THE MERCEDES MENACE
A few years ago, when I moved from MIT to Stanford, I was struck by the prevalence of luxury automobiles. In Cambridge really flashy cars were rare - even if you peeked into the garage of a large mansion you were unlikely to see anything fancier than a Saab or a Volvo. In Palo Alto, by contrast, it was Lexus and Mercedes territory wherever you looked, including the driveways of fairly modest homes. Clearly the denizens of Silicon Valley cared a lot more about their wheels than the people back East.
But last year, when I moved back to Cambridge, I discovered that things had changed. Ostentatious cars had started to proliferate everywhere - even in MIT's faculty parking lots. And I was surprised to realize that this bothered me - not because I envied the people who could afford these machines (oh, all right, I envied them a little), but because I had the sense that something had gone wrong with the values of the place I used to know.
Now at first sight this seems to be a deeply unprofessional reaction. After all, economists are not supposed to be moralists. In his classic 1947 book Foundations of Economic Analysis MIT economist Paul Samuelson retells the old joke about the Communist party official addressing a meeting of the faithful. "Comes the revolution", he shouts, "everybody will eat strawberries and cream!" A young man nervously objects that he doesn't like strawberries and cream. "Comes the revolution", replies the official ominously, "you will eat strawberries and cream - and like it." Samuelson's point is that economists should not try to tell people how to live their lives. I as an individual may despise the music of Barry Manilow or the taste of Pepsi; but my job as an economist is to help people who for whatever reason actually want to hear the one or drink the other satisfy their desires. And in general, the most effective way to satisfy people's wants is to leave it up to the free market - to leave consumers free to choose the products they want, and producers free to compete to make profits by providing them.
The only exception to this rule is when the actions of individuals impinge adversely on the welfare of others. The slogan "free to choose" does not mean that a factory owner should be free to choose to dump toxic waste in a river. But a Mercedes is nothing like a polluting factory - or is it?
Well, maybe it is. A Mercedes is a classic example of a status good - an item that people buy, not so much for the direct satisfaction it yields (they're good cars, but they're not THAT good) as for the statement it makes about their wealth. An even better example is a Rolex watch, which is no better at telling time than an ordinary $30 digital throwaway, but marks its wearer as someone with money to burn. (Rolexes are pretty - but in my experience the typical owner is not a man notable for his aesthetic sensibility).
Now in general economists ignore the desire for status; they usually adopt the working assumption that every man is an island - that his "utility" depends only on his own consumption. Yet we all know that this just ain't so - that the man who has almost everything can still feel deprived if his neighbor seems to have even more. And for all of human history, those who have it have sought to flaunt it, one way or another.
So what? If people want to show off, what’s wrong with that? The answer is that when people try to use their money to buy status, as opposed to such mundane things as comfort and convenience, they are engaged in a zero-sum game: I can raise my status only by reducing someone else’s. When the Joneses buy themselves a Lexus, they make the Smiths in their Ford feel worse about themselves. And it is no use saying that the Smiths shouldn’t feel that way: all the evidence suggests that the desire to one-up your fellow man is hard-wired in the brain. As the cognitive psychologist Steven Pinker points out in his new book How the Mind Works, status-seeking prevails throughout the animal kingdom; a peacock has to grow his tail, while a businessman can buy his Armani suit, but the principle is the same.
But once we concede that people do care about status, it necessarily follows that the status competition that makes people buy expensive consumer goods in order to impress other people constitutes a failure of the market economy - a failure as real as traffic congestion, or pollution, or any other activity in which the individual pursuit of self-interest leads to a collectively bad outcome. Suppose that we could somehow agree to stop competing over who has the fanciest car; everyone could then work a bit less, spend more time with their families, and raise the sum total of human happiness. Or to put it a bit differently, Americans (or at least the top few percent of the income distribution) have gotten into a sort of arms race of conspicuous consumption that, like most arms races, consumes huge quantities of resources yet in the end changes little.
In short, concern over the growing emphasis our society places on material display is not mere moralistic priggishness: it can be justified by perfectly good economics. That is not to say that I have any proposals about to reverse the trend. Ideally, I suppose, status competition could be channeled into productive activities like community service, or charitable giving, patronage of the arts, and so on, rather than into pointless display. But I have no good ideas even about how to do that, except to urge the rich and influential to set a good example - while I try to earn enough money to buy a better car.