Monday, 11 June 2012

Economic Fairness Further Explained

In an earlier article, I explained why deflating to competitiveness through falling wages is unlikely to work in Greece - or Spain or Italy, for that matter.  The reason for the stubborn "stickiness" of wages has been long understood: workers are reluctant to accept significant wage cuts out of a sense of fairness.

In a recent article entitled, "The Fairness Trap," James Surowiecki, a regular financial columnist for The New Yorker, further explores the concept of fairness in economics, and shows how it's undermining an effective response to the current European crisis.  Not only are beleaguered Greek workers railing against further cuts, German voters have grown tired of contributing financial aid for a crisis they didn't cause.  

Suroweicki touches on experimental work which shows that people sometimes prefer to receive no money at all than to accept an unfair deal, if rejecting the deal also punishes somebody who's perceived to be acting unfairly.  This is contrary to rational expectations theory, a bedrock assumption of economics.  Further reinforcing deeply felt convictions of fairness is "self-serving bias," a self-explanatory phenomenon that reinforces perceptions of fairness.  Predictably, people often believe that what's best for them is also what's fairest in general, making such beliefs difficult to shake.

This is not just some interesting fact from economics, however: if somebody doesn't bend, he argues, the Euro might collapse.

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