The Right Questions

Responding to John Nye, Will Wilkinson:

John [Nye] points out a striking paradox of modern economic growth: decreasing real economic inequality creates the illusion of its opposite. … As access to manufacturable goods becomes increasingly widespread, the status-signaling value of these goods declines relative to essentially scarce positional goods.  Meanwhile, as incomes rise, a rising portion of the population finds itself with money to spend on status games. … Our society has become more economically egalitarian, in one profoundly importance sense at least, but it sure doesn’t seem like it.

One question I’ve been asking myself how it is that John’s story can sound so similar to a story Robert Frank tells (in Status Fever, for example), while the lesson each draws from his story seems so different. I think much of the difference is explained by the fact that Frank sees little but waste (too many people competing to be rock stars!) and emotional harm (your BMW makes me feel worse about my Honda!) in positional competition, while John understands status-seeking more along the lines of Adam Smith and David Hume — as an engine of the efforts that drive growth and raise standards of living. …

When our institutions and norms focus the energy of status-seeking into the right kinds of activities, it tends to leave almost all of us economically better off even if it leaves the most status-obsessed feeling wretched.

See also Rob Wiblin on why “the best status games for society … would be enjoyable for the participants, productive for society and as egalitarian as possible.”  I don’t know who is right, but I’m pretty sure these are the important questions.

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  • anon

    I fail to see how status seeking can be described as an “engine of growth”. Sure, status-seekers will be motivated to engage in productive activities. But unless these activities have substantial positive externalities, the resulting productivity will ultimately be dissipated. Perhaps we should try to confer more prestige to status-seeking activities which may have large positive externalities, while discouraging other kinds of positional competition.

    • anon

      By the way, John Nye’s examples of status-seeking as a beneficial activity are (1) buying exclusive real estate and (2) being an early adopter of new expensive technologies. The former is a special case since the positional value of real estate is captured by existing landowners; it’s not dissipated. The latter can be classified as an infant industry effect, i.e. a positive externality.

    • http://shagbark.livejournal.com Phil Goetz

      Couldn’t you use the same argument to say that free markets and the pursuit of money can’t be an engine of growth?

      • anon

        No, because money is not ordinarily spent on zero-sum arms races. If the only way of eating meat was for people to buy cows and let them graze on open-access commons, people would have to compete with one another on a common-pool resource and one might say that the “pursuit of money” has been incented. But the ultimate result would be to devote a large portion of the economy to herding cows; this can hardly be called an efficient result.

    • josh

      I fear status is becoming less and less associated with actual productive activity. People absolutely loath what used to be called captains of industry.

      • anon

        No, business is actually a fairly prestigious activity. Businesspeople tend to be loathed when they’re suspected of engaging in political/regulatory collusion or other kinds of rent seeking behavior, which seems broadly appropriate to me.

  • Robert Koslover

    To anon: I get the impression you don’t think highly of free markets. Am I right?

  • anon

    Quite the contrary–I would support a free market in tradable status certificates. But I don’t think highly of tragedies-of-the-commons and rent-dissipative activities.

    • anon

      Just to clarify the previous post–if there was a way of easily certifying currency balances, these could serve as practical indicators of status. The positional rent would be collected by the government as seigniorage and could be used to offset other taxes or redistributed.

  • http://permut.wordpress.com/ Michael Bishop

    @Wilkinson: You mistake Frank’s book title – its Luxury Fever. Good essays though.

  • Err

    This topic came up on Economist’s View a few days ago, and I’ll repeat a variant of my post here:

    Wealth represents something much more difficult to replicate at the lower end of the spectrum: freedom and security (and power, obviously).

    The more you have, the freer you are.
    The more you have. the (potentially) safer you are.

    If I have lots of money, I’m free to:

    quit a job whenever I want, and tell my boss he’s a joke without fear
    not work at all
    party whenever I feel like it
    keep no steady schedule, stay up late, and sleep in
    travel wherever I like

    I’m also more secure. I can take bigger risks, like skydiving and such, because I can afford medical care if I get hurt. I can get security systems installed in my residence. I can hire bodyguards. I can live in a bunker. I can “disappear” if I need to.

    Let’s also assume I’m not a wastrel and have most/all of my money in savings and not securities. I have far less worry, since I don’t need to think about:

    retirement, since I have more money than I’ll need to survive

    economic crises

    getting sick, since I can afford care

    getting an education (or a 2nd or a 3rd one) – If my job or industry gets outsourced­/disappear­s, I can always start a new career

    losing my residence

    It also means you aren’t *constantly stressed out* about losing your job and income. That in itself completely changes your behavior. Anyone you talk to can be treated as an equal. You do not have to “kiss ass” or “suck up”. You don’t have to lie when you feel the truth needs to be told for good reasons – but are afraid of offending someone or rocking the boat.

    Wealth in any vaguely Capitalist system brings an unbelievable amount of liberation. That is far, far more powerful than any material good.

    This may be a much bigger source of the “perceived inequality” than anything having to do with positional goods. I might have the latest gadget if I’m in the lower middle class, but you, as a wealthy person don’t have to worry about losing your job (because you have enough money to never work again). You get to live with much less fear. That feels amazingly lopsided, because well, it is. Your Mercedes does not compare (in terms of envy) to your freedom. No amount of widely available $insert_preferred_previously_expensive_but_now_cheap material good here can fix that.

    • Doug S.

      Seconded.

    • anon

      Yes, savings/wealth can bring a large amount of security and happiness. But wealth inequality is not the same as income inequality; and it is easier to accumulate wealth if you’re willing to live below your means and save a large portion of your income. Cheap material goods can make this more feasible for a larger portion of the population.

    • http://www.hegemonicon.com hegemonicon

      As I am not fabulously wealthy, I wonder to what degree the fears eliminated by wealth (losing your job, your house, etc.) are offset by the new fears of losing your wealth (being cheated by crooked bankers, investors, so-called-friends, etc.) Does fear actually get eliminated, or do we just allocate a fixed amount of ‘fear’ to different areas?

      • jim

        good point. I THINK i would fear less if i was wealthy but maybe i do just have a fixed amount of fear that i allocate. If my goal is to reduce my fears maybe i can work on them directly rather than get wealthy.

      • Curt Adams

        Happiness is largely constant over the long-term (the “happiness thermostat”) so I would expect fear to be similar. My husband, in spite of a pretty safe, comfortable, middle-class life in a safe neighborhood, manages to terrorize himself over break-ins, vandalism, crazed killers, and a variety of other pretty unlikely or relatively petty issues. I don’t think negative emotions are as tightly set as positive ones as grim circumstances seem to put people in constant states of dread or worry which don’t have counterparts in endless delerious joy; but over the range of circumstances people in modern societies experience I think fear is probably relatively constant.

    • http://www.abs-usa.com Floccina

      But some people have very high income and low wealth and others have moderate income and relatively high wealth. Often the status seekers are in the first category.

  • Jess Riedel

    I strongly agree that zero-sum status arms races can hardly be viewed as beneficial “engines of growth”. They just look destructive.

    It seems much more sensible to answer Robert Frank’s argument by questioning the idea that we treat the “harm” caused by these races in the same way we treat normal harm. That is, the “harm” caused by A buying a BMW and thereby making B feel bad about his Honda is certainly of a different moral class than if A pollutes and decreases B’s air quality.

    This gets to the general idea that we shouldn’t treat all preferences as equal under the law, especially mutable ones. We wouldn’t forcibly move a small racial minority because they cause severe discomfort to a large racist majority, for the simple reason that the racists preferences of the majority are not ones we should value. Likewise, I think it can be reasonably argued that B’s discomfort–which essentially boils down to envy–shouldn’t be valued.

    • anon

      I think the most pressing issue is not that B might feel envious about A’s conspicuous consumption – after all, B’s envy is motivated by status-seeking as much as A’s consumption is.

      The real issue is that the benefits of prestige and status are a socially-created good; hence A should compensate society–as far as practicable–for providing these benefits. Obviously, different “status games” do this to different degrees, and we should aim to encourage the most beneficial activities. It’s not clear that this can be done, but the potential gains are large enough for the effort to be justified.

  • cournot

    Err is making a mistake saying that no amount of inexpensive goods can affect that security. But since food, clothing, and even electronics are part of what Nye means by reproducible goods, it DOES affect one’s security. Consider what losing a job means if food and clothing are costly vs. losing a job if food and clothing are almost free.

    In today’s world, it is much, much easier for a lower middle class person to save enough to afford a minimally liveable lifestyle than for someone two hundred years ago.

    The reason for the insecurity is that there are shifts in valuation of the “relative” minimal lifestyle. But that is partly positional. In absolute terms, someone living off welfare is much more likely to survive than a carpenter in 19th century England. Thus if we assume that technology makes cheap clothing (the Walmart effect) and food even cheaper relative to incomes in the future, then the security of the poor will be greater still.

    However, you’ll still feel insecure, because in the world where everyone is thrice as rich, you might feel unhappy to go without a car, not be able to choose which city to live in, and not be able to command the respect of people around you. That is EXACTLY Nye’s point.

    • anon

      Yes. More importantly, it is also much easier to live well below one’s means by compromising on positional goods. This makes it feasible to acquire a large amount of precautionary savings and considerably increase one’s freedom and security.

  • anony

    That the feeling of job insecurity is not tied to income can be seen by the number of people earning half a million dollars or more who felt insecure when they lost or almost their jobs in last year’s crash. It is obvious that all of them could have lived frugally and saved enough money for 5 or 6 years that they could easily live forever off the interest from their savings if they moved to rural Kansas but would never in a million years consider doing so.

    In contrast, a tenured public school teacher in flyoever America who earns only $65,000 a year can feel very comfortable if she lives modestly. Moreso than a well-paid salesman in Manhattan or LA. But a focus on gross inequalities in wealth will not address these differences and it is misleading to talk about job security as if it’s simply a matter of rich vs. poor.

  • http://www.youtube.com/watch?v=lpOt3Z8Cnus Jonas

    I understand Mr. Nye`s and Mr. Frank`s story to be opposite sides of the same coin.

    On one hand, status games create counterproductive and absurd behavior (resulting in emotional harm). Erich Fromm deconstucts this phenomon very nicely (“Psychoanalyse & Ethik” 1946):

    “Der Mensch, der von […] Neid […] oder anderen Formen der Gier getrieben wird, handelt unter Zwang. Sein Handeln ist weder frei noch vernünftig […} sein Verhalten wird mehr und mehr starr und stereotyp. Er ist zwar aktiv, aber doch nicht produktiv.”

    At the same time, this status seeking is essential for growth and the raising of standards.

    A new innovative product enters the market, resulting in a high status for those who have it. Mass production eventually picks it up, the good becomes cheaper and more available and the signaling effect decreases. This leads to a vacuum in the status game, creating demands for better and more advanced products to fill that gap. This quasi endless cycle of status seeking creates a lot of our economic growth. Emotional harm is a byproduct and influencal variable in this mechanism.

    I am not sure if the problem is solved by the avoidance of games that promote extreme status highs and lows.

    In competitive settings, someone always looses. If our emphasis is on being better than everyone else, then it does not matter how equal status is distributed. The availability of a small but significant difference in potential status might have the same negative effects.

  • http://cob.jmu.edu/rosserjb Barkley Rosser

    There is a rather curious assumption in this entire discussion, including Nye and Wilkinson’s remarks: that economic inequality is decreasing. In the US, real income and wealth inequality have been increasing since the 1970s. Nye makes important arguments, and, yes, status seeking has been argued by a number of people to possibly stimulate real economic growth, but this is not all being driven by some non-existent increase in equality. Get real, folk.