Wealthier Than Thou

Wealthier Than Thou

Wealthier Than Thou

How the dismal science applies to your life.
Oct. 10 1997 3:30 AM

Wealthier Than Thou

Is it enough to be rich, or must others be poor?

What do people really care about: being rich, or being richer than their neighbors?

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Of course, people care about a lot of things that have nothing to do with being rich. Just by logging on to Slate instead of using this time to earn an extra dollar, you've refuted the proposition that people pursue wealth the way sharks pursue food. Instead, we compromise between the pursuit of wealth and the pursuit of leisure, sometimes accepting less of one so we can have more of the other.

Besides wealth and leisure, there's a long list of other things we value. We like to avoid risk; we care about the qualities of our mates; we want our children to be happy. But wealth is one of the things we strive for, so it makes sense to ask how we measure success in that dimension.

One hypothesis is that it's only your raw wealth that matters--a million dollars will make you happy regardless of whether it's half or twice what your neighbor has. In other words, you measure the value of your wealth by what you can buy with it. The alternative hypothesis is that you also care about your place in the pecking order.

If only raw wealth matters, your hard-working neighbor is no threat to you. He keeps what he earns, you keep what you earn, and you can each decide whether you'd rather earn more money or enjoy more leisure. On the other hand, if people care about the pecking order, you and your neighbor can get involved in a costly and futile "arms race," sacrificing valuable leisure in your mutually frustrating efforts to be the top earner on the block.

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To put this in perspective, imagine that we could all agree to take an hour off from work this week. Under the "raw wealth" hypothesis, there's no advantage to that agreement. After all, you were always free to take an hour off. But under the "pecking order" hypothesis, the agreement could serve as a sort of "arms control" that leaves everyone better off by preserving our relative positions while freeing up some extra time for leisure. But any such agreement would be impossible to enforce, which (if the "pecking order" hypothesis is true) is a failure of the marketplace.

Which hypothesis is true? Economists traditionally have assumed that relative position does not matter, and noneconomists traditionally have scoffed at that assumption. The scoffers point to medieval monarchs who earned less (in real terms) than today's average American; nevertheless, by the standards of their contemporaries, they lived--literally--like kings. It's easy to imagine that ruling all of 15th-century England brought greater satisfaction than does, say, the life of a modern certified public accountant.

But when something is easy to imagine, it's often because your imagination is limited. In this case, your vision probably has neglected to include the disease, monotony, and isolation of medieval life. I think it not at all unlikely that Henry V would have traded his kingdom for modern plumbing, antibiotics, and access to the Internet.

Here's another reason to be skeptical of the hypothesis that people care deeply about how their income compares with others': I've never met anyone who subscribes to the analogous theories about leisure or risk. Do you care about the length of your vacation, or about whether your vacation is longer than your neighbor's? Do you care about how well your air bag works, or about whether you've got the best air bag in your neighborhood? In each case, surely it's the former. But if we feel that way about leisure and risk, why would we not feel that way about income?

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On the other hand, if you really believe that people care about wealth only for what it will buy them, it's hard to explain why Bill Gates gets up and goes to work in the morning. Surely it's not because he's afraid he'll run out of money? But it just might be because he's afraid he'll lose his No. 1 ranking in the Forbes 400. (Though here I'm tempted to respond that it's a mistake to generalize about human behavior on the basis of a few extraordinary individuals who probably--and quite atypically--love their work.)

Recently, three economists named Harold Cole, George Mailath, and Andrew Postlewaite (for whom I will use the collective abbreviation CMP) have proposed a compromise between the two theories: On the one hand, people do not care directly about their relative positions in the wealth distribution. On the other hand, they care indirectly about their relative positions, because a high relative position allows you to attract a better mate.

The CMP theory sounds very simple, but it has some remarkable implications. First, it implies that the competition for mates drives most people to save too much money. Young people oversave in an attempt to improve their own prospects, and old people oversave in an attempt to improve their children's prospects. If everyone could agree to save a little less, we'd all be better off: Our relative mating-game scores would be unchanged, but we'd all have more money to spend. And yet, while this "oversaving" is costly to any given generation, it enriches future generations.

When people compete by saving, the rich have a head start. So the CMP theory suggests that income inequality should grow over time. But if inequality becomes so great that people lose all hope of changing their relative positions, then the incentive to oversave disappears, and the inequality could begin to shrink.

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The most striking implication of the CMP theory is that the concern for relative position vanishes in societies where mates are allocated by mechanisms other than wealth. Imagine an aristocracy, where your social status is inherited from your parents and dictates your choice of mate. Such an aristocracy might not be sustainable. People with low status and high wealth can prove attractive to people with high status and low wealth, whereupon the entire social structure disintegrates. Even families with low status and low wealth might be able to save aggressively for several generations in order to buy their way into the aristocracy, and again there is an eventual breakdown.

But the CMP researchers have identified a way for an aristocracy to be sustained indefinitely. Mixed (high status-low status) marriages can be effectively deterred in a society where the children of such marriages are relegated to the lowest status of all. In that case, a low-status man who wants to crack the social barriers (and who cares about his offspring) must save enough to purchase high-status mates for both himself and his children. CMP have demonstrated that to succeed, such social rebels would have to achieve impossibly high savings rates--so the aristocracy endures.

Now here is the punch line: Imagine two societies that are identical in all the ways that economists traditionally view as important. They have identical populations. They have access to identical technologies. Their people have exactly the same preferences in all things. But in Society A, you attract your mate by wealth, and in Society B, you attract your mate by inherited status. Then the standards of living in these societies will differ dramatically and diverge dramatically over time, because they offer different incentives to save--and saving is one of the twin engines of economic growth. (The other engine is technological progress, which we've assumed is the same in both societies.)

The moral of the story is that cultural norms are extremely important. Of course, one could argue that everyone except economists knew this all along. But the CMP research demonstrates something genuinely new: that cultural norms can be extremely important even if we accept all the standard simplifying assumptions that economists like to make about human behavior.

We can go further, imagining societies where status is conferred not by accidents of birth but by learning, or by physical strength, or by darkness of complexion. Clearly any one of these societies will evolve very differently from all the others. But what makes them differ in the first place? Part of the answer, according to the logic of CMP, is that once a cultural norm is established--even for purely random reasons--it can become self-sustaining. Ideally, though, we'd like a coherent account of those "purely random reasons"--and I'm not sure anyone knows how to think about that.