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Saturday, April 21, 2012

Fairness Matters

Chrystia Freeland:

Fairness Can Pay Economic Dividends, by Chrystia Freeland, NY Times: There’s a reason they call economics the dismal science, but Professor Armin Falk’s presentation at an economics conference in Berlin a few days ago made me smile. That’s because his big conclusion — fairness has a financial pay-off — is so cheering...
Prof. Falk’s conclusion is easy to square with our experience of everyday life. Any parent — I’m a mother of three — knows that nothing enrages a child a more than the belief that her brother or sister is getting preferential treatment. Everyone with a job knows the same thing — there are few things more demotivating than discovering that the guy in the cubicle next to you, who does the same job you do, earns more.
But that instinctive sense that fairness matters hasn’t always been shared by mainstream economics. Instead, economists have built their models around the idea of ‘homos economicus,’ a human being who is perfectly rational and whose only goal is to pursue his economic self-interest.
Prof. Falk goes a long way to debunking that view. ... Read what conclusions he comes to in my column...

Here's a bit from the link (which is broken in the actual article). For those who think efficiency is all that matters, notice that fairness matters for efficiency:

The Triumph of the Social Animal, by Chrystia Freeland, Reuters: Does fairness matter? .... Economics ... hasn’t traditionally been much concerned with fairness. ... The alternate view was advanced by Armin Falk, a Bonn University economist, at a recent economics conference in Berlin organized by the Institute for New Economic Thinking. It emphasizes the importance of fairness and trust to human behavior. This approach takes as its starting point the idea that we are social animals, driven powerfully by how we fit into our community.
The social animal school may sound touchy-feely, but one of its favorite research tools is the M.R.I. ... In one experiment, subjects were paid 50 percent more, the same amount or 50 percent less than a peer for doing the same amount of work. Crucially, the absolute payment the research subject received in each case was identical.
But brain scans showed that fairness had a strong impact at a neurological level. Anyone who has ever held a job or has a sibling won’t be surprised to learn that the most powerful response was evoked when the research subject was underpaid, compared with his identically tasked peer. Interestingly, when researchers simulated low social status..., unfair treatment mattered less. The meek may inherit the earth, but in the meantime they have been conditioned to accept less than their fair share.
In another experiment, Dr. Falk and Ernst Fehr, of the University of Zurich, investigated [the question]: Does our perception of fairness influence how hard we work? Their answer is yes — workers who are underpaid don’t work as hard. ...
The next step is to adopt these discoveries about the social animal to our thinking about the broader political economy. In one way or another, this year’s pivotal elections will all be about the economy, stupid. But a sophisticated understanding of how the economy really works means thinking not just about gross domestic product, but about fairness and autonomy, too.

Here's a video of the talk:

    Posted by on Saturday, April 21, 2012 at 10:43 AM in Economics, Equity, Income Distribution | Permalink  Comments (8)


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