Monday, February 7, 2011

When is competition for relative status a good thing?

The argument can be made that people burn a good portion of their resources in zero-sum competition for relative status. For example, that we buy bigger houses partly because it's unpleasant to have a smaller house than our peers, not just because of the "intrinsic" value of a large house to us. There is a socially wasteful, zero-sum component to this, since if I move up in the rankings, it necessarily pushes someone else down. So far so good.

Or, here's another one: We seek more education than we "intrinsically" value, so that we will look better in the eyes of peers (including but not limited to potential future spouses). Maybe it's wasteful to spend so much of our lives learning instead of, say, producing or consuming? Maybe we spend more time in school than is socially optimal?

But here it is not so clear. Because being edumacated also confers positive externalities. Maybe when the country as a whole is better educated, we are jointly better off (e.g. better political outcomes result, more diseases are cured, etc). As individuals, we may have an incentive to free-ride off the general education level of everyone else...in which case our own private concern for relative educational status could actually counteract this and do some good.

If you are thinking, hey, there's no externality to worry about when I cure a disease, monetize it and capture all the rents...please. That never comes close to happening, so we should be happy that people who invent great things are paid largely in prestige, to make up some or all of the difference.

Actually, it seems to me that many of the things which confer the most prestige are also the most socially valuable and most under-rewarded by the market itself. If you want to argue that competing for relative status is wasteful, that's a caveat to keep in mind. Because if, as a society, we tend to glorify traits that are good for society, then we gain relative status by gaining traits that are good for society and there's no problem. When does that fail and why? (what's really going on in the house example?) We will return to this question in the near future.

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