Monday, 2 January 2012

Wealth is a terrible way of measuring success

We all love money because we can use it to buy the things we want. But in a capitalist system money can go wrong. People start to obsess about how much money they have compared to other people - they see it as a measure of their importance and success. The problem is that using money as a status good undermines its proper economic role and distorts the economy as a whole.


According to mainstream economics money shouldn't matter. Money serves several essential functions - as a means of exchange, unit of account, and store of value - but so long as it is organised properly it isn't supposed to really matter to the basic supply-demand relationship. Most economic models don't even include money. Mainstream economists think that welfare consists in the ability of people to get stuff they want (to fulfil their preferences). Of course they recognise that in practice people in actual markets do this by giving each other money tokens in some form, but that's just a detail, not the point of the relationship. Instead, economists focus on developing theories about how to maximise welfare, and then designing rules to make the theory come true.

What happens when money is itself the object of consumption is that people become systematically redirected from what economists think the efficient economy is supposed to be about - supplying goods to people at around the cost of production -  to a status economy. This disrupts some basic economic principles because it shifts welfare from the absolute satisfaction of personal preferences to the relative satisfaction of social preferences. In the standard economy, everyone can be a winner (in fact, if transactions are voluntary, no one will ever be left worse off than they were before). But in a status economy people can only win if others lose, because success is relative.

One of the interesting consequences of this relates to satiability of the preference for money. Since economists think of money only in terms of its economic functions, they expect its value to agents to decline as their need for it declines - i.e. money has decreasing marginal utility. Because we want some things more than others, when we can buy those things we should care less about being able to buy things that are less important (the second house, third house, etc). In other words, if you have 10,000 dollars to spend you'll spend it on the stuff you really really need and get the most welfare from. The next 10,000 dollars will go on less important things, and so on until spending your millionth dollar makes almost no difference to how great your life is going. The rational economic agent will calculate how much she works in terms of the equilibrium between the disutility of working and the utility of spending the income she gets from working.

That's if we're living in the real economy - the one that economists think about - in which what people want is stuff. But if people are only interested in competing with each other - if they think the economy is a race - then they won't get welfare from stuff, but from their positional ranking in the pack. If for some reason people fixate on money as the measure of their relative status then they will have an insatiable demand for money itself, regardless of its real economic value to them. Many problems result

1. Economic value as personal desert.
Mainstream economics sees effective demand (under conditions of perfect competition) as a measure of the aggregate perceived value of what you're selling to society as a whole. Many people seem to think that this means that if you get lots of money, you therefore deserve it all. Yet in economic models 'profits' accruing to individual agents are signs of economic failure, not success. They are inversely proportional to the efficient functioning of the economic system. What producers 'deserve' in a perfectly competitive market is the bare minimum to cover costs of production. When CEOs or hedge fund managers boast of their mammoth bonuses year after year, from the economic perspective that suggests that that they're doing something deeply wrong, not something deeply right.

A focus on achieving personal wealth leads people to outsource their thinking about contributions to society to the economic system; to disparage the contributions of those, like sanitation workers, who earn less; to seek out and create market imperfections that allow the lucky few to reap rents from other people's productivity.

2. People will work much longer than they need to
Because people aren't being selfish consumers, but selfish status chasers, they will not stop working at the point that they can afford a comfortable life. Instead they will work longer if their neighbours work longer. What follows is the characteristic stressful modern life of restless anxiety.

3. People will spend on conspicuous consumption rather than what they really enjoy
If there is any kind of person more superficial than self-welfare maximising homo economicus, it is homo sociologicus. Conspicuous consumption focuses on things like cars (parked in the drive where the neighbours can see it), accessories like i-poddy things, Viking ranges, and so on. The actual utility of these goods is secondary to their function as displays of wealth itself. Things you actually enjoy doing, like going on holiday or spending time with friends will be neglected, despite your supposedly increased wealth.
The life of money-making is one undertaken under compulsion, and wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else. (Aristotle, Nicomachean Ethics)

To conclude, the pursuit of money for its own sake is, as Aristotle analysed, a great moral folly. It is just as ridiculous for people to use their income as a measure of their significance in the world.

18 comments:

  1. Look, how else can you compare the performance of an actor with the performance of builder? Money is the only truly general measure of value.

    It sucks in many ways - note how friends generally tend to give gifts reciprocally as selling things to your friends is considered demeaning - but there is no other really general measure of value.

    Status competition is real and very important - I have suggested before that economists could have a better model of human nature if they would assume status-maximization instead of utility-maximization!

    However it is not caused by money. People have all sorts of ways of competing for status. In rougher places like prisons it is typically violance or its symbol: big ripped muscles. In academic circles, things like credentials are used for status competition.

    Personally I think money is one of the less bad ways of status competition, because violence is worse. This is in line with Keynes's observation that we must bear with people tyrannizing their bank accounts so that they don't tyrannize each other.

    BR

    Shenpen

    ReplyDelete
    Replies
    1. You're right that money has many advantages - that's why it's so seductive. But reducing all worth to monetary value is still an unnecessary and ugly mistake.

      Delete
  2. Howie Berman24 July 2012 01:23

    Agreed, money isn't everything or even all- but people live in an iron cage which thrusts its mettle (metal) on ordinary folks whether or not we internalize its core values

    ReplyDelete
  3. Howard Berman4 August 2012 03:52

    Suppose somebody became obsessed with achievement above all else like winning the 10000 meters in the Olympics or winning the world chess title. How different is their metric for success from the money standard? It might have limits, but taking utility as equivalent to money this is unbalanced and means they are in a sense not doing things for their own sake and raise the bar to perfection if not infinite or indefinite wealth. So what you're saying is that people should strive in their endeavors for intrinsic rewards or maybe even the Golden Mean and not first and best in everything

    ReplyDelete
    Replies
    1. If people want to challenge themselves to achieve strange things like collecting the largest pile of money or winning an Olympic gold medal that is a matter for them. They may be rational fools if they sacrifice more to achieve those goals than they can gain.

      The problem is when large numbers of people get fixated on one of these goals (i.e. wealth getting). When society treats wealth as an end rather than a means, that distorts the economy and reduces overall welfare.

      Delete
    2. So you're saying conspicuous consumption distorts supply and demand

      Delete
  4. Can't it be tricky to tease out what is a bought for pure status and what has added value. A nice car might perform much better and a summer house though surely in part a status item adds intangible value. We can dream up other perhaps more apt examples. ie is an Ivy League education really better? These are all things that people who make money for its own sake might afford yet though hardly necessities reflect added value

    ReplyDelete
    Replies
    1. If you buy things to show off your earning power you are doubly superficial.

      Better to buy things to show off your taste.

      Better still to buy things because you actually want them.

      Delete
  5. this is a wonderful conversation. the only problem with this thread is that it's too academic. lets relate it to the personal. my husband says he wants a porsche (because he is an engineer and has a high regard for it's engine) I however believe he wants it to prove to everybody that he is a successful man. My husband believes he wants a big house, I however don't really mind what sort of shack i live in...just as long as it has nice gardens that my daughter (and i) can play in, I believe a big house is just another status symbol...gardens however are REAL people don't judge you a success just because of your garden. my husband believes that if he loses his hair (goes bald) he will not do business as well because pple will not be as eager to work for him and go into business ventures with him...again, i think hair is just a status symbol (one of virility and good looks) and has NOTHING to do with real success in business. Could I be wrong in assuming that my husband cares far more about status than me? and if so, is it a surprise that he works so hard for these things that he sacrifices his health, and his days and nights to pursue the aim of wealth and success? When my husband speaks to people the most common word on his lips is "success" and the one thing he drums home is how successful HE is...however when i talk to people it is in order to SHARE things such as our life experiences, common values, funny pastimes, curiosities and peculiar titbits etc I enjoy challenges but being viewed as successful does not matter to me because, on the whole, i do not value the opinions of others...what i value is if i can enjoy my time with them. Success for me comes in many different forms, if my daughter is turning into a balanced well-adjusted human being i know i am a success, if my family home is happy i feel successful, if i have tried hard at something and done a job to the best of my ability i feel successful...just putting in my best effort in life is enough. And i think in many ways this all comes back to upbringing. I was never put in daycare but was raised by a mother that nursed me and stayed at home in my infancy and was demonstrative in her love...my father was prone to telling me how proud he was of me on a daily basis - they had their many pitfalls but their depth of love and quality of time spent with me was never lacking. My husband was formula-fed and given to a daycare from six months of age. His father has never told him he is valued and his mother never celebrates his achievements. Instead she consistently talks about 'other people's achievements' and tells me that her son 'needs to show off' to somebody and 'needs to perform' she maintains that every little baby 'needs to show off and perform'. Therefore i hypothesis that it is NOT society and NOT merely a 'capitalist system' that is to fault...at the grass-roots it is the values of the family, nay of the MOTHER that creates a lack of self worth in the psyche of a person and necessitates a a constant drive to demonstrate success and self-value. The capitalist system is merely one vehicle for this end...and the never-ending pursuit to accumulate wealth. What we are dealing with is the psyche of a person, and the way that psyche has been shaped in its infancy. Therefore we should think more about supporting parents and mothers in the early years of a child's life if we wish to change our society's endless pursuit of wealth and success. countries like sweden do this, with family friendly policies and flexible work arrangements for both parents, in this way pple are given a sense of self worth in the early years and do not need to prove it in quite the same way for the rest of their lives!!!!

    ReplyDelete
    Replies
    1. I can't speak for the philosopher's beard and it took time to really grasp his point; but he is not in this particular post arguing against the pursuit of wealth per se but rather against it's effects when pursued on a large scale.
      You might argue, and I am about to, that he would argue against too little pursuit of wealth if it had a similar distorting effect on society and the economy.
      I would also say that in any society, if anything is valued, there will be pressures for some people to pursue that value to an extreme, whether fame, war, knowledge or in this case wealth. I think the philosopher's beard is less concerned with the mechanism than in the moral issue

      Delete
  6. the mechanism is important in order to advocate for change. pursuing wealth on such a large scale distorts the economy - true. However one must not worry about the effects of too little a pursuit of wealth. Because without a strong religious imperative arguing against wealth pursuit, people WILL pursue it one way or another. and without a social welfare system geared to cushion the consequences of laziness people WILL as a whole pursue wealth. hard work is necessary for survival. simple but true. the social welfare system as it is designed in Australia allows for the distortion you are referring to. the moral issue need not be of concern if we evaluated the causes of the imbalance. it seems that the philosopher's argument hedges on a capitalist system where people belong to no other community than the workforce itself. if people evaluated success not just on their role within the workplace but rather as a role within a community sphere one would find that self-worth is not just evaluated monetarily. the philosopher states that using money as a status good distorts the economy as a whole. I argue that when citizens belong to a strong community (outside their workplace) the economy itself benefits.

    ReplyDelete
    Replies
    1. As a liberal, I'm naturally suspicious of this talk of 'community' and religious ones at that.

      Capitalism is great exactly because it frees us from dependence on community relationships and vulnerability to religious dogmatism. Money can be a problem for liberalism to the extent that mindless pursuit of it undermines our own moral autonomy as comprehensively as any crazy religion.

      Delete
  7. Isn't there a certain anomie that sets in upon ceasing to earn money?

    ReplyDelete
  8. Your concept of status may be faulty. Status is not always for it's own sake; it is for social and ultimately economic competition. In capitalism if people aren't getting bigger ie richer they're getting poorer. Status is a form of competition and competition is built into the system. It's what makes it work. Plus, and this point may be related, there needs to be a safety net; if you remove the goal of obscene wealth remove the danger of abject poverty.
    I'm piecing together these ideas and may need extra time to fit it together but this is my main concern

    ReplyDelete
  9. A further argument:
    #1: Status is self esteem
    #2: Self esteem is based on how others view or are perceived to view you
    #3: In capitalism where the predominant gage of how people perceive you is economic, money is the way of measuring self esteem, in the absence of other group measures of self
    #4: Either find other primary identity groups by which we measure our worth than the economic and mitigate capitalism with perhaps communities if not communitarianism or accept that in capitalist societies, money will for some measure worth
    #5: Aristotle lived in a non capitalist society in which there were other avenues to success than self worth than we moderns
    #6: This argument arose from a chapter on the self (and self esteem) in Advanced Social Psychology, which is a text book. I don't know how much evidential backing the theoretical connection of self esteem and how others in your reference group take you (called sociometry) but my argument, given the premise of the theory is sound, I think

    ReplyDelete
    Replies
    1. I find this talk of social status and self-esteem somewhat distasteful, as a liberal and a virtue ethicist.

      Liberals suppose that individuals can and will develop their own moral values from their personal experience and reflection, and take responsibility for them. In doing so, it is quite appropriate to learn from how others think and act. But if you simply copy society's values as your own, or organise your life entirely around satisfying social conventions, then you're hardly living the liberal dream.

      There is something particularly wrong with the concept of self-esteem, as I understand it. It appears to exhibit 'self-absorption without self-examination': people want other people to respect them, but are not particularly concerned with asking themselves whether they are worthy of admiration (Theodore Dalrymple is good on this) Further, self-esteem is a particularly self-defeating approach because it demands and hungers for validation and recognition by others, while demanding that they only consider the most superficial aspects of your life (like your wealth). It just seems ridiculous to me to outsource anaylsis of how well your life is going in this way. I would rather have self-respect than self-esteem

      Delete
    2. I speak only for myself.
      #1 Status is not self esteem. The former is all about what others think of me. The latter is what I think of myself.
      #2 See #1.
      #3 I live in a capitalist economy but none of my acquaintances' predominant perception of me, or my worth, relates to my economic status, nor mine to theirs.
      #4 See #3.

      Delete
  10. There are experiments in social psychology that show that how people think including how they think about themselves are amenable to social pressures and social influence. Perhaps that means it is that much harder to be rational and ethical about things like status and autonomy. Now that I read your reply, yes your values, your liberal values are worthy; I am not an academic social psychologist so I'm no authority on their interpretation. Asch in the 50s did an experiment in which subjects judged two equally long blocks to be unequal due to stooges of the experimenter who said they were of different lengths. Shariff did an experiment in which subjects in a dark room were unable to tell that a light was stationary or moving. Experiments like these are suggestive in questioning the autonomy of our reason. I don't know much in detail about the theory regarding self esteem and many of the researchers don't valorize it in the way pop psychologists do; but these studies need to be addressed as regard to how people make ethical decisions at least in so far as the case in point, as they question people's ability as rational beings to think independently.
    It's not my intention to be overly provocative and I'm open to hearing your perspective on the implications on the body of experimental studies on these issues

    ReplyDelete