"Don't use my data" or "Stop talking about me!"

People are freaking out over Facebook and privacy issues on social media. I have a contrarian take on this issue. When people say things like “Don’t use my data” and “Don’t violate my privacy” I hear something more like “Don’t talk about me, even if you’re discussing relevant information.”

I totally understand the creep-out factor. The idea that somebody is collecting information about me and potentially finding ways to use it against me is unsettling. I’m also sympathetic to “big brother” concerns, the notion that government agencies are using network analysis on, say, Facebook friend lists to identify networks of drug dealers. Obviously if this data is being used to help government do things that government should not be doing, that’s a problem. And of course companies should hold themselves accountable to their user agreements. If they promise to keep your data private to some standard they’d darn well better do it or they’re in violation of contract. And finally, there are obviously some reasonable expectations about privacy. If someone is snooping through your private e-mails looking for compromising information or setting up video cameras around (or inside!) your house, that’s a privacy violation by any reasonable standard. (On the other hand, what about a single e-mail leaked deliberately because the compromising information in it is relevant? What about incidental camera phone video that happened to catch something incriminating through your window?) [This paragraph is my big hedge. If you get to the end and you're mad at me and thinking "Yeah, but...", please re-read and see if I acknowledge/admitted your point already.]

That said, a lot of the information that exists about you is fair game. Is Jimmy friends with Johnny? Does Jimmy “own” that information? Does Johnny? If third parties are discussing whether Jimmy and Johnny are friends, are they “taking” information that belongs to one of the two parties? Not really. They’re merely talking about them. Whether third parties are talking about Jimmy and Johnny because they want to direct targeted ads more effectively (“If they are friends, I should send this ad to both because it increases the odds that a purchase will be made.”) or because a link between them compromises them (“We have a witness’s description roughly matching Jimmy and one matching Johnny; if they are friends it dramatically increases the odds that they were both accomplices in a crime.”), it seems that the knowledge of this connection is just information and doesn’t particularly “belong” to anyone.

Let’s face it: You form negative opinions of people based on their social media posts. The friend with an itchy trigger finger for the “share” button. The friend with despicable political posts. The friend who airs dirty laundry about family members, right there for all the world to see. You probably get fairly accurate impressions of people’s intelligence, conscientiousness, impulsiveness, manners, and so on, and certainly some of these opinions are negative. Is it unfair for you to judge people based on the information you know about them? (That last sentence strikes me as "Is it unfair of you to be a human being?") Are you using their data “against” them? What if you use these opinions to decide not to socialize with someone? Or one of them asks you for a loan or asks you to do some business venture with them? Are you supposed to ignore your impressions of this person’s character?

Now suppose you’re hiring someone to do some kind of work inside your home. A cleaner, a contractor, maybe a babysitter or nanny. You’d snoop, wouldn’t you? You’d Google and Facebook search their names. If you found something compromising, you’d consider it relevant. And here I'm not just saying, "You'd be tempted to cheat on a well-justified rule when it benefits you personally." We can all agree that norms and laws against theft should exist, even if I can concoct some silly hypothetical where you are tempted to steal. No, my point here is that it's good to snoop. It's good to keep people with questionable ethics from entering your home. It's good to keep people with impulse control problems and criminal histories away from your children. For some of these kinds of decisions, it's probably better if we as a society have "pro-snooping" rules and norms. We want to identify risk factors for various social problems so we can prevent them. This can mean unfairly flagging someone as high-risk just because on paper they look similar to other high-risk individuals, even though that particular person will not cause any problems. It's unfair to some individuals. But it means that society gets less child molestation, because only low-risk individuals are put in charge of small children. Or it means that society as a whole has functioning financial markets, because people who are likely to repay their debts can borrow money easily, and people who aren't likely to repay either don't get to borrow money or can only borrow at high interest rates that make the loan profitable.

I fully understand why this makes people seethe with indignation. "How dare someone use my information against me? How dare they snoop and use their ill-gotten findings in a way that compromises me?" But it's not really your information. The entities you are dealing with (potential employers, creditors, insurers) haven't taken anything from you. They are merely talking about you, and mostly they are discussing relevant information. 

I don't have a fully worked out theory of what should be private/protected information and what should not be. I like the idea that people with compromising histories can get a second chance at life. Then again I also think the right kind of data mining can identify those who will benefit most from a second chance. The solution here could be more snooping and more data crunching. We as a society would get more second chances, but at the expense of permanently marking others as irredeemable. I also like the idea that certain kinds of information are below a threshold and get ignored. (Low-level, infrequent swearing and occasional references to alcohol on social media don't register at all, but if they happen above some threshold they start to become relevant.) But, once again, a good enough dataset will allow one to determine this threshold empirically. The learning algorithm will itself tell you that the information isn't relevant...or perhaps that it is.

______________________

I wanted to say something about big, faceless corporations being different from individuals. We might sympathize with the snooping parent who is selecting a safe nanny for their children, but not with the big insurance company with millions of customers, or the mega-bank that holds millions of mortgages. Is it a big deal to tell them "no snooping?" Isn't there a different standard here because they are so big and faceless? I say no. As bureaucratic and automated and mathematical as the risk-pricing is for banks and insurers, these institutions are on the hook for you. Buying an insurance policy is saying, "Will you be on the hook for hundreds of thousands of dollars if I screw up and mangle someone with my car?" Buying a house is a similar deal. Imagine pleading with an individual to write you such a contract. They'd say something like, "Sure maybe, but I'm going to ask around about you so's I can vet you first." They'll ask former creditors if you'd repaid your loans, or ask former insurers if you'd made a ton of claims (or perhaps never made one). I think most people would think this kind of "snooping" is basically fair, and I don't really think changing the intermediary from an individual to a big company changes the example in any relevant way. If anything, the big company will make more accurate judgments based on a much larger data set; the individual will make bad choices based on a small sample of former dealings with customers/borrowers.

When Anecdotes Are Like Data

In Albion's Seed by David Hackett Fischer, there is a long description of Andrew Jackson's courtship or his wife:

Rachel Donelson Robards was unhappily married to another man at the time. A series of complex quarrels followed, in which Rachel Robards made her own preferences clear, and Andrew Jackson threatened her husband Lewis Robards that he would “cut his ears out of his head.” Jackson was promptly arrested. But before the case came to trial the suitor turned on the husband, butcher knife in hand, and chased him into the canebreak. Afterward, the complaint was dismissed because of the absence of the plaintiff-who was in fact running for his life from the defendant.  Andrew Jackson thereupon took Rachel Robards for his own, claiming that she had been abandoned.

He goes on to say (paraphrasing this time because I cannot find the exact passage): For a cultural historian, the events themselves were not as informative as the reactions to them.

Some people have overlearned the lessons of modern science and statistics. Correlation is not causation. Rely on data, not anecdotes. The plural of "anecdote" is not "data." All excellent cautions. But if these are overdone, perfectly salient information can end up being ignored.

If a man abducts a wife and they go on to live happily ever after, that is merely an anecdote. But if a man does this in full view of his community, and the community approves, then you have some kind of signal that this sort of thing is normal and accepted.

If one man threatens another man over a jealous rivalry (and that's all the information you have), it doesn't mean much. It's just a single data point, probably an outlier, probably uncommon. But if the community approves of this kind of threatened violence (as in the man is not sanctioned by social norms or official legal punishments), then you know quite a lot more about the community from this apparently singular story.

I try to interpret news stories with this lesson in mind. A single nervous cop shoots an unarmed man. So what? Does this imply that there is a serious underlying problem? No, not really. But suppose the community almost unanimously backs the officer. Suppose that existing legal traditions exonerate him, almost reflexively. Change the example slightly. Suppose it was not just a nervous cop who perhaps thought they saw a gun. Suppose instead it was a cop who lost his temper and fired on a fleeing suspect, then attempted to plant a gun on him. And imagine that community norms and legal institutions still reflexively support him. I think you can fairly infer something about the community and underlying institutions; someone dismissing this story as "just an anecdote" would be a little bit obtuse.

Or imagine this is a case of a botched S.W.A.T. raid in which someone is  horribly injured or killed while the cops are serving a drug warrant. You don't necessarily have to know that in similar cases the cops are almost never charged with a crime or found civilly liable. You don't require a large sample of similar events to draw some useful conclusions. If a judge signs a warrant allowing a team of heavily armed police officers to raid a residence, you know that this kind of behavior is officially sanctioned. You can probably infer that this is some kind of formal practice that happens regularly without actually pulling a big data set together. On the other hand, if a team of armed burglars raids a home, it's just an anecdote. This singular event doesn't tell you anything about the likelihood that a similar burglary will happen in the future in the same community.

Too often I see police misconduct get written off as "a few bad apples." If every news story about shocking police conduct were about individual cops acting alone, I could believe it. But some of the stories I see implicate entire departments, and for that matter the communities they work in. These stories often involve police working in concert and official support for the police's questionable behavior. Radley Balko gives this example in his book Rise of the Warrior Cop: White police officers serving in a particular black community would often say racist things over the police radio. Balko gives a couple examples, which he acknowledges might be written off as outliers. But he points out that the fact they were saying these things over police radio implies that they felt comfortable doing so. They assumed people who might be listening would be sympathetic and share their values. Otherwise, presumably, the racists would keep their racist thoughts to themselves. You wouldn't necessarily require a full transcript or representative sample of all radio chatter to prove some kind of systemic racism, though of course that kind of information would be relevant, too. (I believe the example was taken from the 1970s, so I should caution that it has only glancing relevance to today's discussion of race and policing.) Even a few examples of this kind can be strongly suggestive.

Another random example comes to mind. Suppose one man beats another man to death by taking a rock to his head. Then change the example and suppose an entire village decides to bury a man up to his neck and throw rocks at him until he dies. I think in the second case you can infer quite a lot more about the cultural traditions of that society, and it has nothing to do with having "a larger sample size".  (Larger sample, as in more people involved. In a statistical sense these are really not independent observations anyway but are highly correlated. A public stoning is still a single observation.)

Other examples? I think this is a useful concept, even if I am wrong about police misconduct being a systemic problem. (That's not the point of this post!)

From Locked In by John Pfaff

This is the intro for chapter 7 of this excellent book:

The emphasis current reform efforts place on reducing punishments for people convicted of low-level nonviolent crimes is understandable, but it should be clear by now that the impact will be limited. Any significant reduction in the US prison population is going to require states and counties to rethink how they punish people convicted of violent crimes, where “rethink” means “think about how to punish less.” 

A simple example makes this clear. Assume that in 2013 we released half of all people convicted of property and public order crimes, 100 percent of those in for drug possession, and 75 percent of those in for drug trafficking. Our prison population would have dropped from 1.3 million to 950,000. That’s no minor decline, but this sort of politically ambitious approach only gets us back to where we were in about 1994, and 950,000 prisoners is still more than three times the prison population we had when the boom began. Or consider that there are almost as many people in prison today just for murder and manslaughter as the total state prison population in 1974: about 188,000 for murder or manslaughter today, versus a total of 196,000 prisoners overall in 1974. If we are serious about wanting to scale back incarceration, we need to start cutting back on locking up people for violent crimes.

Kind of sobering. And it knocks the wind out of certain kinds of criminal justice reforms. Pfaff is clear that he personally supports many of those kinds of reforms. And anything  reform that releases thousands, tens of thousands, or hundreds of thousands of harmless prisoners is certainly a good thing. But we should be honest about how little such reforms would reduce "mass incarceration". Geez, look at me hedging and back-peddling after presenting the raw numbers here. Half the book is like this. "This reform would only release a few thousand prisoners...that's not to say we shouldn't do it! By all means, let's do it. It just won't solve our problem."

I think there would be knock-on effects from legalizing drugs (in particular, legalizing the drug markets) that would affect other categories of crime. But we'd still have a lot of violent offenders who are violent in more conventional ways, and we'd have to make an honest decision about how to punish them.

Made-up Social Problems

While writing this post about income inequality, I think I hit on a useful distinction. There are different kinds of social problems. Some are plainly real. An identifiable party is harmed, there is an identifiable malefactor, and the causal chain between the injuring party’s action and the injured parties harm is clear. Crime. Pollution. Mental illness (though in this case there probably is no malefactor). Unemployment (ditto).

Some social problems are basically made-up. Fake. Bullshit. They are structural features of society that exist in some aggregate sense and that some people find distasteful. But there is no malicious actor, no identifiable injury, no clear causal chain between on person’s actions and another’s harm. Income inequality is a good example. If you look at how people earn their income in an economy, you see a bunch of pairwise interactions between individual decision-makers. “Should I hire this person for such-and-such a wage? Yes!” or “Should I take this job for such-and-such a salary? Yes!” The hiring only happens if both parties agree to the transaction. Presumably the employer wouldn’t hire the person if his productivity didn’t justify his salary, and presumably the employee would not accept the offer if he could get a better deal elsewhere. We know that both parties benefit (at least on expectation, ex ante) because the transaction occurs. For all the talk about workers being exploited by their employers, those workers are free to go work elsewhere. If they don’t, it means their current “exploiter” is offering them a better deal than anyone else at the moment. (All things considered; of course there are non-wage perks or conditions that might make a lower-paying job more attractive than a higher-paying one.) If the employer is paying a surcharge to hire the worker (a surcharge above the worker's next best option), and the worker agrees to the terms, then it's very strange to describe this transaction as exploitation. 

“Trade deficits” are another bullshit social problem. It’s not even a useful concept, even as a summary term. We don’t have a “trade deficit” with China. We have billions of pairwise trades with China. Each of these trades is beneficial to both parties to the trade, otherwise (once again) the trade would not happen. Because of some stupid accounting tricks, some of these exchanges count money flowing in one direction and not the other. If I buy a $10 toy from a Chinese manufacturer, and the manufacturer turns around and invests $10 in an American company, that counts as $10 toward the “trade deficit” even though everybody benefited and everybody got what they wanted. It gets dumber. If a Chinese person buys my home for $500k and keeps it as a rental property, the trade deficit grows by $500k. But if the same person buys a manufactured home for $500k which gets shipped to China, the trade deficit doesn’t grow. In both cases a Chinese citizen bought something worth $500k from an American, but for some arbitrary reason one gets counted as an “export” and the other doesn’t. President Trump keeps harping on the multi-hundred-billion-dollar “trade deficit” with china. But it’s all noise to me, because the concept itself is completely meaningless. There is no injured party here. There’s no aggregate harm, no “emergent property” that exists on the aggregate scale that doesn’t exist in the individual trades. It’s a “problem” that was conjured out of thin air by an accounting trick (perhaps an unintentional accounting confusion?). Framing this as a “deficit” is backwards. If we’re getting a higher aggregate value of stuff shipped to us from China than the aggregate value of stuff we’re shipping to them, I’d call that a "surplus" if anything. But I probably don't want to call it that, either. A more helpful framing is that everyone is basically getting what they want because each individual trade is voluntary.

“Gentrification” seems like another one. If a bunch of upper-class people are moving into your neighborhood and you own your home, good news! You can sell your home for a higher value than what you bought it for and move out. If you rent and the cost of rent is going up, I guess that’s bad for you but it’s good for the person who moves into your apartment. If you don’t own your apartment, you hardly have a legitimate grievance against future renters who outbid you for it. That future renter has just as much claim to that apartment as you do. (Greater claim, actually, if they can manage to outbid you.) You can heap scorn upon the landlord for raising rent on his tenants, but the landlord is really just an intermediary in the market for housing. He’s responding to a market force (the greater demand for housing in an area), not creating it. He’s not simply “deciding” to raise the price of rent. Even if we can imagine a few hold-out "altruistic" landlords who don't raise their rents, they won't hold down prices for long. Their properties will be purchased by landlords who are savvier about market values and profit margins, and the "altruistic" landlords will find it very hard to resist their offers to buy them out. Rising rents are the result of market forces, not individual decisions. It’s not always clear that this process is bad, either. Can’t renters usually find similarly attractive housing elsewhere? (When I was in grad school I knew plenty of people who moved each year to a new rental property, though granted there were lots of people who stayed put for their entire grad school tenure.) Some people see “gentrification” as an insidious force: rich people are kicking poor people out of their homes (or something). Really, it’s just the economic process of stuff being shifted to its highest valued use and away from a lower-valued use. Adjusting to a changing world can be rough, even wrenching. But there’s no “malefactor” and no “externality” in any meaningful sense.

I can think of other examples. Stories about declining cities or communities always strike me this way. Does Detroit feel sad that it's "dying" or declining in population? No, of course not. It's conceivable that every single resident of Detroit (or any other declining community) could be made better off by moving to another city. There is no entity, no communal hive-mind called "Detroit", who would feel any pain. Some individuals might feel harmed. Property values decline because nobody wants to live there, there is less sense of community because all the people are leaving, there is less to do because the population isn't big enough to support little niche stores (or any stores at all perhaps). Still, I'm uncomfortable classifying this phenomenon as a "social problem" in the same sense that crime and pollution are social problems, because "problem" implies that there is a solution. (Which in this case means, what, enticing people to stay rather than leave? Thwarting the plans of individuals who see broader horizons elsewhere? All to preserve the comfortable, settled lives of people who prefer not to see anything change? Such a policy would create real problems in order to solve a fake one.)

This isn't an exhaustive list. I'm sure other examples will occur to me later. There are a lot of cases where people bemoan that "The world is this way, and I wish it were this other way." But not all of these are instances of real problems. Many of these "problems" are just instances of people wanting to re-engineer the world to meet their aesthetic preferences.

Private Solution to the Education Credentials Arms Race?

Bryan Caplan's new book The Case Against Education argues for educational austerity. We're trapped in a credentials arms race, so let's at least stop subsidizing people to get better credentials than their competitors. If you buy Caplan's argument that education is mostly signalling (as I do), then austerity makes sense. But fat chance we'll convince a large enough coalition of voters to make any kind of difference. Just how many libertarian, wonkish, numerate, cautious thinkers are there in the world? The overlap of that Venn diagram gets smaller with each criterion we add.

Geoffrey Miller and Tucker Max might have an answer that does not require large change in public policy. In their book What Women Want (aka Mate, the title it's sold under on Audible where I purchased it), they offer a provocative recommendation to young men who are college bound. Wait a few years, they say, and go when you are 24 or so. Their rationale is maturity. The 18-year-old brain (particularly the 18-year-old male brain) is just not optimally suited for long hours of study. Geoffrey Miller is an evolutionary psychologist. I presume there is some scientific merit to his suggestion. Having once been an 18-22 year old male, it strikes me as true that some important maturation happens during this time. (Stop snickering. I said maturation!) His book argues that instead of going to college young men should find employment, travel, indulge hobbies, etc.  Here is where it gets provocative. In addition to being more mature and better able to cope with a college curriculum, young men will be more attractive to their female classmates.

An 18-year-old male entering college has basically zero social status. Maybe he's done something interesting, or maybe he's a hotshot sports star. But more likely he has nothing interesting to say and nothing to offer the young women he meets. If he's gone off on his own and lived a life for a few years, that changes. He know something. He's managed to survive at work for at least a short career. He has colleagues and acquaintances. He can legally purchase alcohol. Maybe he's even traveled a little and seen parts of the world that other young people are curious about. A short break between high school and college won't exactly make him the Most Interesting Man in the World, but it will give him a leg up over his useless 18-year-old self.

For a lot of young men, this is probably bad advice. I for one wouldn't have found anything better to do with myself. College was the best choice for me. And I've seen the "screw college, I'll go my own way" approach backfire badly. But for a large number of young men who only go to college because they're "supposed to", or because it's free to them, this consideration might dissuade them from making a bad investment (and thus avoid forcing society to underwrite that bad investment). Better yet, many of these young men might "find themselves" in the real world and forego the college experience altogether. It might nudge society to a better equilibrium, where people don't feel like they need a college degree just to compete and employers don't demand a college degree just because every candidate already has one. If enough young people find Miller's suggestion persuasive, there could be a big shift toward that equilibrium without a major change in public policy.

All this feels a little bit creepy. Not the part about telling young men how to make themselves more attractive to women. The book does this in a totally non-creepy way. Despite the title (the original and the alternate), it is not a "pick-up guide" (something I personally would have zero use for). It's more like a self-improvement/self-help book. It doesn't say, "Talk this way and women will like you; say these magic words and women will give you consent." The book is very blunt with the reader that they will have to do some serious work to make themselves attractive to the opposite sex. Get in better shape, because that actually makes you healthier and more worthy as a mate. Clean your home, especially your kitchen and bathrooms, because this actually gives visitors a more pleasant experience. Get a well-fitted wardrobe and groom yourself because it actually shows people that you give a shit. Work hard at your career because success in that realm actually proves that you can navigate the social world. Take up a serious hobby because it shows you have real self-discipline. The book frequently uses the phrases "social proof" and "material proof", referring to observable signals that you are a competent person and have something to offer as a companion and potential father. Having high status at work or with your group of friends (if they are quality friends!) gives you social proof. It's not that women are petty socialites trying to climb some meaningless social hierarchy. They just want some kind of proof that you're not a creep. Having a decent job and income is "material proof". Women aren't just looking for a sugar daddy; the book explicitly argues against "the more wealth you have the more attractive you will be to women" because it's plainly not true. They just want some kind of proof that you can navigate a career and provide for a family. Eighteen-year-olds entering college typically have none of these social or material proofs, but someone who has a short career already behind him has some.

The book takes an evolutionary psyche approach to the dating world. (Anyone who has read The Selfish Gene or The Blank Slate will see familiar themes; people who have not read these books or something similar might be squeamish about the following paragraph.) Women want proof of the above-mentioned traits because they want healthy children who will grow up to have similar traits. In the evolutionary psyche story, if a woman failed to do this she'd give birth to losers who would fail to carry on the gene line. If she's choosy about mates and picks only men who convincingly demonstrate desirable traits (importantly: in a way that is hard to fake), she will have high-quality children who will carry on her genes. It might be obvious that "You should clean your bathroom and the place where you eat so your date doesn't get grossed out" or "You should be in reasonably good physical shape to attract the opposite sex", but some young men probably need to hear it. Hell, some grown-ass men with families probably need to hear it. Even some very successful high-functioning adults probably need a gentle reminder now and then. It's not creepy to give these young men advice that, if actually taken, would truly make the world a little better. (It wouldn't just raise their relative status in an arms-race sense. A world with one cleaner bathroom is a slightly nicer world indeed!)

What feels creepy is enticing young men to solve a bad signaling equilibrium by promising them the attention of young women. Ultimately I'm okay with it. For many young men "delay higher education until you're mature enough to appreciate and benefit from it" is legitimately good advice.

I have some lingering doubts. If you take a break from your working career at ages 24-28, as opposed to 18-22, you are taking yourself out of the labor market at a point when you have more experience and your income is higher. This likely lowers your lifetime income, unless maturation causes you to really get a lot more out of college. If Bryan Caplan's signalling story is true then this is unlikely, unless maturation means you are simply more likely to finish college. Another point: most people don't go to college anyway. Sixty percent of working adults don't hold a college degree. (I think most people in my personal bubble would be surprised by this figure. Take a moment to soak it in, and contrast it with the fraction you'd get by surveying people you personally know and interact with.) So most people are already taking Miller's advice, just without the "go to college later" part. Spreading this advice more widely might encourage young men currently in the labor force to instead go to college, perhaps more so than it does to encourage young college-bound men to instead join the labor force. The net effect on college enrollment/completion is unclear. Still, my guess is that most young men are not even remote candidates for college and never will be. The advice to "Get a job, grow worldly, enter college when you are more interesting and mature" probably only appeals to people who would enter college in the first place. I'm sharing because I thought Miller's "delay college" advice was provocative and probably appropriate for a lot of young people currently considering college. If in a few years my own children are not absolute shoe-ins for college (and on sheer base-rates most kids aren't), I'll gladly share this thought with them.

Income Inequality: Who is the Least Cost Avoider?

A general principle in law and economics is that you want the “least-cost avoider” for any particular problem to be responsible for solving the problem. (There is a discussion of this topic starting on page 269 of David Friedman’s excellent volume Hidden Order.) The problem being solved here is usually some kind of “externality”, a cost imposed by one party on another.

For example, suppose I’m operating a noisy factory and there are nearby residents who are bothered by the noise. Maybe it would cost me $10 million to shut down my factory, but only $1 million (total) for the residents to sound-proof their homes, automobiles, and perhaps wear earplugs when they are outdoors. For society as a whole to function well, we don’t want to destroy $10 million in value when we can instead pay only $1 million. The noise-abatement should be done by the residents. They are the least-cost avoiders. Even if a judge rules that I am responsible for the liability, I can offer to pay the cost of sound-proofing the local residences.

Or perhaps it’s reversed: maybe I can sound-proof my factory for only $500k. I that case I am the least-cost avoider. Again, a judge could get the ruling “wrong” and tell the residents that they have to just lump it. The residents don’t have to sit there and take it, nor do they have to shell out the $1 million. They can offer to pay me $500k if I’ll agree to install sound-proofing. There are other solutions. Maybe the residents can simply move away, or they can just deal with the noise. There are also potential problems. Maybe people move close to noisy factories anticipating that they’ll have an opportunity to sue. We don't want to set up rules that encourage "lawsuit entrepreneurs." These are all things to consider when adjudicating externality problems, whether it’s a judge or the affected parties negotiating with each other, or perhaps a legislature setting rules and defaults. The point is you ultimately want the party who can solve the problem at the lowest cost to be responsible for implementing its lowest-cost solution.

 Enter income inequality. I’m not even sure what kind of social problem this is. It’s not really an “externality.” There isn’t a harm done by one party to another. It’s just a structural feature of society that some people find distasteful. A high-salary top executive is paid by an employer who values that executive’s contribution more than the salary, otherwise the employer wouldn’t hire that person. Both parties agree to the transaction, so we can presume both parties benefit from it. Both parties are better off for having each other. That is a net win for society. Third parties can take umbrage at these salaries for being "too high," but this is no more an externality than the moral revulsion and disgust felt by moralizing puritans (say, anti-gay or anti-pornography agitators). Sorry, but those very high incomes are easily justified by the underlying economics; they aren't some kind of mistake or "market failure" (a term that is increasingly used to mean "a feature of the world I don't like").

Nor are the low wages of low-earners "externalities" in any meaningful sense. Sure, we’d all love it if everyone were more productive and could command a higher salary. But some people simply don’t have the skills necessary to justify such a salary. Employers offer, say, $8 an hour to flip burgers because placing someone in that position adds at least $8 an hour to the company’s revenues. As much as we might bemoan the low pay of these workers, they do willingly accept these jobs. It’s still a win-win, even though it’s not quite as big a win as we’d hope (on either end of the transaction, BTW).

What we have here are voluntary pairwise transactions in which both parties to the trade benefit. Nothing magical happens when you aggregate them across the economy. Aggregating the distributional data and plotting it or fitting a Pareto curve to it or calculating a Gini coefficient doesn’t conjure into existence a “problem” that was not there in the original interactions. You could try to tell some story about how the little guy is getting “screwed” by big, powerful players, but this is usually a refusal to acknowledge the reality. Those low-wage and low-salary workers have inherently low productivity.  It’s not like their employers are making a huge profit off their backs. (Who do you think loses their jobs first in an economic downturn: low-wage workers or high-wage workers? Doesn’t the “low-wage workers are underpaid” theory predict the opposite? Shouldn’t employer be loath to let go workers on whom they’re reaping such a huge surplus? This stops being a mystery if we acknowledge that there is no huge surplus and the low-paid workers are probably being paid appropriately for their productivity.)

Forget all that for a second and let’s posit that “income inequality” is some kind of externality. Who is the least-cost avoider? It’s surely not the high salary earners. Are they supposed to monitor the effort of low-wage workers? Are they supposed to judge whether they are making a serious enough attempt to acquire education and meaningful employment, and then to perform adequately once on the job? Do high earners acquire a larger and larger “monitor, judge, and redistribute” workload as they move up the distribution? The “inequality” framing gets this wrong by trying to make high earners responsible for the poverty of low earners. It’s not just that this indulges zero-sum thinking (though that too is a pretty serious error); rather it’s that if the low-wage workers perceive a problem with their income they usually have many levers of control. There are many options for that person to increase their own income if the figure on their W-2 is too low. The individual income earner is the only person who can observe their own level of satisfaction/disappointment with their own salary. S/he's also the only person who can accurately judge the attractiveness of various options (as in "I could go back to school but it'd be so boring the wage premium isn't worth it" or "I could put in the extra effort at work, but meh I got a good enough thing going on right now.") The least-cost avoider is in most cases the low-wage worker. He can say, “I’ll take another shot at acquiring education, and this time I’ll take it seriously.” He can say, “I’ll show up to work on time and try to work more effectively.” He can say, “I’ll choose a profession that offers more upward mobility.” No other person can weigh the relative costs and benefits of these options for him (not without making heroic assumptions and generalizations). 

Of course there are cases where these expectations on the low earner are unreasonable. An abandoned (perhaps battered) wife with small children probably needs external help. Or someone with a serious mental or physical disability. It would be dense to say, “Why didn’t you choose the medical profession?” to someone with, say, Downs Syndrome or a severe attention deficit problem. But, at least in my observation, these are a minority of cases. Many people in the “low earnings” group deliberately choose to remain there and reject easy steps toward upward mobility. I observe many people who were at some point in the same cohort as me: same high school, same college, same grad school, started work at the same time with the same number of exams completed, etc. Some of them lapped me because they were more ambitious, and I lapped many of them because of my own ambition. It’s a mistake to summarize as “inequality” the divergence of different people starting with the same level of opportunity. And it’s a bigger mistake to place the burden of “fixing” the “mistake” on the people who opted for higher earnings, as opposed to more leisure time or bigger families. 

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[Bad experiences have forced me to anticipate bad comments. I won't publish any comments along the lines of "Oh, so it's poor peoples' fault that they're poor!" If that's anyone's reaction, I'm afraid you misread the post and missed the point. My post is about income inequality, not poverty. Despite them being often confused or intentionally conflated, these are very different topics.]