Arnold Kling  

Against MRV

Educated Women Don't Like Glob... On heterodox Economics and Inn...

At Mahalanobis, Eric G. Falkenstein writes,

I argue in Why Risk is Not Related to Return that a relative status utility function can explain the failure of the risk-return empirical relationship. Perhaps it can explain persistent irrationality on policy matters?

Read the whole thing. As I understand it, he wants to suggest that voters who favor bad economic policies are not being irrational. Instead, voters' preferences for policies are based on how they affect relative status, not absolute economic well-being. If my concern is for relative status within my local group, then as long as an economic policy does not give a neighbor an advantage over me, I can be happy with it.

But if relative status is what people care about, then I am not sure how any economic policy gets favored. That is because relative status is such a zero-sum game. If steel workers want a tariff because it raises their status relative to their neighbors, then their neighbors should oppose a tariff for the same reason.

The mystery is why the steel worker's neighbors go along with the tariff. I think it's pretty hard to get that out of a model of rational voters.

Comments and Sharing

CATEGORIES: Political Economy

COMMENTS (10 to date)
John Thacker writes:

The mystery is why the steel worker's neighbors go along with the tariff. I think it's pretty hard to get that out of a model of rational voters.

Well, I could offer suggestions, though I'm not necessarily convinced by them.

1) It's not necessarily "irrational" to wish to improve the relative status of other fellow countrymen compared to your own. Presumably some people who favor manufacturing tariffs/farms supports are willing to help people whom they believe are generally deserving and disfavored by modern technological changes.

2) A variation on 1) where people support such altruistic policies for other reasons (such as "heading off social unrest.")

3) B and C both agree with supporting policies that relatively help A against X, in turn for A's support on policies that help them.

4) Related to 3), relative status may be in some sense a zero-sum game, but that doesn't mean that the absolute number of beneficiaries is equal to the number of losers. Some evidence suggests that whites in the segregationist South were familiar with and understood arguments that segregation hurt themselves economically, but it hurt blacks more. A 70% majority might favor a policy that hurts themselves economically slightly but pushes down the other 30% much more relatively.

Josh R writes:
The mystery is why the steel worker's neighbors go along with the tariff. I think it's pretty hard to get that out of a model of rational voters.

The Steelworker benefits substantially, while the rest of society is out only the marginal cost increase related to the tarriff. Spread over the entirety of the economy, this doesn't hurt anyone bad enough to get us riled up.

The squeaky wheel gets the oil, and most folks are not going to squeak much over the loss of a few cents here and there due to the increased cost of raw materials in the products that they buy. They steelworker is going to squeak a lot over reduced wages or loss of job.

I think this is one of the downfalls of our political system. It embezzles fractions of pennies a time from voters to feed the pork machine. It would not be economically efficient for the voters to invest time or resources into saving any one of these fractions of cents, but when you add them all together, it is a pretty humongous leak in our pocketbook.

Michael Sullivan writes:

I think he's wrong but onto something.

I strongly doubt that anyone has a utility function where absolute wealth is meaningless. But most people do care about relative status to some degree, and I suspect that the richer you get, the more important relative status is. To pull something out of my ass, an approximate utility function might look something like U(log(x)*(x/mean(x))^0.1). So the bigger x is, the more important relative status (x/mean(x)) is versus your absolute wealth (x). No realistic amount of absolute wealth will make up for being below, say 5% of the local mean, but people at 50% of the mean in europe/us would definitely feel a lot richer than people at the mean in India. Under that function, it takes about 10K a year for a Bangladeshi to feel as rich as an american making 70k.

Obviously the relationship there will be different for different people, but it seems like a model needs to include both for most real people.

Cyrus writes:

In some of Bastiat's satires, a compromise is reached in which everyone gets protection (to the detriment of all).

I'm not sure that rational voters, caring only about their relative position in the group, would oppose such a policy.

Cyrus writes:

More generally, though, the complaint is that the voter may be rational, but just not evaluating by the criteria that the economist thinks he ought to be evaluating by.

My individual ability to affect the outcome of an election, and much less my individual ability to affect the outcome of some policy decision, is vanishingly small. If I derive disutility from supporting a political platform that contains some planks I disagree with, then is it irrational to change my mind so as to experience less cognitive dissonance?

Matt writes:

Michael Sullivan:
But most people do care about relative status to some degree, and I suspect that the richer you get, the more important relative status is.

I don't know how much they support the Democrats' politics of envy, but don't professionals earning low 6-figures lean Democrat? If you're a lawyer in NYC making $120,000 and your friend in IB just got a bonus of $350,000, doesn't that create a wide status gulf? How many people in America have a neighbor with that big a difference in earnings? Or is $60,000 versus $40,000 just as big?

Tom West writes:

My personal understanding is that status-based happiness is not greatly affected by people being below you, but it's important that you not be lower than everyone else. Thus it's not a zero-sum game.

You can see this in the behaviour where most people are happy to give a hand up to people lower than themselves, but kind of resent people doing much better. In fact, many people are happier when there aren't a lot of low status individuals around.

Under that model, policies to help others (especially at low cost to oneself) are not at all suprising.

I'm afraid that it is economists that don't necessarily have the right status model in order to understand rational human behaviour.

Josh writes:

Imagine that there were no government tariffs, but instead we had a sort of voluntary insurance pool where particular industries/companies/people could all pay in and if one of them were threatened by "foreign" competition, the insurance company would pay the companies as sort of an inverse tariff (i.e. don't make the foreign goods more expensive but make the domestic goods cheaper because of the payment).

Obviously there are all kinds of problems with implementing this, but if you could implement it, would people sign up for it voluntarily? I think they would. People like the security of knowing they won't be bid out of a job by foreigners. Even though when all is said and done, the average cost to each person equals their average gain (it's insurance after all).

The point is that this is what tariffs do (or other similar policies) - people pay a little to help others but in return they get a secure feeling that the government will take care of them if something goes wrong (however in the case of insurance it's guaranteed while with the government, there's no guarantee that just because they enacted steel tariffs they will enact XXX tariffs when you need them. But I don't think it changes the problem substantially because people believe the gov't will bail them out).

And in that sense, it's not irrational. Economically irrational maybe, but the non-monetary benefits must obviously be quite high for this to be the case.

eric writes:

I think it's pretty straightforward to see that in a zero-sum world, people will favor things they understand over things they don't, things that generate quid pro quos and are amenable to forming coalitions.

Think about why African nations prefer their leaders to colonial rule even though they are manifestly corrupt and incompetent. Is that rational? Not with VN-M utility, but it is with relative status utility.

Daublin writes:

Part of the problem is that both diffuse benefits, and long-term benefits, are difficult to believe when a politician pushes them. Rightfully so, honestly. For every policy that really will improve long-term growth, there are a thousand communist policies floating around that are supposed to improve long-term prosperity. Honestly I am happier for voters to be generally skeptical, than to be credulous, even if it means my own favorite approaches get left aside.

Back on the main subject, keep in mind that the "compared to neighbors" part of the idea is not just psychological. Consider the case where it is not your neighbors you compare against, but your competitors. If every other competitor is taking an equal risk as you, then it's no big deal. If you take a lesser, but DIFFERENT risk, then you might well be increasing the risk that your company goes bust. In the unlikely case your idea does not work, the other companies keep on steaming and can out-compete you.

Comments for this entry have been closed
Return to top