The Rich, the Poor, Incentives, Learning, and Land Reform

At Marginal Revolution, comments on a story in Neuron magazine.

Reporting in the current issue of Neuron, the scientists reveal that when a small sum of money is on the line, poorer people learn quickly how to maximize their profits, leaving their wealthier counterparts in the dust.

In a Pavlovian paradigm, a number of abstract shapes flashed in front of 14 participants. After each shape appeared for three seconds, a picture of either a 20-pence coin (roughly 40 cents) or a scrambled image followed. A card of one particular shape was always followed by the coin, and subjects were told that they could take a 20-pence piece home if they could accurately predict when the money card was the next one up….

The poorer people tended to figure out which card signaled money ahead within about 12 trials… whereas the richer people took about 35 trials.

I’m reminded of a post I once wrote about
land reform and Marxism in South America

Early on in the settlement of Brazil, the king of Portugal, Dom Joao III, created a number of hereditary “captaincies” – enormous land grants the size of states today. Needless to say, the captains who got these captaincies were extremely wealthy, well-connected individuals. Also needless to say, someone who is given a property the size of, say, Oregon, isn’t going to care too much about developing that property. That person’s major source of wealth is not developing property, its making nice to the king who can give him more property.

Now, consider the captaincy. In every single case, there were already people living there at the time the land was granted. In many instances, natives (who would soon be virtually wiped out), but also European settlers. Many were criminals or just the random dregs of society, while others were hoping to make a quick buck and go back to Europe wealthy.

Regardless, the vast majority of Brazilians were living on what, legally (assuming the Portuguese government had right to decide what was legal) living on land owned by others who had little interest in that land. And its not like there was anyplace else to go… the Portuguese split of the lands under their domain, the Spanish did the same to the lands under their domain, ditto the Dutch, and whoever else was jostling around in South America.

So what do you do? Well, say you, as a settler goes and builds something. If it produces wealth, the landholder will express some interest. So your incentive is either not to build anything, or build on the sly, in the boondocks. If you get too big, too successful, someone else – the captain or his descendents, would simply take your stuff away. (And those of you who are ready to argue that – “No, that’s irrational. The captain’s best interests are served by encouraging small businessmen to create a thriving economy on his property” forget that doing that takes effort and foresight, but simply seizing provides a benefit here and now, especially to someone born of enough privilege.)

Update… I’m also reminded of my thoughts on the estate tax. I consider myself a capitalist, but I feel where possible, everyone should have a fair shot. (Put another way, I’d like to see equal starting points, not equal outcomes. I think outcomes should truly depend on work and talent and skill, not, say, who one’s parents are.)

One more thought… doesn’t the experiment show that, all else equal, having fewer resources makes one make better decisions about how to allocate one’s resources. Does that mean a very high estate tax is efficient?

Update. Mark Thoma looks at claims that this study says something about Marginal Utility across individuals.