Friday, February 24, 2012

What is opportunity? What is a "land of opportunity"?


A reader emailed me recently and wanted to discuss the issue of whether America is a "land of opportunity." Like many people, he was of the opinion that America's low intergenerational income mobility means that we're not the land of opportunity that many Americans think we are. He went on to speculate as to why Americans labor under this delusion.

But is it a delusion? As I see it, the question has as much to do with philosophy and semantics as it does with actual economics. It all hinges on what "opportunity" means, and what it means for a country to be a "land of opportunity."


Thought Experiment 1:

As a thought exercise, consider a world in which ability is 100% heritable; if your parents have abilities of 57 and 73, you will have an ability of 65, with absolute certainty. And suppose that in this world, income is purely a linear function of ability (I=kA, where k is a positive constant).

In this world, your income will just be the average of your parents' incomes. Intergenerational mobility, as measured by the likelihood of being in a different income class than your parents, will be zero at the individual level, and at the household level will be determined entirely by who you marry.

Is this world a "land of opportunity"? It's a pure meritocracy, after all. But no one's income differs from that of their parents.


Thought Experiment 2:

As another thought experiment, imagine a world in which income is determined entirely by luck. When you are born, a die is rolled that determines your lifetime income. In this world, therefore, no one's income will be correlated with their parents' income at all. There will be a very large degree of observed intergenerational mobility.

Is this a land of opportunity? You have the chance to be in a different income class than your parents, and your chance is just as good as anyone else's chance. But that's all it is - chance. You are completely at the mercy of the dice.


You may feel that one of these hypothetical worlds is a "land of opportunity," but I think you'll be in the minority. What about a combination of the two? If income were a weighted sum of inherited ability and pure luck, would that make us a "land of opportunity"? Would it depend on the weights?

I doubt many people would say "Yes." The reason is that inherited ability is just another kind of luck. If income is the sum of luck and more luck, it still probably doesn't feel like a land of opportunity. Luck just doesn't feel like opportunity to most people; that's almost certainly why low intergenerational mobility bothers people in the first place (because it implies your income is determined by the luck of your birth).

So what do we feel does constitute "opportunity"? I'm not sure, but after thinking about it, I think it has to do with a third variable: effort. I conjecture that we think of a "land of opportunity" as being "a place where hard work allows you to succeed."

If I'm right, this means that we value opportunity because it fits with a certain moral model that we have regarding rewards, punishments, and free will. We view humans as being able to freely decide how much effort to put forth; hard work is a choice. And we think society should be setup so as to reward hard work and punish laziness - to change the incentive structure of people's effort decisions so as to maximize the effort that they choose to put out.

Furthermore, I don't think we want this kind of society because of a concern for economic efficiency. Leisure is fun! Rewarding hard work does not necessarily increase utility, even if it increases production. Instead, I think that our desire to reward hard work and punish slot comes from a moral value judgment that work is good in and of itself.

This, I am guessing, is why the idea of a low-mobility society bothers people. If your parents' income determines your income, it means that working hard does not bring the rewards that it ought to bring. The people who are most concerned about low mobility are not, then, socialist types who want to redistribute outcomes; they are old-fashioned moralizers who want people to reward people for working hard. They are angry that Horatio Alger stories to rarely come true.

What does this mean for the debate about opportunity? Well, much of the pushback against the "low mobility" complaints has come from libertarian and conservative circles. But this fight may not be about differences in values - libertarianism vs. socialism - as much as it is a debate about facts on the ground. Libertarians and conservatives who claim that America is still a "land of opportunity" are saying that it's still the case that hard work still gets rewarded here, as it ought to be; and those who complain about intergenerational immobility are claiming that hard work isn't as rewarded these days as it ought to be. So I think both sides should realize that this is what they're arguing about.

As a final note, what about my own values? Well, I was raised to think that "equality of opportunity" was a good and desirable thing. But until today, I didn't really realize what that meant. And now I'm starting to question my own values! Do I really care about how much society rewards hard work for hard work's sake? I'm not sure if I do. Maybe there are other kinds of equality that I care about more...but that is a subject for another post...

36 comments:

  1. AngryKrugman12:31 PM

    Rewarding hard work for hard work's sake is why the Peter Principle exists.

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  2. Anonymous12:39 PM

    Ability is the average of your parents? (57+73)/2 isn't 60

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  3. You say

    "I think that our desire to reward hard work and punish slot comes from a moral value judgment that work is good in and of itself."

    I would like to add a point to this. Maybe the general perception is that as we work harder we are (presumably) contributing to net utility of society as a whole either from a the direct utility that extra money and hence goods and services are presumed to bring, or from non-monetary sources. These non-monetary sources are; the erosion of famine; diplomatic progress in the middle east; the protection of human rights; the toppling of brutal dictatorships. None of these can be achieved through "leisure". Thus maybe the motive behind people's perceptions as you describe them above is that the more you work, the greater the net-positive contribution you make towards society's utility as a whole.

    P.S I have a somewhat related post today on wage inequality and income mobility...http://macromattersblog.blogspot.com/2012/02/banker-bashing-economic-argument.html

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  4. Ability is the average of your parents? (57+73)/2 isn't 60

    Haha thanks, fixed. :)

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  5. Well, from this side of the atlantic it looks very much like Land of Opportunity = Land of Calvinist attitudes to hard work. It is amazing how much history shapes the current world.

    Also, isn't this all complicated by whether effort is heritable or not? The plot thickens.

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  6. Anonymous2:04 PM

    I'd also add that the concept of effort should be correlated to producing utility, in which case mental effort that increases efficiency can be more productive than simply hard physical effort. To me this is what creates a land of opportunity.

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  7. I'm not sure what science says about this, but from my experiences in college and also working at a software company in India, it seems that willingness to work hard is highly correlated with the misery, fear, and insecurity one experienced in one's formative years. (To add to this intuition, think about kids from poor neighborhoods outperforming their rich peers in sports because the poor kids work harder, having fewer options.) Also, self-styled Tiger Mothers are willing to psychologically torture their children into hardworkingness.

    If this is true - that misery causes hard work - then rewarding hard work simpliciter will also indirectly increase misery (by increasing its economic payout).

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  8. "Furthermore, I don't think we want this kind of society because of a concern for economic efficiency. Leisure is fun! Rewarding hard work does not necessarily increase utility, even if it increases production."

    Noah, I disagree with the lines in quotes above. That rewards for effort is a moral argument, not an economic one. I think there is a strong economic argument.

    Lets say 1) GDP/capita captures some notion of utility/welfare; 2) technological progress drives GDP/capita in the long run; 3) technological progress is a function of effort (and a lot of other things); 4) people put forth more effort in a "land of opportunity" than a "land of luck." Then, its very straightforward to think how equality of opportunity can lead to higher welfare in the long run.

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  9. That's weird. I always thought that a "land of opportunity" was one in which there were resources could be appropriated - a person could obtain resources for less than the net present value of all future returns on them. Just go West, young man.

    If it's about hard work providing opportunities for advancement, the canonical land of opportunity is pre-1900 Southern China.

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  10. Anonymous2:55 PM

    What about the idea the one's inherent ability to produce effort and work hard is also endogenous?

    A child's performance in school is highly dependent on parental aspirations and views, independent on material cicumstances.

    If one grows up in an environment where all of their endeavors have failed then they will naturally adjust their effort (the part they have control of) - its simple optimisation.

    The idea that the poor are lazy scoungers may have the causality the wrong way round - maybe they are lazy because they've been unemployed so long they see no returns to expending effort?

    If one questions a meritocracy the arguement must naturally be extended to a system founded on rewarding effort instead of the best performance.

    If natural ability is arbitrarily assigned and so is one's capacity for work, then how is a system that rewards these attributes determined by chance any more a land of "opportunity"?

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  11. o. nate3:22 PM

    I don't think our concept of opportunity means equal rewards for equal effort. I think it's closer to something like equal probability of rewards for equal potential - where potential is a combination of effort, character, ability, and other intangibles - and where the probability term leaves some room for the operations of chance.

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  12. The immigrant experience tends to support the conclusion that there is opportunity. Opportunity means that each person can fully exploit his or her own abilities and is not held back by accidents of birth. That does not necessarily translate into mobility. If you have one social group which values hard work, education and financial success then the group is going to produce doctors, lawyers and university professors. If you have another social group which glorifies dropping out, violence, drug use and promiscuity then that group is not going to produce as many doctors, lawyers or university professors. Those intergenerational social values /choices do not mean there is no opportunity (although the heritability of culture may reduce mobility)

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  13. But if you despair that people don't have enough opportunities...then where's your own personal responsibility to do something about it? If you get a chance you should read this...A Strategy for the OWS Movement.

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  14. Opportunity for whom and to do what?

    For talented people to get ahead? Or for ordinary people to lead a good life? http://facingzionwards.blogspot.com/

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  15. In the real world-

    Being born rich is the surest way to live a (financially) rich life.

    Being born poor is the surest way to live a (financially) poor life.

    Hard work is, at best, orthogonal to success, reward and social standing.

    In fact, to a very large extent, hard word is for saps, just like taxes are for little people

    Ideally, opportunity would mean that
    1) the pie is growing faster than the population, so that everyone has the opportunity to increase his slice;
    2) the game isn't RIGGED to favor a certain class that is elite by birth or some other arbitrary accident of good fortune, like race;
    3) success is, therefore, some function of effort, ability, business acumen, creativity and - yes, unavoidably -luck
    4) access to resources like training, education, financing and gainful employment is close to equal.

    That's off the top of my head.

    Think about these characteristics now as opposed to 60 years ago, when I was in kindergarten. It's much worse now, in every respect, except one. For all the racism you seen now, that was far, far worse back then.

    The other important thing is to be born in the right place at the right time. I had opportunities my kids didn't have, and my grandchildren won't even comprehend.

    Sadly,
    JzB

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  16. You've stepped into the trap of arguing that ability correlates well with income. Is this true in the real world?

    Doug Prasher did nobel-level biology work and ended up driving an airport shuttle for next-to-nothing. Plenty of brilliant scientists make substantially less than mediocre MBAs. Even in this "age of the nerd", the rewards to innovators are highly uneven- if you work on the last, most applied step of a chain of development, you can be rewarded fairly well. If you do the foundational work, odds are you won't be (look at the spread between what a chemical engineer and a chemist make).

    We need to get past ability = income before we can start thinking about what opportunity means.

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  17. There are actually two traps here:

    1. your achievement is directly correlated with your ability.

    2. your ability is some mathematical function of your parents' ability.

    Both of these claims are false. And that assumes 'ability' can even be reduced to a simple numeric value.

    The article is pure nonsense.

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  18. ignatz8:43 AM

    Sorry Noah, I find this post confused and confusing.

    You seem to have decided that opportunity means something about intergenerational social mobility, and what determines it.

    But opportunity says nothing about how you are doing relative to others. Just how you are doing relative to where you started. So if you stay in the bottom five percent but everybody is doing better, is that a land of opportunity? You'll still be doing better than your parents did.

    And second, opportunity describes the context for your luck, ability and effort, not those attributes themselves. If you have luck, ability and effort but live in a locked box under the bed, your opportunities are zero.

    The first thought experiment also has everybody's ability (and therefore income) averaging out to be equal over time, unless we all only marry people whose ability is the same as ours. So that kind of neutralises the meritocracy thing.

    The whole "Land of Opportunity" schtick is also pretty cleary historically situated as an advertising slogan for settlers. To go all Old World for a minute, as the US is the outcome of a European settler project in one sixth of the earth's landmass declared essentially terra nullis, a project that's only about 20 generations old, no wonder Americans have this structural perception of their country as a Land of Opportunity.

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  19. marcel8:59 AM

    Greg@2:47PM: If it's about hard work providing opportunities for advancement, the canonical land of opportunity is pre-1900 Southern China.

    Can you provide references? I am not sure how I'd google this effectively.

    Thanks

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  20. Anonymous10:39 AM

    The problem with your argument is that you are assuming economic efficiency. You make the very common economic assumption that income is correlated with potential productivity, i.e. that the reason why CEOs are paid so much is that they are contributing that much to productivity. This is why you equate income with merit a priori in your first thought experiment.

    Thought Experiment 3:

    Consider a world in which financial success is 100% heritable; if your parents have financial success parameters of 57 and 73, you will have a financial success parameter of 65, with absolute certainty. And suppose that in this world, income is purely a linear function of the financial success parameter (I=kA, where k is a positive constant). You call this a meritocracy. I wouldn't.

    Now, consider that in this same world, ability, in terms of your potential to contribute productivity to economic growth, is completely orthogonal to the financial success parameter.

    In this world, your income will just be the average of your parents' incomes. Intergenerational mobility, as measured by the likelihood of being in a different income class than your parents, will be zero at the individual level, and at the household level will be determined entirely by who you marry.

    Your ability to contribute economic productivity is only poorly correlated with your financial success if at all.

    Is this world a "land of opportunity"? It's a pure meritocracy, after all, unless you don't believe that wealth and income directly reflect potential for productivity. But no one's income differs from that of their parents.

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  21. You've oversimplified your initial cases, and left out the case that most people use as their model of the world.

    Take the model where everyone is born with an inherent earning potential P, as your case 1. The individual's actual realized earnings R is some function of P*f(F, E), where F is the family input and E is effort. This is the model we want to believe in.

    In this model, in a truly just land F goes to 0, but this is not realistic. A land of opportunity is one in which high E can overcome low F. What we believe is occurring now is that f(F, E) is growing more dependent on F and less on E.

    Whether the individual *wants* to maximize their earning potential is an orthoganal question. Whether the system will allow them to reach the same level as someone with a lower P but a higher F is the root of the issue.

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  22. Jim:

    There are actually two traps here:

    1. your achievement is directly correlated with your ability.

    2. your ability is some mathematical function of your parents' ability.

    Both of these claims are false.


    OK, I usually refrain from slapping down commenters for blatantly failing to read the things I write, but seriously...did you not see the words "THOUGHT EXPERIMENT"? Are you not familiar with that phrase? It means "I don't think this is the way the world works, I'm imagining a hypothetical situation." READ, man!


    ignatz:

    But opportunity says nothing about how you are doing relative to others. Just how you are doing relative to where you started.

    Yeah, that's another kind of opportunity, but not what people are talking about in the media these days...

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  23. Noah: "OK, I usually refrain from slapping down commenters for blatantly failing to read the things I write, but seriously...did you not see the words "THOUGHT EXPERIMENT"? Are you not familiar with that phrase? It means "I don't think this is the way the world works, I'm imagining a hypothetical situation." READ, man!"

    Noah, there's no such thing as innocent assumptions in economics.

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  24. Anonymous5:43 PM

    Consider thought experiment 1- where ability is the average of your parents. It still doesn't follow that INCOME is the average of your parents.

    i.e. if two talented medical doctors give birth to a talented scientist, the scientist will make substantially less than his parents. I'd argue a land of opportunity is one that allows someone to make a wage that is somewhat reflective of his marginal productivity.

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  25. Jazzbumps is right. Opportunity is about the relative reward, in terms of money and security, for a combination of talent, work, initiative and luck. To some extent you can measure it by measuring inter-generational mobility or by measuring living standards in general and making assumptions about the distribution.

    Since we've had flatline and falling living standards for most non-exempt workers and rising hours, slow pay growth and falling security for exempt workers, we aren't showing off as a land of opportunity. Americans haven't been getting lazier, they just have fewer opportunities.

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  26. So on the idea that effort should be rewarded, yes, some people believe that because it fits in with a moral worldview that hard work is inherently good, but another reason even more people like this idea is because it means you can control your own destiny. People want to live in a world where they can believe they have control of where they end up.

    The value placed on being in control isn't always rational -- some people feel safer driving than flying because they feel that they are in control, and people worry more about terrorism than they logically should because it means someone else choosing their fate. But it is nonetheless quite natural to value it and I think people are generally happier when they feel they can affect their lot in life, whether or not they are correct.

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  27. ignatz3:07 AM

    Noah

    "Yeah, that's another kind of opportunity, but not what people are talking about in the media these days..."

    Fair enough. I guess I don't read a lot of the same media. And the historical angle is less relevant if that's what you're focusing on.

    And I should have also said thanks for opening up the conversation. It's always important to try to get behind these vague and bland phrases.

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  28. I guess I am sort of the Horatio Alger-hero. Despite years of child abuse and having a misdiagnosed brain tumor (thank you vaunted American medical system),I made it from the lowest income quintile to the highest. Opportunity was education. But the biggest obstacles weren't the 1% or big government. It was my "friends", people who found all sorts of excuses to not help me. I mean I can understand that befriending someone who had my problems was scary and not particularly rewarding. But all I needed was a small sliver of a chance from someone. But I never got it. So I lied, cheated and stole until I could afford the medical care to get myself to a place I could take care of myself. So, yes there are obstacles. If you are damaged by your parents, you then have to fight like hell to get the sort of medical care that will get you to the point that you are close to even with the people who had decent parents. And if you can't fight, because you are too tired, too demoralized or too damaged, well.....they call you lazy.

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  29. Noah - I feel like there's a whole dimension missing here.

    As a basis for opportunity, we need a society in which effort can produce affluence. But economic opportunity has much more to do with the constraints in the system than with the idea of work or effort.

    A person who complains of a lack of opportunity is really complaining that many of the channels for expending effort in the system are not available to him or her.

    Instead of rolling a die to determine income, imagine rolling a die to determine how many channels for effort are available to you.

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  30. James Edwards1:51 AM

    It's not a matter of hard work, but rather the optimal pairing of ability and work.

    Imagine we have two people. The first is born into a very wealthy family. He is at best of average intelligence and has very little self discipline. He is an alcoholic and a cocaine user. He gets into a prestigious Ivy League school because his father went there and donated a large sum of money to the university. His politically well connected family keeps him from having to serve in a war. The person goes on to failed business after failed business, but working the law manages to make large amounts of money off each failure. This person is making large amounts of money and not contributing at all to the wealth of the country.

    Now imagine a really smart kid who studies hard, gets good grades, and has the potential to make a huge contribution to the lives of millions. He can't afford to go to college but sees the GI bill as a way to realize his dreams. He heads off to war and is killed.

    The point of the stories is to illuminate what is meant by opportunity. When opportunity stagnates, we get more of these kinds of stories and the country is worse off. Opportunity is an important economic factor because lack of opportunity means sub optimal allocation of resources.

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  31. This comment has been removed by the author.

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  32. This topic brings up something that the upper class doesn't want to admit - they *hate* the lower class. Someone who doesn't have a college education and works in a factory is equivalent to an untouchable in the Indian caste system. Sub human.

    True or false?

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  33. Perhaps I could offer some additional hypotheticals:

    1. Smith is looking for a job, but there aren’t many. Then, an entrepreneur member of the 1% invents a new gadget that is highly demanded. The entrepreneur builds a factory in the proximity of Smith and puts out “help wanted” signs on the lawn. Smith’s opportunities have increased.

    2. Smith believes he has perfect free will. He believes he is 100% responsible for achieving or failing to achieve his goals. He is then given the chance to leave his native country of North Korea to move to the US, because it is claimed there are more “opportunities” there. He refuses, noting that so-called "opportunities" are a function of circumstances, and circumstances are a function of luck. He doesn’t rely on luck: he is 100% responsible for what he does.

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  35. Anonymous3:15 AM

    Opportunity: Drawing one eye on a daruma and knowing there's a chance you might get to draw the other.

    Land of Opportunity: Any place where the above can happen.

    'Nuff said!

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  36. economist8:23 PM

    "Those who are concerned about inequality see much of it as arising out of luck - the luck of being born with good genes or with rich parents (the "sperm lottery"), or the luck of buying a piece of real estate in the right place at the right time (just before oil is struck, or before a local real estate bubble develops). Those who are less concerned feel that wealth is a reward for hard work. In this view, redistribution of income not only takes away incentives for work and savings but is almost immoral, for it deprives individuals of their just rewards." Joseph Stiglitz, Making Globalization Work.

    I think this somehow explains why some people think that America is still a "land of opportunity" (those who believe income inequality comes from hard work), while some others complains about intergenerational immobility (those who think it's a matter of luck).

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