The Causes of Poverty (68): Rich People Not Giving Enough Money to Poor People

An illustration of Andrew Carnegie, originally published on July 25, 1903

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You can criticize trade policy, immigration restrictions, bad governance or any other commonly cited cause of poverty, but you shouldn’t forget the obvious: there are a lot of wealthy people in the world who could, without losing much wellbeing (due to the diminishing marginal utility of money), help to lift every single poor person in the world to a much higher level of wellbeing.

The fact is that they could but don’t. We do have progressive taxation systems and other means of redistribution, we have development aid, we have charity etc., but none of these things yields enough money to lift everyone out of poverty. And there’s not enough public support to strengthen these redistribution mechanisms. Development aid is already unpopular at current levels, and don’t even start to talk about tax increases. The tireless efforts of Peter Singer and company to promote giving also have only a small effect.

Peter Singer

The insufficiency of giving and other means of redistribution is hard to understand, in particular given the fact that rich people are generally not very dumb and able to understand the law of diminishing marginal utility. Of course, I know about loss aversion, the endowment effect, habit formation, the importance of status etc. But again, wealthy people should in general be the ones best able to overcome biases, to distinguish the important things in life from the unimportant, and to see how helping others can be beneficial to ourselves, both psychologically and socially (helping makes you feel good, and living a good life amid misery is socially untenable). But perhaps I’m wrong about rich people.

And then there’s something else stopping us from giving more (or allowing ourselves to be taxed more, which is roughly the same thing), namely the stories we tell ourselves. For example, you often hear that it’s better to allow people to look after themselves first, so that they can create the conditions in which they unintentionally help. Allowing entrepreneurs to get rich – i.e. not taxing them too heavily and not insisting that they should give their money away rather than invest it – will be much more beneficial to the poor. Many of the poor will get a job thanks to them, and their products and services will also make the lives of many a lot better.

However, this is not incompatible with giving. True, what you give you can’t invest, but we can allow people to delay their giving until the day that they don’t need to invest a lot more. The example of Bill Gates comes to mind. So we can accept that there is some truth to the story that free enterprise takes care of a lot of poverty, and at the same time insist that there should be more giving.

Bill Gates

Another story we tell ourselves goes like this: giving people money isn’t a very good way of helping poor people. Many of them will just waste it, middle men will confiscate it, third world governments will misuse it, people will become to depend on it etc. Well, that doesn’t seem to be completely correct. Experiments with conditional cash transfers are very promising. And even if it’s correct to some extent, that’s just an argument to be smarter when giving money: invest it in businesses, healthcare etc.

And finally, there’s the story about agency: helping people is disrespecting them as self-authors and self-governing moral creatures. You may make them materially better off – at least in the short run because dependence on help may create motivational problems in the long run – but you take away their dignity and make them psychologically and morally worse off. People may not want to be helped, and even if they do it may not be in their best long term interest. The problem with this story is not that it’s false as such; it’s that people may not have a long term if we fail to help, and that starvation or homelessness is also an affront to dignity, and surely one that is a lot worse than receiving help.

More about giving is here. More posts in this series are here.

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The Causes of Human Rights Violations (38): Status Quo Bias

when you’re affected by status quo bias, all places where you can go right or left rather than merely straight forward look dangerous

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Status quo bias is an irrational preference for the current state of affairs, even when there are no obvious reasons why this state of affairs should be preferred over possible and knowable alternatives.

A preference for the status quo is not always a bias and can be entirely rational in some cases:

• when the balance of costs and gains is in favor of the status quo and when all possible and knowable alternatives yield a lower balance
• when some alternative yields a higher balance but the transition cost is too high
• when your role in society requires that you are consistent (you’re a school teacher and you’re supposed to teach the canon, or a judge and precedent and predictability are important)
• etc.

When a preference for the status quo is a form of reasonable risk avoidance, then it’s also wrong to call it a bias: it’s true that sticking with what worked in the past is a safe option when the consequences or costs of alternatives – compared to the cost of existing arrangements – are uncertain or unknowable.

However, people also tend to stick with proven options when the respective costs of different options are clear and an alternative is less costly than the status quo. We sometimes even prefer the status quo when costs aren’t an issue at all. In those cases, it’s correct to call our preferences a bias. Maybe the bias occurs because people don’t want to invest the effort of looking for alternatives and calculating all the costs. Status quo requires no mental effort. Choice is difficult, hence the tendency to do nothing. Or maybe cost calculations – when they are performed – are distorted because people wrongly attribute goodness to longevity. People often believe that something must be worth something if it has existed or if it has been practiced for a long time.

Cost calculations can also be biased because people tend to weigh the potential losses of switching from the status quo more heavily than the potential gains. This is called loss aversion - people prefer avoiding losses to acquiring gains even if the gains objectively outweigh the losses – and it could explain a preference for the status quo in the presence of alternatives that are objectively less costly. But status quo bias occurs even when there are no losses or gains from alternatives (experiments have shown that just designating an option as the status quo makes people rate it more highly). Hence, status quo bias is not always a form of loss aversion. Maybe regret avoidance plays a role (a past experience of regret teaches people to avoid decisions that imply change). Or an overvaluation of the virtue of consistency. Or the sunk cost fallacy: American involvement in Vietnam continued for years despite massive loss of lives, precisely because this loss would make defeat costly.

This last example shows how status quo bias can cause human rights violations. Other examples:

• The use of precedent in judicial decisions even if those decisions violate human rights (overvaluing consistency).
• Female genital mutilation often has no other justification than the fact that it has been practiced a long time, that it’s traditional (overvaluing longevity) and that abandoning it would cause disaster.

Something on the related endowment effect is here. More posts in this series are here.

Why Do We Need Human Rights? (25): Human Rights and the Endowment Effect

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Why do we say that people fighting for their rights are in fact fighting for the recognition of their rights? That people have rights even when the law doesn’t recognize these rights? That, in other words, people have moral rights that precede their legal rights? And that these moral rights can be used to evaluate and, if necessary, create their legal rights?

At first sight, such statements imply the dubious ontological claim that moral rules have an objective reality, independent of what people believe or do, and that these rules populate a parallel and invisible universe of morality. These days, we usually think that rights and rules are the products of human beings, rather than natural or God-given entities. On closer examination, however, denying that there are such independent rights creates a problem and ignores an opportunity.

• The problem: without independent moral rights, all we’re left with are the existing legal rights, which more often than not are insufficient or even complicit in human rights violations. In other words, we’re left with legalism and legal positivism, rather unattractive worldviews.
• The missed opportunity: without independent moral rights, we ignore the strategic advantages of the endowment effect: people are much more eager to fight when they believe they are fighting to keep what is theirs already, than when they fight in order to get what isn’t theirs already. Usually, the endowment effect is considered to be a cognitive bias (in economics, the value of something shouldn’t change just because you already have it), but in this context all means to make the fight for rights more successful are welcome.