This is a followup to my previous post. Robert Frank likes to talk about "positional goods." These are goods I like, not because they confer any direct benefit on me, but because I feel happy when I have more of this type of good than what others have. Similarly, I feel worse when others have more of this good than I do. Examples are large houses that are mostly empty or Beamers driven by people who couldn't tell the difference between riding in a Beamer and riding in a Hyundai if they closed their eyes. An extreme example is this house in India. Frank thinks that positional goods are ubiquitous and lead to social waste - basically, a lot of time and resources wasted over nothing. From his point of view the social welfare loss is large, and can be corrected with a progressive consumption tax.
But hold on. Aldo Rustichini likes to study envy and regret. He is an economic theorist who also has in interest in economic experiments and neuroeconomics. Rustichini likes to view envy and regret as elements of psychology that propel learning and economic development. Envy is a force that makes me want to replicate the successful behavior of others, while regret is a force that helps me to correct my own errors so that I can become successful.
To motivate these ideas, Rustichini likes to talk about how performance is evaluated in elementary schools in the United States. I went to elementary school in the 1960s in Canada, where we were graded in each subject, and were given a report card to take home with little else other than the odd short comment next to the grade - "shows promise," "improvement needed," etc. Grades were of course supposed to be private, but we knew what was going on. I felt good. Some others felt bad. Concern that some children in elementary school might feel bad led people in Schools of Education to push for changes in performance measurement in elementary schools. By the time my own children went to elementary school in the United States, grades had been ditched in favor of a lot of words that the teachers had to put together to describe performance on a report card. The parents get roughly the same message, but now the kids have a harder time figuring out who the top performers among their peers are.
Rustichini seems to think that grades in elementary school are a good thing, and that the modern wishy-washy approach to student evaluation is thwarting envy, which will actually reduce the amount of learning that takes place. If you know who the top performers are in your class, you can watch them, see what they do, and try to replicate it. Maybe you can get them to show you a few things.
What about "positional" goods? These can actually be performing a useful economic role, even if they are pure "waste" in the conventional sense. This is what signaling is all about. In a signaling model, acquiring a signal may be costly and a pure waste, but it reveals information because the signal is less costly to acquire for "good types." Sometimes people argue that there is a signaling component to higher education. It doesn't matter that you didn't learn anything in college, because employers know that only the smart and diligent ones actually finish.
To get envy working as a force for social good, we need to be able to correctly identify economic successes. How are we going to do that if the successful people hide their wealth? Someone who pushes her Beamer off a cliff in public is demonstrating to us that she is successful - so successful that she can waste resources. I see this and it makes me curious. How does a person get so rich that they would be willing to destroy their Beamer? Maybe I can replicate her behavior and get rich too, not because I want to destroy Beamers, but because I want to relax my budget constraint in a big way.
You don't want to tax the positional goods or pass laws against having them, for the same reason that you don't want to take grades away from the elementary school kids. In doing so, you are thwarting envy. When you do that, you will get less learning and less innovation, and on average we will all be worse off.
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