The Pursuit of Fairness

As James Surowiecki illustrates in an excellent piece in the New Yorker, the pursuit of perfect fairness causes a lot of terrible problems in system function.

Surowiecki calls this The Fairness Trap:

…Rationally, then, this standoff should end with a compromise—relaxing some austerity measures, and giving Greece a little more aid and time to reform. And we may still end up there. But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration. The grievances aren’t unreasonable, on either side, but the focus on fairness, by making it harder to reach any kind of agreement at all, could prove disastrous.

The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it. Behavioral economists have shown that a sizable percentage of people are willing to pay real money to punish people who are taking from a common pot but not contributing to it. Just to insure that shirkers get what they deserve, we are prepared to make ourselves poorer. Similarly, a famous experiment known as the ultimatum game—one person offers another a cut of a sum of money and the second person decides whether or not to accept—shows that people will walk away from free money if they feel that an offer is unfair. Thus, even when there’s a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.

You can see this in the way the U.S. has dealt with the foreclosure crisis. Plenty of economists recommended giving mortgage relief to underwater homeowners, but that has not happened on any meaningful scale, in part because so many voters see it as unfair to those who are still obediently paying their mortgages. Mortgage relief would almost certainly have helped all homeowners, not just underwater ones—by limiting the spillover impact of foreclosures on house prices—but, still, the idea that some people would be getting something for nothing irritated voters.

The fairness problem is exacerbated by the fact that our definition of what counts as fair typically reflects what the economists Linda Babcock and George Loewenstein call a “self-serving bias.” You’d think that the Greeks’ resentment of austerity might be attenuated by the recognition of how much money Germany has already paid and how much damage was done by rampant Greek tax dodging. Or Germans might acknowledge that their devotion to low inflation makes it much harder for struggling economies like Greece to start growing again. Instead, the self-serving bias leads us to define fairness in ways that redound to our benefit, and to discount information that might conflict with our perspective. This effect is even more pronounced when bargainers don’t feel that they are part of the same community—a phenomenon that psychologists call “social distance.” The pervasive rhetoric that frames the conflict in terms of national stereotypes—hardworking, frugal Germans versus frivolous, corrupt Greeks, or tightfisted, imperialistic Germans versus freewheeling, independent Greeks—makes it all the more difficult to reach a reasonable compromise.

From the perspective of society as a whole, concern with fairness has all kinds of benefits: it limits exploitation, promotes meritocracy, and motivates workers. But in a negotiation where neither side can have what it really wants, and where the least bad solution is as good as it gets, worrying too much about fairness can be suicidal. To move Europe away from the brink, voters and politicians on all sides need to stop asking themselves what’s fair and start asking themselves what’s possible.

It is more important to have the right system in place than perfect fairness to the individual. The argument here is one of moral hazard and incentives. If you don’t punish Greece, you foster a system where it’s ok to default once in a while. This idea will spread to other countries.

In Steven Sample’s excellent book, The Contrarian’s Guide to Leadership, he talks about the law of a higher good, which he took from Machiavelli’s The Prince.

Let me clarify the most fundamental misunderstanding. Machiavelli was not an immoral or even an amoral man; as mentioned earlier, he had a strong set of moral principles. But he was driven by the notion of a higher good: an orderly state in which citizens can move about at will, conduct business, safeguard their families and possessions, and be free of foreign intervention or domination. Anything which could harm this higher good, Machiavelli argued, must be opposed vigorously and ruthlessly. Failure to do so out of either weakness or kindness was condemned by Machiavelli as being contrary to the interests of the state, just as it would be contrary to the interests of a patient for his surgeon to refuse to perform a needed operation out of fear that doing so would inflict pain on the patient.