The Sovereign Mind

Free thought on politics and real life

Archive for the ‘economics’ Category

A Poor Man in a Rich Country

leave a comment »

In Timothy Noah’s last installment on his series on inequality, he makes the case that rising income inequality is a concern for our society. For the most part, I agree with him. But while addressing some of the common counter-arguments, I have to take issue with this one:

Quality of life is improving. This argument has been made by too many conservatives to count. Yes, it’s true that an unemployed steelworker living in the 21st century is in many important ways better off than the royals and aristocrats of yesteryear. Living conditions improve over time. But people do not experience life as an interesting moment in the evolution of human societies. They experience it in the present and weigh their own experience against that of the living. Brooks cites (even though it contradicts his argument) a famous 1998 study by economists Sara Solnick (then at the University of Miami, now at the University of Vermont) and David Hemenway of the Harvard School of Public Health. Subjects were asked which they’d prefer: to earn $50,000 while knowing everyone else earned $25,000, or to earn $100,000 while knowing everyone else earned $200,000. Objectively speaking, $100,000 is twice as much as $50,000. Even so, 56 percent chose $50,000 if it meant that would put them on top rather than at the bottom. We are social creatures and establish our expectations relative to others.

Ironically, the Woody Allen firm that the last words link to seem to make the counter-argument: that such thinking is wrong-headed and that what matters most is where the train is heading and not which car you’re on. But moving past that…

For one thing, in doing a little searching I found a study that claims to contradict the 1998 study that Noah refers to. I can’t read either of them without paying, so I can’t compare the two, but my point is just that the conclusion of one study doesn’t prove or disprove something. You have to look at how the study reached that conclusion and compare that conclusion with other similar studies. Most of the time, scientific studies make very narrow conclusions that are then generalized too far by the media. I suspect that might be going on here.

But what I really didn’t like about this argument was that Noah, despite I assume being knowledgeable about economics, doesn’t even mention a glaring flaw in the methodology as he describes it: money does not equal wealth. The number 200,000 doesn’t mean anything without knowing how much “wealth” or “quality of life” that buys. If everyone were to double their income tomorrow, but that wasn’t matched by a corresponding increase in productivity, that doubling of income would be meaningless since everything would cost twice as much. By asking the question in terms of dollar amounts, which are meaningless without a reference to the wealth that it represents, the question is clearly flawed. The assumption, it appears, is that people would think that in both scenarios a dollar has the same buying power. I don’t think that’s a valid assumption. Granted, most people don’t consciously make the distinction between money and wealth, but I think subconsciously people have an intuitive sense that your buying power does not depend only on the quantity of money that you have, but on the total quantity of wealth and the share of it that your money represents. If everyone earned two million dollars and you earned one million, do you think you’d be able to buy a mansion? I think it’s obvious to most that you wouldn’t, but in case it isn’t, ask yourself this question: who would build it?

Would you even be able to afford any house at all?


Written by Mike

September 28, 2010 at 9:44 pm