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Envy pollution
Greg Mankiw considers Brad DeLong's view that the presence of the rich makes the poor worse off. Jane Galt discusses Cindy Crawford. I will add the following:
1. Often the rich make us feel we are worse off when we fill out questionnaires, but the quality of experienced life doesn't go down much from their existence.
2. Consider food. If I hear of other people visiting El Bulli, I might downgrade the quality of my own eating life on a survey. But I don't enjoy my Sichuan Chili Chicken or my Silpancho any less.
3. "...its a great testament to economic progess that, walking round the city center these days, say, it's very hard to differentiate the rich and the poor in the first instance. In this sense, things have indeed become a lot more egalitarian." That is from one of Greg's commentators.
4. Envy tends to be local. Few Americans resent Bill Gates or Warren Buffett. The real definition of a wealthy man is one who earns more than his wife's sister's husband.
5. Greg Mankiw suggests that perhaps we segregate the rich into places like Nantucket and Aspen, so as to minimize the envy of the poor. That won't get at the root of the problem, as expressed in #4.
What we need to do is tax gatherings of extended family and other like-minded people.
Posted by Tyler Cowen on September 2, 2006 at 05:03 PM in Economics | Permalink
Comments
The rich coerce the rest of us through their control of the political system. They stack the deck to promote transfer of wealth to the rich. Perhaps if they were not so rich, the rest of us might be able to regain the levers of power and fashion more egalitarian rules for society.
Posted by: Mike Huben at Sep 2, 2006 6:04:34 PM
On the the blogs on your blogroll is called Fly BVottile, and I really can't believe the people over there when this topic is raised. How can anyone have such little understanding of human nature as to not see that people are upset when others are richer than them?
It's like the top people at a big company where the HR department tells them their low-level employees are paid above the industry average, and then think that no one will object when they give themselves (the top people) large bonues, because "our people are making more money than they ever have before" and are therefore like contented well-fed pigs. And then being shocked, (shocked!), when the rank and file gets upset. There's a reason such clueless leaders are ridiculed.
Posted by: Dirk at Sep 2, 2006 6:26:17 PM
I resent W. Wayne Huizenga and his show-offy helicopter.
Posted by: Uncle Lumpy at Sep 2, 2006 6:30:13 PM
I disagree that it's only when filling surveys. There are far more opportunities to resent them. Whenever one "hits the wall" of life where some money or power would be useful, it seems obvious to wish for a slight relaxation of the constraints. Knowing that the rich (and powerful, perhaps the same groups) don't have to put up with such problems can lead one to resent them. This is one reason that "old money" tends to be less ostentatious -- they remember 1789. The oligarchs and other nouveaux riches have not learned -- and attract more resentment.
Posted by: David Zetland at Sep 2, 2006 7:26:33 PM
There seems to be an implicit suggestin here that the wealth of the wealthy has nothing to do with the rest of us -- that they earned it or won it in a way that doesn't involve us. But if you work, as many people (myself included) do, for middling-performing companies where the CEO and a couple of others have seen 50% compensation increases and the rest of us precious little, then that picture seems rather remote.
Posted by: tom s. at Sep 2, 2006 7:32:03 PM
Interdependent utility functions can have either positive or negative partials of one utility with respect to another's utility.
Posted by: EclectEcon at Sep 2, 2006 8:43:54 PM
I do not envy the rich but I do think they do set a harmful example, if they have gotten rich by taking advantage of people. Pimps, drug dealers, and over paid bank CEO's fall into last group. If you include as rich a larger group who consume enough to bid up prices on limited resources, such as housing in cities, then we would be better off if they had less money.
Posted by: joan at Sep 2, 2006 8:52:53 PM
The rich coerce the rest of us through their control of the political system.
And this nugget of acumen comes from the author of the Non-Libertarian FAQ?!
The mind boggles at the discongruity. . .
Posted by: Matthew Cromer at Sep 2, 2006 8:55:47 PM
I would argue that people don't resent Bill Gates or Warren Buffett, not because of lack of proximity, but because both people are pretty understated with their consumption. People seem to resent Paris Hilton, even though she is no more local than either Gates or Buffett.
Resentment theory. Why do people resent some of the rich but not others who are much more wealthy? 1. People have a problem with different lifestyles not wealth, they don't care if someone is rich so long as that persons lifestyle is not totally alien from their own. 2. People have no problem with wealth as long as they feel it is well deserved. 3. People have a problem with ostentation not with wealth. People don't resent people for having more wealth, but consider it impolite to remind others of the fact either through purchases or actions. 4. Wealth in exchange for value. Fewer people seem to resent wealthy doctors than wealthy lawyers. Both may work similarly hard but it is more obvious to people (myself included here) the value created by a doctors efforts. Because people can easily understand how doctors generate value they are resented less (usually actively respected).
I don't think the location effects are very important, I mean in order to resent someone you must be aware of them, and people are more aware of those that live near them, but I don't think the fact proximity has any impact beyond information effects.
Posted by: Michael F at Sep 2, 2006 9:16:37 PM
To many, it's not an issue of envy. They see it as an issue of justice. Understanding that difference is important.
Posted by: Macneil at Sep 2, 2006 9:52:20 PM
I find this discussion hard to reconcile with the fact that people generally don't move/migrate from wealthier areas or avoid being exposed to more affluent lifestyles (e.g., TV) for this reason. Are they irrational? This is not to deny the effect, but it must be (i) very local (ii) outweighted by the positive externality. For instance, if all my neighboors buy cheap cars, my neighboorhood will not cause a great impression on _my_ visitors as well.
Posted by: Richard Phillips at Sep 2, 2006 10:17:03 PM
Most arguments I see about inequality fall into three categories:
1) Marxian: The rich steal from and exploit the poor and use capitalist ideology to cover their tracks and justify the inequality they create. This argument is pretty unconvincing to the unconverted which includes the majority of people in most capitalist countries.
2) Rawlsian: We should aim for a distribution of resources that is close to equal because this is what we would all agree to without knowing all of our individual traits and characteristics as we sit behind the veil of ignorance. It's an interesting argument, but too abstract for most people. Other criticisms of this approach can and have filled books.
3) New left utilitarian: Based on purely utilitarian grounds we should aim for egalitarian distribution of resources because conspicuous consumption by the rich makes the rest of us worse off because we are left feeling jealous and convinced the outcome is unfair.
Macneil's comment is more along the lines of 1) while Delong is definitely a 3) guy. One thing missing from a lot of these discussions is the power of incentives for the rich. Most reasonable people would argue that some should earn more money than others if they work harder or take on more risk. Yet measuring these things and assigning efficient levels of compensation to them is a task I'm not sure even Delong would want to take on. Another way of putting it is that even the Soviet Union paid doctors more than metro ticket agents: what is the optimal premium on compensation or optimal gini coefficient a society should have so that it does not distort incentives? I have yet to see anyone try to answer this question. People like Krugman and Delong have argued that earnings at the top end of the income distribution have grown too rapidly to be justified by economic efficiency, but exactly how much is too much?
What makes me suspicious of the number 3) point of view is that it is entirely possible the rich enjoy their extra consumption even more than the "poor" lose in utility. Once you introduce the idea that utility depends on everyone else's consumption, it's not clear to me that this possibility can be discounted -- especially if there are different kinds of utility functions for different people. I think all of us know people like this: they're the ones always trying to be number one in everything and have hypercompetitive personalities. They also happen to be the kinds of people who become CEOs for better or worse...
Posted by: Mark at Sep 2, 2006 10:46:16 PM
Good for Mike Huben to be briefer than usual when posting his whimsy of the day. How long after the French Revolution did it take for France to get a king again? Less than a generation? Those "more egalitarian rules for society" didn't seem to hold up too well. His religious faith in "the rest of us" not to abuse the political system once the nefarious rich people are disappeared is touching, if a little unsettling, though.
If one goes and reads the comments at Fly Bottle, Dirk's misrepresentation is clear -- the posters there are not confused about the notion that people feel envy and that this makes them feel upset, but rather that the policy implications of this are far from clear (unless, of course, it is the role of the state to minimize how much people feel upset, a notion almost as charming as Huben's).
Posted by: asg at Sep 2, 2006 11:07:08 PM
Tyler,
Your arguments, particularly (1) and (2), strike me as correct but misleading and perhaps sophistic. You seem to assert in (1) and (2) that status disutility is experienced in a different time-horizon from consumption, but different time horizons does not say anything magnitude.
(3) I'll disagree with as an empirical matter. Certainly in the building where I work its easy to tell who has a corner office, an office, who has a cubical, and who has neither. A "city center" is something of a slight-of-hand seeing as how now, more often than not, our city centers tend to be shopping districts which do segerate in terms of wealth. Pull a random sample of people from Neiman Marcus (just off of Boylston in Boston) and from Ross three blocks away and ask subjects to guess which store each person is shopping in. I would guess that, while not perfect subject would determine which store people where shopping in with a high accuracy rate. Indeed, the comment may reflect the fact that we are less egalitarian not more, since we find ourselves associating so often with people of same status that there is a false-perception of the absence of status differentiation.
Finally, Tyler defined cynacism as a general dissatisfaction with the quality of things relative to their potential quality. Envy pollution is something of a misnomer -- it isn't quite so much that we are envious of what others have as much as we have a heightened awareness of the lack of quality of what we have relative to its potential quality. The reason local effects are more poignant is that they're harder to turn a blind eye to.
Posted by: Drew at Sep 2, 2006 11:33:37 PM
The most important thing we consume in life is usually a spouse. Competition from those who are richer and more handsome directly reduces the quality of spouse we can attract and reduces the likelyhood that that spouse will remain faithful.
Goods where quality varies widely and supply is strongly limited and consumption of most buyers is severely limited by alternative bidders are often called competitive goods.
Access to competitive goods is affected more by differences in wealth than other kinds of goods, so if competitive goods are a large portion of our consumption, then large imbalances in wealth are harmful to most citizens. It is not possible to make interpersonal comparisons of utility, but inequality is likely to hurt many many people if competitive goods are important in a society.
The most expensive and most rewarding (outside your kids, a closely related subject) thing you will buy in your life is the love and attention of your spouse. The love and attention of your spouse is a competitive good.
The most expansive and one of the most rewarding material goods you will buy in your life is your home. Real estate is a competitive good.
Slice them poppies.
Posted by: Brian at Sep 3, 2006 12:18:15 AM
Status is almost always a reward from a tournament (sometimes the tournament can be total wealth but the winner of the international lockpicking tournament might be higher status than the average attorney even if the attorney earns more). Since certain tournaments will tend to generate more than optimal investment, we can impugn the pursuit of status because of a production externality not only because of a consumption externality.
Posted by: Drew at Sep 3, 2006 12:39:45 AM
What we need to do is tax gatherings of extended family and other like-minded people.
Tyler, have pity! The society is atomized enough without a tax on family gatherings. Better give tax credits when people gather together for non-business reasons.
Posted by: A Tykhyy at Sep 3, 2006 1:38:52 AM
"...its a great testament to economic progess that, walking round the city center these days, say, it's very hard to differentiate the rich and the poor in the first instance. In this sense, things have indeed become a lot more egalitarian."
You'd have to be pretty oblivious to the obvious to find it very hard to differentiate the rich and the poor as you walk down the street.
Posted by: Steve Sailers at Sep 3, 2006 2:19:53 AM
Poor people, especially poor teenagers spend a much larger percentage of their income on clothes than do middle income people. The $100 Nikes, that the right is so scornful of, are important enough to sacrifice for. They do this to avoid being identified as being poor. It is not a sign of an egalitarian society that it is not always possible to differentiate, but show that being poor is something to be hidden. As you move up the income scale people over spend on cars, then houses, and for the very rich the arts and vacations.
Posted by: joan at Sep 3, 2006 5:58:47 AM
I envy rich people kids when I see them tooling about London in their Ferraris. It makes me want 100% death taxes. Unless of course I become rich at which point I will of course see them as iniquitous...
Posted by: Stuart at Sep 3, 2006 8:25:47 AM
I believe that Delong's argument asserts the existence of a change over time, so it's not clear to me how the "measurement-instrument-induces-measurement-error" claim is supposed to work.
My armchair speculation would concern perceptions of long-term mobility prospects: it's one thing to have Sichuan Chili Chicken for dinner tonight, another to think that you might not _ever_ dine at El Bulli, and yet another to think that your kids might not either. That may be new.
Posted by: eweininger at Sep 3, 2006 9:30:20 AM
DeLong clarifies. The point of conspicuous consumption is to elevate yourself above the poor—by definition, if that's not the point it isn't conspicuous consumption.
It's an empirical question whether this effect exists and how significant it is, but Tyler certainly hasn't disproved its existence with his assertion that the effect is restricted to questionnaires.
I also suggest that the poor, one of the major classes DeLong discusses, may not be eating Sichuan chili chicken all the time.
Posted by: Matt Weiner at Sep 3, 2006 12:16:13 PM
I thought the tax among family/social groups was taken care of with Christmas (or whatever the gift exchangey holiday of choice is). People actually do get rather upset when someone with much more money gets the same level of gift someone with much less money got them.
Also in social gatherings having everyone over at your pool, or large airy house could be seen as a form of tax. So people entertain because they have to equalize the cost that they inflict on their less fortunate friends (and so to keep the relationship strong). It is kind of a form of self taxing backe up by very strong social norms (which one would expect since it is impossible for government to enforce). Of course to an extent the showing of the house/pool/etc inflicts additional damage, so to avoid seeming like one is rubbing ones nose in wealth it needs to be (often/grand/flexible) enough to overcome the harm.
So by this understanding the worse sort of rich person is the rich person you know who shows pictures of their many houses, and drives a nice car, but never offers a ride. In fact the social cost of that is sufficient to terminate the relationship in most cases.
Posted by: yasth at Sep 3, 2006 3:19:09 PM
Minimize envy by keeping the poor in their own countries.
Delong misses the obvious point that people work hard and produce more goods so that they can look down on other people from their more successful perch on the class ladder. We don't want to demotivate those who want to look down on others.
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Posted by: levan at Sep 12, 2006 4:19:26 AM
