Falling Behind. Robert Frank
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quality might look like, quickly agreeing that any reasonable one would incorporate an explicit comparison of the car’s features with the corresponding features of other cars in the same local environment. Cars whose features scored positively in such comparisons would be seen as having high quality, for which consumers would be willing to pay a premium.
Such a model would be essentially identical to one based on a desire, not to own quality for its own sake, but rather to outdo, or avoid being outdone by, one’s friends and neighbors. Yet the subjective impressions conveyed by these two descriptions could hardly be more different. To demand quality for its own sake is to be a discerning buyer. But to wish to outdo one’s friends and neighbors is to be a boor, a social moron. To be sure, there are people whose aim is to flaunt their superiority over others. But most of us do our best to avoid such people, and the fact that we succeed most of the time suggests that they are relatively rare.
I noticed that on the heels of this discussion, everyone at the table suddenly took much more interest in talking about the kinds of behavior that are driven by contextual concerns. It was fine to talk about behaviors that result from context-dependent perceptions of quality, but not at all palatable to speak of behaviors that result from envy or a desire to outdo others.
In sum, if relative deprivation is really about context, which shapes perceptions of quality, which in turn drive demand, then it is not a peripheral concept. It applies to virtually every good, including basic goods like food. When a couple goes out to dinner for their anniversary, for example, the thought of feeling superior to their friends and neighbors probably never enters their minds. Their goal is just to share a memorable meal. But a memorable meal is a quintessentially relative concept. It is one that stands out from other meals.
With my dinner conversation in Chicago still fresh in memory, I was careful to emphasize, both during my Wildavsky Lecture and in the roundtable discussion the following day, that concerns about context and relative position have little to do with envy of the rich or a desire to keep up with them. Middle-class families don’t look to Donald Trump and worry about what he is spending his money on. Likewise, it’s totally irrelevant to most in the middle class that Bill Gates has a 40,000-square-foot mansion on the shore of Lake Washington.
The existence of such houses nonetheless affects the spending behavior of people in the middle. It does so through a chain of local comparisons. To begin with, there are people in Bill Gates’s league who are influenced by the fact that he built such a house. Indeed, others who live on Lake Washington now have houses even larger than his. Some have 50,000 square feet of living space, some have 60,000, and at least one has 70,000. And just below these people on the economic ladder, there are others for whom these large houses do matter.
For some, they matter because of envy, to be sure. But others are influenced even if they feel no envy. The mere presence of the larger mansions, for example, may shift some people’s perceptions about how big a house one can build without seeming overly ostentatious. Or it may change the way people entertain, making dinner parties for thirty-six guests the norm, rather than parties for twenty-four. Or perhaps because their larger mansions make it possible to do so, those at the top of the economic ladder may begin hosting their daughters’ wedding receptions in their homes, rather than in hotels or country clubs. Or perhaps people build bigger houses simply because the larger houses of others make their own houses seem small. In each of these instances, we need not invoke envy to explain people’s behavior.
The simple point is that local context matters for a host of reasons, most of which have nothing to do with envy or a desire to feel superior to others. Viewing the phenomenon of relative deprivation in terms of such feelings has consigned it to the periphery. This, I will argue, has been a grand mistake, one that has seriously undermined our ability to reach sensible judgments about economic policy.
CHAPTER ONE
Introduction
Many years ago, I attended a lecture by a philosopher who began his talk with a thought experiment. For me as a listener, that approach worked so well that in the years since I have tried to employ it myself at every opportunity. A recent conversation with a neuroscientist friend shed some light on why this device is often so effective. Different parts of the brain, it seems, specialize in thinking about different things. When we are confronted with a question in a Different domain, blood flows to the relevant part of the brain, priming it to think more effectively about the related ideas to follow.
So I want to begin by asking you to conduct not one but two thought experiments. Each is addressed to that part of your brain that thinks—and, more important, that cares, in the most deeply personal way—about inequality. Try as best you can to imagine that you are actually confronting the hypothetical choices I am about to describe.
In each case, you must choose between two worlds that are identical in every respect except one. The first choice is between World A, in which you will live in a 4,000-square-foot house and others will live in 6,000-square-foot houses; and World B, in which you will live in a 3,000-square-foot house and others in 2,000-square-foot houses. Once you choose, your position on the local housing scale will persist.
According to the standard neoclassical economic model of choice, which holds that utility depends on the absolute amount of consumption, the uniquely correct choice is World A. For if absolute house size is all that matters, A is indeed a better world for all, since everyone has a larger house there than the largest house in World B. The important thing, though, is to focus on how you would feel in the two worlds.
In fact, most people say they would pick B, where their absolute house size is smaller but their relative house size is larger. Even those who say they would pick A seem to recognize why someone might be more satisfied with a 3,000-square-foot house in B than with a substantially larger house in A. If that is true for you as well, then you accept the main premise required for the arguments I will present.
In the second thought experiment, your choice is between World C, in which you would have four weeks a year of vacation time and others would have six weeks; and World D, in which you would have two weeks of vacation and others one week. This time most people pick C, choosing greater absolute vacation time at the expense of lower relative vacation time.
I use the term positional good to denote goods for which the link between context and evaluation is strongest and the term nonpositional good to denote those for which this link is weakest.1 In terms of the two thought experiments, housing is thus a positional good, vacation time a nonpositional good. The point is not that absolute house size and relative vacation time are of no concern. Rather, it is that positional concerns weigh more heavily in the first domain than in the second.
The argument I will advance in this book can be reduced to four simple propositions.
1 People care about relative consumption more in some domains than in others. Or, to put this proposition in more neutral language, context matters more in some domains than in others. The two thought experiments just discussed illustrate this proposition. Although context matters for evaluations of both housing and leisure time, it matters more for evaluations of housing.
2 Concerns about relative consumption lead to “positional arms races,” or expenditure arms races focused on positional goods. In the context of the two thought experiments, this proposition says that individuals will work longer hours to earn the money that will enable them to buy larger houses, expecting to enjoy the additional satisfaction inherent in owning a relatively large house.
3 Positional arms races divert resources from nonpositional goods, causing large welfare losses. When people contemplate working longer hours to buy larger houses, they anticipate additional satisfaction not only from having a larger house in absolute terms, but also from having a larger house in relative terms. For the move to appear attractive, the anticipated sum of these two gains must outweigh the loss in satisfaction associated with having fewer hours of leisure. When all make the same move in tandem, however, the distribution of relative house size remains essentially as before. So no one experiences the anticipated increase in relative house size. When the dust settles, people discover that the gain in absolute house size alone was insufficient to compensate for the leisure that had to be sacrificed to get it. Yet failure to buy a larger house