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Sentences to ponder
Back in grad school, I remember a friend telling me as a rule for investments and portfolio selection “People maximize utility, while the rich maximize wealth.”
That's from RortyBomb, an observation he made after his quest to find the most expensive refrigerator on the market.
Posted by Tyler Cowen on August 8, 2009 at 01:34 PM in Economics | Permalink
Comments
The refrigerator described sounds very tacky and nouveau riche, and I doubt many truly wealthy people would buy it.
IMHO, the big driver of savings for the ultra-rich is that at some point their status competition shifts from 'who has the most stuff' to 'who has the most real power/most money/biggest company/best contribution to society/most thorough crushing of all competition' and in some cases 'who has the biggest longlasting charitable impact'. This kind of status competition helps society at large when it focuses on charity or inventions (e.g. Gates and Buffet's foundations, Bezos' space investments, and Google's green investments) but hurts society when it focuses on political power or illegal crushing of the competition.
Posted by: DK at Aug 8, 2009 4:08:23 PM
Why are liberals (er, progressives) so obsessed with inequality?
Posted by: Rich Berger at Aug 8, 2009 6:03:01 PM
"Why are liberals (er, progressives) so obsessed with inequality?"
I guess Rorty Bomb sort of addresses that (as does TC's previous post, "What is Progressivism").
As someone who doesn't make that much money, I couldn't care less about inequality. My uncle recently got rich and the rest of my family now treats him differently (in a bad sort of way). It's ugly stuff.
Posted by: thehova at Aug 8, 2009 6:18:43 PM
On refridgerators:
The truly truly rich let their employees think about how to store their food for them. ;)
Posted by: david at Aug 8, 2009 6:46:00 PM
@Greg Clark. "...is hard to predict" is the only part of that article not requiring a leap of faith.
Posted by: Harkins at Aug 8, 2009 10:18:28 PM
Honestly, if I were looking for status, I would buy an ice box that used genuine antarctic ice from the South Pole.
Makes me want to Google it just to see if some other moron hasn't already beat me to the idea.
Posted by: Yancey Ward at Aug 8, 2009 11:23:34 PM
“People maximize utility, while the rich maximize wealth.”
Interesting to note: some of the rich are also people.
Posted by: C at Aug 9, 2009 1:34:23 AM
Apparently he didn't look very hard, here’s a $109,000 fridge on sale for $61,000:
http://www.acitydiscount.com/American-Panel-HurriChill-80-Pans-Blast-Chiller-Shock-Freezer-w-Remote-AP80BCF900-3.0.80298.1.1.htm?PPCID=10&link=Commercial-Freezers
Posted by: Doug at Aug 9, 2009 1:53:24 AM
From the comments @ Rortybomb:
To be honest, this whole conversation about “consumption inequality” as the gauge to measure the stratification of our society (or lack of class division within our society, depending on your viewpoint) – the idea that because we all get three square meals a day and a fridge to store the food in means we’re all more equal than our income would imply – strikes me as a huge crock of BS used to justify the extreme rise in income disparity that we’ve seen since Reagan between the top 1 percent and the rest of us.
I view this as the representative sentiment of Progressives wrt inequality. Quite starkly here, ensuring a minimal acceptable (and increasing!) level of quality of life is considered to be unacceptable if some are doing much better than others.
Posted by: Jody at Aug 9, 2009 7:04:44 AM
The sad thing is that even a poor person could probably finance the expensive fridge, and it would probably keep his food just as cold as a poor man's fridge.
"I'd like the premium cold please. Yes, give me Centigrade, that sounds European and sophisticated. No, I can't afford Kelvin. I don't want to be conspicuous about things."
Posted by: Andrew at Aug 9, 2009 10:10:32 AM
"...their status competition shifts from 'who has the most stuff' to 'who has the most real power/most money/biggest company/best contribution to society/most thorough crushing of all competition' and in some cases 'who has the biggest longlasting charitable impact'. This kind of status competition helps society at large when it focuses on charity or inventions (e.g. Gates and Buffet's foundations, Bezos' space investments, and Google's green investments) but hurts society when it focuses on political power or illegal crushing of the competition."
Or I would add, when it is used to accomplish political ends that cannot be accomplished by the market.
People do not seek wealth as a linear pursuit, but as part of a Maslowian pyramid. They seek survival, then safety, then they seek status in different forms, first material, which makes them legitimate to their commercial peers, then after material, they become social, which makes them legitimate to the next higher peer group, and at some point they become effectively social figures (Buffet or Gates) which makes them very exclusive and therefore accumulators of status.
Status is a permanent part of the mating ritual, as well as a permanent part of necessary epistemology (knowing what to do and what choices to make), as well as part of the historical epistemology (who we should imitate). As people increase their wealth, they both want to be busy (use their developed skills) want to be successful (achieve positive feedback from business) and they set goals that are relative to their performance capacity (they generally want to expand their skill range as humans prefer to operate near their maximum capacity in order to find the work interesting).
In other words, as you get money, you get it from relationships, and skill development and it's all pretty entertaining because you start having longer term successes (returns) which allow you to change from being short term acting as an opportunity exploiter in need of quick returns, to a long term opportunity generator, and it allows you to be patient, and contemplative in those pursuits, and to do so at lower risk. From there you actually move to where you're shopping for opportunities that others present to you, so that you can choose from them the ones that produce the most status or fun given the knowledge and resources that you have at your disposal. So it's actually less stressful and more rewarding at the same time. And if you stop using your accumulated wealth, and knowledge and relationships for increasingly complex ends, you stop having all the fun of interacting with all these people and doing all this fun stuff, and getting all the positive feedback and attention, and life frankly seems boring, so you keep doing it and frankly it keeps getting easier as you do more of it. It's really hard work actually, and it's uncommon for the average citizen to understand the volume of work that high-performers have to process. In fact, simple act of information processing at such volume is what makes such people so uncommon. (Gladwell's error in 'Outliers' to the contrary.) Not all that many people can do it.
It's the guy who hates his job every day that wants to go fishing in a peaceful stream for the rest of his life. The people who love what they do and are successful at it and rewarded for it simply want to keep doing it, largely because it's fun and interesting. And the more wealth and relationships and knowledge about both specific techniques (finance, legal, economic, political, social) and processes (how to get things done in each domain) that you have the more abstract (social and political) become your interests, because in the end, the wealth needed to accomplish any goals is generally a measure of how many people you're affecting for what period of time.
Taxes should be applied to balance sheets, not income. Large Balance sheets allow people to use money accumulated by 'public service market capitalism' for political ends that cannot be prosecuted in the market and therefore can be used to abuse the market system. It is these people that cause the problem with capitalism's excesses. Income taxes simply are regressive in reducing people's public service by penalizing those who are most active in applying money in the midrange of human performance toward ends that are social goods (business people), but not political ills. (Soros and Ford Foundation)
And these balance sheet numbers are reasonably calculable and constant over time compared to the chaos of income statements. The problem then becomes capital flight, which is solveable in the balance sheet context, but not in the income statement context. Furthermore this encourages the state to behave in a way that produces longer term results rather than simply distorting behavior by constant taxes that these same business people simply seek to avoid by changing their pursuits. Of course, this would also make it very visible (as it is in NYC) just how few people fund the state, and it would recreate some sort of publicly visible merchant nobility over time. But I'm not convinced that having entrepreneurial heros isn't far better than political demagogues.
Posted by: Curt Doolittle at Aug 9, 2009 12:19:30 PM
as David says: "The truly truly rich let their employees think about how to store their food for them."
I'm not "truly truly rich," but refrigerator management is handled by the staff. Keeping the kitchen stocked with fruit and veggies, and throwing old stuff out at expiry is one of the easiest things to outsource. For about $3/day you get a magic fridge that is self-cleaning and always has the stuff you need in it.
Posted by: gorobei at Aug 9, 2009 12:37:31 PM
How do you get that for $3 a day?
Posted by: Doug at Aug 9, 2009 3:33:51 PM
This is actually a testable hypothesis. See if rich people play the Allais paradox differently - people maximizing expected return as their utility function, if not making a mistake, should not fall prey to the Allais paradox.
Posted by: michael webster at Aug 9, 2009 4:57:34 PM
Doug,
You spend $100/day, and assign 3% of the labor to keeping your fridge clean and stocked with basics :)
Posted by: gorobei at Aug 10, 2009 9:42:04 PM
