"Suppose that I drive through a two-lane tunnel, both lanes going in the same direction, and run into a serious traffic jam. No car moves in either lane as far as I can see (which is not very far). I am in the left lane and feel dejected. After a while the cars in the right lane begin to move. Naturally, my spirits lift considerably, for I know that the jam has been broken and that my lane’s turn to move will surely come any moment now. Even though I still sit still, I feel much better off than before because of the expectation that I shall soon be on the move. But suppose that the expectation is disappointed and only the right lane keeps moving: in that case I, along with my left lane co-sufferers, shall suspect foul play, and many of us will at some point become quite furious and ready to correct manifest injustice by taking direct action (such as illegally crossing the double line separating the two lanes).
It is easy to translate this situation into the language of welfare economics. An individual’s welfare depends on his present state of contentment (or, as a proxy, income), as well as on his expected future contentment (or income). Suppose that the individual has very little information about his future income, but at some point a few of his relatives, neighbors, or acquaintances improve their economic or social position. Now he has something to go on: expecting that his turn will come in due course, he will draw gratification from the advances of others—for a while. It will be helpful to refer to this initial gratification as the 'tunnel effect.'"
How Bernanke, Geithner and Paulson lulled the Democratic party into complacency?
Why Audacity of Hope turned into Fear of Impending Crises?
How Donald Trump broke the rule of Capitalism?
Why Bernie's rhetoric is being adopted by new Democratic leaders?
Why China's tolerance for Income Inequality is so high?
Hirschman's basic proposition (1973): In the early stages of economic development, when inequalities in the distribution of income among different groups of society (classes, industries and regions) are prone to increase sharply, it is likely that the tolerance for such disparities will be very high. To the extent that such inequalities are conducive to further divergence in an almost linear or providential fashion. But, he reminds us that such disparities could be liken to credit that falls due at a certain date. It is extended that eventually the disparities will reduce again. If this does not happen, there is bound to be violent revolution or peaceful re-distribution of wealth.
The tunnel effect, described in the first two paragraph, operates because the advances of others provide positive signal about the external environment; receipt of this signal produces gratification and this gratification, overcomes or at-least suspends, envy.
For example, during the cyclical upturn, someone I know is getting his job back, this will provide me gratification that will suspend any possible envy, for the positive news is a confirmation that better times are under way for me also.
As long as the tunnel effect is strong, both those who have become richer and those who have not, feels better off. According to Hirschman, distribution of the new incomes generated by growth will be preferred over egalitarian distribution of wealth. The income inequality will not only be politically tolerable, but it would be desirable for social welfare.
Two phases of Integration and Revolution:
1. "During a first and all-round paradoxical phase, frustration and continued alienation are the lot of the upward bound, while the non-mobile derive satisfaction from the anticipation that matters are bound to improve pretty soon. The non-mobile see only the improvement in the fortunes of the mobile and remain totally unaware of the new problems being encountered by them."
2. The Second phase is symmetrical switch. "The upwardly mobile become integrated, whereas the non-mobile lose their earlier hope of joining the upward surge and turn into enemies of the existing order. The non-mobile may experience the turnaround from hopelessness to disenchantment, while the mobile are still disaffected. This situation clearly contains much potential for social upheaval."
Case Study 1. How Bernanke, Geithner and Paulson lulled the Democratic party into complacency?
J-Hypothesis was introduced in 1962 by American sociologist James C. Davies, who believed that social and political unrest was precipitated by a brief period of sharp decline in economic development after a prolonged period of economic growth and improvement. In 2008, Bernanke, Geithner and Paulson, understood the possibility of social upheaval after the great financial crises, they reacted promptly and saved the world from the political or social crises.
On the other hand, Hircshman's hypothesis is not easy to understand and economical decay happen through the passage of time; "the rulers are not necessarily given any advance notice about its decay and exhaustion, that is, about the time at which they ought to be on the lookout for a drastically different climate of public and popular opinion; on the contrary, they are lulled into complacency by the easy early stage when everybody seems to been joying the very process that will later be vehemently denounced and damned as one consisting essentially in 'the rich becoming richer.'"
Conditions and Characteristics of the Tunnel Effect.
In what kind of societies and countries, the tunnel effect arise and gather strength? What are the conditions under which it will last for a substantial time period or, on the contrary, decay rapidly and turn into the opposite,namely disappointment, alienation, and outrage at social injustice?
A. The Tunnel Effect, Empathy, Trust and Homogeneity:
1. The Tunnel effect could arise in a unitary, homogeneous or countries with high trust among population. For the Tunnel Effect to be very strong (or even to exist), the group that does not advance, must be able to empathize with the group that does move ahead.
2. "If, in segmented societies, economic advance becomes identified with one particular ethnic or language group or with the members of one particular religion or region, then those who are left out and behind are unlikely to experience the tunnel effect: they will be convinced almost from the start of the process that the advancing group is achieving an unfair exploitative advantage over them. The non-mobile group may thus make the prediction opposite to that implied in the tunnel effect: as a result of another group’s advance, it will expect to be worse off." Capitalism would not be the strongest form of economic model for growth in such countries. According to Hirschman, Socialism is also not a suitable option. The policy makers should focus on increasing trust, communism, positive nationalism and create positive imagined communities.
3. "A variant of a segmented society in which economic progress becomes largely identified with one domestic segment is a society where most emerging economic opportunities are created or seized by foreigners. Once again, the tunnel effect will not prosper in such a situation."
B. The Curse of Tunnel Effect and Homogeneous Societies:
According to Hirschman, "the greater tolerance of these more homogeneous countries for inequality has a real and possibly fearful price. As we know, the greater the tolerance, the greater is the scope for the reversal that comes once the tunnel effect wears off (unless the inequalities are corrected in time). In this fashion a somewhat counter intuitive conclusion is reached: the more homogeneous the country, the more prone will it be to violent social conflict in the course of development unless its leadership is uncommonly perceptive and able." The the evidence favoring the hypothesis could come not from actual revolution, or similar civil strife, but from protracted lower class alienation such as is found in Argentina, France, and Italy."
National Homogeneity: It could be defined based on static characters such as unity of race, language and religion. But the most effective factor is historical experience that has been shared by all members of a group. Wars and revolutions are frequently such experiences, therefore, the tunnel effect is strongest after war and post-revolutionary societies.
We conclude that in such economies, The result can be an irony-laden historical cycle, "the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive re-circulation." (Will and Ariel Durant).
Hirschman also noted that US has accepted a long acceptance for income and wealth in-equality due to their history - "the collective leaving behind of Europe with its feudal shackles and class conflicts".
C. Why traditional societies such as China and India, are conducive to Tunnel Effect or Existing Imbalances?
The presence and strength of family bonds has a direct bearing on the conclusiveness of Tunnel Effect. In many cases, "the advances of others will generate hope not so much for oneself as for one’s children". The hope that my children will have a better life than I did should improve my own welfare in any event, but it will do so with particular force if I expect my grown-up children to be living with me, to share in the expenses of the household, and eventually to support me in my old age. From this point of view, then, traditional family arrangements facilitate the operation of the tunnel effect and turn out to have some development-promoting potential. "Provided it is not highly segmented, “traditional” society is generally in a better position than its modern counterpart to take advantage of the tunnel effect."
D. Why countries with High Trust are vulnerable to Economic Depression?
Changes in the income of B lead to changes in A’s welfare not only because A’s relative position in the income scale has changed, but because changes in B’s fortunes will affect A's projection of his own future income.
Again, Tunnel effect is defined as: The advancement of B leads A to predict an improvement in his own position as well.
"Mention has also been made of the diametrically opposite situation: a deterioration in B’s situation leads A to be apprehensive about his own, as is the case in a spreading depression. Is a mixed case conceivable? In other words, could A come to feel under certain circumstances that an advance on the part of B is likely to affect his own welfare negatively?
Actually this sort of prediction is not too far fetched: it is likely to be made in a society who members are convinced that they are involved in a zero-sum game because resources are available in strictly limited amounts." Examples - Greece, Japan and Iceland
E. The Perception of Success of others, Theories of Success and the Tolerance for Income Inequality and Tunnel Effect:
1. Success by Luck: "If individual advances are attributed primarily to chance, the success of others will occasion the tunnel effect; for the next time fortune strikes, I may well be the lucky one. Hence, the belief that the world is governed by chance, ordinarily considered so harmful to sustained development, has something to recommend itself to the extent that the tunnel effect is considered a valuable."
2. Success by Nepotism, Favoritism or similar Unfair Practices: There will be hardly be any initial feeling of anticipatory gratification among those who are not participating in the division of the spoils. Tunnel Effect will never arise.
3. Success by Merit: "Those who are left out would then blame only themselves for their lack of advance. They could, as a result, either simply defer to the more successful members of their community, or they might envy them for being more richly endowed, or they could try to emulate them by redoubling their own effort." In this case, therefore, the result would be rather indeterminate, and one needs more information.
4. Success by not qualities, but defects: One often rationalizes his own failure to do as well as others in the following terms: “I would not want to get ahead by stooping to his (ruthless, unprincipled, servile, etc.) conduct." It makes it possible, of course, for those who are not advancing to rest content with their own station in life. Is France a good example?
But it could also happen, "that the next time around they will change their conduct and be a bit more ruthless, unprincipled, servile, etc., than hitherto. To the extent that it is easier to be servile and unprincipled than gifted and hardworking, attribution of success of others to their faults rather than to their qualities may actually facilitate the operation of the tunnel effect."
F. The role of Types of Decision Making in The Perception of Success of others
1. Decentralized Decision Making: If decision making is perceived to be largely decentralized, individual advances are likely to be attributed to chance, or possibly to merit (or demerit). Decentralized decision making is conducive to Tunnel Effect and hence, increasing income and wealth in-equality. It is indeed characteristic of market economies.
2. Centralized Decision Making: "When decision making is known to be centralized, such advances will be attributed to unfair favoritism or, again, to merit. To the extent that merit is not a likely attribution, Centralized-decision-making economic systems have come typically into the world because of excessive inequalities existing in, or arising under, decentralized systems. It is interesting to note that they will strain to be more egalitarian not just because they want to, but also because they have to: centralization of decision making largely deprives them of the tolerance for inequality that is available to more decentralized systems." This is the reason why, Bernie's rhetoric is being adopted by new Democratic leaders.
"For example,the tolerance for inequality can be expected to decline when a capitalist economy becomes more oligopolized and bureaucratized. An upsurge in populist sentiment has usually been attributed to the greater concentration of wealth that has sometimes been characteristic of such a period.But the tolerance for inequality may decline even without such concentration,simply because those who are excluded from advances no longer perceive such exclusion as temporary bad luck, but as an inevitable or even calculated effect of the “system.”
Case Study 2. How Donald Trump broke the rule of Capitalism?
1. Decentralized Decision making to Centralized Decision making - Donald Trump used the existing imbalances, income inequalities and wealth inequalities of different regions and groups for his advantage. People who were ready to believe in Capitalism and Tunnel Effect, were spoiled by central rhetoric: 'The System is Broken'. The American people will not be conducive to Tunnel effect or be able to tolerate income/wealth inequalities for a long time.
Disturbed the National Homogeneity and Increased Mistrust among Americans: 2. Donald Trump increased mistrust against Political Parties, Media, Corporate and NGOs. As mentioned before, for strong Tunnel effect and market driven unbalanced, trust is very important among the population.
3. Provided Catalyst to In-Equality of Wealth and Income with conducive policies: Instead of reducing the exposed imbalances or income inequality, Donald Trump promoted it with conducive policies.
4. Increased vulnerability to J-Curve Hypothesis: As the monetary and Fiscal policies are already exhausted, America is exposed to social and political unrest.
Case Study 3. Trust and Fractionalization (2003) and Wealth and Income Inequality (in 2018).
Due to lack of time series data of the following variables: 1. Trust, 2. Fractionalization and Inequality indices. My analysis is not complete and is only there to provide information on how the Wealth and Income Inequality evolved in various societies.
1. List of Countries based on Ethnic, Religion and Linguistic Fractions & Trust among Population-
Trust: Sourced - Inglehart et al. (2000), Zak and Knack (2001), Inglehart et al. (2004)
Ethnic, Linguistic and Religious Fractionalization - Alberto Alesina; et al
2. Countries which had high trust in the society in 2003 and Income and Wealth Inequality in 2018 - This will help us gauge, if Tunnel effect was present or not.
1. China, US and Indonesia had the highest tolerance for Income Inequality ~ Showing presence of Tunnel Effect in the last 15 years. This tolerance of inequality has given these countries highest growth vs its peer economies.
2. Sweden, Finland, Denmark, Norway, Netherlands, Ireland, Canada ~ High Trust but policy makers and population were not tolerant to Tunnel Effect. More study is needed.
3. Greece, Japan and Iceland - proves Hirschman's hypothesis that how societies with high trust could suffer from depression. This is reverse of Tunnel Effect.
The Gini coefficient - measures the inequality among values of a frequency distribution (for example, levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of 1 (or 100%) expresses maximal inequality among values.
3. Countries which had low trust in the society in 2003 and Income and Wealth Inequality in 2018 - This will help us gauge, if Tunnel effect was present or not and whether, Tunnel Effect and higher imbalances caused political revolution or not?
1. Brazil, Peru, Philippine and Bolivia ~ All had a crises due to low trust among people and rising inequality and wealth concentration. This validates Hirschman's Tunnel Effect Hypothesis.
2. Romania and Slovenia low trust but low wealth concentrations~ peaceful protests against the political parties ~ due to corruption and 2012 European Crises. This also validates Hirschman's Tunnel Effect Hypothesis.
Case Study 4. Awaiting the Future: The Global Trust Crises and Global Wealth Inequalities
1. Trust in Retrospect
Source: EDELMAN TRUST BAROMETER
2. Defining Trust Inequality and Trust Gap -
Trust Gap = Trust on the system by the Informer Public - (minus) Trust on the system by the General Online Population.
Source: EDELMAN TRUST BAROMETER
3. Awaiting the Future: Wealth Inequality and Trust Inequality (2019):
Source: EDELMAN TRUST BAROMETER (2019)
Case Study 5. Tunnel Effect, J-Hypothesis, The next Recession and the Fate of American Politics
A vast systole and diastole of concentrating wealth and compulsive re-circulation
Source: Bridgewater Associates , LP
Rise in Income Inequalities
Source: Bridgewater Associates , LP
Trust is collapsing in America.
Source: Bridgewater Associates , LP
Awaiting for their turn - more and more folks are expecting that they will be able to assimilate to the 40% & 10%.
Impatient but there is still a beacon of light (all hail Donald Trump).
Next Recession - 'Hard rain's a gonna fall' or 'With God on Our Side'?
Source: US Department of Commerce, World Economic Forum & National Bureau of Economic Research
Source, Ideas and Quotes - The Essential Hirschman - Albert O. Hirschman
Disclosure: For informational and educational purposes only & all opinions are my own.