Conspicuous Consumption, Arms Races and the Needy
Bob Frank was a professor of mine in graduate school at Cornell. He is perhaps most well known for his argument in favor of a progressive consumption and income tax. Why? He argues that much of the consumption of goods by the rich (and perhaps middle class too) takes place over status competition and “positional” goods. In other words, some people buy a fancy car just to have a fancier car than the other guy. Then the other guy buys an even fancier car. And so on ad infinitum (I suppose). Forget the fact that prices and incomes even matter for these people. The point Frank makes is that each of them expended a huge amount of resources, at the end of the day only one of them could still have the nicest car, and that the whole thing does not lead to any measure of happiness being larger for the two of them as compared to a world where they stopped their arms race with the first purchase of a new Mazda 6 or Toyota Camry. This is an idea we’ve touched on here and several other places.
His solution? Higher consumption taxes and income taxes to “nudge” people into not making huge arms-racy purchases that do not make them better off, and perhaps use the proceeds to help others with more “worthy” endeavors, or to encourage the rich to engage in more worthy charitable giving and the like. These arguments seem bizarre to most classical economists and for a variety of reasons.
- Who should we be worrying about “consumption arms races” for more, the rich or the poor? It is more awkward to have a position that sounds like, “oh, those poor rich, if we could only free them from the shackles of their own irrationality, they would know that they’d be happier with one Porsche instead of two, and that would be the path to their true happiness!” Or is it more awkward to have a position that sounds like, “when the poor engage in acts of conspicuous consumption, not only is that likely to not make them happier than they were before the arms race, but their irrationality has caused them to purchase a really nice Ford Mustang instead of getting a used Mazda 3 and spending the difference on healthier food, a safer apartment or more schooling.” My point here does not undermine the case for progressive taxation (it can depending on how far you want to push the argument) but it does focus the attention on what “problem” is one that is the proper concern of policymakers. In fact, the reason we have food stamps instead of cash vouchers, for example, is precisely because policymakers fear the unwise spending decisions the poor would make if they were able to exercise their freedom.
- The knowledge problem here is incredible. It is absurd to argue that anyone knows what types of consumption are conspicuous and what are not, or that the goods that are purchased instead of the “Porsche’s” are not also done for positional purposes? No one can know. In fact, since the point of conspicuous consumption is not to have more toys than the next guy, but to raise your status over the next guy, then what will the now more highly taxed people be trying to do to raise their status? And just because the consumption of some of those “new” goods is more to the social approval of some planners in DC and Albany, does that mean that the consumption is any less “arms-racy?” Indeed, economics suggests it will be more arms-racy because we’d have to take greater and greater efforts to find things to compete on status over, and this raises costs. Indeed, any other thing that I compete on is likely to entail at least as much waste as the initial situation.
Who says my passion for hiking is not a similar pursuit of status, and not “wasteful”? If I cannot purchase a larger car, perhaps I try to spend all of my time scaling the 46 highest peaks in the Adirondacks. I might even put a sticker on my car, or have a patch on my jacket to celebrate this achievement. In fact, what is different about that is that my pursuit of bagging the high peaks very likely does not benefit anyone else, whereas my consumption of a super-duper hedonic treadmill actually does – the investors, owners and employees in the treadmill factory and its suppliers.
- A related problem would seem to be that it is not clear what would be considered “conspicuous” consumption in the first place. For example, I am not the brightest or sharpest tool in the shed. Maybe when my neighbor gets that shiny new boat in his yard, my way to “one-up” him is to go purchase 50,000 potatoes, and then give them free of charge to all of my neighbors. Or maybe I take them and build a potato sculpture in my yard. Who gets to say that this is wasteful? What if, perhaps, my neighbor inspired me to great things, or to become an entrepreneur – and these potatoes were research tools into some new and exciting product? Do we want to snuff all of that out by forcing me to go hiking? And who gets to say what a “good kind” or bad kind of consumption is? I am not even sure I know for myself what is good and what is bad, and you would trust me to pass that judgment about people I have never met, and whom I certainly cannot possibly care for?
I cannot keep thinking anything but that the only common theme in all of these sorts of discussions is an implicit (explicit?) contempt for the rich. Before I spend any more time discussing this issue, or the importance of materialism, I’d like to have someone demonstrate to me that this is not about envy, double standards, and incredible nanny-state interventionist preferences. I just cannot see the efficiency argument, that’s all.