): 171–77; and Alexandra Haferkamp, Detlef Fetchenhauer, Frank Belschak, and Dominik Enste, “Efficiency versus Fairness: The Evaluation of Labor Market Policies by Economists and Laypeople,”
Journal of Economic Psychology
30, no. 4 (August 2009): 527–39. See also Robert Kuttner,
Everything for Sale: The Virtues and Limits of Markets
(New York: Knopf, 1997);
and William Lazonick,
Business Organizations and the Myth of the Market Economy
(New York: Cambridge University Press, 1991). For a somewhat different perspective, see Bryan Caplan, “Systematically Biased Beliefs about Economics: Robust Evidence of Judgemental Anomalies from the Survey of Americans and Economists on the Economy,”
Economic Journal
, April 2002, pp. 433–58.

32.
The John M. Olin Foundation, named after the industrialist who endowed it, funded a huge array of research that injected law schools and other academic dialogue with conservative economic ideas until its closing in 2003. The
National Review
writer John J. Miller, who has written a book celebrating the foundation titled
A Gift of Freedom: How the John M. Olin Foundation Changed America
(San Francisco: Encounter Books, 2006), described the foundation’s influence this way: “If conservative intellectuals and organizations were NASCAR vehicles, then just about every one of them would sport at least an Olin bumper sticker—and a good number would have O-L-I-N splashed across their hoods.” See Miller, “Foundation’s End,”
National Review
, April 6, 2005, available at
http://www.nationalreview.com/articles/214092/foundations-end/john-j-miller
(accessed March 4, 2012).