I launch my recently published book Falling Behind by observing that variants of the relative deprivation concept have been talked about for hundreds, even thousands, of years. The concept has been introduced repeatedly, and each time, after generating a flurry of discussion, it disappears. Why has it failed to become a serious player in our intellectual debate?
The answer, I believe, is that many understand the concept far too narrowly. Many, for example, understand it to entail envy provoked by comparisons with others in more favorable circumstances. Although that may be true in specific cases, the core phenomenon actually has little to do with envy. Rather, it is fundamentally about the link between context and evaluation.
No one denies that a car experienced in 1950 as having brisk acceleration would seem sluggish to most drivers today. Similarly, a house of given size is more likely to be viewed as spacious the larger it is relative to other houses in the same local environment. And an effective interview suit is one that compares favorably with those worn by other applicants for the same job. In short, evaluation depends always and everywhere on context.
This observation is completely uncontroversial among behavioral scientists. If the link between context and evaluation is in fact what relative deprivation is mostly about, then explanations that ignore relative deprivation must also ignore this important link. This is true, for example, of the reigning economic models of consumer behavior, which ignore context completely. These models assume, preposterously, that each person’s consumption spending is completely independent of the spending of others.
Future intellectual historians will find this more puzzling than the fact that physicians once prescribed leeches to treat fever. Eighteenth-century doctors, after all, had no way of knowing about the germ theory of disease. But ignorance cannot explain the absence of context from economic models. Even those economists who have not studied the relevant social science literature surely know from their own experience how much context matters.
Evaluation guides choice. So if context shapes evaluation, it must also guide choice. Many important economic choices—ranging from the kinds of houses, cars, and clothing we buy to the amounts we save—simply cannot be understood without reference to context. But that claim raises an obvious question: If context is so important, why have economists largely ignored it? Below the fold, I summarize my attempt to answer this question.
In recent years, I have asked a number of friends and colleagues, both in and out of the economics profession, why they think economists omit context from their models. One suggested that economists will fully embrace context models once it can be shown conclusively that they track the data better than traditional models. Experience, however, suggests otherwise. A case in point is that economists continue to ignore context in models of consumption spending, even though those models don’t track the data nearly as well as context-based models from the 1950s.
Another economist speculated that many of our colleagues fear that taking contextual, or positional, concerns seriously might signal a certain lack of rigor. But as recent work has amply demonstrated, there is no barrier to formalizing models that incorporate such concerns.
Still another economist suggested that the aversion to positional concerns might be rooted in the fact that such concerns undermine the celebrated invisible hand theorem, which holds that unregulated markets produce the most efficient possible allocation of resources. I suspect there is something to this. Yet the profession has incorporated numerous other forms of market failure into its arsenal of policy recommendations. Even the most ardent proponents of free markets, for example, are quick to concede a productive role for government intervention to curb pollution when transaction costs are high.
But I suspect the most important source of economists’ aversion to taking explicit account of the influence of context is that many feel that to do so would be to give weight to envy and jealousy, which they feel merit no consideration in normative analysis. They reject models that incorporate context for the same reason they would reject models that give policy weight to the preferences of sadists.
Society does indeed have a legitimate interest in discouraging envy. But the influence of context stems less from envy than from the fact that many important rewards in life depend on relative position. For example, the median household must keep pace with community spending on housing or else send its children to below average schools.
Perhaps even more important, context is the very wellspring of the everyday quality judgments drive consumer demand. That this point is not widely appreciated first became clear to me during a dinner conversation that took place before a lecture I gave at the University of Chicago several years ago. Three of us were waiting outside a restaurant when the fourth member of our party arrived at the wheel of a brand new Lexus sedan. Once we were seated at our table, the Lexus owner’s first words to me were that he didn’t know or care what kinds of cars his neighbors and colleagues drove. As it turned out, I had had numerous conversations with this gentleman over the years and found his statement completely credible.
I asked him why he had chosen the Lexus over the much cheaper, but equally reliable, Toyota sedan from the same manufacturer. He responded that it was the car’s quality that had attracted him—things like the look and feel of its interior materials, the sound its doors made on closing, and so on. He mentioned with special pride that the car’s engine was so quiet and vibration-free that the owner’s manual posted warnings in red letters against attempting to start the car while its engine was already running.
I then asked him what car he had been driving before trading up. I forget what he said, but for the sake of discussion will suppose that it was a five-year-old Saab. I asked him how he thought people would have reacted to his Saab if it had been possible to transport it back to the year 1935 in a time capsule. He answered without hesitation that anyone from that era would have been extremely impressed. They would have found the car’s acceleration and handling spectacular; its interior materials would have amazed them; and its engine would have seemed unbelievably quiet and vibration-free. His own evaluations of his former car were of course strikingly different on each dimension.
We then discussed what a formal mathematical model of the demand for automobile quality might look like, quickly agreeing that any reasonable one would incorporate an explicit comparison of the car’s features with the corresponding features of other cars in the same local environment. Cars whose features scored positively in such comparisons would be seen as having high quality, for which consumers would be willing to pay a premium.
Such a model would be essentially identical to one based on a desire not to own quality for its own sake, but rather to outdo, or avoid being outdone by, one’s friends and neighbors. Yet the subjective impressions conveyed by these two descriptions could hardly be more different. To demand quality for its own sake is to be a discerning buyer. But to wish to outdo one’s friends and neighbors is to be a boor, a social moron. To be sure, there are people whose aim is to flaunt their superiority over others. But most of us do our best to avoid such people, and the fact that we succeed most of the time suggests that they are relatively rare.
I noticed that on the heels of this discussion, everyone at the table suddenly took much more interest in talking about the kinds of behavior that are driven by contextual concerns. It was fine to talk about behaviors that result from context-dependent perceptions of quality, but not at all palatable to speak of behaviors that result from envy or a desire to outdo others.
If relative deprivation is really about context, which shapes perceptions of quality, which in turn drive demand, then it is not a peripheral concept. It applies to virtually every good, including even basic goods like food. When a couple goes out to dinner for their anniversary, for example, the thought of feeling superior to their friends and neighbors probably never enters their minds. Their goal is just to share a memorable meal. But a memorable meal is a quintessentially relative concept. It is one that stands out from other meals.
In short, concerns about context and relative position typically have little to do with envy of the rich or a desire to keep up with them. Middle-class families don’t look to Donald Trump and worry about what he is spending his money on. Likewise, it’s totally irrelevant to most in the middle class that Bill Gates has a 40,000-square-foot mansion on the shore of Lake Washington.
The existence of such houses nonetheless affects the spending behavior of people in the middle. It does so through a chain of local comparisons. To begin with, there are people in Bill Gates’s league who are influenced by the fact that he built such a house. Indeed, others who live on Lake Washington now have houses even larger than his. Some have 50,000 square feet of living space, some have 60,000, and at least one has 70,000. And just below these people on the economic ladder, there are others for whom these large houses do matter.
For some, they matter because of envy, to be sure. But others are influenced even if they feel no envy. The mere presence of the larger mansions, for example, may shift some people’s perceptions about how big a house one can build without seeming overly ostentatious. Or it may change the way people entertain, making dinner parties for thirty-six guests the norm, rather than parties for twenty-four. Or perhaps because their larger mansions make it possible to do so, those at the top of the economic ladder may begin hosting their daughters’ wedding receptions in their homes, rather than in hotels or country clubs. Or perhaps people build bigger houses simply because the larger houses of others make their own houses seem small. In each of these instances, we need not invoke envy to explain people’s behavior.
The simple point is that local context matters for a host of reasons, most of which have nothing to do with envy or a desire to feel superior to others. Viewing the phenomenon of relative deprivation in terms of such feelings has consigned it to the periphery. This has been a grand mistake, one that has seriously undermined our ability to reach sensible judgments about economic policy.