Hoisted from Ten Years Ago: Greg Mankiw's Abstract Is Misleading...

Envy and Spite in the Social Welfare Function: Hoisted from the Archives from a Decade Ago

I have never understood the people who say that we should not count the disutility generated by the fact that the poor envy the rich in the social welfare function when solving our societal optimization problem.

And I have also never understood the ferocity of their adverse reaction to the reply: "Well, if we are not going to count the disutility generated by envy, we should also not count the utility generated by spite."

From a decade ago...

Daniel Davies: No Riff-Raff: "Entering into the Brad DeLong Eat The Rich Controversy...

...I offer this observation:

If it is not the case 'that the rich are spiteful--that they enjoy the envy of the poor', then why is the word 'exclusive' so popular in the marketing material for hotels, nightclubs, holiday resorts and residential property developments.

'Exclusive' is probably these days an advertising man's synonym for 'nice', but it also has a clear and specific literal meaning. It means that the hotel, nightclub, resort etc is providing a bundled service; partly, the provision of a normal hotel or nightclub, and partly the service of excluding a segment of the population from that service. One pays extra to go to a health club whose swimming pool is not polluted by the greasy, hairy polloi.

The reason that this service is valuable is that those who consume it get utility from a) dividing society into two groups, rich and poor, b) creating institutions which physically and socially segregate these two groups and c) them being in the 'rich' group.

Nobody would apply for membership of Bouji's or the Bucks if it was just a matter of waiting your turn and paying your fee. This would completely defeat the point of the exercise and destroy the value proposition. The point is that in order to attract a better class of customer, you have to keep the riff-raff out. Basil Fawlty understood this; why doesn't the blogosphere?


J. Bradford DeLong (2006): Making 'em Feel Small...: I wrote that one reason that America's rich today live the expensive and ostentatious lifestyles they do (rather than spending much more money on charity, or philanthropy) is that it is a way of making other people feel small and unhappy:

]Brad DeLong's Semi-Daily Journal: Lyndon Johnson, Yes. William Jennings Bryan, No.](http://delong.typepad.com/sdj/2006/09/lyndon_johnson_.html): I'm enough of a touchy-feely sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor...

and that as a result:

...the happiness America's working poor and middle class derive from the compensation distribution--given their compensation, the compensation of the rich, and the lifestyles of the rich and famous--seems to me to be certainly less than that of their counterparts back in 1973.

Greg Mankiw translates this into:

Greg Mankiw's Blog: [T]he answer is less obvious if, as Brad suggests, people derive utility from comparisons with others. In this case, making the rich poorer raises others' welfare, even if their material standard of living is unchanged. In Brad's world, a rich person conveys a type of negative externality, like pollution. High taxes on the rich can be seen as Pigovian. Economists like me complain that high tax rates on high earners discourage their hard work and entrepreneurship. The Veblenesque Pigovian economist replies, 'Precisely!' I must confess that I do not have a good retort to the argument.... But I am uncomfortable making envy a basis for public policy...

He misses the import of the phrase 'conspicuous consumption.' It's not the hard work and entrepreneurship that is to be discouraged. Make inventions, build enterprises, donate money for hospitals and libraries--that is all extremely meritorious and praiseworthy. It's the conspicuous consumption that is the problem.

Surely spite is at least as offensive an other-regarding preference as envy, isn't it? Surely public policy should weigh the spite-generated utility the rich gain from their conspicuous consumption as worth less than nothing, shouldn't it?

And Jane Galt talks about how:

Asymmetrical Information: Should we cut down the tall poppies to give the shorter ones more light?: it is repulsive to make people suffer just because others enjoy it.... The quest for autonomy, the thirst for knowlege, the desire to live a cleaner, healthier, richer life, free of hunger and want... these are the sorts of values we want our government to express and empower. Envy is not.

thus missing my point. My point was that the rich are spiteful--that they enjoy the envy of the poor.

Perhaps some sociologist or psychologist or social psychologist can explain why the reaction is one of jumping to condemn the poor whom the displays by the rich make feel small, rather than to condemn the rich for making the displays in order to feel large...


Blissex takes on the role of Apostle to the Gentiles, and tries to shed light on the issues. He returns depressed:

http://delong.typepad.com/sdj/2006/09/lyndon_johnson_.html#comment-21888738: Hi I have been very depressed to see that Greg Mankiw first and then ''Jane Galt'' in an even worse fashion have twisted DeLong's comments in this post in a way that I think is thoroughly vile: http://JaneGalt.net/archives/009434.html

(Mankiw): But the answer is less obvious if, as Brad suggests, people derive utility from comparisons with others. In this case, making the rich poorer raises others' welfare, even if their material standard of living is unchanged.

(''Jane Galt'') No, I think the reason that we recoil is that it is repulsive to make people suffer just because others enjoy it. And it is horifying to give free reign to our worst impulses through the power of the state.

I have tried to explain what I think DeLong actually meant, quite clearly, and I hope that I haven't misinterpreted it myself: http://JaneGalt.net/cgi-bin/MT/mt-comments.cgi?entry_id=9434#110374 http://JaneGalt.net/cgi-bin/MT/mt-comments.cgi?entry_id=9434#110379


J. Bradford DeLong (2006): Lyndon Johnson, Yes. William Jennings Bryan, No.: Paul Krugman:

The Big Disconnect - New York Times: There are still some pundits out there lecturing people about how great the economy is. But most analysts seem to finally realize that Americans have good reasons to be unhappy with the state of the economy: although G.D.P. growth has been pretty good for the last few years, most workers have seen their wages lag behind inflation and their benefits deteriorate.... [T]he disconnect didn't begin with Mr. Bush, and it won't end with him, unless we have a major change in policies.... The real wage of nonsupervisory workers reached a peak in the early 1970's, at the end of the postwar boom. Since then workers have sometimes gained ground, sometimes lost it, but they have never earned as much per hour as they did in 1973. Meanwhile, the decline of employer benefits began in the Reagan years.... The most crucial benefit, employment-based health insurance, has been in rapid decline since 2000.

Ordinary American workers seem to understand the long-term disconnect between economic growth and their own fortunes better than most political analysts.... The [Pew] center finds that workers perceive a long-term downward trend in their economic status. A majority say that it's harder to earn a decent living than it was 20 or 30 years ago, and a plurality say that job benefits are worse too....

Workers' concern about worsening benefits is new... the health care crisis is back, both because medical costs are rising rapidly and because we're living in an increasingly Wal-Martized economy, in which even big, highly profitable employers offer minimal benefits. Employment-based insurance began a steep decline with the 2001 recession, and the decline has continued in spite of economic recovery....

Why have workers done so badly in a rich nation that keeps getting richer? That's a matter of dispute, although I believe there's a large political component: what we see today is the result of a quarter-century of policies that have systematically reduced workers' bargaining power. The important question now, however, is whether we're finally going to try to do something about the big disconnect. Wages may be difficult to raise, but we won't know until we try. And as for declining benefits -- well, every other advanced country manages to provide everyone with health insurance, while spending less on health care than we do.

The big disconnect, in other words, provides as good an argument as you could possibly want for a smart, bold populism. All we need now are some smart, bold populist politicians.

I'm enough of a believer in CPI bias to want to say "real compensation for male nonsupervisory workers has stagnated since 1973"--I think it has grown, but only very slowly, and much less rapidly than productivity.

On the other hand, I'm enough of a touchy-feey sociology-lover to believe that a good chunk of the utility the rich derive from their conspicuous consumption is transferred to them from the poor: the happiness America's working poor and middle class derive from the compensation distribution--given their compensation, the compensation of the rich, and the lifestyles of the rich and famous--seems to me to be certainly less than that of their counterparts back in 1973.

The easiest and most important thing the government can do to neutralize the adverse consequences of rising inequality is to make the tax system more progressive, not less. A reality-based government would react to growing pretax inequality by taxing the rich more, and subsidizing the poor more (through policies like the EITC) as well.

But when I read Paul's call for "smart, bold populism," I am reminded of earlier calls a couple of decades ago by Milton Friedman, Marty Feldstein, and their ilk for smart, bold conservatism or smart, bold libertarianism. But they did not get what they ordered: on the economic policy front the policies of Reagan and of Bush II have been a horrible botch. What populist policies that we can think of would be smart? And how can we make our high politicians allergic to populist policies that are stupid?

Lyndon Johnson, yes. William Jennings Bryan, no.

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