I’ve touched on these types of goods a few times in the past:

http://www.tvhe.co.nz/2012/11/26/prisoners-dilemma-game-justification-for-state-housing/

http://www.tvhe.co.nz/2013/06/27/deleveraging-the-question-that-never-gets-answered/

http://www.tvhe.co.nz/2013/07/17/the-olympic-drugs-prisoners-dilemma/

To think about “value from consumption” we have to think about a little more than just the fact that a person chooses to pay for a good – we have to think about the situation they have made this choice within.

If someone only values something because it signals their “relative position”, such as with “keeping up with the Joneses”, then we end up with an arms race to purchase that good – and other forms of consumption (including leisure time) will suffer. In that case, another individuals choice to have a “bigger house” has a cost for other individuals.

Here having people want to keep up with the Joneses does lead to higher GDP – but to lower welfare.

We can look at other examples where someones choice may in turn impose a benefit on you – having someone else add something to their house, which is an experience good, will show other people how awesome that addition is. As a result, other people will do it and the individuals choice will have increased the benefit to others – no doubt there are motivations like this around. In this case, we see GDP and welfare rise.

In these two examples we “observe” the same outcomes – which is why we have to be super careful saying that something will decrease or increase welfare. We need to come up with our “functional relationship”.

Johnson explicitly said he believed the relationship was due to envy and “keeping up with the Joneses”. By using status/Veblen goods as his example of inequality being good he showed that he has explicitly confused higher GDP with higher welfare. That, along with his blahing about IQ, is what I am strongly criticising in the post.

Is it then because you don’t regard possession/consumption as an “achievement”? I don’t think you’d have written about individuals “valuing achievement on the basis of the relative position”, or an “achievement externality”, as if those were bad things.
Otherwise, surely the Joneses’ having a new house qualifies as “people achieving things and motivating you, or showing you that you can do it”, and “revealing information about the choices available”?
If there’s no cost in receiving the new information, then where’s the motivation? If the newly-revealed information does /not/ make you less satisfied than you were before with where you are, what you’re doing, what you have, then how does it motivate you to act differently?

Keeping up with the Joneses implies that the individual values consumption on the basis of the “relative position”. So it is like a ‘consumption externality’ – someones choice to have a bigger house makes you value your current house less etc etc.

Having people achieve things and motivate you, or show you you can do it, is just a form of revealing information given uncertainty! It isn’t about envy or valuing yourself relative to someone else – it is about having information provided to you in a way that expands the set of choices you envision, or changes the way you perceive those choices WITHOUT a counterveiling cost!

What exactly do you see as the difference between:
“keeping up with the Joneses”
and
“by having people “achieve” others may say “hey we can do that too” and will strive to improve themselves”?

Hola Elinor,

“Is it really a “value judgment” to state that given equal opportunity, people who are inherently less capable are likely to end up earning less and therefore be less well placed to achieve whatever their own personal version of satisfaction is? Do “many economists” really think as a “starting assumption” that there is something wrong with that?”

It was presumptuous of me to say that “economists think” – let me tone it down to, economists models imply and work from a value judgments that focuses on subjective satisfaction from consumption – where there is some “cost” associated with the provision of labour. This is the households choice.

When it comes to policy making, and normative choices, the starting point for many sets of analysis (optimal tax models and monetary policy are two clear examples) is the satisfaction gained from consumption – not the endowed ability of an individual to produce. “Ability” is an endowment – an endowment based on luck, and on that basis redistribution is oft justified by economists:

http://www.tvhe.co.nz/2013/05/28/series-on-tax-part-3-poll-taxes-ability-taxes-and-fairness-considerations/

Now, there is an equity-efficiency trade-off, as lowering the return on investment, or the incentive to do something, through taxation will shrink the pie. AND there is another equity point – namely that some “ability” comes through work/investment by the individual, and the argument to redistribute that income is not nearly as clear – in fact many would see it as very unfair!

My issue with Johnson is that he focused on endowed ability and IQ. He did mention it in the speech – and explicitly acted as if differences in people ability to consume based on their endowed IQ were “just”. This is in no way clear, and is not the default starting assumption of normative analysis by economists (although it is an interesting positive assumption for description, saying it is just is a different kettle of fish).

“Do you really not see any role for inequality as a motivator or incentive for individuals to make the most of themselves and the opportunities they get? If that’s not what you mean when you say “competition is good” then what /do/ you mean by it?”

Indeed – there is an equity-efficiency trade-off, and furthermore by having people “achieve” others may say “hey we can do that too” and will strive to improve themselves – that is great. Again my issue was that Johnson specifically picked keeping up the Joneses as the thing he thought was good. This IS NOT an example of this – this is a prisoners dilemma that leaves people worse off.

There is a large brush of different views we can all have about what is fair and just – this is good, this is fine. However, these two points that Johnson made were fundamentally opposed to commonly accepted judgments on what is fair – and he made it sound “as if” they were the common justifications for inequality.

In truth, both the explicit arguments I discuss in the post had issues – but there is also scope for inequality to be a good thing. I also agree with him about opportunity etc, but the way he frames his argument makes “production” and “GDP” the only real goals of welfare – without a recognition that there are a wider set of welfare principles.

I would also note that it is perfectly fine to disagree with transfers of endowments, and to use different principles of fairness – but these are not the assumptions much of the economics literature is based on, and unsurprisingly they are not the ethical judgments I would make. That is something I was just trying to make clear here 🙂