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PREFACE TO THE 2007 EDITION

The psychiatrist George Ainslie, author of the brilliant book Picoeconomics, is one of the most interesting and creative people I have ever had the pleasure to know. He remarked to me one afternoon over coffee that the ultimate scarce resource in life is the willingness of other people to pay attention to us. New technologies are constantly creating opportunities to engage with things rather than people, or to watch others perform on television or on film rather than to interact with them directly.

Ainslie argues that it is a basic human need for other people to engage with you, to pay attention to you, to take you seriously. He forecasts that failure to meet this need will prove the most serious and enduring mental health problem of the future. That’s not a happy prospect, of course, but his concerns seem hardly farfetched.

I therefore count myself incredibly fortunate to have had the opportunity to deliver the Aaron Wildavsky Lecture at the Goldman School of Public Policy at the University of California at Berkeley. The Wildavsky Forum takes place over two days, with a reception and dinner preceding the main lecture on the first day, and then a lengthy panel discussion about the lecture on the following day. I am mindful of what a luxury it was to have had so many smart and experienced people pay such close attention to what I had to say and respond to it in such focused and energetic ways.

I am grateful, too, to have enjoyed the luxury of being able to write this book after having benefited from their commentary. The insightful remarks of Gene Smolensky, Hal Wilensky, and Gene Bardach led to countless improvements. Most important, they persuaded me of the wisdom of launching the book with a discussion of what, exactly, the concept of relative deprivation entails.

As my distinguished commentators pointed out, variants of this concept have been discussed for hundreds, even thousands, of years. So we must ask why the concept has never become a serious player in our intellectual debate. It is repeatedly introduced, and each time, after generating a flurry of discussion, it disappears from sight. Why is that?

The answer, I believe, is that many understand the concept far too narrowly. Most people, my commentators included, understand it to entail envy provoked by comparisons with others in more favorable circumstances. Although that may be true in specific cases, I have become increasingly convinced that relative deprivation actually has little to do with envy. Rather, it is fundamentally about the link between context and evaluation. This is a critical point, because, as I will explain, the contrary belief is what has consigned the concept to marginal status.

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 I am correct that the link between context and evaluation is what relative deprivation is mostly about, then explanations that ignore relative deprivation must also ignore this important link. This is true of the reigning economic models of consumer behavior, for example, which ignore context completely. These models assume 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. In this book I will argue that many economic choices simply cannot be understood without reference to context. But as the animated discussion that followed my Wildavsky Lecture persuaded me, this argument becomes a lot easier to digest if we first attempt to answer this obvious question: If context is so important, why have economists largely ignored it?

In recent years, I have posed this question to a number of friends and colleagues, both in and out of the profession. 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 the history of modern consumption theory, which I will discuss in chapter 7.

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 economists’ celebrated invisible hand theorems, which hold 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.

Yet another reason I discovered for the aversion to taking explicit account of the influence of context is that many economists feel that to do so would be to give weight to negative emotions such as 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. We should continue to teach our children not to envy the good fortune of others. But the influence of context stems less from envy than from the fact that many important rewards depend on relative position. As I will explain in chapter 5, 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 that 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 dinner party pulled up behind 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 happened, 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 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.

In sum, 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 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.

With my dinner conversation in Chicago still fresh in memory, I was careful to emphasize, both during my Wildavsky Lecture and in the roundtable discussion the following day, that concerns about context and relative position 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, I will argue, has been a grand mistake, one that has seriously undermined our ability to reach sensible judgments about economic policy.