Monday, September 04, 2006

Inequality, Spite, and the Game of Love

The debate du jour in the economic blogosphere seems to be about relative wealth – whether it affects welfare and whether public policy should take this possible effect into account. We have the usual dramatis personae, with Brad DeLong and Greg Mankiw in the leading roles, Jane Galt as the female lead, a cameo appearance by Chris Dillow, and Mark Thoma in the role of messenger (and let’s not forget Tyler Cowen…and now Gabriel Mihalache...and...and...and...never mind, I'm going to have to post this before I read every single blog). Most of the discussion concerns “envy” and “spite” – the supposed emotions of the poor and rich, respectively, which mediate the welfare effect of relative wealth.

I have a couple of points to bring up. First, from a utilitarian point of view, it doesn’t help Brad’s case that he points particularly to the spiteful rich rather than the envious poor. If the rich get pleasure from knowing they are better off than the poor, that, by itself, is a good reason to keep the income distribution unequal. Why not give the rich that extra pleasure of being relatively, rather than just absolutely, rich? The only utilitarian reason is that it (ostensibly) harms the poor, which is to say, in the terms of the discussion, that the poor are envious. Yes, I do understand that Brad is countering Greg’s comment about “making envy a basis for public policy,” but it seems to me that Greg's whole line of thought brings us into the realm of emotional, rather than rational, policy analysis. Greg casts redistribution in an unpleasant light by using the word “envy,” and instead of trying to cast it in a pleasanter light (“people like being equal”), Brad reflects back the bad light by using the word “spite.” In any case, it’s all mood music.

But I wonder why everyone (except Chris Dillow) thinks that the effect of relative wealth is merely subjective. As Chris points out, there are objective ways in which consumption by the rich may hurt the not-so-rich. I wonder why nobody has brought up what seems to me to be the obvious example: sexual competition. (For example, suppose you like tall redheads and you’re into spanking….OK, never mind.) I think particularly of competition among men, although arguments can also be made about competition among women. (My example also assumes, without loss of generality, that the men are heterosexual. And, oh, yes, back in the 80s I used to believe that stuff about men and women being roughly equal, so it didn’t matter who was chasing whom…but the 80s ended back in 1989, if I recall.)

In the area of beauty, evolution somehow seems to have failed the human male (well, most human males, anyhow: men are no plums, but they do contain the occasional Pitt). So men tend to compete for the attention of women not (like peacocks) on the basis of their natural endowment but on the basis of other things, which are often expensive. If I own a BMW and you buy a Jaguar, it hurts me objectively, because all the chicks that used to ride in my BMW will want to ride in your Jaguar instead. (In reality, it’s probably just as well that I drive a Saturn; my wife wouldn’t be too happy if I used the car to go cruising for chicks.) There’s no envy or spite involved here: just men who are competing rationally and women who like men with fancy cars. Although the competition has some benefit for the women involved, it’s easy to see that there’s also a deadweight loss. It’s a multi-player prisoner’s dilemma, and there is no mechanism to produce a cooperative solution.

UPDATE: Steve Waldman brings up another, much more important (but less sexy!) area in which objective competition causes relative wealth to have an impact: politics.

UPDATE2: I missed Alex Tabarrok’s important post, which might sort of provide a justification for Brad’s focus on spite. Also this other one by Gabriel Mihalache.

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17 Comments:

Blogger Gabriel Mihalache said...

I'll have to reread your post in the morning since now I'm tired but I think there's an aspect you're forgetting...

Let's assume that there are women, rated from 1 to 10, and men rated from 1 to 10. Evolution made it so that men of 1 hook-up with women of 1, and so on, while men rated as 10 will hook up with women rated as 10. (There's a psychological trick that makes ugly people see each other as beautiful after a while.. I'll have to dig for the link.)

So what I'm saying is that inequality of male endowments (interpret as you wish) don't lead to the no hook-up equilibrium but rather to the rate-on-rate one.

This is why I don't date libertarian Swedish supermodels but I hook-up instead with Tantza, the flabby junior welder from the factory.

So if you could, in theory, equalize the incomes of all men, you'd just lower the weight of income in the rating for males, to the advantage of other characteristics (non-monetary endowments).

Alternatively, if all women were made, by virtue of hyperperformant plastic surgery, equally sexy, then their rating would shift to cooking, deductions of a priori truths from the self-evident metaphysical principles and other wonderful criteria.

Mon Sep 04, 04:37:00 PM EDT  
Blogger Gabriel Mihalache said...

P.S. You made my day but puting me in the same sentence, in the same paranthesis, with Cowen & the others. Now I can die happy!

Mon Sep 04, 04:38:00 PM EDT  
Blogger knzn said...

So if you could, in theory, equalize the incomes of all men, you'd just lower the weight of income in the rating for males, to the advantage of other characteristics (non-monetary endowments).

But my point is, that would be more efficient, because men would not have an incentive to spend money on things that have no other purpose than to demonstrate (or exaggerate) their income level. They would, I admit, have the inefficient incentive to spend money on things that have no other purpose than to demonstrate their non-monetary endowments, but those things are almost certainly less expensive. With conspicuous consumption, the more money you spend, the more effective it is: there are no diminishing returns. But if you look at, for example, make up and plastic surgery, there are fairly rapid diminishing returns, so you get less inefficiency.

Although to be honest, this whole topic is mostly just an intellectual exercise. I believe pretty strongly in the Willie Sutton principle as the primary justification for progressive taxation.

Mon Sep 04, 05:52:00 PM EDT  
Blogger Gabriel Mihalache said...

OK. Let me get this straight... You're saying that if incomes are unequal, and you can afford the Jaguar, then you're hurting my chances at the supermodel. True. But isn't that like outbidding me in an auction? You win, I lose, the seller wins. (The supermodel wins because she faces less risk now. She can safely pick you.)

Sure, if the auction clients form a monopsony, they can drive the auction prices really low, but that harms the seller.

Men incur the cost of conspicuous consumption they don't otherwise benefit from (by assumption) and get the women (the benefit). Since there's a constant stock of women, a zero-sum game, as it were, then by "efficiency" you mean that they could, arguably, increase efficiency by decreasing their costs.

Let's assume that by some mechanism, they all spend 0 in conspicuous consumption. They get all women, by assumption, and their efficiency is maximum (maximum of benefit with the minimum of cost). But then we forgot the efficiency of women. (If their benefit is getting a preferred male and their cost is constant, then they face risk because of the now undifferentiated males.) Men also face a different lottery.

So, I would dispute (in a very wordy fashion ;-) your assertion that preventing competition via conspicuous consumption might be a Pareto-improvement or a Kaldor-Hicks-improvement (because it's a matter of empirics: who is willing to pay what to face what odds).

Returning to the serious topic at hand, I can't see how inequality could be inefficient since the Coase theorem assures us that w/o transaction costs, in a broad sense, efficiency is guaranteed, regardless of property rights. (If there's a world with resource, that world will be efficient regardless of who owns what.)

Re: "Willie Sutton principle", I had to look it up... Geez, I fondly remember the days when Ramsey seemed questionable ;-)

Mon Sep 04, 06:46:00 PM EDT  
Anonymous Anonymous said...

I think knzn's pont is that conspicuous consumption involves a waste of resources. The status effects don't matter, they're zero-sum.

Mon Sep 04, 07:06:00 PM EDT  
Blogger Gabriel Mihalache said...

It's the "waste" part I don't get. If resources are allocated by opportunity cost then the actual use is the most profitable use, given the distribution of information, institutions, etc.

One could argue that the mechanism for sexual pair-up based on conspicuous consumption is inefficient compared with another mechanism. One might, but I don't know such mechanism, and the way to show this might require empirics.

Would a mechanism were men would compete by boxing be more or less efficient? Would a mechanism where the women bear the burden? Maybe and maybe.

Income inequality enables conspicuous consumption but we don't know, yet, how the world would look without conspicuous consumption. (E.g. I'd rather have an income-unequal world rather than one in which men compete via violence.)

Even so, I have the sense that I'm missing something here... huh...

Mon Sep 04, 07:41:00 PM EDT  
Anonymous James said...

Look at the example you give:

"If I own a BMW and you buy a Jaguar, it hurts me objectively, because all the chicks that used to ride in my BMW will want to ride in your Jaguar instead."

OK. But then the issue isn't inequality of income, now is it? The issue is inequality of preferredness. If I made the argument that taller men harm me by luring women away, would anyone take seriously the idea that this is a serious social problem? I'd guess not. But the only difference between the scenario you describe and the scenario I describe is the basis for the choices of the women.

Mon Sep 04, 10:22:00 PM EDT  
Blogger knzn said...

James, being taller doesn’t use up any resources. Building a Jaguar does. If I’m the tallest guy in town, and then you come in and are taller, and women suddenly prefer you to me, that hurts me and helps you in equal degrees, so there is no inefficiency. But if you have to buy a Jaguar to do it, then you’re out the price of a Jaguar, and you’ll be willing to pay that price as long as the net benefit to you (value of chicks minus cost of Jaguar) is positive, even if that net benefit is extremely small. So I could be hit with a substantial loss, whereas you get only a slight benefit. That’s inefficient. That’s the difference between our two scenarios.

Gabriel, if you model the woman’s behavior as a rational attempt to choose a mate with the optimal characteristics, then it does boil down to a signaling problem. And in that case, a much more efficient signal – which somehow the market has been unable to devise – would be for richer men to carry around their income tax returns (“Hey, babe, check this out!”). And, yes, if the efficient solution is somehow impossible, there’s still no obvious reason that redistribution would make things any more efficient.

But modeling sexual attraction as a rational attempt to choose a mate with the optimal characteristics is like modeling food preferences as a rational attempt to choose foods with the optimal combination of nutrients. It’s not realistic. What the producer (the food company or the man) is trying to do is to provide a product with characteristics that consumers (or women) will find subjectively attractive. In the case of foods, because a formula can be easily repeated and spread over potential customers, and because the cost of development doesn’t directly affect consumer preferences, it’s relatively inexpensive to develop foods that people like. In the case of sexual attraction, where each case is handled individually and where the trappings of wealth directly influence consumer preferences, the development and marketing process becomes extremely expensive. It could still be worth it if women derive sufficient utility from those expensive products (i.e., guys that are particularly hot because of their conspicuous consumption). So technically it’s still an empirical issue, but personally, I find it implausible that women do derive sufficient utility to justify the costs.

Tue Sep 05, 12:20:00 AM EDT  
Anonymous James said...

knzn,

My point was that wherever there is choosing going on, there will always be competition to be chosen. If there are two restaurants side by side, your argument would apply to any expenditure beyond the minimum needed to get people to patronize whatever restaurant they were going to visit anyway.

"So technically it’s still an empirical issue, but personally, I find it implausible that women do derive sufficient utility to justify the costs."

You bring your tax return and I'll bring my (rented) Jaguar and we'll let revealed preferences decide this.

Tue Sep 05, 02:24:00 AM EDT  
Blogger knzn said...

If there are two restaurants side by side, your argument would apply to any expenditure beyond the minimum needed to get people to patronize whatever restaurant they were going to visit anyway.

True, but it’s a matter of degree. Advertising, to the extent that it does more than simply inform, is arguably inefficient, but usually advertising is not a huge expense. If your expenditures have the nature of trying to demonstrate (or exaggerate) how rich you are, then they are going to be a huge expense (relative to your income). Otherwise they presumably wouldn’t be effective. (Although you do make a good point, implicitly, that there are shortcuts, like renting a Jaguar for Saturday night only, that might give you the effect without the expense.)

Tue Sep 05, 02:37:00 AM EDT  
Blogger knzn said...

Just a side comment: it occurs to me that, if one were to accept my argument about conspicuous consumption, the appropriate Pigovian tax would not be on income or even on luxuries generally, but specifically on conspicuous luxuries. Although when I try to think of examples of inconspicuous luxuries, there are usually other reasons to tax them (e.g. legal services).

Tue Sep 05, 02:48:00 AM EDT  
Anonymous James said...

Even if advertising were held constant, the two restaurants would still expend resources trying to obtain the favor of customers i.e. preparing ever nicer meals and a fancier dining experience to get their customers to return. In the end, there would be a winning restauranteur and a losing restauranteur, and the same outcome could be had at a lower cost if the restauranteurs just agree to refrain from making quality improvements. But I wouldn't see that as a reason to call the process inefficient. The costs of the factors (exotic spices, leather upholstry, etc.) are determined by the value that customers place on the final product ("authentic" curries, time in the passenger seat of a fancy car, etc.)

Tue Sep 05, 03:47:00 AM EDT  
Blogger Gabriel Mihalache said...

I agree that, considering this situations as a signaling problem, there might be more efficient signaling mechanisms, ones that are Pareto-improvements over the current one, which would free up resources for alternative uses. I don't find that particularly damning for conspicuous consumption, let alone for inequality.

Re: the rationality of women's sexual choices... I see no reason to doubt it. Everything from evolutionary psychology to ordinary Freudianism can testify to this. Becker-ish economics too.

The complex system of signals, strategies and so on, which solve (quite efficiently) an evolutionary optimum genetic problem, in a decentralized manner are the kind of stuff that make quasi-libertarians like me go nuts.

I'm also skeptical that the current system of male showing-off can be improved via taxation because of that old libertarian argument, that the costs of setting up, monitoring and prosecuting for such a tax might outweigh the efficiency benefit.

I like the idea of framing the issue of inequality in terms of inefficiency. Keep everyone on their feet ;-)

Tue Sep 05, 07:16:00 AM EDT  
Blogger knzn said...

Re: the rationality of women's sexual choices... I see no reason to doubt it.

Perhaps the divorce rate is lower in Romania than in the US ;-)

Everything from evolutionary psychology to ordinary Freudianism can testify to this.

I don’t see how evolutionary arguments could testify. Evolution designed women to prefer men whose characteristics were associated, during the Pleistocene, with survival of many (of their mate’s) descendants. A lot has changed since the Pleistocene. And moreover, I would strongly dispute the premise that having many descendants is an inherently rational goal. Some people may prefer to have many descendants, but I, for example, am not one of those people, and I suspect there are many women who also aren’t. In choosing men that would (in the Pleistocene) have given them many descendants, they are not being rational.

Wed Sep 06, 01:26:00 AM EDT  
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