The CPI and the Rat Race

The search for better economic policy.
Dec. 22 1996 3:30 AM

The CPI and the Rat Race

New evidence on the old question of whether money buys happiness.

(Continued from Page 1)

Is my license as a practicing economist about to be revoked? Aren't we supposed to believe in Economic Man? And doesn't admitting that people care about fuzzy things like status undermine the whole economic method? Not really: Homo economicus is not a central pillar of my faith--he is merely a working assumption, albeit one that is extremely useful in many circumstances.

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But admitting that people's happiness depends on their relative economic level as well as their absolute economic resources has some subversive implications. For example: Many conservatives have seized on the Boskin report as a club with which to beat all those liberals who have been whining about declining incomes and increasing poverty in America. It was all, they insist, a statistical hoax. But you could very well make the opposite argument. America in the 1950s was a middle-class society in a way that America in the 1990s is not. That is, it had a much flatter income distribution, so that people had much more sense of sharing a common national lifestyle. And people in that relatively equal America felt good about their lives, even though by modern standards, they were poor--poorer, if Boskin is correct, than we previously thought. Doesn't this mean, then, that having a more or less equal distribution of income makes for a happier society, even if it does not raise anyone's material standard of living? That is, you can use the fact that people did not feel poor in the 1950s as an argument for a more radical egalitarianism than even most leftists would be willing to espouse.

You could even argue that American society in the 1990s is an engine that maximizes consumption yet minimizes satisfaction. In a society with a very flat distribution of income and status, nobody feels left out. In a society with rigid ranks, people do not expect to rise above their station and therefore do not feel that they have failed if they do not rise. (Aristocrats are not part of the peasants' reference group.) Modern America, however, is a hugely unequal society in which anyone can achieve awesome success, but not many actually do. The result is that many--perhaps even most--people feel that they have failed to make the cut, no matter how comfortable their lives. (In a land where anyone can become president, anyone who doesn't become president is a failure.) My European friends always marvel at how hard Americans work, even those who already have plenty of money. Why don't we take more time to enjoy what we have? The answer, of course, is that we work so hard because we are determined to get ahead--an effort that (for Americans as a society) is doomed to failure, because competition for status is a zero-sum game. We can't all "get ahead." No matter how fast we all run, someone must be behind.

If one follows this line of thought one might well be led to some extremely radical ideas about economic policy, ideas that are completely at odds with all current orthodoxies. But I won't try to come to grips with such ideas in this column. Frankly, I don't have the time. I have to get back to my research--otherwise, somebody else might get that Nobel.

Paul Krugman is a professor of economics at MIT whose books include The Age of Diminished Expectations and Peddling Prosperity.

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