Nye on Positional Goods and the Paradox of Growth

Before I reply to John Nye’s fascinating essay, I want to mention that I probably wouldn’t be writing about inequality if not for John. My views on the subject have been greatly shaped by a conversation we’ve been having on and off for almost ten years now. And a lot of what little I know about economics, I learned from John. He’s a good friend and a great teacher.

In his reply essay, John points out a striking paradox of modern economic growth: decreasing real economic inequality creates the illusion of its opposite. John points out that there are goods — positional goods — which are by definition in exceedingly short supply. As it turns out, people tend to care a great deal about their relative position in hierarchies of social status, and we tend to try to establish and signal status through consumption. 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. The result is a bidding war for positional goods that forces their prices to astronomical levels and ever further from an average household’s reach. Since most of us are tuned in to the local status-signaling channel, goods that broadcast strong status signals captivate us while other goods don’t. As broad prosperity advances, the background of attention fills with a swelling inventory of stuff plain folks have in common with rich folks while increasingly inaccessible positional goods loom ever larger in the mind’s eye.

I’m sold. I think John’s story brilliantly accounts for the data. 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 is how it is that John’s story can sound so similar to a story Robert Frank tells (in Status Luxury 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. If this is not quite John’s view, it is mine.

I’d say, along with Adam Smith, that our tendency to compare ourselves to others, and to want badly to compare favorably, is a source of frustration, dissatisfaction, and even humiliation (as Elizabeth Anderson rightly points out in her reply essay). But 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. And here’s John’s paradox from another angle: our hunger for inequality can, given a suitable institutional and cultural setting, act as an equalizing force.

This is counterintuitive, to say the least. And I think the differences between the views of people like John and me and the views of those more like Robert Frank (Lane? Elizabeth?) raise some really hard questions about how best to approach positional or status inequality when thinking about economic inequality. To repeat a theme from my response to Lane, I think it depends on what we have in mind when we’re thinking about “material welfare” or “real standard of living” or what have you. People evidently care a good deal about signaling to one another. Signals of various kinds are part of what many people are trying to buy with their money. If the price of signaling a certain level of social status rises sharply relative to income, as John says it has, should we take that into account when trying to determine how well off people are economically? Maybe we should. But how much weight should give it? I honestly don’t know, but I have some thoughts about it.

Status is multidimensional. Money isn’t the only status game in town. Many academics could make a lot more money doing something else, but there’s a certain respect and admiration extended to professors of economics or philosophy or sociology that is hard to come by as a financial analyst or a software engineer. I don’t want to say that well-regarded academics are economically better off than they might at first appear, due to their relatively high social status. I certainly don’t want to say that a professor making $75,000 at Harvard is economically better off than a professor making $75,000 at Northeastern, since Harvard is so much more prestigious.

Now, if the price of beef rises while the price of chicken stays the same, that doesn’t much affect the cost of living as long as people like chicken about as well as they like beef. Suppose the price of signaling the next position up in a certain domain of status competition rises rapidly relative to income growth. Can we just switch to another, more affordable, dimension of status competition in the way we can just switch from beef to chicken? I say yes. Do people do this? Yes. But what about people who just don’t like chicken? What if that’s most people? What if most people could learn to like chicken just as well as beef, but they never try? Do we say their money buys them less now that the price of beef has gone up? Or do we say they’re wasting money?

John asked why we give so little consideration to inequalities in natural endowments, unless they’ve been translated into economic inequalities. It’s a very good question. In the context of a conversation about economic inequality, the answer might seem obvious, but it isn’t. Some people are a lot funnier than other people, and being funny has a lot of advantages. But a quick wit and good comic timing can’t be bought. So humor inequality isn’t an economic inequality, right?

However, it used to be that a perfect set of teeth, which also has its advantages, couldn’t be bought. Now they can be bought. What if perfect teeth becomes the norm? Does that mean smile inequality became an economic inequality? If naturally perfect teeth weren’t an economic asset before, are they now? My total bafflement suggests to me that there’s something wrong with this question, but I’m not sure what it is.

Also from this issue

Lead Essay

  • In his lead essay, Will Wilkinson observes what he believes is a poor chain of reasoning: Income inequality is rising; it is also a measure of injustice. To fix this injustice, we should redistribute incomes. Wilkinson attacks this reasoning on several fronts: Income inequality is less important than consumption inequality, and consumption inequality is probably lessening. But if income inequality is a problem, it is so only as a symptom of a different problem: substandard schools, perhaps, or our high incarceration rate, or CEOs who conspire to overpay one another. Rather than redistributing income, we should identify the underlying problem and fix it directly. This may well lessen income inequality, and it will also fix an undoubtedly serious problem somewhere else in our society.

Response Essays

  • Lane Kenworthy argues that income inequality is indeed important, and that we should not be misled by the relatively reassuring data on consumption. Unconsumed income also adds to the quality of life enjoyed by the rich, even if that increase is still hard to measure. A more egalitarian society need not entail a radical social leveling, but it should entail better public services for the poor and the middle class.

  • John Nye adds several considerations to the mix: First, positional goods may make us feel more unequal — there are only so many “top ten” schools for our kids, only so many “best” views or neighborhoods. Yet, with rising incomes, more of us feel that we should be able to afford them, even as they slip further from our grasp. As we become more equal, we feel less equal. Second, one other effect of relative equality has been to erode the security formerly enjoyed at the very top of the economic pyramid. This security itself was a form of compensation, and executive salaries may be rising in recent years in part because executive security has fallen. And third, much of human inequality is not directly measurable in money at all. Differences in appearance, intelligence, ability, and the like are all real and may translate into economic inequality as well. Consideration of these elements is curiously absent from many discussions on inequality.

  • Elizabeth Anderson agrees with Wilkinson that the root causes of inequality are more troubling than inequality taken alone. But economic inequality is still a problem for two reasons: First, economic inequality of the sort we have today is not making the poor better off in absolute terms, but rather it is making them worse off. And second, economic inequality translates directly into inequality of political power, which in turn reinforces economic inequality. This is an unacceptable state of affairs.