Why do you want to be Rich?
Imagine I offer you the choice between living in one of two worlds, A or B:
A: you earn £50k, and others earn £25k
B: you earn £100k, and others earn £250k
In which world would you prefer to live?
I'm guessing that many of you will have chosen world A (or at least been very tempted to do so), despite the fact that you get 50% less cash than in world B. Indeed when Solnick and Hemenway (1998) first conducted this test with a group of Harvard graduates they found that half of respondents chose World A. (Read summary here)
What does this survey tell us? Well, it implies something that it is fairly obvious but which economist's seldom incorporate into their models: what people really care about is their income relative to other people's, rather than their absolute level of income per se.
The way in which we are envious of other people's income has begun to be more systematically examined. For example Blanchflower and Oswald (2004) use a large panel data set to estimate the impact of other people's income on an individual's self-reported happiness. They find that the negative effect on happiness of other people's income is about 30% of the positive effect of own income. That is, if your neighbour earns an extra £1, this event decreases your happiness by the same extent as a fall in your own income of 30p.
So to answer the question posed as the title of this Blog entry- my hypothesis is that a big part of the reason you want to be rich is not because you want to enjoy consuming goods in and of themselves (as standard economic theory suggests), but because you want to have more stuff than your mates- so you can parade around feeling like the big man.
As J.S Mill once wrote: Men do not desire to be rich, but to be richer than other men
Don't I have more purchasing power in the world A?
No, assume same purchasing power
Well, then I'm indifferent... Won't the way your asking the question confuse people? Or at least, your responses will confound the positional preference with the, apparent, increase in purchasing power.
There should be a way to ask the question such that the purchasing power issue goes away... I'm just not being creative enough right now to come up with such a clever rewording. :-)
In the original survey I think they added 'assume purchasing power is constant in both worlds'.
The fact that you are indifferent between the worlds also confirms my point: your concerns about relative income have lead you not to strictly prefer an increase in your own income.
Standard economic theory suggests you would always strictly prefer the option which leads to an increase in income.
A bunch of us have been arguing about this same issue here:
http://tvhe.co.nz/2008/02/14/is-wanting-less-money-irrational/
It seems to boil down to the question of why people value relative wealth.
If we assume people are bounded rational - then it is possible that a preference for relative wealth evolved given the impact of relative wealth on the distribution of resources.
In this case, people will intrinsically value relative wealth simply because in most situations being richer than your neighbours implies having more resources - even if this specific example tried to bypass that by making a person imagine two entirely different situations.
"your concerns about relative income have lead you not to strictly prefer an increase in your own income"
Not really. If my purchasing power isn't different in the two worlds (which is strange given nominal incomes go up between A and B but my share changes), then being indifferent between the worlds is exactly what you'd expect if someone only cares about absolute income levels.
purchasing power is king.