Relatively Speaking

by Don Boudreaux on April 8, 2006

in Standard of Living

The April 3, 2006, issue of the New Yorker features this article, by John Cassidy, entitled “Relatively Deprived.”  Its principal point is that relative income or wealth matters a great deal – that people whose absolute level of material prosperity is quite high might nevertheless suffer many of the ill consequences of poverty if they are worse off than others in their society. Consider:

Erzo Luttmer, an economist at the John F. Kennedy School of Government, recently found that people with rich neighbors tend to be less happy than people whose neighbors earn about as much money as they do. It appears that, while money matters to people, their relative ranking matters more.

Relative deprivation is also bad for your health. In a famous study conducted between 1967 and 1977, a team of epidemiologists led by Sir Michael Marmot, of University College London, monitored the health of more than seventeen thousand members of Britain’s Civil Service, a highly stratified bureaucracy. Marmot and his colleagues found that people who had been promoted to the top ranks—those who worked directly for cabinet minister —lived longer than their colleagues in lower-ranking jobs. Mid-level civil servants were more likely than their bosses to develop a range of potentially deadly conditions, including heart disease, high blood pressure, lung cancer, and gastrointestinal ailments.

My first thought when I read the previous paragraph was “Administrators in the top ranks presumably are paid more than are administrators in lower ranks; so some or all of the worse health of lower-rank administrators (relative to the health of higher-rank administrators) might well be due simply to the fact that lower-rank administrators can buy less health-care than can their higher-ranking colleagues. Absolute, rather than relative, income differences might still be the driving force behind this empirical finding.”

But put this possible objection aside. Instead, ask how the “relatively deprived” hypothesis squares with this report on the state of economic research by Nobel laureate Daniel McFadden:

First, both behavioral observation and brain studies indicate that organisms seem to be on a hedonic treadmill, quickly habituating to homeostasis, and experiencing pleasure from gains and pain from losses relative to the reference point that homeostasis defines…. People quickly grow to accept the city in which they are located, their job, their mate, and their health status. They may recognize and complain about unfavorable absolute states, but their levels of satisfaction by various measures are not nearly as differentiated as they would have to be if their sensation of well-being were experienced on an absolute scale.

[From Daniel McFadden, “Free Markets and Fettered Consumers,” American Economic Review, March 2006, Vol. 96, page 9.]

At one level, McFadden says something similar to what John Cassidy says – namely, relative states matter more than do absolute states. But the details of McFadden’s message differ fundamentally from those of Cassidy’s message.  McFadden says that a person’s subjective well-being is reckoned relative to his or her own accustomed state.  Cassidy says that a person’s subjective well-being is reckoned relative to the material standard of living enjoyed by other people.

If Cassidy (and the research he reports on) is correct, then McFadden (and the research he reports on) is wrong.  If McFadden is correct, then Cassidy is wrong.  And, of course, both could be wrong.


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