'It's NOT FAIR!' yell RICH KIDS ... and that's a GOOD THING

So what does this have to do with economics?

Those who have thought through the point more deeply tell us that this is actually one of the things that makes a market society work. Not so much the altruism bit, but rather the punishment mechanism for those who abuse trust. Yes, we will punish people who treat us unfairly, even at cost to ourselves.

Given that life is a repeated iteration of such economic contacts, then that willingness to punish “unfairness” will quite soon drive those who are unfair to the sidelines of that society. A high trust equilibrium is thus reached and that's what enables a market economy to work in that we generally assume, and it's generally true, that we get what we think we're going to get.

Hurrah, etc.

However, given this, why aren't all societies high trust ones in which markets bring their blessings of untold riches? The answer came when people started playing the ultimatum game with people who were not rich American students, outside of that ecology that is the natural habitat of the economics professor. They quickly found that in poor, pretty much non-market societies, a $99 to $1 split would be accepted. After all, a dollar is a dollar and a free one is free. So it turns out that the inhabitants of poor and non-market economies are much more like that entirely rational homo economicus than we luxuriating in the riches of a capitalist and free marketish one may be – which was a bit of a shock to be quite frank.

Institutionalised ...

A slight detour here: it's a standard part of development economics that “institutions” matter. Sure, it's good if you've got iron ore, coal and limestone within reach of each other, an educated population and all that. But things like the rule of law (or as Adam Smith put it, peace, easy taxes and the tolerable administration of justice) do rather help. The thing is: “institutions” are really a residual.

It's much like when we talk about productivity, in fact. Sure, we say that when output rises and inputs don't, productivity must have risen – the efficiency with which we turn inputs into outputs has changed. But we do measure it as a residual: we measure outputs, inputs and ascribe changes to changes in productivity. We don't really know what's happening to productivity at all, nor often why. So with this institutions stuff. OK, so, this place has great land, good climate, hard workers – why the hell is it so damn poor then? "Ah, institutions!" people mutter to themselves sagely.

But we don't really know all that much about which ones are important though. We're pretty sure the rule of law is important, private property and so on, but it's all a bit hazy in this residual we're using as an explanation. And here we've added another one to our list of things: the willingness to punish, at personal cost, those deemed to be acting unfairly. That altruism perhaps leads to the high trust society in which markets work their magic... or is it the other way around?

Having discovered that people do differ in this manner across rich market-based societies and not-so-rich not-market-based ones, of course, we'd like to know which comes first: the chicken or the egg? Or, even, is there some fundamental difference in people that means that that altruism will never happen in certain societies? That last part would be a real bummer: I'd not welcome the chance to explain to some Bolivian peasant up on the altiplano that his grandchildren will never be rich because he's willing to take a free dollar, for example.

And that's where this latest research is so cheering. For they're indicating that altruism is a learned behaviour and furthermore, one that seems to be rather easily inculcated. Heck, if you can get two-year-olds to do it, it must be easy. We're still left with the chicken and egg, in that we don't know which comes first.

The benefits of getting richer in a market-based economy either lead to that altruistic punishment starting to happen, or else the behaviour leads to the possibility of the riches. So we are still at the boundaries of our knowledge about our own species and its behaviour. But we do know that this behaviour can and does change under relatively simple influences.

Thus the institutions we think are necessary to create a rich and flourishing society can indeed be created where they do not currently exist. Which means, and this is very cheering indeed, that the seemingly permanent division of the world into rich and poor places of the past couple of centuries need not be permanent. It's possible that the poor places can and will get rich too. ®