Comparison and Growth
Magisterial is not a word to be thrown around lightly, but I suspect it applies to Benjamin Friedman’s The Moral Consequences of Economic Growth
Friedman notes that the effect of income on well-being depends mainly on two different kinds of comparisons. First, we compare our present circumstances to our past circumstances. If we’re better off economically than we used to be, we feel better off. Second, we compare our circumstances to those of other people. If we’re doing better than our imagined peer group, we feel better; if worse, then worse.
Friedman’s insight is that these two forms of comparison in some ways substitute for one another. If almost everyone is continuously doing better than they were before, due to a steady rate of growth, the satisfaction from intra-personal comparison mitigates the tendency to compare ourselves to others. However, if economy stagnates, and most are no better off economically than they used to be, the tendency to compare ourselves to others is heightened. And this, Friedman argues, has deleterious political and social consequences.
Here is what he says:
By continually giving people a sense of living better than they or their families have in the not very distant past, sustained economic growth reduces the intensity of their desire to live better than one another. Economic growth satisfies the form of people’s aspirations for “more” that is possible for everyone to fulfill. . .
When an economy stagnates, however, the importance people attach to living better than others against whom they naturally compare themselves is more intense. The fact they cannot do so, or at least on average cannot, then takes on heightened importance in their eyes. The resulting frustration generates intolerance, ungenerosity, and resistance to greater openness to individual opportunity. . .
Mobility, either economic or social, is inherently threatening because it means the possibility of movement either up, or, more to the point, down, compared to the prevailing norms of the society as a whole. But when the average income for an economy is stagnant, people who allow others to get ahead of them are not only falling behind in relative terms but also losing ground compared to their own past living standard. They lose out from the perspective of both benchmarks. When an economy is growing, however, and per capita income is rising, those who fall behind compared to others can still be moving ahead–and if growth is sufficient, moving ahead solidly–by the standard of their own experience.
If Friedman is right about this, and I suspect he is, then this is an exceedingly important argument. A number of happiness-centric economists argue that because increasing wealth has little positive effect on happiness, due to adaptation and comparison, we shouldn’t worry about implementing policies that would reduce, or even stall, economic growth just as long those policies are increasing happiness. But if slowing or stalling growth itself heightens the negative effects of social comparison, we have a powerful argument against such policies on the very grounds that they are supposed to be justified.
I highly recommend this book.
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Comparison and Growth
Magisterial is not a word to be thrown around lightly, but I suspect it applies to Benjamin Friedman’s The Moral Consequences of Economic Growth. (I’ve only been through the first 100 pages, but I don’t imagine it’s going to get…
So where are the diminishing returns? I know millionares, some of whom are able to relax and be happy, but others who are driven to do it again, to compete with they new millionare peer group, in a sense to prove their place.
My observation in wealthy Orange County California, is that there is a sort of overshoot at work. People work hard, get everything, and for some reason keep going.
And the intesting question might be, as a soiciety becomes wealthy, does it miss the off-ramp to happiness?
In his undergraduate classes and at least one graduate class, Prof. Friedman requires students to read of parts of Hirsh’s “Social Limits of Growh” (ch. 3). The thesis there is that increased social wealth increases competition for positional goods (e.g. high prestige and status jobs, beachfront property, etc.). So growth may decrease competition for wealth, but it increases competition for status which is (Hirsh says) (a) unproductive in terms of creating greater social wealth and may (I think)(b) be at least as detrimental to happiness as striving for relatively high income. Hirsh’s thesis runs counter to Friedman’s theory that Will cites.
Thanks.
Do you know of anyone who’s tried to take this to the data?
It may find some support in Claudia Senik’s work comparing the comparison effect in Eastern and Western Europe. Senik finds that, in contrast to the usual negative effect, reference-group income has a positive effect on SWB in a number of Eastern European countries. Her hypothesis is that as well as providing a comparison point, others’ income also acts as a signal for one’s own future prospects. She argues that this effect is heightened in countries where there is significant income volatility - so much so that it can outweigh the comparison effect. However, it’s also possible that something of Friedman’s hypothesis is going on here, and that the overall positive effect occurs in part or in whole because the pure comparison effect is reduced.
It’d certainly be interesting to try to separate the two hypotheses.
The thesis there is that increased social wealth increases competition for positional goods.
The thesis that, basically, when we all have food, there’s increased competition to get into the “best” restaurants, and when we all have more than enough clothes, there’s increased competition to get the most fashionable, etc. That’s certainly true to some degree. However, I’d part with Hirsh on his cliam that those things are unproductive in terms of creating greater social wealth. To reference Mrs. Postrel, style has a substance, after all. I’m one of those who believe that, for example, increased choice and quality in certain goods has a definite social upside.
I don’t think that the two theses are unreconciliable. One is an effect of the total level of wealth in a society, whereas the other is an effect of the rate of increase of wealth.
I don’t think that the two theses are unreconciliable. One is an effect of the total level of wealth in a society, whereas the other is an effect of the rate of increase of wealth.
I’d only like to see a little more self-awareness in our “consumer society”
FWIW, the phrase that sprang to mind in reading your comment was “fashion victim” … what kind of creatures are we that we coin terms like “consumer society” and “fashion victim” anyway?
I’d only like to see a little more self-awareness in our “consumer society”
FWIW, the phrase that sprang to mind in reading your comment was “fashion victim” … what kind of creatures are we that we coin terms like “consumer society” and “fashion victim” anyway?
I don’t know, but I do think that making people bad about consuming or enjoying style and fashion hardly contributes to increasing happiness. However, that seems to be many people’s idea of increasing “self-awareness.” The moral scolds who hate “conspicuous consumption” rarely seem as happy as people who are enjoying their consumption, rich or poor. So apparently it’s not all about maximizing social happiness.
John Thacker raises the queston of what actually should count as “wealth”. This concept is philosophically interesting and important.
The unreflective may flippantly claim that anything that someone will pay for is ipso facto wealth. (Thacker himself starts down this road.)
But people are willing to pay to have others killed! Is wealth maximized when everyone lives or dies according to the wishes of he is willing to pay most (with the high bidder having to actually pay the minimum necessary)? This is the kind of reductio that Dworkin provided in “Is Wealth a Value?” (Journal of Legal Studies, 1980).
Clearly the very concept of wealth (important as it is) depends on some value standards more substantive than willingness-to-pay.
One might think its obvious that we should attribute supreme significance willingness/ability to pay except when death or enslavement are up for grabs. But, fortunate as we are that these murder and slavery seem easy cases, most people of integrity ask more than this from the concept of wealth.
Bill I think you are confusing willingness to pay with wealth. I may be willing to pay $1000 for a Ferrari but that does not add $1000 to total worldwide wealth. Wealth is only added when something is produced. Note in your macabre example this would only occur if the killer negotiated with the killed, a price to take his life. If the killer agreed to pay more than the killed valued his life, then in theory wealth has been added to. I think it is pretty rare for such a coincidence of wants to occur though.
But people are willing to pay to have others killed!
Yes, but not only are people are willing to pay to stay alive (and to pay to keep others alive as well), as you say, but you’re forgetting ownership. The owner of an item does not have to bid for it in order to keep it; consider Matt Canavan’s point and realize that your example of murder does not apply unless the person being killed agrees to be paid in order to die. Yes, that could possibly happen under some circumstances, and people make decisions that increase their chance of dying all the time (perhaps one’s family or loved ones dearly need the money), but we don’t call it murder.
But, fortunate as we are that these murder and slavery seem easy cases, most people of integrity ask more than this from the concept of wealth.
Willingess to pay/sell is certainly a reductionist concept, but I fail to see how reducing everything down to a single concept of whether it increases wealth or not can be anything other than reductionist.
I see plenty of evidence that rising wealth causes people to put more time and effort into seeking goods which have subjective qualities like fashion, style, taste, and quality. Certainly some people may question the real value of these subjective quality. Yet, precisely because their value in inherently subjective, I’m not sure what fair ways there are to value these things other than the value their owners put on them.
I’m unconvinced that rising wealth really causes greater striving for position, per se, though. It may seem wasteful to see people striving to eat at the best restaurants or get the nicest clothes, but do you really think that they would strive any less to be the only person who was completely full at the end of the day or the only person with clean clothes every day? Certainly many of the Communist countries had lots of striving for position in the midst of poverty and famine.
The thesis there is that increased social wealth increases competition for positional goods (e.g. high prestige and status jobs, beachfront property, etc.).
But there’s only so many hours in the day, no? So this only seems to hold if wealth is not increasing. If wealth is increasing, then the supply of alternative luxury goods is also increasing. We may not all be able to get beachfront property, but if there are other ways to spend our leisure time than going to the beach, we won’t all want to. Increasing wealth increases the diversity of ways to spend your leisure time, and the diversity of ways to get prestige as well. People enjoy the prestige of being famous in their circle as a great musician, a surfer, an athlete, a computer gamer, a coder, or a great many other things.
Sorry, one more thing:
But, fortunate as we are that these murder and slavery seem easy cases, most people of integrity ask more than this from the concept of wealth.
I would argue there is confusion between measurement and normative ideals. Certainly most people agree that your ideals for how you judge whether wealth is being created should have some sort of grounding outside pure money. Your ideals exist outside of that. But when it comes time to measure what sort of value people put on something, money is a very effective (the most effective) reductive way to do it. None of this precludes making separate moral arguments for why certain things should be valued at all; the economist’s view simply tells you how much people do value certain things, not that such a value is the true value, or the value that they should attach to it.
Matt and John: Thanks for the thoughtful comments! As you clearly see, I realize that this hitman example is tangential, but I’m glad to see that you see the live issues involved. I’m still not clear on a few of your points though.
(1) Definition of wealth and its maximization: I could be wrong, but in my understanding, this is the standard relationship between willingness to pay and wealth:
Wealth is maximized when everything is possessed by the person willing-to-pay most for it. The more difference there is between what people were willing-to-pay and what they had to pay, the more wealth is created.
(2) Is production necessary for wealth? Maybe no wealth is created if something is not “produced”. (I surely agree that simple willingness-to-pay does not amount to wealth.) But services rendered create wealth too on the standard definition, don’t they?
(3) Negotiation and the relevance of ownership: Unless you consider the victim’s rights, I cannot see why the victim of the murder contract would have to be negotiated with in order for a hit to be a wealth-maximizing transaction. All that would be strictly required would be that the person ordering the killing must IN FACT be willing and able to pay more for the hit than the victim willing and able to PAY to stay alive. Transactions that are definately wealth-maximizing take place all of the time without any negotiations taking place with parties who are clearly not willing and able to pay enough.
The question of whether theft can be efficient in principal is different from the question of whether we can know it is in any given case (to put that last point more tersely).
John: WRT Hirsh on status and beachfront property etc. His thesis, with which you may or may not disagree, is that people want material goods and positional goods. The material wants are more urgent, but as these get satisfied the marginal utility of status goes up relative to material prosperity. So people do the things he discusses in ch. 3 which, he thinks, are inimical to rather than supportive of increased creation of material wealth. You do not seem to endorse the “material/positional distinction”. But, in my opinion, Hirsh is attempting to articulate a more nuanced conception of wealth. Other economists would do well, in my opinion, to follow his lead.
The material wants are more urgent, but as these get satisfied the marginal utility of status goes up relative to material prosperity.
Ah, but what about Say’s Law? Or, to put it another way, new things can be invented that create material wants that didn’t exist before, and further substitutes for status.
I do believe the research that says that reported happiness doesn’t go up with time or general prosperity level. I believe this because I believe that people adapt to their situation. But precisely because I believe this, I believe that people’s material wants can increase and adjust to the situation as well.
His theory can’t be ruled out a priori. But I think that the happiness research opposes his theory.
In short, I don’t believe that the people’s material wants really just “get satisfied,” because you get adapted to your situation and your wants change.
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Friedman’s argument appears to explain what Bryan Caplan calls the idea trap.