Cafe Hayek: Relatively Speaking

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April 08, 2006

Relatively Speaking

Don Boudreaux

The April 3, 2006, issue of the New Yorker features this article, by John Cassidy, entitled “Relatively Deprived.” Its principal point is that relative income or wealth matters a great deal – that people whose absolute level of material prosperity is quite high might nevertheless suffer many of the ill consequences of poverty if they are worse off than others in their society. Consider:

Erzo Luttmer, an economist at the John F. Kennedy School of Government, recently found that people with rich neighbors tend to be less happy than people whose neighbors earn about as much money as they do. It appears that, while money matters to people, their relative ranking matters more.

Relative deprivation is also bad for your health. In a famous study conducted between 1967 and 1977, a team of epidemiologists led by Sir Michael Marmot, of University College London, monitored the health of more than seventeen thousand members of Britain's Civil Service, a highly stratified bureaucracy. Marmot and his colleagues found that people who had been promoted to the top ranks—those who worked directly for cabinet ministers—lived longer than their colleagues in lower-ranking jobs. Mid-level civil servants were more likely than their bosses to develop a range of potentially deadly conditions, including heart disease, high blood pressure, lung cancer, and gastrointestinal ailments.

My first thought when I read the previous paragraph was “Administrators in the top ranks presumably are paid more than are administrators in lower ranks; so some or all of the worse health of lower-rank administrators (relative to the health of higher-rank administrators) might well be due simply to the fact that lower-rank administrators can buy less health-care than can their higher-ranking colleagues. Absolute, rather than relative, income differences might still be the driving force behind this empirical finding.”

But put this possible objection aside. Instead, ask how the “relatively deprived” hypothesis squares with this report on the state of economic research by Nobel laureate Daniel McFadden:

First, both behavioral observation and brain studies indicate that organisms seem to be on a hedonic treadmill, quickly habituating to homeostasis, and experiencing pleasure from gains and pain from losses relative to the reference point that homeostasis defines…. People quickly grow to accept the city in which they are located, their job, their mate, and their health status. They may recognize and complain about unfavorable absolute states, but their levels of satisfaction by various measures are not nearly as differentiated as they would have to be if their sensation of well-being were experienced on an absolute scale.

[From Daniel McFadden, “Free Markets and Fettered Consumers,” American Economic Review, March 2006, Vol. 96, page 9.]

At one level, McFadden says something similar to what John Cassidy says – namely, relative states matter more than do absolute states. But the details of McFadden's message differ fundamentally from those of Cassidy's message. McFadden says that a person’s subjective well-being is reckoned relative to his or her own accustomed state. Cassidy says that a person’s subjective well-being is reckoned relative to the material standard of living enjoyed by other people.

If Cassidy (and the research he reports on) is correct, then McFadden (and the research he reports on) is wrong. If McFadden is correct, then Cassidy is wrong. And, of course, both could be wrong.

Posted by Don Boudreaux in Standard of Living | Permalink

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You can't imagine a situation where one goes up, the other goes down, and both matter?
It seems to me these could be independent factors, and vary in relative importance with the individual, the situation, and the culture. Speaking only for myself, they're both wrong - my real wealth and disposable income have dropped every year since I retired, but I'm happier.
That said, I am more worried about my absolute standard of living than my relative position, so the McFadden explanation seems a more accurate description of me. I don't know that that says anything about people in general.

A question, also: do either of these gentlemen address uncertainty in position/standard of living, the question of whether (relative) losses matter more than gains, or whether people can tell local fluctuations from long-term changes at the national or world level?

Posted by: Larry Knerr | Apr 8, 2006 7:25:15 PM

It may depend on the level of contact between the relative groups. People probably would take higher absolute gains over relative ones if it was in anonymity, such as a general market, but this could be different for some people if it was the Jones's down the street.

Posted by: Mickey Klein | Apr 8, 2006 9:16:36 PM

Sometimes it seems like envy is the last accredited virtue. I lived in a cockroach infested slum as a child, and some of my friends lived in nice houses. I didn't want them to live in slightly crappier houses and me to live in a slightly nicer slum; I just wanted to live in a nice house myself.
The government is in the business of building slightly nicer slums. No thanks...

Posted by: someguy | Apr 9, 2006 7:09:27 AM

It looks like those dudes who wrote the Bible had some similar observations and corrective advice. For example....

For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. (1 Tim 6:10 NIV).

A heart at peace gives life to the body, but envy rots the bones. (Prov 14:30)

Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income. (Eccl 5:10 NIV)

Keep your lives free from the love of money and be content with what you have...(Heb 13:5 NIV)

From my observations of people over the years in different circumstances and in rich and poor areas, it is envy that drives down happiness.

Posted by: Jay Godse | Apr 9, 2006 10:15:37 AM

"people whose absolute level of material prosperity is quite high might nevertheless suffer many of the ill consequences of poverty if they are worse off than others in their society."

Notably absent from Cassidy's "ill consequences of poverty": failing longevity and infant mortality, malnutrition, starvation, cholera, dysentery, plague, malaria and infection. Illiteracy, homelessness, famine.

By demonstrating that both the rich and the poor alike experience "envy," Cassidy is on the verge of realizing something many of us have known all along: that envy is distinct from poverty.

Now, if Cassidy could just connect a few more dots he'd be a changed man for life: When you look at what defines actual poverty, you see things that simply don't exist in America. Makes you wonder what we're fighting in the war on poverty, doesn't it? And, of course, for many years that war's been nothing more than attempt to placate envy (or as the far left likes to dignify it, "relative immiseration").

Then, consider as Cassidy has implied, that this war cannot in fact be won. You cannot raise the poor out of their misery, because by the very nature of how our economy works, that would require somebody, somewhere, to get very rich.

Meaning that the only option for those who would eradicate *envy* is to crush the very engine that has eradicated *poverty*. And the scary thing is that there are those among us who think that's a fair trade.

Posted by: johngaltline | Apr 9, 2006 10:53:44 AM

>>"Marmot and his colleagues found that people who had been promoted to the top ranks—those who worked directly for cabinet ministers—lived longer than their colleagues in lower-ranking jobs."<<

Maybe people that lead healthy lifestyles, and are happy tend to get promoted over those that do not.

Posted by: Mcwop | Apr 10, 2006 7:46:03 AM

JohnGaltLine,

Re; "...envy is distinct from poverty."

Exactly. I would add that envy is not a valid consideration in public policy.

Posted by: Randy | Apr 10, 2006 9:23:40 AM

In fact, I actually included that, but I took it out because I was really getting on a roll and I thought I might never finish.

More of "the rant":

It would be irrational to accept more absolute poverty in the pursuit of eliminating relative envy.

It is rational to simply accept relative envy and to channel it as constructively as our willpower permits. Government should focus on limiting the destructive outlets for envy.

There are people who know they benefit from reason, and people who do not. Government does not exist to reach a compromise between the rational and the irrational; it exists to protect the rational from the irrational.

Posted by: johngaltline | Apr 10, 2006 12:07:39 PM

"some or all of the worse health of lower-rank administrators (relative to the health of higher-rank administrators) might well be due simply to the fact that lower-rank administrators can buy less health-care than can their higher-ranking colleagues"

I'm not sure you're got the causality pointed in the right direction. Perhaps those with good health and abundant energy are more likely to make it to the top ranks.

Posted by: Ann | Apr 10, 2006 2:54:22 PM

Randy,

Envy IS the primary driver of public policy and, in a democracy in which simply majorities rule without the limits imposed by the original intent of the constitution, envy will be the primary driver of redistributive tax policies. Should envy be the primary driver of policy? No. But it is and it will be that way under an unlimited government under democracy.

Posted by: Kim Duncan | Apr 11, 2006 4:14:09 AM

Posted by: Jeff | Jun 10, 2007 9:00:25 AM

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April 08, 2006

Relatively Speaking

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